We’ve taken a dim view of the “worse than stress tests” review by Federal regulators of foreclosure practices late last fall. This was an obvious effort to alleviate concerns in the wake of the robosigning scandal. When the bank-friendly OCC released the results of the review, the guts of which was a look at 2800 seriously delinquent loans from all the major servicers, it confirmed our reservations:
Can you see what a garbage in, garbage out exercise this was? This is all a limited review of the servicers’ internal records, with no external validation. This process is inherently incapable of capturing numerous abuses flagged in the media and in this and other blogs, including document forgeries (production of allonges to cover for the failure to convey notes correctly), loss or deliberate late application of payments; the application of “junk fees” and impermissible fee pyramiding; notes held at the originator rather than the trust (notice the failure to audit trustees), lack of cross checking of servicer claims re servicing with borrower experiences. The HAMP fiascoes alone, with repeated servicer false claims of document losses, should lead to serious skepticism about servicer claims about the integrity of their internal processes.
And it is also impossible for Walsh’s statement about standing to have any solid foundation without a 50 state review of foreclosure actions as well as a legal analysis of the New York trust theory discussed in Congressional hearings, Congressional Oversight Panel reports and on this blog. There is not evidence that any such review took place in either the original Treasury project description, the Walsh retrospective comments, or the staffing (which would require the involvement of considerable outside resources to even take a stab at the task in a mere eight weeks).
The banking regulators are so obviously corrupt or at best deeply captured that they no longer even do a remotely credible job of covering for their abdication of their role. And until the media starts to call them out on it, it is certain to continue.
The GAO has just released a useful report that gives an overview of servicing, describes how regulation of it is fragmentary and incomplete, and recommends that the CFPB develop a plan for how to regulate servicers and that banking regulators look more seriously at documentation risk.
The GAO also discussed the famed foreclosure task force review, and its commentary bore out some of the charges we made. They noted that the files chosen were a small sample, clearly chosen to be a mix. The GAO refrained from using language critical of the process, but reading between the lines, made it clear that this selection process was not rigorous, but was an informally designed but hopefully indicative sample. This section was telling:
The reviews did not include an analysis of the payment history of each loan prior to foreclosure or potential mortgage-servicing issues outside of the foreclosure process. For example, examiners focused their reviews on foreclosure procedures and documentation preparation and did not examine whether servicers had followed other requirements, such as FHA requirements for assessing the borrower for a loan modification or other loss mitigation alternatives, before initiating foreclosure…
However, bank regulatory officials told us that examiners did not always verify, as part of the loan file review process, whether documentation included a record of all previous mortgage transfers from loan origination to foreclosure initiation, as may be required by some state laws or contracts.55 In addition, with some exceptions, examiners found that notes appeared properly endorsed and mortgages appeared properly assigned. In a few instances, examiners uncovered notes that were not properly endorsed, which could subject the servicer to challenges on its authority or standing to foreclose. Additionally, while each of the regulators stated that servicers could generally produce requested documentation, servicers at times had required some time to find necessary documents
Lawsuits like Ibanez, in which two servicers had over a year of appeals to find notes and prove chain of title and instead came up emptyhanded, as well as numerous other cases where the notes have been missing, have “tah dah” allonges, or where the foreclosure mill changes the story of how the note got from the originator to the courthouse several times casts considerable doubt on the largely clean bill of health produced by this Federal review. In fact, the issue is often not the inability to locate the note, but that the chain of title is problematic. Consider this language from the widely discussed Massachusetts Supreme Judicial Court Ibanez decision:
The plaintiff banks, who brought these cases to clear the titles that they acquired at their own foreclosure sales, have simply failed to prove that the underlying assignments of the mortgages that they allege (and would have) entitled them to foreclose ever existed in any legally cognizable form before they exercised the power of sale that accompanies those assignments.
As MBS Guy noted:
I am even more convinced that the failure of the banks’ attorneys to track down the actual legal documents was not “carelessness”….
I suspect the foreclosing attorneys requested the documents and the requests were rejected by clever attorneys for the issuers who saw the potential liability and didn’t want to create a clear paper trail back to them.
If the low level foreclosing attorney looks incompetent in assembling his case, that’s one thing. If a big Wall Street law firm made a major mistake about the legal basis for selling loans without proper title in Massachusetts or any other state, well, that’s a whole different story.
As we indicated in our earlier mini-rant, there were significant “see no evil” gaps in this foreclosure study. The GAO is directionally correct, that certain important issues were not probed, but by being too trusting of the regulators and by not knowing this terrain in depth, missed the scope and significance of the issues that were not investigated.