By MBSGuy, a securitization expert
In comments to my post yesterday, “So Why Did the Mortgage Servicers Use ‘Robo Signers’?“, reader Justica pointed out another element of servicer misbehavior, namely, investor lack of confidence in the reports, and therefore the disbursements, that servicers are giving them. From “Investors Grumble Over Flawed Remittances” at Asset-Backed Alert:
Mortgage-bond buyers are losing faith in the accuracy of remittance reports, and some say the apprehension could soon factor into their investment strategies.
Remittance reports, distributed monthly by securitization trustees, are supposed to provide routine snapshots of the cashflow-collection and distribution activities of servicers. However, investors say there has been a rash of recent instances in which the reported data differed considerably from what actually happened – making it impossible to determine values for their holdings.
Why have the once-reliable reports been wrong? Investors point in part to increasing use this year of mortgage-modification programs that government agencies and lenders have implemented to aid troubled borrowers. They claim some servicers fail to verify when the changes take effect, resulting in mismatches between when a given loan’s cashflows actually shift and when those adjustments are reported.
Servicers argue the volume of recent modifications has become overwhelming in comparison to their staffing levels. They also have faced ongoing struggles in figuring out how to treat loans that are in the trial phases of modification programs. “It has made it nearly impossible for us to appropriately account for changes,” one servicing professional said.
Buysiders call that a red herring, saying servicers are equipped to account for modifications as they occur. “The servicers simply don’t pay enough attention to what’s happening to the underlying loans,” one source said.
On one level, this article looks like yet another lame servicer excuse not to do mortgage mods; “See, this is SOO hard, we can’t even account for it properly.”
The real causes little to do the difficulty of the task, and everything to do with management.
One of the reasons they don’t have the people to work all this complicated stuff out is because they fired all of the experienced people and kept the cheapest staff. As the market has modestly improved, anyone with any skills left the places that put such a low value on them, leaving behind the weakest workers (there has been a lot of turnover in the last 9 months or so).
Somehow, the big bosses are convinced this is not their fault.
By the way, over the years, I witnessed many instances of servicers or trustees screwing up far less complicated situations in investor reports, sometimes to the real detriment of certain bond holders. That is almost certainly going on now. If the adjustments from the modifications are not being properly accounted for, it probably means too much money is being distributed to the junior bond holders, who ought to be taking write downs, at the expense of the senior bond holders. As a result, interest that was due to the senior bond holders is being paid to the junior holders, and since there is only a finite amount of cash, the senior bond holders will end up with less money than they should have received.
In addition, it is very likely that the servicers are not properly accounting for the huge foreclosure expenses they are now incurring on contested foreclosures. If it costs, in some cases, more to defend the foreclosure than the balance of the loan (let alone the recoverable proceeds from the sale of the home), these costs should not be borne by the trust. The servicer should only reimburse themselves for the costs of a foreclosure, plus all of the accrued interest, from the proceeds of the foreclosure sale. The servicer should also stop advancing interest for the delinquent loan if the interest and expenses can no longer be recovered.
I suspect it is impossible to determine if this is actually being done right from the servicer reports.
A final area of incorrect accounting that would be significant to investors is repayment of servicer advances of principal and interest advances on delinquent borrowers. These are to be repaid solely from foreclosure proceeds. But given what a drain these advances represent (servicing now is a negative cash flow activity), it isn’t hard to imagine that services are also using proceeds from non-foreclosure principal repayments (sales and refis) to reimburse their advances, when those principal payments should go to investors.
A lawsuit on behalf of the investors against the trust and sellers should probably also include claims for improper servicing and trust administration against the servicer and trustee.