More Mortgage Madness
April Charney of Jacksonville Area Legal Aid argues that this mortgage maze is more insidious than hapless, because few servicers can foreclose without committing fraud. The mortgage-backed securities market is terribly byzantine, but it's also one governed by hard and fast rules that make it labor intensive for all involved. And that militates against the high-volume, low-cost business models of originators and servicers. How have they gotten around this dilemma? Charney and a growing number of lawyers and judges say they simply cheat.
The first step of foreclosing is to show a court a mortgage assignment saying you own the loan. But it turns out that in the rapid-fire process of securitizing loans, few players slowed down long enough to mind this legal detail. So servicers and their law firms--which earn a flat fee per foreclosure and are loath to drag the matter out--fill out assignments and backdate them, sloppily leaving all kinds of tells. The signer and the notary will be in different cities. Origination dates will be left blank. The trust, which represents the investors who bought the loan, will appear as assigning the loan to itself, from itself.
Charney cites the infamous deposition of a Citi Residential Lending employee, Tamara Price. Jim Kowalski, a former prosecutor now handling foreclosure defense cases in Jacksonville, sat Price down in April 2008 to determine why her name appears over and over again as the signer on mortgage assignments in Citi's foreclosures. Price described an automated process for faking the assignments.
Does she prepare the documents? Kowalski asked. No, the foreclosure lawyer does. Does she review the case files, as testified in the affidavit? No. Does the notary witness her signing the documents, or even notarize them on the professed date? No. Price even revealed that the "vice president" title attached to her name on assignments is bogus. "They're lying," Parker rails. "They're filing fraudulent documents and giving this to a judge in order to kick somebody out of their house."
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Servicers argue that they're unable to modify loans they don't own, which might anger investors by cutting into profits. Obama's plan addresses this assertion. It establishes federal standards for an appropriate modification--primarily by creating monthly payments that are no more than 38 percent of a borrower's income. If a servicer gets a borrower's payment down that far, the feds will chip in to bring it down to 31 percent. That encourages steep payment reductions, but it also gives servicers legal cover: the government has said, Here's a reasonable way to rewrite loans.
But many researchers and consumer advocates have long insisted that the servicers' professed fear of angering investors is a red herring. Valparaiso's Alan White has shown that investors lose far more money on foreclosures than they would on modifications. Looking at January's investor reports, White found that the average loss on a completed foreclosure was $130,000, or about 60 percent of the original loan amount. Meanwhile, the average loss for the few loans in which servicers wrote down principal was just $26,000, or 13.5 percent of the original loan.
Jim Carr of the National Community Reinvestment Coalition says the only firm that has grasped this fact is Ocwen Loan Servicing, based in Florida. "The question's not, Why are they doing it?" says Carr. "It's, What in the world is the rest of the industry thinking?"
Ocwen general counsel Paul Koches says the problem is that his industry isn't doing much thinking. "I'd love to some day be able to say to the media, it's all charitable and blah, blah, blah. But honestly, it's a win-win-win for us" to modify loans, Koches offers. The homeowner keeps the home, the investors get more money than they would for a foreclosure and Ocwen keeps collecting money from servicing the loan.
Ocwen is the largest remaining firm among a small crop that specialized in servicing subprime loans before the boom. Predictably, then, Koches is among those who consider the industry's consolidation an original sin. "You have prime-loan, big institutions that have acquired subprime operations but don't fully appreciate the difference." It's this fact that's held up modifications, says Koches, not the "various and sundry reasons" the broader industry has offered. "I think it's a smoke screen to cover an inability to execute modifications."
But here again, the Obama plan sets aside these structural concerns and instead aims to entice industry into better business by giving servicers billions of tax dollars. Rather than strengthening borrowers' hands, it aims to make working with borrowers as cost-effective for servicers as rushing to foreclosure. The administration will pay $1,000 for every loan modified in line with the new federal standard, and another $1,000 per year for every year the loan continues to perform. In addition, servicers will get $500 for every loan they modify that avoids default.
Of course, investors and borrowers have already paid servicers to do all these things, which already make the most sense for investors and borrowers alike. But the industry's high-volume, low-cost business model doesn't account for doing the hard part of the job. And that poses a larger question than the ones addressed by Obama's many technical fixes: can an industry built to rapidly and cheaply process huge numbers of overvalued loans be retooled as an industry that slogs through the detailed, highly skilled negotiations needed to rewrite those loans? And if so, does it make sense for taxpayers to foot the bill?
"The whole paradigm is a little frustrating, in that servicers have maintained that their hands are tied," says the California Reinvestment Coalition's Kevin Stein. "Now they say, 'Sure, Mr. President, if you give us $2,500, maybe we can do something.' So let's just say what it is: they have not been helpful because it's not in their financial interests to do so."