An article by Kate Berry in American Banker earlier this week hasn’t gotten the attention it deserves. Anyone who was paying attention to the mortgage beat in 2010 through 2012 knew that mortgage securitization originators and servicers were playing fast and loose with critical documents like mortgage notes because they couldn’t be bothered to observe their own contracts and transfer them to the mortgage trust as stipulated.
But exposing that threatened to blow up the mortgage-industrial complex. So the Obama Administration and the major regulators labored mightily to engineer a
cover-up settlement, which included all sorts of pious promises by servicers to Do Better.
Two years later, what do we find? Bank of America, one of the biggest miscreants, wants to exit servicing mortgages guaranteed by Ginnie Mae. One thing that may not be obvious to most readers is that servicing those mortgages should be a no-brainer. Unlike subprime mortgages, where each deal had slight (or sometimes not so slight) variations in terms, Ginnie Mae has a handbook that servicers are supposed to follow.
Yet with crystal-clear guidelines, plus two years post the state-national settlement to clean up its operations, Bank of America has so many important documents missing that Ginnie Mae won’t let them sell their servicing operations. From American Banker:
Ginnie Mae has halted the transfer of mortgage servicing rights from Bank of America (BAC) to a nonbank servicer because the bank is missing documents such as recorded mortgages and title policies on the underlying home loans.
Ted Tozer, the president of Ginnie Mae, says he has held up the transfer of servicing rights by B of A “for an extended period” because the bank is not complying with agency’s guidelines that require all mortgage documents be delivered to custodians in a timely manner..
Though Ginnie Mae has flagged problems with servicing transfers by Bank of America before, Tozer says, they were resolved quickly and did not affect the transfer dates. This is the first time a transfer has been delayed for an extended period.
“All we’re asking for them to do is to live up to the agreement from 10 years ago,” Tozer says.
The striking part of this is that as derelict at duty as Bank of America has proven to be, Tozer isn’t sure they are any worse than the other banks:
It is unclear how widespread the problem of missing documents is in the transfers of mortgage servicing, Tozer says, and he does not want to single out B of A.
“I don’t mean to sound like we’re picking on B of A,” he says. “I can’t say if it’s just B of A or not.”….
Ginnie’s “representations and warranties” program allows participating servicers to classify pools of loans as receiving “final certification” from Ginnie, even if there is no receipt of documents and no review by a trust’s custodian that the essential documents have been delivered to the trust.
Instead, the servicers in the program agree to send all the essential records of the mortgage, deed of trust, title policy and intervening mortgage assignments to the document custodian in the normal course of business, usually within a year, though there is no set time frame.
Some servicers have asked the agency to extend leniency or grant waivers under the program; Ginnie has refused to do so. The agency now is asking the largest mortgage servicers for an inventory of loans that may have missing documents that cannot be verified by trust custodians.
It’s going to be intriguing to see if Ginnie Mae wind up going where no financial services regulator has been willing to go before, namely, to get to the bottom of how severe the “bad records” problem is at the major mortgage servicers.
On a related front, Bloomberg described on how another fixture of the servicing industry, MERS, seems to be suffering a slow and well deserved decline, and perhaps demise, due its inability to meet the terms of a 2011 settlement agreement and contend with ongoing litigation. From the article (hat tip Lisa Epstein):
As the rest of the housing industry recovers, a little-known firm with a key role in U.S. mortgage finance remains stuck in limbo, wrestling with regulators, lawsuits and the departures of senior employees.
The turbulence feeds uncertainty about the fate of Mortgage Electronic Registrations Systems Inc., or MERS, which documents the ownership and resale of about half of U.S. home loans. A breakdown could force clients such as Fannie Mae (FNMA) and Bank of America Corp. to make costly changes to their loan businesses.
Management hasn’t completed fixes promised in a broad 2011 U.S. settlement designed to stop foreclosure abuses, according to two people briefed on MERS’ operations. Regulators rejected one of the firm’s consultants as unqualified and are examining why four employees hired to help with reforms — including the chief legal officer — recently quit, said the people, speaking on condition of anonymity because the matter is private.
The closely held Reston, Virginia-based firm, a unit of Merscorp Holdings Inc., is also facing scores of lawsuits and state probes that challenge its business model as well as the legality of its filings in hundreds of county courthouses.
Things at MERS are so bad that *gasp* observers as daring to suggest that banks might suddenly be forced to register mortgages the old-fashioned way, as in reliably:
“If the use of MERS is found not to be valid, we could be obligated to cure certain defects or in some circumstances be subject to additional costs and expenses,” Bank of America reported in a February filing. “Our use of MERS as nominee for the mortgage may also create reputational risks for us.”
Fannie Mae, in its annual financial report filed in February, also noted the potential effects if the lawsuits or regulatory pressures force changes in MERS.
“A large portion of the loans we own or guarantee are registered in MERS’s name and the related servicing rights are tracked in the MERS System,” Fannie Mae’s report said, adding that if the firm couldn’t function in the same way, lenders could be forced to go back to time-consuming and expensive methods of recording land transfers.
We have repeatedly flagged that the underlying problem with servicing is the state of the underlying records, yet the authorities keep pretending as if they can put Band-Aids over a gunshot wound. For instance, as we wrote in early 2013 during our Bank of America/Independent Foreclosure Review whistleblower series:
At Bank of America, the disorderliness of the project is only part of the story. Focusing on that aspect serves to exculpate OCC, the bank and Promontory. The dirty secret of these reviews is they could never have been done properly. There was no pre-existing, internally consistent, complete and provably correct account of a customer and his loan in the Bank of America systems. All the dysfunction of the reviews was inevitable given the state of the records. The only course of action possible was a cover-up; the only open question was how much effort would be expended to create the appearance a thorough investigation was made.
So here we are, years later, still seeing the same wound continuing to fester….and remarkably, people like Ted Tozer at Ginnie Mae are surprised to find how bad things are. It shows you how even people who really ought to know better have been taken in by bank and regulatory propaganda.