On the eve of Senate Banking Committee hearings into mortgage securitizations and the release of a Congressional Oversight Panel report covering the same terrain, the mortgage securitization industry has a full bore pushback underway.
A story in the New York Times bears all the hallmarks of being a PR plant. Remember the sympathetic New York Times article about health care lobbyist Karen Ignagni while the health care reform debate was in progress?
This time, the “woman who humanizes a supposedly misunderstood industry” ploy goes downscale with tonight’s New York Times piece, “” The article’s central actor is Bank of America servicier call center operator Brenda Seymore, who is presented as saving a single borrower from foreclosure, at least for now. Wow! What a cause for celebration!
This pure and simple lie is worked early on into an otherwise lightweight piece:
She finds herself caught between frustrated, anxious homeowners many months behind on their mortgage payments, and investors who hold mortgages and do not necessarily want to modify the loans, or reduce the amount of money homeowners owe.
Seymore is most assuredly not under any pressure from investors, either directly or indirectly. The only people pressuring her not to facilitate mods is her management.
Let’s get one thing clear. Despite the enormous media hype presenting a struggle between banks and borrowers on the mortgage front, the reality is that the overwhelming majority of investors favor mods. And it’s easy to understand why. Loss severities (finance speak for losses as a percentage of original par amount of mortgage) are currently running at over 70%. A principal mod of 50% for viable borrowers should be an easy win-win.
Ah, but there is one party that wins, big time, from foreclosing, and it’s the servicers. Servicing a mortgage that is current is a breakeven, at best a thin profit business. Late fees and foreclosure-related fees pad a servicer’s bottom line. Moreover, if a borrower becomes delinquent, the servicer advances principal and interest to the investors. In normal times, when foreclosure volumes are low and homes can be sold readily, the servicer can recover these outlays fairly quickly. But now, with foreclosures and liquidations attenuated, the amount of these advances have become very large, and the only way for the servicer to recoup is to foreclose. Hence foreclosure isn’t an option, it’s an institutional imperative.
And we also have the fact that deep principal mods to viable borrowers would force the biggest banks to write down their second mortgage portfolios, which means again the banks are putting their interests before those of the investors.
A more obvious bit of propaganda today comes via a short paper from SIFMA. “.” A distilled version of the main argument of this piece, which increasingly appears to be the standard industry defense, showed up in a Bloomberg article, ““:
It doesn’t matter when mortgage assignments and endorsements are recorded because the existence of the pooling and service agreement and purchase sale agreement is proof in itself that the loan was conveyed, said Stephen Ornstein, a partner in the Washington office of SNR Denton, a law firm that represents loan servicers and lenders.
“If the assignment is missing, you can create it by having the old assignee reassign it to you,” Ornstein said.
I’ve heard this argument before, and none of the five experts who advise New York state on trust matters (and virtually all mortgage securitizations use New York trusts) accept that point of view. New York trusts can accept assets only as stipulated in their governing agreement. The pooling and servicing agreement made very specific provisions as to how the notes (the borrower IOUs) were to be endorsed and further required that the process be completed by specific dates, typically no later than 90 days after the trust was closed, with only very limited exceptions. And the trustee, on behalf of the trust, was required to provide multiple certifications that all these steps had been taken.
Let’s put it another way: the industry position is that the underlying contract, the pooling and servicing agreement, can just be ignored if the industry screws up on a grand enough scale. Would any servicer tolerate this argument if someone, say Treasury, tried to cut their fees? Funny how the “sanctity of contract” argument is nowhere to be found when adherence to contracts might crimp industry profits.
1. Why did firms like SNR Denton’s predecessor, Thatcher Proffitt, have specific requirements in the PSAs if they didn’t have to be followed?
2. Why did the trustee certify that they had the notes and mortgages endorsed and assigned in the specified form when they appear never to have checked this information? Isn’t this a significant misrepresentation particularly since investors and rating agencies relied on these certifications?
3. While the electronic records of the PSA may indicate that a mortgage loan is part of the trust, what proof is there that another party could not also own the mortgage loan? Isn’t this exactly why there are recording requirements?
4. Were the attorneys and parties unaware that intent to sell the collateral is not sufficient if the steps to demonstrate conveyance were not followed?
5. Doesn’t the failure to have conveyed the notes as stipulated expose the trust unnecessarily to subsequent confusion and challenges in foreclosure court?
There is more clever positioning in the pretending-to-be-impartial SIFMA piece. This document is not worth parsing in detail, particularly since the American Securitization Forum is set to release its longer-form defense tomorrow, and it will likely cover the same ground. But let’s look at a couple of extracts so you get a feel for it:
SIFMA rejects sweeping claims that fundamental flaws regarding the transfer and ownership of mortgage loans are endemic to secondary markets and mortgage securitization, and believes that such concerns are exaggerated and without merit. While each situation may have variations, SIFMA believes that the customary practices utilized in secondary markets to convey ownership of mortgage loans from originators to other parties, and into securitization trusts, are sound and in accordance with generally applicable legal principles.
The use of “sweeping claims” implies that the critics have no evidence for their views, when borrower attorneys all over the US report widespread errors. A group of nearly 100 attorneys who work with bankruptcy lawyer Max Gardner have reported that in their collective experience, they have yet to find a single note that was conveyed correctly in accordance with the requirements of the pooling and servicing agreement. Other investigations show widespread problems. As much as SIFMA tries to dismiss the use of the word “endemic”, all they offer is bluster, when the evidence on the ground to the contrary is extensive.
And you have to love this part: “customary practices…are sound and in accordance with generally applicable legal principles.” This is simple an effort to divert attention from the fact that the contracts that the industry itself devised were often ignored. So a more accurate rendering would be “We did what was convenient instead of what we agreed to do, and if you pretend we didn’t have to satisfy a lot of complicated legal requirements to meet all the objectives of all the parties, we can find a way to justify what we did.”
And the next bit is just as disingenuous:
Q. Please explain the recent press reports that question the validity of residential mortgage loan transfers into mortgage backed securities.
A. These claims generally arise in the context of contested foreclosures. While most of the concerns that have been raised pertain to the technical process of filing for judicial foreclosure, some concerns relate to whether the loan servicer or loan holder is the proper party to bring the foreclosure action. In other words, the question is not whether the borrower defaulted under the loan documents for which foreclosure is a permissible or proper remedy. Rather, the question is whether the party filing the foreclosure documents has sufficient authority to bring the foreclosure action against the borrower and the home.
First, notice how this section pretends that no one is disputing the validity of the foreclosures. While most people losing their homes are indeed over their heads, contested foreclosures are a different kettle of fish. SIFMA ignores the fact that servicers routinely and repeatedly try to break bankruptcy stays, and often submit a bill for additional fees immediately post bankruptcy, when all charges were to be presented during the bankruptcy process. The consequences of forcing someone who is on a strict budget (as a result of agreeing on a bankruptcy plan with creditors) to come up with legal fees he does not have is often enough to put the borrower into a terminal tailspin. Attorneys have also reported that servicers as a matter of policy apply payments improperly, contrary to both the securitization agreement and Federal law, with the intent of compounding late fees and interest charges. And they escalate faster than you would think. One lawyer’s first case in this area involved a borrower about to lose his house as a result of the multiplying charges resulting from a single disputed late fee. This same attorney estimates that servicer error and fraud is responsible for 60% to 70% of current foreclosures in Chapter 13 cases. Even if he is off by a factor of 4 and the level is only 15%, that’s vastly higher than anyone in the industry would acknowledge. And this “we’re perfect, they are all deadbeats” ignores the fact that banks are also foreclosing on people who have signed loan modification agreements and are current on them (the Florida borrower-oriented legal blogs have numerous reports from courtroom observers).
Second, notice that the “proper party” framing suggests that the matter at issue is mere protocol. It isn’t. If the trust is not the proper party to foreclose (as in it is the holder, with the servicer acting as its agent), then that means the note is owned by someone else, presumably earlier in the securitization chain. That party can foreclose, but there is no proper way for the proceeds of that foreclosure to get to the trust, and the trust similarly under New York law is not permitted to accept the note so far after the trust closed.
As we indicated, there is little merit in taking our shredding much further. This piece simply talks past the real problem, in all likelihood because the industry experts know there is no obvious remedy if our evidence is a valid sample.