Congressional Oversight Panel Takes Tough Stand on Mortgage Documentation Problems Posted: 17 Nov 2010 02:55 AM PST The spectacle of Senators in Tuesday’s banking committee hearings on the mortgage largely siding with articulate, fact-driven critics of the mortgage securitization is a sign that financial services industry misdirection and lame excuses are wearing thin. But far more devastating is the contrast between the long-promised American Securitization Forum paper on mortgage transfers, versus the Congressional Oversight Panel report on the broader issue of mortgage documentation. A securitization lawyer called me to say he’d gotten calls from investors as soon as the ASF report was out. He said they were surprised at how weak the paper was, and complained that it did nothing to alleviate investor concerns. Georgetown law professor Adam Levitin, in the Senate Banking Committee hearings on Tuesday neatly dispatched the ASF paper. To give a rough paraphrase: I agree with much of what is in the American Securitization Forum paper, as far as it goes, but it doesn’t go far enough. It is analyzing the wrong law. The paper discusses Article 3 of the UCC, which covers negotiable instruments, and Article 9, which covers promissory notes. But the UCC allows for parties to enter into other contractual arrangements, and the pooling and servicing agreements do that. Most securitization trusts are also governed by NY trust law, and they force additional measures for transfer. In other words, this is pretty much the same argument that the industry has offered from the outset. There is no mention of the conflicts between the actual steps taken versus. those required by the PSA, no discussion of post closing transfers. There are some citations where courts supposedly held the PSA was a sufficient “assignment” of the mortgage loans to make up for any other transfer failings; I’ll have to read them to see how narrow they are. It should probably not be a surprise that this report was so flimsy. The ASF had originally indicated its report would be out two dates after it promised it, which should have been the very end of October. It is noteworthy that they released it the same day as both the Congressional Oversight Panel report and the Senate Banking committee hearing. If it had been a potent document, there would be every reason to have gotten it out sooner so it could inform the hearings and the COP report. The fact that it was presented at the same time seems to be a tacit admission that it had little new to add. But having the report come out the same day as the COP paper still serves to blunt its impact. And today, Moody’s issued a report on MERS and robo signing. As a securitization expert remarked, Great timing by Moody’s – coming out the morning of the COP report and hearings to say that they see no risk. No doubt, this was coordinated by the ASF to be timed with their white paper. Doesn’t speak well for Moody’s having learned anything in the past three years or for their independence. By contrast, the Congressional Oversight Panel paper is painstakingly thorough. It ties the robo signing issue into broader concerns: While these documentation irregularities may sound minor, they have the potential to throw the foreclosure system – and possibly the mortgage loan system and housing market itself – into turmoil. At a minimum, in certain cases, signers of affidavits appear to have signed documents attesting to information that they did not verify and without a notary present. If this is the extent of the irregularities, then the issue may be limited to these signers and the foreclosure proceedings they were involved in, and in many cases, the irregularities may potentially be remedied by reviewing the documents more thoroughly and then resubmitting them. If, however, the problem is related not simply to a limited number of foreclosure documents but also to irregularities in the mortgage origination and pooling process, then the impact of the irregularities could be far broader, affecting a vast number of investors in the mortgage-backed securities (MBS) market, already completed foreclosures, and current homeowners. This latter scenario could result in extensive litigation, an extended freeze in the foreclosure market, and significant stress on bank balance sheets arising from the substantial repurchase liability that can arise from mistakes or misrepresentations in mortgage documents.3…The severity and likelihood of these various possible consequences depend on whether the irregularities are pervasive and when in the process they occurred. It also highlights the New York trust law issue we have discussed at length here: New York trust law requires strict compliance with the trust documents; any transaction by the trust that is in contravention of the trust documents is void, meaning that the transfer cannot actually take place as a matter of law.40 Therefore, if the transfer for the notes and mortgages did not comply with the PSA, the transfer would be void, and the assets would not have been transferred to the trust. Moreover, in many cases the assets could not now be transferred to the trust.41 PSAs generally require that the loans transferred to the trust not be in default, which would prevent the transfer of any non-performing loans to the trust now.42 Furthermore, PSAs frequently have timeliness requirements regarding the transfer in order to ensure that the trusts qualify for favored tax treatment.43 And it draws out some implications: Failure to follow representations and warranties found in PSAs can lead to the removal of servicers or trustees and trigger indemnification rights between the parties. Failure to record mortgages can result in the trust losing its first-lien priority on the property. Failure to transfer mortgages and notes properly to the trust can affect the holdings of the trust. If transfers were not done correctly in the first place and cannot be corrected, there is a profound implication for mortgage securitizations: it would mean that the improperly transferred loans are not trust assets and MBS are in fact not backed by some or all of the mortgages that are supposed to be backing them. This would mean that the trusts would have litigation claims against the securitization sponsors for refunds of the value given by the trusts to the sponsors (or depositors) as part of the securitization transaction. If successful, in the most extreme scenario this would mean that MBS trusts (and thus MBS investors) could receive complete recoveries on all improperly transferred mortgages, thereby shifting the losses to the securitization sponsors. If a significant number of loan transfers failed to comply with governing PSAs, it would mean that sizeable losses on mortgages would rest on a handful of large banks, rather than being spread among MBS investors… in many cases, any put-back liability is likely to rest on the securitization sponsors. Although these put-back rights sometimes entitle the trust only to the value of the loan less any payments already received, plus interest, the value the trust would receive is still greater than the current value of many of these loans. As a number of originators and sponsors were acquired by other major financial institutions during 2008-2009, put-back liability has become even more focused on a relatively small number of systemically important financial institutions. There is a great deal more informative discussion in the report, and I encourage you to read it. And the discussion above no doubt explains the industry’s dilatory response to these legal concerns. The banks appear to be relying on their TBTF status to bulldoze the law. And even though they are getting pushback in the courts, the industry seems almost constitutionally unable to see that it may not be able to bully its way through the colossal mess it has created.
	Senate Hearing on Foreclosure Mess Goes Badly for Banks Posted: 17 Nov 2010 01:30 AM PST It’s become conventional wisdom to denounce Congressmen as know-nothings who routinely harass businessmen by hauling them before investigations and asking them uninformed questions. Tuesday, we saw a refreshing and badly needed contrast to that stereotype in the form of a comparatively short (less than three hour) hearing by the Senate Banking Committee on the foreclosure/securitization crisis. The senators were informed, engaged, and well versed in most of the issues. The rushed timetable also helped, for instead of having the witnesses read their prepared testimony, each had to give a shorter summary, which gave the hearings a sense of urgency and meant most of the hearing time was spent on questions from the committee members. What was striking was the contrast between the representatives of the banking industry, namely Barbara Desoer of Bank of America, David Lowman of Chase, and R.K. Arnold of MERS, versus the critics, who were Tom Miller, the Iowa attorney general, Adam Levitin, Georgetown law professor, and Diane E. Thompson of the National Consumer Law Center. I strongly recommend you watch the hearings, they were very instructive and even entertaining at points (several Senators gave long form reports of how badly their constituents were being treated by banks). Even Richard Shelby had his moments. Shelby used to be in the title insurance business and roughed up R.K. Arnold, who looked like a rabbit in the headlights. Or you can read the liveblogs at FireDogLake by David Dayen and emptywheel The financial services industry members offered not merely tired bromides, but repeated flat out lies: we always try to save borrowers; we don’t foreclose on people who aren’t delinquent; we don’t make money from foreclosing (no joke, the Chase guy said that); we never consider out second liens in our foreclosure decisions (huh? only true on a case by case basis, utter bunk at the institutional level); we don’t have any conflicts (double huh, every business has to make tradeoffs); yes, we make mistakes, but we correct them as soon as we learn about them (yeah, right). And this palaver did elicit reactions. Early on, when Lowman claimed that Chase was committed to working with homeowners, he was called a lair by a member of the audience from the audience. The session had to be halted while the offending truth-teller was removed. And the other witnesses often felt compelled to take the floor after a particularly egregious bank remark, as Levitin did on the claim that banks don’t make money from foreclosing, and offered evidence to the contrary. Some highlights of the session: Thompson did a very effective job of debunking the “deadbeat borrower” meme, and her written testimony contains an extensive discussion of servicer-driven foreclosures and abuses with numerous examples. Senator Johans tried to minimize the impact of her account by asking her how many people were being foreclosed upon who hadn’t failed to pay (note Thompson had examples of that too). Thompson was not diverted, and stressed that she as an attorney only fought foreclosures when she thought the borrower should not have been foreclosed upon, and intimated that her views were not unusual among legal services types. After a lengthy exchange, she estimated that 10% of her cases had been where the borrower had never been late (!) and another 50% were the result of improper servicing fees being charged (the balance were people who were in mod programs where the foreclosure was not halted). Levitin endorsed the failure to convey-New York trust theory that has been discussed at length on Naked Capitalism. He made it clear that there are unanswered questions of fact and law, and the worst case scenario was dire indeed. He also stressed that the problem was not the law but failure to comply. Dodd comported himself well and gave a very good introductory speech, and in particular, stressed that this was precisely the sort of issue that the Financial Stability Oversight Counsel needed to address. There was consensus from virtually everyone who spoke save the two bank representatives about the merits of principal mods for viable borrowers, as well as having banks initiate mod discussions before proceeding to foreclosure, and having an expedited foreclosure process for borrowers who are clearly not viable. It is remarkable to see how much the bank representatives stick to their talking points and do everything they can to not discuss contradictory evidence. It wasn’t convincing in this session, and I imagine it will start wearing thin on the wider public. The one bit of bad news about these hearings is how little media attention they’ve garnered: no mention on the business page of the New York Times, while the weak American Securitization Forum paper is featured in Dealbook. But these issues are not below the radar for the public, as the degree of engagement by the senators attests.
	On Bank of America’s Loan-by-Loan Fight in Putbacks Posted: 17 Nov 2010 01:20 AM PST It’s more than a bit puzzling when readers get upset when once in a great while, we point out how the case against banks on a particular issue is overstated. The reaction seems to be that we’ve suddenly gone soft on financial firm miscreants, which is about as wide of the mark as you can get. Overhyped attacks on authority (and unfortunately for us all, banks are very much part of the officialdom) backfire. They allow the defenders of the orthodoxy to paint critics as hysterical, reckless, and ill informed. As a result, the best chance for reining in the industry is to make charges that stick. One area where the case against banks is exaggerated is non-GSE mortgage putback actions. In very simple terms, the servicer on a securitization, on behalf of the trust, has an obligation to “put back”, as in return to the originator, loans that are in violation of the representations and warranties made in the securitization agreement. There is a big difference between putback provisions on GSE paper, where Freddie and Fannie have strong rights to insist on putbacks, versus in so-called non-GSE (aka “private label”) deals, where the investors have very limited authority. Despite this disparity, the ongoing GSE putbacks have gotten comparatively little attention in the media, while a flurry of cases filed by the monoline insurers (who have fewer obstacles to overcome in these cases than bond investors) and a letter sent to Bank of America by Pimco, BlackRock, and the New York Fed, among others, that appears to be laying the ground for a putback action have gotten a great deal of attention. As we have stressed, our dim view of these cases is based on the fact that they are difficult and costly to win. Even though it may seem obvious that folks like Countrywide, which is now part of Bank of America, originated boatloads of bad mortgages and clearly harmed investors, that does not mean that this legal theory is a winner. And the reason we keep harping on this issue is that there are much better legal theories that investors could be pursuing (notably ones related to the apparently widespread failure of mortgage originators to take the steps set forth in their own contracts to convey mortgage loans to the securitization trusts). So to the extent that the media is unwittingly overselling the merits of costly litigation, it may actually wind up serving the banking industry. The latest report of the Congressional Oversight Panel sets forth the issue (boldfaced ours): If any of the representations or warranties are breached, and the breach materially and adversely affects the value of a loan, which can be as simple as reducing its market value, the offending loan is to be “put-back” to the sponsor, meaning that the sponsor is required to repurchase the loan for the outstanding principal balance plus any accrued interest. The problem with these cases is the plaintiff needs to show that it was the failure to adhere to the terms of the agreement regarding loan quality, and not some other cause, like borrower unemployment job loss, death, or disability, that led to investor losses. Broadly-measured unemployment at 17% and housing prices down 25% to 45% are also major causes of investor losses. Consider this analogy: someone buys a car that unbeknownst to him has a tendency to partial brake failure which produces nasty skids. The manufacturer knew about this defect but kept selling the cars anyhow. The owner gets in an serious accident when he hit his brakes and the car started fishtailing. Seems like a slam dunk, right? In court, the driver’s lawyer presents the information about the brake defects and the driver’s testimony. But the other side presents forensic evidence: the street was covered with wet leaves. The skid pattern is consistent with correctly performing brakes where one wheel was not getting traction due to the leaves. Oh, and the analysis of the skid marks and the impact suggests the drivers was speeding before he hit the brakes, and investigator ascertained he had had three drinks at a dinner before getting in his car. Does this lawsuit now sound so clear cut? You have a similar process with these putback cases. One side claims it was the product defect, the rep and warranty breach, that resulted in the losses, while the other side points to other circumstances. And remember, these cases are fought on a loan-by-loan basis. Consider Bank of America CEO Brian Moynihan’s remarks yesterday as reported by Bloomberg: Bank of America has said it would review claims “loan-by- loan” to protect shareholders as Fannie Mae, bond insurers and private investors press for so-called putbacks. While it’s a good reflex to assume that anything said by a bank is probably untrue, it does not follow that everything they say is untrue. I’ve spoken at some length to an attorney who is on the anti-bank side of litigation and drafted one of the early putback suits (much of his language has been copied faithfully in the recent suits). While these suits do get settled, they tend to be not hugely lucrative. And he notes that the bond insurers, which have fewer procedural hurdles to overcome than securities investors, are only in the early stages of these actions, which promise to be a long haul. Now other commentators have a more optimistic reading of these suits. For instance, a few weeks ago, when BofA last got some press for its “well fight them every inch” posture, Barry Ritholtz posted a lengthy extract from some court exchanges between Bank of America and MBIA on a putback suit. Barry read this as undercutting the Bank of America position. Barry and I are generally in agreement on the mortgage front, but I read this material quite differently than he did. First, BofA and MBIA are still fighting over BofA’s speed (or alleged lack thereof) in getting information on 386,000 loans (the case has been in litigation for over two years). However, MBIA made a major tactical error in not only asking for the files, but asking BofA (Countrywide) to meta tag the data. This gives Countrywide more latitude in their response speed. MBIA also tried to allege that the files submitted so far weren’t all complete, but did it simply based on the length of some files, when Countrywide argued (and the judge agreed) that the issue was completeness, not length, and they hadn’t provided any proof of their beef. MBIA also argued that they should be permitted to make their case based on a sample of the files, not on every loan. The judge seemed sympathetic, but said they needed to provide a methodology, which MBIA has yet to do. And of course, both sides will fight over what sampling methodology is appropriate. Now consider: when these loans in these deals were reviewed by firms like Clayton Holdings prior to issuance, they’d typically look at 25%. So there is industry precedent for a sample being very large. Even if MBIA manages to whittle a sample down to 10%, how long is it going to take to work through why the defaulting borrowers in a sample of 38,000? If you assume a 30% default rate, it still adds up to an case by case analysis of 11,400 borrowers. I hate to be the bearer of bad tidings, since I really do want the banks to get their comeuppance. But the real question is why did investors sign up for transactions that gave them such weak recourse in the case of originator fraud? Perversely, the banking industry became so careless that investors do have other avenues for recovery, as we discuss in our post on the Congressional Oversight Panel report today.
	Rumors of Negotiations on Settlement of 50 State Attorney General Foreclosure Probe Posted: 16 Nov 2010 10:18 PM PST Two media outlets tonight, Reuters and a Washington Post blog post, discussed the idea of a relatively quick settlement of the probe by 50 state attorneys general into robo signing and other foreclosure-related abuses. What is interesting is the timing of these sightings, which came the same day of the release of the Congressional Oversight Panel report on servicing and securitization, the promised American Securitization Forum defense of securitization industry practices, and Senate Banking Committee hearings on foreclosures and securitization. As we discuss in other posts today, the day went very badly for the industry. The sudden, albeit small, flurry of “settlement talks are on” reports on the attorney general front bears all the hallmarks of a banking industry trial balloon being hyped as something further along to try to create the impression that the mess is on its way to being resolved on terms not terribly painful to banks. The story seems to have started with a rumor on CNBC, which is being treated with more dignity than it deserves, particularly since the supposed source denied it. CNBC reported that Iowa attorney general Tom Miller was nearing a settlement of the 50 state probe (we noted yesterday that CNBC ran a credulity-straining report on MERS, so it seems to be the preferred outlet for bank PR these days). But when Reuters contacted Miller’s office, they disputed this account. Nevertheless, this idea was carried further by the Reuters piece, which quoted Bank of America CEO Brian Moynihan stating that a “quick resolution” of the 50 state investigation would be be the best outcome for all parties involved. That view strains credulity, unless you are of the “what is best for banks is best for America” school of thinking. The state AGs started their inquiry on October 13, and signaled their intent to go beyond the robo signing scandal. It’s highly unlikely that they have gotten much of anywhere with their probe. And in normal negotiating settings, quick settlements take place only when there is little difference of views between the two sides on the facts or limited resources on both sides, which created a mutual recognition that they have a vested interested in reaching a resolution expeditiously. Neither of those conditions apply here. So the argument that a quick settlement is best can only be based on the assumption that an investigation will uncover real dirt, and create market uncertainty. And of course we can’t have that, now can we? That hidden assumption, that there is real risk should investigations continue for a protracted period, is the polar opposite of the position that the banks have taken thus far, that there is nothing to see here, that the robo signing scandal was merely procedural (as if frauds on the court are mere “procedural” miscues) and the underlying foreclosure actions were all correct. This evening, we see this rumor carried a step further in a post by Washington Post blogger Ariana Eunjung Cha: The 50 state attorneys general are in negotiations over an agreement over foreclosures that would include a victims’ compensation fund that would provide money for borrowers whose homes have been taken away improperly, according to state and industry officials. The discussions are still preliminary and the final deal may change significantly as details are hammered out and the settlement is vetted by 50 separate state offices, the official said. While there’s no universal agreement that would apply industry wide and the AGs are negotiating separately with each bank, many of the stipulations are the same for the agreements being discussed with the three largest mortgage servicers: Bank of America, JP Morgan Chase and Wells Fargo. Both sides have tentatively agreed that mandatory third-party mediation if a homeowner requests it is something that should be included. They also agree that there should be no more “dual track” loan modification negotiations that end suddenly with foreclosures. Many homeowners have complained that they were in the middle of loan modification discussions when they were foreclosed on or told to default on their loans to get a modification, and then ended up having their home foreclosed on. The most radical part of the settlement deal has to do with providing monetary compensation for homeowners who have lost their homes but can prove that they have been foreclosed on wrongly. Yves here. Exactly how many sources are there for this story? As I read it, it could be as little as the CNBC and Moynihan statements (if you believe the Miller rumor, he’s a state official, Moynihan is clearly an industry official), plus a conversation with one unnamed official (presumably industry). And the account simply does not add up. First, we have Ohio, which is one of the lead actors in this 50 state effort, pushing for a speedy trial in a robo signing case in which it is seeking sizeable damages. I can’t see Ohio agreeing to any settlement as long as Ohio attorney general Richard Corday is in office (admittedly only till the end of January). And he is clearly trying to get enough stakes in the ground so as to limit his successor’s ability to make a radical retreat. In addition, the supposed process for these negotiations, which the Washington Post says is bank by bank, assures a protracted process. And it ALSO indicates that any settlement would have to be approved by 50 “separate” state offices. So even by the account presented in the Post, there is not a cohesive front on either side of this supposed initiative, which begs the question of who exactly is driving this train. The only way you could get fast resolution in situation like this is to get all the parties in a room and treat it as a a two-sided negotiation. However, we have indicated that efforts by attorneys general need to be regarded with some skepticism. We’ve pointed to instances in which AG initiatives add up to far less than their headlines would lead you to believe. They do have incentives to collect a scalp quickly and declare victory. But given the high level of public ire and the economic importance of the foreclosure crisis, the AGs are likely to appreciate the dangers of appearing to cave in to bankers. They clearly have them on the run now; why act in haste when keeping the pressure on will lead to a more favorable outcome? The one area where I could see a relatively quick resolution is if the robo signing abuses were carved out from the other issues and negotiated separately. But overall, it appears likely that this convenient story of advanced settlement talks is just that, a mere story. via Naked Capitalism