Fannie and Freddie Near a Deal with Title Industry

/in , /by

As I noted in my last post on the move, led by Fidelity National, to require banks to warrant against “incompetent or erroneous affidavit testimony or documentation,” the move was largely about getting Fannie and Freddie on board and with them making this a standard practice in the industry.

So I’m not surprised by the report that that’s precisely what is happening. But I do find the description of Fannie and Freddie’s role in this process to be noteworthy.

The behind-the-scenes work illustrates how, as banks prepare to resume home repossessions, few entities have a greater interest in helping to put the foreclosure train back on track than Fannie and Freddie, which together own or guarantee half of all U.S. mortgages.

“They’re in a position to pursue good, straight, and solid answers. In that way, they play a quasi-regulatory role,” said Kurt Pfotenhauer, chief executive of the American Land Title Association, a trade group.

[snip]

Still, the foreclosure-document crisis is raising an age-old question that has dogged the mortgage firms: Should they play the role of regulator, or business partner, with the mortgage originators and servicers that are their customers?

On one hand, Fannie and Freddie need to make sure foreclosures are proceeding properly. But on the other hand, they want to move the process along as fast as possible because each day that they can’t repossess homes, they lose more money and ring up a bigger bill for taxpayers.

“Given their public purpose and the special advantages they have in the marketplace, Fannie and Freddie should be a model to the whole industry of how to make sure the foreclosure process is working properly,” said Julia Gordon, a senior policy counsel at the Center for Responsible Lending.

But the firms’ regulator, and the companies themselves, say that the onus is on servicers to fix any problems and vouch for the quality of their foreclosure processes.

Fannie Mae “is not in a position to be the determining body as to whether servicers are putting processes in place that comply with the law,” a company spokeswoman said.

This is basically the government–as the owner and guarantor of Fannie and Freddie–basically saying the banks should just fix their own practices. No wonder that line sounds so similar to what we’re hearing from the Obama Administration.

And couple this disinterested stance toward servicer problems with the news that the government has known, since sometime after May, that there was a,

significant difference in the performance of servicers, and in particular, information that shows us there is not compliance with FHA rules and regulations around loss mitigation.

Yet it has not done anything about the servicers that it knows (but will not name) which have not followed required practices to try to keep people in their homes.

Note too the reference in the linked article to Fannie’s institution of fines on servicers that didn’t churn through their foreclosures in timely fashion.

The past practice of Fannie and Freddie shows they have every intention of keeping foreclosures churning through the system and government regulators appear to have no intention of slowing that churn. Signing this title insurance agreement is part of that same process.

We, the taxpayers, have become the owners of a system that churns inexorably on to evict us from our homes.

“The Federal Government Is Moving Comprehensively and Quickly”

/in , /by

Something has been nagging me about this HuffPo description of HUD Secretary Shaun Donovan’s briefing on the foreclosure crisis the other day. It’s the revelation that, in a review started in May, the government had found that foreclosure servicers are not complying with FHA requirements that servicers attempt to modify loans before they foreclose on them.

Donovan said the administration had yet to complete its review, which began in May. Thus far, though, it had found “significant difference in the performance of servicers, and in particular, information that shows us there is not compliance with FHA rules and regulations around loss mitigation.” Donovan said the findings were limited to firms that deal with FHA loans. He declined to single out servicers. Other HUD officials likewise declined, despite repeated requests.

When it came to the larger issue of what some legal experts describe as a fundamentally-flawed and fraud-ridden mortgage market — fraudulently-underwritten loans that passed through a maze of institutions that failed to properly maintain basic paperwork or follow legal procedures in bundling, securitizing and ultimately selling those mortgages to investors — Donovan said that, thus far, all is well.

“The primary issue that’s been the focus of the moratoria is, is the foreclosure process being followed correctly? Are affidavits being filed correctly, and are notarizations and other things being done correctly? That is one set of issues,” he said. “A second set of issues — and we think this is very important — that we look more broadly at, ‘Are servicers taking steps to help keep people in their homes?'”

The lesser, third issue that has been raised, Donovan said, is whether the process underlying the securitization of mortgages is “in question.”

“So that’s the point that I’m trying to make, is that the issues that we are finding … that we’re focused on are, ‘Are there particular servicers that are not following these processes?'”

Donovan added that “we have not found any evidence at this point of systemic issues in the underlying legal or other documents that have been reviewed.”

Keeping in mind that this review started five months ago, watch this video of Donovan from Wednesday. In it, Donovan seems intent on declaring the overall system of mortgage finance–including MERS–to be sound, even while he reveals that the review showed some servicers were not making the required effort to modify loans before foreclosing on people.

This is not a systematic issue, according to Donovan, but some servicers that he declines to name (as he did in the briefing HuffPo describes) are not following processes to keep people in their homes. Oh, and “the Federal government is moving comprehensively and quickly to ensure that servicers are complying with the law and that they are taking the actions they’re required to take and they should take to keep people in their homes.”

Well over a million homes have been foreclosed on since the government began its review of the foreclosure process. At some point in that time, the government determined that certain servicers were not complying with federal rules about modifications.

So why are we just hearing about it now after those million families have lost their homes?

I appreciate that the government–by refusing to call this systemic fraud systemic–acquires new leverage over servicers to actually do something about their refusal to modify loans. But why have we heard nary a peep out of the government about this before now? And why is the government refusing to make public which deadbeat banks are breaking the rules on loan modifications?

Fidelity National’s Role in the Cover-Up

/in , /by

I’ve got a slightly different take than DDay on the news that Fidelity just established a policy requiring lenders to warrant all foreclosure sales going forward.

Fidelity National Financial Inc., the largest U.S. title insurer by market share, will require lenders to sign a warranty assuring their paperwork is sound before backing sales of foreclosed homes.

An indemnity covering “incompetent or erroneous affidavit testimony or documentation” must be signed for all foreclosure sales closing on or after Nov. 1, the Jacksonville, Florida- based company said in a memorandum to employees today. The agreement was prepared in consultation with the American Land Title Association and mortgage finance companies Fannie Mae and Freddie Mac, Fidelity National said.

DDay argues that Fidelity National is basically asking for a guarantee that it won’t have to pay off any claims on title problems.

I’m sure the health insurance market would love a clause that forced the maternity ward to sign a warranty that the baby they birthed into the world will be healthy their entire life, or else they pay up. I do understand the title insurers’ complaint, and I’m glad they’re forcing the issue with the lenders, but I can’t help but find it a little weird. If the banks are paying on the insurance, I’m not sure we need a title insurance industry.

Now, I’m not an expert. I’m just someone who has been considering whether she should still be looking to buy a house in this market. But as I understand title insurance the biggest part of the service they offer–what you’re paying them for–is not risk going forward, but rather a competent and thorough search for any outstanding title problems. Here’s one explanation:

Because title insurance protects against what may have happened in the past, most of the expense incurred by title companies or their agents is in loss reduction. They look to reduce losses by finding and fixing defects before the policy is issued, in much the same way as firms providing elevator or boiler insurance. These types of insurance are very different from life, property or mortgage insurance, which protect against losses from future events over which the insurers have no control.

So I take this move not as an effort to avoid paying any claims. I take it as an admission from Fidelity National that it cannot or will not adequately do that main part of its job: review the documents on a house and make sure the documents say what they appear to say. Instead of doing the forensics required to check that documentation (lawyers challenging foreclosures have proven fraud by showing notary stamps post-date the purported signing of the notarized document, comparing signatures to prove some are forgeries, and pointing to allonges not attached to the actual note, among other things) on every sale, they’re simply demanding that banks claim they don’t need to do that work.

Note, too, that Fidelity National instituted this policy (as distinct from the agreement it signed with Bank of America on the day BoA halted foreclosures) in consultation with Fannie and Freddie. That is, in consultation with government owned entities holding a majority of the mortgages out there.

So the government and Fidelity National have gotten together and said, “rather than actually check for fraud we’ve got abundant evidence exists not just in foreclosures being processed now, but in foreclosures already sold and–significantly–in performing loans that were securitized at the height of the boom, let’s just have the banks sign off on any foreclosures going forward.” As a particularly nice touch, they’re describing this fraud not as fraud, but “incompetent or erroneous affidavit testimony or documentation.”

From the standpoint of an industry and a government hoping to prevent people from learning about the extent to which our property system has been tainted by the banksters, that might be shrewd. After all, the most common time for real people to challenge bank conduct here is when they are foreclosed on or when they buy a house–when they are involved in a legal transaction. We only came to understand the true extent of foreclosure fraud after foreclosure and bankruptcy lawyers had dealt with such volume of cases that they came to learn the tricks of the servicers and even reviewed enough documents to have solid evidence of notary and robosigner fraud. By getting indemnity from the banks, Fidelity National (and our government acting through Fannie and Freddie) will ensure that one entity at least will continue to offer lenders title insurance, helping them unload those properties that may or may not have fraudulent title, but will never look closely at the documentation to see if there has been fraud. Fannie and Freddie just worked with Fidelity National to ensure that 38% (Fidelity National’s market share) of the 25% of all homes that are sold that are foreclosures will never have their title examined closely. 9.5% of homes will be sold without the thorough paperwork review that everyone knows should be done at this point, thereby ensuring not only that the market will continue to move, but also that banks always have a way to sell a house without the title insurer doing its job, but instead relying only on the bank’s say-so for the most likely title problem.

But the thing is, they may well get away with it (or, at the very least, minimize bank losses). Read more →

Obama Admin: Look Forward! Even in the Face of Obvious Corporate Fraud!

/in , /by

I’m not surprised by this–but I simply don’t understand how the Obama Administration can claim they haven’t found anything fundamentally flawed (though that could be HuffPo’s formulation) when thousands of people have been thrown out of their homes based on documents whose signers falsely attested to those documents.

U.S. Housing and Urban Development Secretary Shaun Donovan said Wednesday that the Obama administration will attempt to protect homeowners and police the kind of paperwork fraud that led the nation’s largest banks to temporarily halt foreclosures this month, but added that the administration had yet to find anything fundamentally flawed in how large banks securitized home loans or how they foreclosed on them.

“Where any homeowner has been defrauded or denied the basic protections or rights they have under law, we will take actions to make sure the banks make them whole, and their rights will be protected and defended,” Donovan said at a Washington press briefing. “First and foremost, we are committed to accountability, so that everyone in the mortgage process — banks, mortgage servicers and other institutions — is following the law. If they have not followed the law, it’s our responsibility to make sure they’re held accountable.”

He added, however, that the administration is focused on ensuring future compliance, rather than on looking back to make sure homeowners and investors weren’t harmed during the reckless boom years. The administration is “committed to forcing institutions to change the way that they conduct business,” Obama’s top housing official said, “to make sure these problems don’t happen again.”

When people were suckered into inflated mortgages, it wasn’t good enough for them to “make sure [those] problems don’t happen again.” They lost their homes, their credit ratings, and their savings.

But I guess that’s their own fault for being a mere human rather than a corporate person.

Administration Inches Closer to Rule of Law on Foreclosure Crisis

/in , /by

…with this statement from Robert Gibbs:

As institutions are determining their next steps in addressing these issues, we remain committed to holding accountable any bank that has violated the law. In addition to strongly supporting the investigation by the state attorneys general, the administration’s Federal Housing Administration and Financial Fraud Enforcement Task Force have [sic] undertaken their own regulatory and enforcement investigation into the foreclosure process.

This is stronger than the repeated statements from HUD Secretary Shaun Donovan.

Let’s hope the Administration includes individual banksters in that statement.

Foreclosure Mill King David Stern Announces Big Management Changes

/in , /by

David Stern’s company, the foreclosure mill that has removed thousands of Floridans from their homes, announced big management changes today. Otherwise known as abandoning ship:

DJSP Enterprises, Inc. (Nasdaq:DJSP) (Nasdaq:DJSPW) (Nasdaq:DJSPU) today announced that Stephen J. Bernstein, the Company’s Lead Independent Director, has been appointed as Interim Chairman of the Board of the Company. Initially, Mr. Bernstein’s role as non-executive Chairman will be a full time position as he provides Board support to the Company as it develops and executes plans to respond to recent developments impacting the Company and the industry. Mr. Bernstein replaces Mr. David J. Stern as Chairman of the Board. Mr. Stern continues in his role as Chief Executive Officer of the Company and will serve as its President.

The Company also announced the voluntary resignations of Richard Powers, as President and Chief Operating Officer, Kumar Gursahaney as Executive Vice President and Chief Financial Officer and Howard S. Burnston, as Vice President, General Counsel and Secretary, each of whom joined the Company in 2010. [my emphasis]

The only question is whether these guys were fired for being insufficiently loyal, or whether they’re trying to get out just before the sheriff arrives.

HUD Secretary Donovan: Banks Should Fix Problems Caused by their Law Breaking

/in , /by

Check out the following passage in HUD Secretary Shaun Donovan’s statement opposing a moratorium on foreclosures:

No one should lose their home as a result of a bank mistake. No one. That is why the Obama Administration has a comprehensive review of the situation underway and will respond with the full force of the law where problems are found. The Financial Fraud Enforcement Task Force that President Obama established last November has made this issue priority number one. Bringing together more than 20 federal agencies, 94 US Attorney’s Offices and dozens of state and local partners to form the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud, the Task Force is examining this issue and the Attorney General has said publicly that if it finds any wrongdoing the members of the task force will take the appropriate action. The Federal Housing Administration and Federal Housing Finance Agency have launched reviews to make sure servicers are in full compliance with the law. The Office of the Comptroller of the Currency has directed seven of the nation’s largest servicers to review their foreclosure processes, fix the processing problems and determine whether there is specific harm that has been caused in individual cases.

The message all these institutions are sending is the same: banks must follow the law — and those that haven’t should immediately fix what is wrong. [my emphasis]

Donovan offers a list of government agencies which have regulatory and legal authority to penalize the banks, but ultimately says that the banks themselves will be directed to police themselves.

The message these regulatory and law enforcement agencies are sending, Donovan says, is that the banks that haven’t followed the law should immediately fix what is wrong. Not, “the banks that haven’t followed the law should be prosecuted.” But “the banks that haven’t followed the law should make it right on their own.”

And while Donovan brags that the Financial Fraud Enforcement Task Force has been on the job for almost a year, it has done nothing about the multiple bank employees who have given sworn dispositions admitting to committing fraud on courts.

But that’s not all that surprising. After all, Donovan is also propagating the myth that this systemic fraud is just bank “mistakes.”

The rest of Donovan’s statement is no better. It tries to personalize the harm that hypothetically would result from a moratorium. But the examples make no sense and all basically assume that banks owning properties lead to declining property values; if that’s the case, then let’s crack down on deadbeat bank landlords. And it certainly misunderstands how a generalized problem with titles–the Administration’s refusal to address the underlying problem–will affect the housing market a lot more than a delay to address to address that underlying problem.

It all appears to be further indication that the Administration hopes that by letting the banks fix this themselves, the problems caused and covered up by the banks’ crimes will just go away.

Did Servicers Commit Fraud So Banksters Could Get Big Bonuses?

/in , /by

When I asked yesterday about the relationship between the stress tests and the servicers’ foreclosure fraud, I had a hunch that the banksters might have been committing that fraud so as to be able to show financial viability so as to be able to repay TARP funds so as to escape the oversight of the government. I wondered whether the stress tests were not just a means by which the government should have exercised some control over the servicers that they already knew to be having problems, but were also one reason the servicers were pushing for the most profitable outcomes (including choosing to foreclose rather than modify loans).

Rortybomb, who knows a lot more about how this stuff worked than I do, provides these damning details:

For what it is worth, I’m sure those conducting the stress test knew that this conflict existed and knew that it was very profitable to the banks. Servicing is considered a “hedge”, because as the origination business dries up foreclosures will increase and servicing income would go up, something Countrywide and others loved to talk about.

Let’s go to a Countrywide Earnings call from Q3 2007:

Now, we are frequently asked what the impact on our servicing costs and earnings will be from increased delinquencies and lost mitigation efforts, and what happens to costs. And what we point out is, as I will now, is that increased operating expenses in times like this tend to be fully offset by increases in ancillary income in our servicing operation, greater fee income from items like late charges, and importantly from in-sourced vendor functions that represent part of our diversification strategy, a counter-cyclical diversification strategy such as our businesses involved in foreclosure trustee and default title services and property inspection services.

The servicing operation will “fully offset” lost income from increased delinquencies and lack of origination business. This is by design. It’s tough to find good counter-cyclical strategies, but this appears to be one. If you were both TBTF and really in need of cash, could you squeeze this a bit further, say by violating the rule of law?

[snip]

Someone enterprising on the hill could ask how the servicing income was incorporated into the stress test and how predictive it was in the adverse scenario case. Things like this make it even more important that the government takes a strong hand in rooting out foreclosure fraud.  We cannot allow an impression to form that we collectively looked the other way at issues of foreclosure abuse, issues well documented since before the stress test, because this business line is one of the few profitable things available to TBTF firms.  TBTF firms that needed cash, were (and are) backstopped by taxpayers and wanted to get out of TARP to issue bonuses.   Nobody gets to be above the law, regardless of how systemically important they are or whatever numbers needed to be hit on the stress test.

In other words, going back to 2007, mortgage companies were upfront in claiming that their servicer-related profits served to offset their loan losses. That’s not to say they would have argued that in their stress test results (again, I’m not expert on this, but I’m not even sure that the stress tests looked at the servicer income). But it does say that to prove viability–to make a half-credible claim they weren’t insolvent and to evade restrictions on bonuses and political giving–they had an incentive to suggest their servicer income was enough to offset a significant chunk of their loan losses. That not only gave them a huge incentive to keep servicer costs low (by doing things like hiring WalMart greeters and hair stylists to serve as robo-signers), but it also increased the incentive to increase profits as a servicer by refusing to modify loans.

So I’d go further than Rortybomb in calling for some enterprising Hill person to look into this. Given that we know Timmeh Geither, campaigner against injustice, was officially warned and knew about this conflict, I’d like to know how much he knew about this hedge. The Administration now says it was helpless to stop this kind of fraud, yet it chose not to use at least two sources of leverage (cramdown and stress tests) to control it. Is that because they knew the servicer fraud was an important part of extend anad pretend?

Timmeh Geithner, Campaigner against Injustice

/in , /by

What a load of crap:

Charlie Rose: You’re encouraging banks to declare a moratorium on foreclosures?

Tim Geithner: No, I wouldn’t say it that way. I think that you know what you’re seeing in housing still now is a national tragedy, still very, very difficult. You know, again, this was a crisis caused by a lot of people were taken advantage of, a lot of people were too optimistic about what they could afford in terms of a house, lot of people were speculating in real estate, and a lot of innocent victims got caught up in the consequences of those basic mistakes. You saw, you know, the nation’s largest banks that ran these servicing businesses, not invest anything like what they needed to, to run that business effectively in a downturn like that. And you’re seeing the consequences of all those mistakes play out still across the American economy. Now, you’ve seen some banks suspend temporarily the foreclosure process so they can just make sure that they’re not causing any injustice to the borrowers and that’s very important for that to happen. And we’re going to –

Charlie Rose: So you’re pleased to see that happen.

Tim Geithner: I think where that’s happening again the suspension is to make sure they’re not causing any injustice is very important, but I think it’s important to recognize, Charlie, that if you — a national moratorium would be very damaging to exactly the kind of people we’re trying to protect, because the consequence of that would be in neighborhoods that have been most affected by the foreclosure crisis, where you see lots of houses on the block empty, unoccupied, what it means is those communities will be living longer with houses unoccupied, with more pressure on their house price with the people still in their houses. That would be very damaging, and so again we want to make sure we’re holding these services accountable, that they’re not causing any injustice to people who can afford to stay in their home, and we’re going to make sure we’re careful in doing that. But we also want to make sure that we’re not going to make the problem worse. [my emphasis]

You see, Timmeh and the banks are entirely motivated by an interest in justice. It has nothing to do with protecting the banks (even though Timmeh conveniently leaves out the fraud of the people between the mortgage originators and the servicers, all of whom share the blame in this process, or the liability of the banks selling properties with titles they have to know are flawed). It has nothing to do with protecting the government’s own position with Fannie and Freddie. It’s all about preventing injustice.

Of course, Timmeh seemed fine with letting HAMP continue for a year causing significant injustice to those who could afford to stay in their home.

And Timmeh, tremendous economist that he is, seems not to have thought about what’s going to happen to foreclosures with dubious titles in the market place (and with those foreclosures, the value of property in the neighborhood).

But he sure is pitching this desperate scramble by the banks in the best light!

Remember the Stress Tests?

/in , /by

The other day, I noted that Administration claims that they were helpless to affect what they now depict as loan servicers’ “sloppiness” but what really amounts to fraud ignores their decision to stop pushing for cramdown–and with it, leverage over the loan servicers.

I think (though I’m less sure of this) they’re ignoring one other source of leverage they once had over the servicers: the stress tests.

First, remember that the top servicers also happen to be the biggest banks. Here is Reuters’ list of the top loan servicers.

  • Bank of America (19.9%)
  • Wells Fargo (16.9%)
  • JPMorgan Chase (12.6%)
  • Citi (6.3%)
  • GMAC (3.2%)
  • US Bancorp (1.8%)
  • SunTrust (1.6%)
  • PHH Mortgage (1.4%)
  • OneWest (IndyMac) (1.4%)
  • PNC Financial Services (1.4%)

And here is the list the nineteen banks that had to undergo stress tests in 2009.

  • American Express
  • Bank of America
  • BB&T
  • Bank of New York Mellon
  • Capital One
  • Citigroup
  • Fifth Third
  • GMAC
  • Goldman Sachs
  • JP Morgan Chase
  • Key Corp
  • MetLife
  • Morgan Stanley
  • PNC Financial
  • Regions
  • State Street
  • SunTrust
  • U.S. Bancorp
  • Wells Fargo

So all of the top mortgage servicers–Bank of America, Wells, JP Morgan Chase, Citi, and even GMAC–had to undergo a stress test last year to prove their viability before the government would allow them to repay TARP funds and therefore operate without that government leverage–which was threatened to include limits on executive pay, lobbying, and government oversight of major actions–over their business. Significantly, all but JPMC were found to require additional capital.

Now, I’m not sure what I make of this. The stress tests were no great analytical tool in the first place. Moreover, the stress tests focused on whether the banks could withstand loan defaults given worsening economic conditions, not whether they could withstand financial obligations incurred because their servicing business amounted to sloppiness fraud.

But in letters between Liz Warren (as head of the TARP oversight board) and Tim Geithner in January and February 2009 discussed foreclosure modification, stress tests, and accountability for the use of TARP funds (Geithner made very specific promises about foreclosure modifications and refinancing which Treasury has failed to meet). And those discussions–and the stress tests–took place as COP reported on the problems with servicer incentives, servicer staffing and oversight, and the lack of regulation of servicers more generally (the COP report came out March 6, 2009; the stress test results were announced May 7, 2009). So at the same time as the Administration was officially learning of problems with servicers, it was also giving those servicers’ bank holding companies a dubious clean bill of health. And with it, beginning to let go of one of the biggest pieces of leverage the government had over those servicers.

Beyond that, I’m not sure what to think of any relationship between the stress tests and the servicer part of these banks’ business. Rortybomb has an important post examining how this foreclosure crisis may go systemic. If it does, these same banks that eighteen months ago promised the government they could withstand whatever the market would bring will be claiming no one could have foreseen that they’d be held liable for their fraudulent servicing practices. Ideally, we would have identified this as a systemic risk eighteen months ago, and based on that refused to let the big servicers out of their obligations (which would have provided the needed incentive for the servicers not only to treat homeowners well, but to modify loans). Had the stress tests included a real look at these banks’ servicing business, these banks might not have been declared healthy.