Stop Servicer Scams, 2: Dissecting the Letter and Its Requests.

(Part One.)

Regulating the servicers now is continuing to grow as a political issue.  This Zach Carter story,House Democrats Push For New Foreclosure Regulations, explains how a new letter fromRepresentative Miller is being signed by House Democrats.  This letter joins and references a letter from 52 economists, financial experts and activists. Cheyenne Hopkins of American Banker has an excellent article explaining the different positions taken by regulators and lobbyists.

So what specifically does this letter from economists, financial experts and activists call for?

This list was organized by Chris Walen and Josh Rosner. Josh Rosner wrote and presented the securitization section of the Roosevelt Institute’s “Will It Work and How Will We Know? The Future of Financial Reform” panel and report. These are two major experts in this field.

The nice part of trying to fix a system that is so broken is that there are a lot of low-hanging fruit out there to pick. The letter itself is an excellent read to understanding the problem.  I want to go through their list of demands, and see how common sense they are.

– Credit monthly loan payments promptly and correct any misapplication of such funds in a timely manner.

– Engage in loan modifications, including reductions in the payment amount and
principal balance, consistent with state law, to address reasonably foreseeable default when a homeowner can make a reasonable payment and it is economically feasible to do so. When existing or future loans are more than 90+ days delinquent, federal regulations should mandate that the credit be assigned to a special servicer.

– Prohibit the commingling of homeowners’ monthly mortgage payments with servicers assets except for the time necessary to clear the payments received, but generally not more than two (2) business days.

– Be accountable for lost paperwork on loan modifications and/or for failing to suspend the foreclosure process when a homeowner is actively engaged in the loan modification process.

I like how these requirements fall broadly under the “do your job” category. The first is even better, as it falls under a “follow the law” category. But these are simple – the job of the servicer is to servicer the debt, the debt owned by the lender. The servicer should not look out for their own pocketbook at the expense of the lender, or cover the butts of the big banks they work for instead.

The third takes off a huge temptation towards corruption, by moving the funds to where they need to go. Note the special requirement for a special servicer – like a phone company, multiple servicers end up servicing a delinquent loan randomly.  These rules require servicers to actually assign special people to accounts that go delinquent.   A delinquent loan is a very sensitive problem for the lender, who needs it to get special attention.

– Mitigate losses on residential mortgages by taking appropriate action to maximize the net present value of the mortgages for the benefit of all investors in a securitization rather than the benefit of any particular class of investors.

– Make servicer advances to a securitization vehicle a required reporting item. Prohibit the servicer from advancing delinquent payments of principal and interest by mortgagors for more than three (3) payment periods unless financing or reimbursement facilities to fund or reimburse the primary servicers are available.

– Disclose any ownership interest of the servicer or any affiliate of the servicer in other whole loans secured by the same real property that secures a loan included in a given pool of mortgages used in a securitization.

– Eliminate the regulatory incentives that motivate banks to keep troubled portfolio
loans in “limbo,” without permanent modification or remediation, merely because the bank is successful in obtaining a marginal payment that avoids classifying a loan as non-accrual.

– Establish a pre-defined process to address any subordinate lien owned by the servicer or any affiliate of the servicer, if the first mortgage is seriously delinquent (i.e., 90 days or more past due) to eliminate any potential conflicts of interest.

– Attest annually in writing under penalty of a fine or legal action that a bank or nonbank servicers’ foreclosure process complies with applicable laws.

This can get complicated, but they go to the crucial the second-lien problem.   This doesn’t always get enough coverage, as it is another problem that piggy-backs onto the original problems.  But it’s fascinating.

(This links to the roundup of the 2nd lien debate that we ended up having here.)

The servicers work for the largest banks:

The largest banks have a lot of second lien debt on their books, second liens that are valued very high from the stress tests:

If there is a principal reduction the second and other junior liens will be wiped out. That’s great for homeowners, lenders, and the community, but really bad for these major banks that made dumb junior loans.

However, if the servicer keeps the homeowner in limbo, encouraging them to make their relatively smaller second lien payment while not making their first payment, allowing servicers to juke the process and necromance a zombie homeowner, that is really great for the largest banks but a disaster for homeowners, lenders, and the community.

We simply don’t know what is happening here. But lenders are very worried, and they are right to be. These simple reporting and process requirements will take care of the worst parts of this information asymmetry that exists in reporting on the second lien.  They keep homeowner debt from becoming zombified into limbo, and instead force a serious process, negotiation or resolution and foreclosure, to start moving.

Notice what isn’t on this list: There’s no “give poor people a free home.” There’s no “let’s make excuses for people not paying their mortgages”, or whatever other bizarre thoughts banking lobbyists have about their opponents. There is simply a call for accountability, good information, reliable process, and allowing for win-win, improving agreements to be made by interested parties. Or in other words, an actual market that works for lenders and borrowers, not the corrupted process that works only for the middlemen we have now.

If you want to get involved you can sign this stop servicer scams petition.