Institutional mortgage investors and distressed homeowners are strange bedfellows. Last week both groups scored a victory when the Massachusetts Supreme Court issued a landmark ruling voiding two foreclosures, asserting U.S. Bankcorp and Wells Fargo did not prove they owned the mortgages. The court decision doused lenders’ claims that an end to back-end robo signing practices is an adequate industry fix in the foreclosure mess. Legal challenges point to serious front-end problems in the actual securitization of the mortgage. The Massachusetts Supreme Court agrees.
Banking analysts question the liabilities of trustees.
“It creates a host of issues. The court left the door open for the banks to go back and complete the assignments. It calls into question all the mortgages already in the foreclosure process and the foreclosures that have been executed,” said Josh Rosner of Graham Fisher & Co. “It will slow the process down as we see paperwork refilled. Whether or not courts will accept paperwork that replaces falsely filed paperwork is another matter.
“The trustee of the mortgage backed security pool who has an obligation to the note holder, to make sure at the time of closing of the mortgage backed pool that all material documents are there and properly assigned to the trust, seems to have failed. They are as much at fault as the sponsor. It was their job to secure the assets on behalf of the noteholders,” added Rosner.
In the meantime, Congress weighs potential mortgage servicing legislation alternatives, and state attorneys general are investigating foreclosures and drafting settlements with banks.
Rep Brad Miller (D-NC) told The Washington Post lawmakers have been in close contact with consumer groups that represent borrowers and with mortgage investors, noting both groups shared a common interest in mortgage reform. “Some unlikely allies are now talking and working more together to fix the problems,” he said.
Miller confessed he is not confident about prospects for legislation that could force banks to spin off their mortgage servicing operations. He thinks foreclosure practice will see changes when regulators flex their muscle under the Dodd-Frank financial regulatory law.
Mortgage Investors Pitch Sustainable Solutions
The Association of Mortgage Investors said lawmakers and industry should aim to help all willing homeowners find long-term, effective, and sustainable solutions. “No one should lose their home solely because of paperwork mishandling or lack of due process,” explained AMI executive director Chris Katopis. AMI represents hedge funds, state pension funds, charitable endowments, and other investors.
“We’re focused on developing real solutions to sort out the housing finance market and broken servicing model in an equitable fashion for responsible borrowers, distressed homeowners, mortgage servicers and the mortgage investors,” said Chris Katopis, executive director of the group. “All too often, homeowners are being victimized by the servicers’ past and ongoing actions. The time is now for a permanent solution to America’s housing crisis.”
AMI called on all mortgage servicers to provide an explanation for why the servicing operations continue to exhibit weakness in areas where they could offer homeowners immediate attention and real support with programs that are currently available like HAFA. The group said major servicers harm homeowners while benefitting themselves in the following ways:
Servicing Fees: Servicers generate significant servicing and late fees throughout the delinquency and foreclosure process. They can be reluctant to find quick sustainable solutions for homeowners. This is clearly evidenced by long call waiting times and high call abandon rates that homeowners experience when calling servicers.
Profits from Affiliated Companies: Servicers generate profits through affiliated companies during the process of repurchasing, insuring, and liquidating homes from distressed homeowners. Servicers can be reluctant to aggressively pursue short sales and other viable options to foreclosure due to these above-market fees generated by affiliated companies.
Second Liens: Servicers own the second liens behind the first liens they service for investors. Their interest in the second liens can cause them to advise homeowners to defer payments on the primary mortgage while aggressively collecting on second liens to avoid losses to their own portfolio and balance sheet.
AMI proposed changes it said will help protect homeowners:
- Mortgage modifications once the second lien holders stop their intransience;
- More research and diligence regarding incomplete or mishandled paperwork;
- More resources at mortgage servicing centers and the use of non-conflicted special servicers.
AMI also urged all servicers no longer place their own conflicted interest ahead of homeowners. “We urge all the major bank servicers to invest the time and resources necessary to allow for borrowers to find sustainable solutions in a timely manner and customary fashion,” remarked Katopis.