Tag Archives: National Mortgage Settlement

The Sloppy State of the Mortgage Market

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photo by Badagnani

I published a short article in the California Real Property Law Reporter, Sloppy, Sloppy, Sloppy: The State of the Mortgage Market, as part of a broader discussion of Foreclosures Following Problematic Securitizations.  The other contributors were Roger Bernhardt, who organized the discussion,  as well as Dale Whitman, Steven Bender, April Charney and Joseph Forte.  My article opens,

Much of the discussion about the recent California Supreme Court case Yvanova v New Century Mortgage Corp. (2016) 62 C4th 919  has focused on the scope of the Court’s narrow holding, “a borrower who has suffered a nonjudicial foreclosure [in California] does not lack standing to sue for wrongful foreclosure based on an allegedly void assignment merely because he or she was in default on the loan and was not a party to the challenged assignment.” 62 C4th at 924. This is an important question, no doubt, but I want to spend a little time contemplating the types of sloppy behavior at issue in the case and what consequences should result from that behavior.

Sloppy Practices All Over

The lender in Yvanova was the infamous New Century Mortgage Corporation, once the second-largest subprime lender in the nation.  New Century was so infamous that it even had a cameo role in the recently released movie, The Big Short, in which its 2007 bankruptcy filing marked the turning point in the market’s understanding of the fundamentally diseased condition of the subprime market.

New Century was infamous for its “brazen” behavior.  The Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (Jan. 2011) (Report) labeled it so because of its aggressive origination practices.  See Report at page 186. It noted that New Century “ignored early warnings that its own loan quality was deteriorating and stripped power from two risk-control departments that had noted the evidence.” Report at p 157. And it quotes a former New Century fraud specialist as saying, “[t]he definition of a good loan changed from ‘one that pays’ to ‘one that could be sold.”  Report at p 105.

This type of brazen behavior was endemic throughout the mortgage industry during the subprime boom in the early 2000s.  As Brad Borden and I have documented, Wall Street firms flagrantly disregarded the real estate mortgage investment conduit (REMIC) rules and regulations that must be complied with to receive favorable tax treatment for a mortgage-backed security, although the IRS has let them dodge this particular bullet.  Borden & Reiss, REMIC Tax Enforcement as Financial-Market Regulator, 16 U Penn J Bus L 663 (Spring 2014).

The sloppy practices were not limited to the origination of mortgages. They were prevalent in the servicing of them as well. The National Mortgage Settlement entered into in February 2012, by 49 states, the District of Columbia, and the federal government, on the one hand, and the country’s five largest mortgage servicers, on the other, provided for over $50 billion in relief for distressed borrowers and in payments to the government entities. While this settlement was a significant hit for the industry, industry sloppy practices were not ended by it. For information about the Settlement, see Joint State-Federal National Mortgage Servicing Settlements and the State of California Department of Justice, Office of the Attorney General, Mortgage Settlements: Homeowners.

As the subprime crisis devolved into the foreclosure crisis, we have seen those sloppy practices have persisted through the lifecycle of the subprime mortgage, with case after case revealing horrifically awful behavior on the part of lenders and servicers in foreclosure proceedings.  I have written about many of these Kafka-esque cases on REFinBlog.com.  One typical case describes how borrowers have “been through hell” in dealing with their mortgage servicer. U.S. Bank v Sawyer (2014) 95 A3d 608, 612 n5.  Another typical case found that a servicer committed the tort of outrage because its “conduct, if proven, is beyond the bounds of decency and utterly intolerable in our community.” Lucero v Cenlar, FSB (WD Wash 2014) 2014 WL 4925489, *7.  And Yvanova alleges more of the same.

Final Accounting for National Mortgage Settlement

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Attributed to Jacopo de' Barbari

Luca Pacioli, A Founding Father of Accounting

Joseph Smith, the Monitor of the National Mortgage Settlement, has issued his Final Compliance Update. He writes,

I have filed a set of five compliance reports with the United States District Court for the District of Columbia as Monitor of the National Mortgage Settlement (NMS or Settlement). The following report summarizes these reports, which detail my review of each servicer’s performance on the Settlement’s servicing reforms. This report includes:

• An overview of the process through which my team and I have reviewed the servicers’ work.

• Summaries of each servicer’s performance for the third quarter 2015.

Pursuant to the Settlement, the requirement to comply with the servicing standards ended for Bank of America, Chase, Citi, Ditech and Wells Fargo as of the end of the third quarter 2015. Accordingly, this is my last report under the NMS for these servicers. Like all mortgage servicers, they are still required to follow servicing-related rules issued by the Consumer Financial Protection Bureau (CFPB). (2)

Smith concludes,

The Settlement has improved the way these servicers treat distressed borrowers, and, under its consumer relief requirements, the banks provided more than 640,000 borrowers with $51 billion in debt forgiveness, loan modifications, short sale assistance and refinancing at a time when families and the market were subject to distress and uncertainty.

I believe the Settlement has contributed towards the rebuilding of public trust and confidence in the mortgage market and hope that it will inform future regulation of financial institutions and markets. I look forward to further discussions on these topics among policymakers, consumer advocates and mortgage servicers. (13)

I have blogged about the Monitor’s earlier reports and have been somewhat unhappy with them. Of course, his primary audience is the District Court to which he is submitting these reports. But I do not believe that the the reports have “contributed towards the rebuilding of public trust and confidence in the mortgage market” all that much. The final accounting should be accurate, but it should also be understandable to more than a select few.

The reports have been opaque and have not give the public (even the pretty well-informed members of the public, like me) much information with which to contextualize their findings. I hope that future settlements like this take into account the need to explain the findings of decision makers and court-appointed monitors so that the public can have a better sense of whether justice was truly done.

Systemic Servicing Failure

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Joseph A. Smith, Jr.

Joseph A. Smith, Jr.

Joseph A. Smith, Jr., the Monitor of the National Mortgage Settlement, issued An Update on Ocwen’s Compliance. It opens,

I filed a compliance report with the United States District Court for the District of Columbia (the Court) today that provides the results of my tests on Ocwen’s compliance with the National Mortgage Settlement (Settlement or NMS) servicing standards during the third and fourth calendar quarters of 2014. (2)

The Monitor found that Ocwen (which has been subject to numerous complaints) failed at least four metrics and a total of ten metrics are subject to some type of corrective action plan. As with many of these reports, the prose is turgid, but the subject is of great concern to borrowers who have mortgages serviced by Ocwen.  Problems were found with

  1. the timeliness, accuracy and completeness of pre-foreclosure initiation notification letters
  2. the propriety of default-related fees
  3. compliance with short sale notification requirements regarding missing documents
  4. providing the reason and factual basis for various denials

The Monitor concludes, “The work involved to date has been extensive, but Ocwen still has more work to do. I will continue to report to the Court and to the public on Ocwen’s progress in an ongoing and transparent manner.” (5) This sounds like bureaucratic understatement to me.  Each of these failures has a major impact on the homeowners who are subject to it.

The Kafka-esque stories of homeowners dealing with servicers gone wild are graphic and frightening when a home is on the line. And when I read the corrective actions that the Monitor is implementing, it reads more like my 6th grader’s report card than like a plan for a massive corporation. One of them is “ensuring accuracy of dates used in letters.” (Appendix ii) Hard to imagine a grown up CEO needing to be told that.

I have wondered before how a company under court-ordered supervision could continue to behave like this. I remain perplexed — and even a bit disgusted.

Bank Break-ins

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Chris Odinet has posted Banks, Break-Ins, and Bad Actors in Mortgage Foreclosure to SSRN. The abstract reads,

During the housing crisis banks were confronted with a previously unknown number mortgage foreclosures, and even as the height of the crisis has passed lenders are still dealing with a tremendous backlog. Overtime lenders have increasingly engaged third party contractors to assist them in managing these assets. These property management companies — with supposed expertise in the management and preservation of real estate — have taken charge of a large swathe of distressed properties in order to ensure that, during the post-default and pre-foreclosure phases, the property is being adequately preserved and maintained. But in mid-2013 a flurry of articles began cropping up in newspapers and media outlets across the country recounting stories of people who had fallen behind on their mortgage payments returning home one day to find that all of their belongings had been taken and their homes heavily damaged. These homeowners soon discovered that it was not a random thief that was the culprit, but rather property management contractors hired by the homeowners’ mortgage servicer.

The issues arising from these practices have become so pervasive that lawsuits have been filed in over 30 states, and legal aid organizations in California, Florida, Michigan, Nevada, and New York report that complaints against lender-engaged property managements firms number among their top grievances. This Article analyzes lender-engaged property management firms and these break-in foreclosure activities. In doing so, the paper makes a three-part call to action, which includes the implementation of bank contractor oversight regulations, the creation of a private cause of action for aggrieved homeowners, and the curtailment of property preservation clauses in mortgage contracts.

This is a timely article about a cutting edge issue. All too often I have heard pro-bank lawyers claim that banks almost never foreclose improperly. The news reports and lawsuits discussed in this article counter that claim. And yet, I hope that some empirically-minded person could quantify the frequency of such misbehavior to better inform policymakers going forward.

Are Billions Enough?

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Jenner & Block has issued the Citi Monitorship First Report. By way of background,

The Settlement Agreement resolved potential federal and state legal claims for violations of law in connection with the packaging, marketing, sale, structuring, arrangement, and issuance of residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs) between 2006 and 2007. As explained below, in the Settlement Agreement, Citi agreed to pay $4.5 billion to the settling governmental entities, acknowledged a statement of facts attached as Annex 1, and agreed to provide consumer relief that would be valued at $2.5 billion under the valuation principles set forth in Annex 2.2 As part of the Settlement Agreement, [Jenner partner] Thomas J. Perrelli was appointed as independent monitor (Monitor) to determine Citi’s compliance with the consumer relief and corresponding requirements of the Settlement Agreement. This is the first report assessing Citi’s progress toward completion of those obligations. (3, footnote omitted)

Because this is the first report, much of it sets the stage for what is to come. I was, however, struck by the section titled “Impact of Relief Provided:”

To evaluate fully the impact of the relief that is the subject of this report and authorized under the Settlement Agreement would require a variety of activities not contemplated by the settlement and not easily achievable (e.g., interviews with individual homeowners). Isolating the effect of this settlement, the National Mortgage Settlement, and other RMBS settlements from the broader housing market is also difficult.

One question frequently asked is whether the relief provided to borrowers and for which Citi has received credit would have been provided in any event (e.g., is this really additional?) On this question, the answer is mixed. Given ordinary accounting practices, loans for which foreclosure does not make economic sense are frequently written-off by financial institutions. In that circumstance, however, the banks may not release liens as a matter of routine, leaving borrowers with an ongoing burden and impeding potential efforts to redevelop the property. To get credit under the Settlement Agreement, Citi was required to release the lien, thus giving an additional benefit to the homeowner to allow him or her to make a fresh start and to remove any legal obstacles from the transfer of the property. (17, footnote omitted)

As I have noted before, it is hard to truly assess the restorative and retributive impacts of the ten and eleven digit settlements of litigation arising from the financial crisis. Are individuals appropriately helped? Are wrongdoers appropriately punished? Are current actors appropriately deterred?  I find it bizarre that it is so hard to tell even when settlements are measured in the billions of dollars.

Mortgage Servicer Accountability

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Joseph A. Smith, Jr, the Monitor of the National Mortgage Settlement, issued his third set of compliance reports (I blogged about the second here). For those needing a recap,

As required by the National Mortgage Settlement (Settlement or NMS), I have filed compliance reports with the United States District Court for the District of Columbia (the Court) for each servicer that is a party to the Settlement. The servicers include four of the original parties – Bank of America, Chase, Citi and Wells Fargo. Essentially all of the servicing assets of the fifth original servicer party, ResCap, were sold to and divided between Ocwen and Green Tree pursuant to a February 5, 2013, bankruptcy court order. Accordingly, Ocwen and Green Tree are now subject to the NMS for the portions of their portfolios they acquired from ResCap.1 These reports provide the results of my testing regarding compliance with the NMS servicing standards during the third and fourth calendar quarters of 2013, or test periods five and six. They are the third set of reports for the original four bank servicers, the second report for Ocwen and the first report assessing Green Tree. (3)

The Monitor concludes that Bank of America, Citi, Chase, Ocwen and Wells Fargo “did not fail any metrics during the most recent testing periods.” (2) The Monitor also reports on “fourth-quarter compliance testing results for the loans Green Tree acquired from the ResCap Parties. Green Tree implemented the Settlement’s servicing standards after such acquisition. Green Tree failed a total of eight metrics during this time period.” (2) The metrics that Green Tree failed include a number of practices that have made the lives of borrowers miserable during the foreclosure crisis. They are,

  • whether the servicer accurately stated amounts due from borrowers in proofs of claims filed in bankruptcy proceedings
  • whether the servicer accurately stated amounts due from borrowers in affidavits filed in support for relief from stay in bankruptcy proceedings
  • whether loans were delinquent at the time foreclosure was initiated and whether the servicer provided borrower with accurate information in a pre-foreclosure letter
  • whether the servicer provided borrower with required notifications no later than 14 days prior to referral to foreclosure and whether required notification statements were accurate
  • whether the servicer waived post-petition fees, charges or expenses when required by the Settlement
  • whether the servicer has documented policies and procedures in place to oversee third party vendors
  • whether the servicer responded to government submitted complaints and inquiries from borrowers within 10 business days and provided an update within 30 days
  • whether the servicer notified the borrower of any missing documents in a loan modification application within five days of receipt (9, emphasis added)

These metrics seem pretty reasonable — one might even say they are a low bar for sophisticated financial institutions to exceed. Until the servicing industry can do such things as a matter of course, close government regulation seems appropriate. The monitor notes that “work still remains to ensure that the servicers treat their customers fairly.” (2) Amen to that, Monitor.

Is $50 Billion of Mortgage Relief Enough?

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The National Mortgage Settlement Monitor issued his Final Crediting Report. The report states that

In total, the servicers have provided more than $50 billion of gross dollar relief, which translates into more than $20 billion in credited relief under the Settlement’s scoring system. More than 600,000 families received some form of relief under the Settlement. Aggregate credited relief includes:

• $7,589,277,740, or 37 percent of total credited relief, of first lien principal forgiveness.

• $3,105,152,359, or 15 percent of total credited relief, of second lien forgiveness.

• $3,587,672,814, or 17 percent of total credited relief, of refinancing assistance.

• $6,410,554,173, or 31 percent of total credited relief, of other forms of relief, including, but not  limited to, assistance related to short sales and deeds in lieu of foreclosure. (2)

I am not going to criticize the substance of the mortgage settlement. But I have a hard time translating these massive numbers into an understanding of how much help people got from the settlement. $20 Billion of credited relief divided by 600,000 households comes out to about $33,000 in relief per household. The Monitor gives us no sense as to whether that $33,000 made a difference to the affected families.

Perhaps going forward, massive settlements like this should include metrics that help to break down these large numbers into categories that make more intuitive sense:  for instance, did the mortgage relief reduce the monthly payment to a sustainable level?  What percent reduction was there in monthly mortgage payments? How many mortgages were converted from underwater mortgages into ones that were in the money as a result of the settlement? Metrics such as these would help give an understanding of how many people were helped (certainly more than one of the metrics often repeated by the monitor, “My team spent 36,000 hours reviewing and testing the consumer relief and refinancing activities reported by the banks.”

As counter-intuitive as the question may seem, do we have enough information to really know whether $50 Billion of mortgage relief made a meaningful difference for American households?