by Tanta on 6/25/2008 08:12:00 AM

As usual, I can't tell if this sounds a little absurd because the complaint is this weak or because all I have to go on is the Gretchen Morgenson Version of the complaint.

The Illinois complaint was derived from 111,000 pages of Countrywide documents and interviews with former employees. It paints a picture of a lending machine that was more concerned with volume of loans than quality.

For example, former employees told Illinois investigators that Countrywide’s pay structure encouraged them to make as many loans as they could; some reduced-documentation loans took as little as 30 minutes to underwrite, the complaint said.

Volume-based compensation structures? There have been volume-based compensation structures in this business since long before Tanta got into it. Does it create perverse incentives? Sure. Do we have to like it? No. Has it operated all these years in plain sight of regulators, investors, and the public? Yes. Is CFC's pay structure all that different from anyone else's? I profoundly doubt it.

And if anyone who has ever underwritten a loan in 30 minutes has to go to jail, the jails will be full indeed. I wonder if they'll let me take my new Kindle. Jesus H. Christ on a Process Re-engineering Consultant Binge, folks, anybody who didn't tell the analysts on the conference calls that they'd got their average underwriting time down to 30 minutes was Nobody back in 2000. Not to mention the AUS side of the business where underwriting had gotten down to 30 seconds.

The lawsuit cited Countrywide documents indicating that almost 60 percent of its borrowers in subprime adjustable rate mortgages requiring minimal payments in the early years, known as hybrid A.R.M.’s, would not have qualified at the full payment rate. Countrywide also acknowledged that almost 25 percent of the borrowers would not have qualified for any other mortgage product that it sold.

It is now grounds for a lawsuit that you have borrowers in your lowest credit quality product who do not qualify for any alternative product? Um. We used to think that if borrowers in your lowest credit quality product could have qualified for an alternative product, you might be guilty of predatory "steering." Now you're also guilty of predatory lending if indeed the borrowers at the bottom of the pile only qualify there? Every lender has borrowers in, say, its FHA product who could not not qualify for any other mortgage product it sells. Are we going to call that a problem? That'd get pretty interesting pretty fast.

Even more surprising, Ms. Madigan said, was her office’s discovery of e-mail messages automatically sent by Countrywide to its borrowers offering complimentary loan reviews one year after they obtained their mortgages from the company.

“Happy Anniversary!” the e-mail messages stated. “Many home values skyrocketed over the past year. That means that you may have thousands of dollars of home equity to borrow from at rates much lower than most credit cards.”

Ms. Madigan said, “I was just struck that on the first anniversary of these people’s loans they would get these e-mails luring them into a refinance, into another unaffordable product to generate more fees and originate more loans.”

Lisa Madigan cannot be such a Pangloss as to be bowled over by the idea that lenders solicit their current loan customers for refinances. She can't.

Nobody has to like any of these business practices. But they have been hiding in plain sight for a long, long time. This ginned-up outraged innocence--all directed at Countrywide, as if everyone else in the industry had never heard of any of this--is truly getting on my nerves.

by Tanta on 5/31/2008 07:46:00 AM

Our colleague P.J. at Housing Wire is being a shill for Countrywide again. I intend to pile on before Gretchen Morgenson gets on the case.

***************

Says Housing Wire:

Last week’s Investor’s Business Daily painted a pretty rough picture of everyone’s favorite industry whipping post Countrywide Financial Corp., after getting wind of a servicing policy that requires some delinquent borrowers to pay 30 percent of arrearages before the lender will begin discussing loan modification options — fees that the reporter, Kathleen Doler, called “a steep entrance fee.” . . .

It’s not a blanket policy, as Doler notes, but some borrowers are seeing this policy while others are not. And, of course, Doler finds a few consumer advocates more than willing to demonize the policy, and Countrywide as well. Not hard to do these days.

For its part, Countrywide told IBD that the policy was intended to be a good-faith demonstration, and suggested that the 30 percent policy is only applicable to borrowers staring down a scheduled foreclosure auction. . . .

Allow us to paraphrase what we think the nicely-worded press statement really says: look, if we’ve tried and wasted our resources trying to contact a borrower anywhere from the past 8 to 12 months and they don’t bother to return any of our calls, read any of their mail, or answer the door when we send countless loss mit specialists out there in person, you’ll have to forgive us for calling bullshit when they decide to call asking for a loan mod the day before the foreclosure sale.

I'm pretty sure Angelo was in favor of using "bullshit" in the statement but his PR people told him he's already in enough trouble over "disgusting."

As far as the policy itself, of dealing with eleventh-hour workout requests from borrowers who have been blowing you off until the week before the trustee's sale? I have two words to respond to that: Laura Richardson. You will recall that the good Congresswoman let three homes go into the foreclosure process--and she has admitted that she made no attempts to work with the servicer until all three foreclosures were well advanced and the legal fees had started piling up--and then got all righteous with WaMu because her request for a modification the week before the scheduled sale didn't magically make everything go away. I am not suggesting that Richardson is a "typical American borrower," but she suggested that, so there. Would I make her put cash down on the table before bothering to start a last-minute workout with her? You bet your sweet eclair I would.

What really frustrates me about the criticisms of this specific policy is the complaint that it's "inconsistent": it is exactly a policy that is applied only in certain circumstances. On a case-by-case basis. When appropriate. (I am not affirming excessive faith in Countrywide's ability to determine what is and is not "appropriate" in all situations. But saying they need to do better at that is not to say the policy is wrong.) But as I have argued since the "Hope Now" thing first emerged last year, one-size-fits-all paint-by-numbers workout strategies are doomed to fail.

The fact of the matter is that not all borrowers are the same, and not all circumstances are the same. I am reminded of this article from the Washington Post we looked at several weeks ago, which contained some pretty level-headed advice from Diane Cipollone, of the Sustainable Homeownership Project:

Then, said Cipollone, contact a nonprofit housing counseling agency or an attorney. Avoid any unsolicited offers from people who say they can save your house. Do not avoid mail or phone calls from your lender. And if your lender stops accepting payments because it is moving toward foreclosure, save that money for a contribution toward the loan workout. "If you've missed eight mortgage payments and have spent all that money because the lender stopped accepting payments, that is not a good outcome [nor] a good way to start negotiations," said Cipollone.

The article then describes the successful modification workout that a couple named Ramsey received, after having made a $3000 "down payment" to the servicer.

The fact of the matter is that no one is going to modify your mortgage payments down to zero in any scenario. If you have made no payments for months on end, and have made no attempt to contact your servicer to request a repayment plan or anything else during those months, and at the last minute before foreclosure you do not have any money in savings--the equivalent of several months' worth of a reasonably modified payment--why should the lender bother with you? You can try telling the lender that for the last six months or more your other expenses were so high that you could not set aside even two or three hundred dollars a month that would otherwise have gone toward the mortgage payment, but in that case, how will you afford the modified payments? If you can document a "temporary" financial hardship, why haven't you contacted the servicer until now?

I am personally willing to bet that if Countrywide asked you for 30% of back payments, late fees, and legal charges, and you were only able to scrape up 20%, they'd probably play ball with you, assuming you have a good story about why there is reason to believe that you can and will make the modified payments. Workouts are a process of negotiation; that's the point. And I'll eat my blog if it turns out that Countrywide is the only servicer with a policy similar to this for late-stage modification requests. My sense is that the animus here is against Countrywide, not any coherent objection to a policy of asking borrowers to put down some "earnest money" before being given a deal that may be in everyone's financial best interest, but which is inevitably beset by moral hazard.

I Want To Know How CFC Is Screwing Borrowers This Time.

by Tanta on 5/22/2008 08:26:00 AM

It is inevitable that we would join the mirth all over the rest of the toobz regarding The Tanned One's unfortunate use of the "reply" rather than "forward" button in the process of registering his "disgust" with a borrower who emailed some 20 Countrywide executives (including the press office) with a request for a mortgage modification based on a form letter he found on the net. Moe Bedard, whose advice on approaching his servicer this borrower faithfully followed, wasted not a moment in "reaching out to the media" with this story, managing to land it in the LAT yesterday.

As a PR stunt, there's not much you can criticize here about Mr. Bailey's letter or Moe's media-savvy frothing in response. Angelo just handed these folks a dose of self-righteousness that will keep them stoned for weeks. The problem here, of course, is that if you are a borrower in distress trying to work something out with your servicer--Countrywide or anyone else--your primary need is not sympathy from the senior execs or attention from the press office or a flap in the newspaper. Your primary need is to reach a person in default servicing who can do something about your problem. This person needs to understand very clearly what your problem is and what can, practically, be done about it. At the risk, therefore, of sounding like a shill for Countrywide (this is a blog in-joke; every time I write something insufficiently hostile to CFC I get accused of being an "industry shill"), I offer to use what insight I have into the minds of loss mitigation specialists who deal with these things to offer some advice on how to write a letter that runs much less of a risk of being dismissed as just another sympathy-seeking form-letter.

* * * * * * * * * *

First of all, your goal is not to convince the servicer that you deserve a loan modification. Some people can't quite get a handle on this point, but you need to. Your goal is to convince the servicer that what you are asking for--in this case, a modification, although it could be a deed-in-lieu or a short sale or just a temporary repayment plan--is 1) necessary given your financial situation and 2) going to work. The biggest problem I have with Mr. Bailey's letter is that it does not ask for anything specific and it does not help me see why a modification would actually work in his case. In fact, it makes the mistake of suggesting that a modification would only allow Mr. Bailey's shaky income situation to continue or get worse. That being the case, it doesn't really matter if the person reading your letter feels sympathy for you or believes that the situation was truly beyond your control.

Let's start at the beginning:

To Whom It May Concern:

I am writing this letter to explain my unfortunate set of circumstances that have caused me to become delinquent on my mortgage. I have done everything in my power to make ends meet but unfortunately I have fallen short and would like you to consider working with me to modify my loan. My number one goal is to keep my home that I have lived in for sixteen years, remodeled with my own sweat equity and I would really appreciate the opportunity to do that. My home is not large or in an upscale neighborhood, it is a “shotgun” bungalow style of only 900 sq. ft. built in 1921. I moved into this home in May of 1992…this was the same year I got clean and sober from drugs and alcohol, and have been ever since, this home means the world to me.

The first sentence of this letter encapsulates what's wrong with it: it is going to be about "explaining" "unfortunate circumstances." The fact is that every letter every Loss Mit specialist in the universe gets from borrowers is about "unfortunate circumstances." It is quite rare to get a letter from someone that says "Look, I'm a selfish irresponsible pig, but I want more from you than I already have." Trust me on this. Everyone who talks to the Loss Mit department has "unfortunate circumstances." That is what the Loss Mit department is designed to deal with.

It is very hard for people in financial distress not to focus on their own misery, or to imagine that the "uniqueness" of their misery is not really the point. You need to get beyond that. You may think it is "unfair" that your story sounds more or less like everyone else's. Life is unfair. Servicers do not modify loans because they feel sorry for you. They modify loans because you have convinced them that you will be able to make payments that way.

A much better first paragraph would be: "I am writing to request that you consider a modification of my delinquent mortgage loan so that I can continue to make payments. I have tried to analyze my own situation objectively, and I believe that a monthly mortgage payment of no more than $xxx would allow to me to keep current on my mortgage and my other necessary obligations. I am a long-time homeowner and am committed to staying in my home if we can work out terms that are practical for both of us."

Starting out by addressing head-on what payment you need in order for this to work accomplishes a couple of things: it shows that you are, indeed, thinking practically about your situation. It gives the Loss Mit people a clearer idea of what you want. And it (hopefully) sets a tone that keeps you from degenerating into irrelevancy or sympathy ploys. No one needs to know that you had a booze or drug problem prior to 1992. Certainly no one needs this hint that your property is old, obsolete, and probably filled with DIY "remodeling." Not given what we see in the rest of the letter.

The main reason that caused me to have a hardship and to be late is my misunderstanding of the original loan. I was told that after the first year of payments, I would be able to refinance to a better fixed rate- then the bottom fell out of the industry. My payments for that first year were on time. I also lost my second income due to physical conditions in a very physically demanding industry.

Where to start with this? It simply sounds too vague to be believable, even if you think a Loss Mit specialist will be moved to modify your loan because you were told you could refinance. If you feel you need to include such information, I'd try this: "I refinanced my home in [month of year], and I made the mistake of relying on the broker's oral assurance that I could refinance it in a year to lower the payments. After making the first year's payments on time, I contacted my original broker again to apply for a refinance. I was told that I did not qualify because [specific reason given by broker]. I inquired about refinance opportunities with two other companies, both of whom told me [the truth goes here]. It appears that the only way I can lower my payments to a tolerable level is to request a modification."

This would show that you did indeed attempt to refinance, that you paid attention to what you were told the second time, and that you have some understanding of what your options are. The original letter simply blames everything on the loan officer who wrote the original loan and sounds a little too pat--"the bottom fell out of the industry" does indeed sound like something you read on the Internet. Once again, this writer is asking for sympathy, not presenting himself as someone who has made a good-faith effort to rectify the problem himself.

As far as "I also lost my second income due to physical conditions in a very physically demanding industry," you're much better off being factual and specific there--especially since, if you do get a Loss Mit specialist assigned to your case, you might be asked for documentation of income in the last two years. A much better approach (assuming, of course, it's true) would be: "I took a second job as a part-time bricklayer in [month and year] to help make ends meet, but I suffered a back injury in [month and year] that meant I could no longer do physically-demanding work. There are no second jobs available to me now that pay more than minimum wage, which is not enough for me to meet all my current obligations." If you got fired, you should either admit it frankly or leave the whole detail out. If you were laid off, say so. "Lost my second income" quite honestly suggests the worst to those of us who read letters like this all the time.

As my ARM payments increased, I have had less money to put towards making my business (income) work. I had been unable to generate business because all of my funds were going towards attempting to make my loan payments. This, coupled with major repairs to my vehicle (93 jeep) and paying out of pocket for medical and dental issues (I have no ins.) caused me to fall further and further behind, destroying my credit rating.

Now, it’s to the point where I cannot afford to pay what is owed to Countrywide. It is my full intention to pay what I owe. But at this time I have exhausted all of my income and resources so I am turning to you for help.

I feel that a loan modification would benefit us both. With that, and knowing my home will not be foreclosed, I would be able to obtain a roommate in order to generate more income, have the funds to generate more business and have a good working relationship with Countrywide. I would appreciate if you can work with me to lower my delinquent amount owed and payment so I can keep my home and also afford to make amends with your firm.

Here's where the wheels really fall off this letter. I need to know what kind of business you are in, and why it requires you to spend money on it, and what kind of money we're talking about. As written, this letter suggests that you need your mortgage payment reduced so that the monthly cash-flow can be "invested" in a business that doesn't seem very successful. Why does Mr. Bailey think that the lender would conclude, in this case, that a modification would work? And this is, actually, the point at which one wonders what happened to the proceeds of Mr. Bailey's latest refinance. Apparently it didn't go into home improvements; did it go into a failing business? That does happen a lot. Will it help to, in essence, do it again by means of a modification?

It is certainly OK to mention unexpected expenses that have arisen lately--like the car repair and the medical bills--but I would caution anyone about claiming that that "destroyed your credit rating." The first thing a servicer is going to do is pull your credit report. If you can supply the car repair invoice and medical bills (or cancelled checks), showing that these expenses were incurred just before delinquencies began appearing on your credit report, you may indeed help the servicer see that the issue here is unforeseen expenses. But you need to be honest with yourself: if your credit history was a mess before those expenses popped up--which is likely the case for Mr. Bailey, I fear--then you don't help your case by writing something like this. The person reading your letter can see your credit report.

Finally, suggesting that you would take in a boarder if you got the modification won't help you much if you need boarder income to qualify for the modified payment. And how much would a boarder pay? How much of a difference would it make?

The big problem with this letter is that Mr. Bailey doesn't simply present a budget and a proposal. The letter needs to say something like this: "My current income is $xxx per month. My monthly expenses [itemized] are $xxx per month. I believe I can add $xxx per month to income by taking in a boarder. That means that I can continue to pay my mortgage if we can reduce the monthly payment to $xxx." The bottom line is, if you cannot write something like that because you cannot come up with a set of numbers that work (and can be verified), you really have no business asking for a modification. If you can come up with reasonable numbers that work, it only helps your case with the servicer to come across as someone who has taken a clear view of the monthly budget and can suggest a concrete plan.

Finally, if you are going to email or fax a letter like this, you need to offer to provide whatever documentation the servicer needs in a follow-up letter. A simple way to do this: "Please let me know what financial documents you will need from me, and where to address them so that they come to the attention of the right person." Quite honestly, the offer to work cooperatively and promptly with the servicer in a specific way is worth any number of rhetorical flourishes borrowed from some Internet form letter.

There are some unfortunate comments over on Moe's site about this letter, the burden of wisdom of which is "not everyone is a college grad or trained writer, you know, so people use form letters and shouldn't be criticized for it." Let me tell you that the biggest problem Loss Mit folks tend to have with borrower letters is not that they don't have the old college polish. The biggest problem is that "explanations" for delinquencies are not actually the same thing as proposals for a successful workout. Nobody cares about rhetorical flourishes; Mr. Bailey's modification will stand or fall on the question of whether it is likely to keep him out of foreclosure, and that stands or falls on whether he can afford the modified payments out of his current income.

To be just as honest as I can, I don't think I would have used the term "disgusting" for Mr. Bailey's letter, as Angelo did. However, the term "bullshit" did pop into my underwriter's mind as I read it. That was in part because of the "form letter" quality of some of it; it was also because Mr. Bailey's discussion of his income situation is so muddled. I write this to suggest to Mr. Bailey, and anyone else contemplating sending such a letter, that this is a likely response from servicing people. I am not particularly defending it, you know. I was in fact trained as an underwriter years ago and we were in fact trained to not leap to conclusions and use the term "bullshit" loosely. (And to "forward," not "reply," but that's another matter.) So it's possibly quite "unfair" that I think Mr. Bailey's letter is unlikely to cut any mustard on its own (although now that it got Angelo in the papers again, he might get a more thorough hearing than his letter alone would have gotten).

But most people can't count on the CEO screwing up and winning the battle in the pages of the LAT; most people really really need to get somewhere with the actual servicing employees we have, not the ideal ones who never react badly to borrower pleas for sympathy. We are what we are. I suggest writing in your own voice, about the details of your monthly budget, sticking to the relevant facts, and trying as hard as you can to stifle the impulse to blame your problems on everyone but yourself. That doesn't mean you have to blame yourself; it means we're past "blame" at this point. You're in trouble; you need to work something out; you need to get on with a practical request. You are a flawed person writing to an undoubtedly flawed person. If you don't want the Loss Mit specialist to "fill in the blanks" in your letter from his or her own possibly cynical experience with other letters of this type, don't leave those blanks in it. That's the best advice I can give you.

But Wait! There's More!

by Tanta on 3/10/2008 11:20:00 AM

From Marketwatch:

Getting the FBI to do your due diligence doesn't seem like a particularly great business strategy.

by Tanta on 3/07/2008 02:21:00 PM

I noted yesterday the Memorandum Opinion of U.S. Bankruptcy Judge Jeff Bohm in regards to a series of bankruptcy filings and testimony by Countrywide, its national law firm, and the local firm hired by the national firm, each of which involved a series of "negligent bungling" that rose right up to about an inch from "full-blown bad faith," if it didn't quite get there.

The Opinion is available online in two segments here and here. I very much recommend them as reading material for anyone with any connection to the mortgage business, and that would include you regulatory people. And reporters. Judge Bohm is asking the right questions, in my view, and he's done us all a public service.

The short summary of what went on:

A Countrywide-serviced borrower (the loan is actually owned by Fannie Mae) filed a Chapter 13 bankruptcy in October of 2006. A BK filing will place an automatic stay on foreclosure, which can only be lifted by the court if the lender files a motion to lift the stay. As a part of this process, the servicer is required to bring proof to the court of "pre-petition" and "post-petition" delinquency of the borrower. It is Fannie Mae's policy, to which CFC would have been expected to comply, that motions to lift stay are not filed unless the borrower is at least 60 days delinquent on the mortgage loan.

CFC submitted a "payment history" (this is a printout from a servicing system that shows all transactions on a loan, including payments, charges, fees, suspense and escrow account items, rate and payment adjustments, etc.) As CFC payment histories in general, not just in this case, are so complex and awkward as to be essentially meaningless not only to lay people but to courts and lawyers, CFC's national law firm had actually established, back in the spring of 2006, a separate corporate entity ("MR Default Services") which employs a bunch of "legal assistants" (not lawyers) to cut & paste information from the payment histories received from CFC into a more readable, simplified format; the new document is attached to the court filings. The new document is never, apparently, reviewed either by CFC or by the actual attorneys for quality-control or basic plausibility-check purposes. CFC is apparently just fine with the risk of going to court with a document that is a third-party prepared "version" of the actual official payment history. CFC's lawyers are also apparently cool with that.

In the specific case at hand, there was a series of errors: first, CFC for some reason got confused about when the borrower filed his original petition, and so included the payment made in November as a "pre-petition" payment, making it appear that the borrower had not made his first "post-petition" payment. (That's important; you are much less likely to get the stay lifted if the borrower continues to make mortgage payments after the petition.) Then, when "MR Default Services" went to "simplify" the payment history, the copy & paste process missed the first item on the top of one of the pages, and it turns out that item was a mortgage payment made way back in May. Also, this payment history was sent to the simplification factory on or around December 11, but the motion to lift stay wasn't filed with the court until December 29. The problem with that is that the borrower made a payment on December 13. Nobody requested an updated payment history from CFC, which is hard to believe: it is a simple fact of life in the business that a three-week-old payment history is "stale," especially if it was generated during the "grace period" in the beginning of a month, and in fact it appears (I'm not quite sure) that the actual payment history they used in the first place was prepared in early to mid-November.

The long and short of it was that the debtor's counsel pointed out that the payment history was simply wrong, and that (at worst) the debtor was only 30 days delinquent, not more than 60 days (and had made two payments post-petition that the motion ignored). CFC filed a motion to withdraw the motion to lift stay. The judge asked CFC's attorney (a local firm hired by the national firm, in this great game of legal "telephone") about it, and he basically lied about the reason for the motion to withdraw.

The whole thing snowballed from there into multiple lawyers from two different firms plus at least one person from CFC giving false testimony to the court about the whole thing to cover up the mistakes. If you read the entire Opinion, you have to conclude that Judge Bohm wouldn't have turned this into a high-powered series of hearings if someone originally had simply fessed up to a clerical error. Not only was the cover-up worse than the crime, but the cover-up exposed the whole wretched set of business arrangements and CFC operational practices that clearly do not function to prevent errors, and in fact seem prone to creating them.

One of the good Judge's intentions in investigating the reasons for the withdrawal of the motion to lift stay was, bless his heart, to assure that the debtor didn't get stuck with legal fees for the costs of the original motion and withdrawal motion, if this legal work was caused by CFC's or its attorney's errors. That opened up a whole can of worms about how CFC accounts for "non-recoverable" legal charges. It turns out that CFC's process is not to permanently remove non-recoverable costs (things you can't charge the debtor/borrower) from the loan records until the BK is discharged, which of course can take years and years for a Chapter 13 and which may never happen, if the Chapter 13 is dismissed rather than discharged. Whether or not the point of this idiotic practice is to let fees "lurk" in the system that can later "accidentally on purpose" be charged to the borrower some day in the future when the Court isn't looking, or whether the point is just another one of those famous "efficiencies" isn't clear. (You can easily imagine some moronic consultant telling CFC that "once through the process!" is a great slogan for the accounting department, and that it can save a lot of money by letting such things as non-recoverable fee entries pile up until the case is "done" and all work can be done once at the same time. Of course that's insane from a risk-management perspective, but I've heard consultants say even dumber stuff, myself.)

The other can of worms that got opened was the whole business of the two law firms and their relationship to CFC. It turns out that CFC--for "efficiency" reasons--wanted one and only one "official" law firm, who would parcel out filings to all the different local law firms all over the country. The contract with the national law firm explicitly stated that the local firms were not allowed to communicate directly with CFC. They could only talk to the national firm, who could only talk to CFC. Among other problems this creates, if the local firm, say, happens to notice at 4:45 p.m. that there seems to be something wrong with a payment history, that firm can't pick up the phone and call Eunice in CFC's bankruptcy servicing department to get it straightened out. The whole thing has to go through the national law firm, and as far as I can tell the best anyone ever expected was 48-hour turnaround.

And the loan in question being a Fannie Mae-owned loan, the legal work is required strictly to be on a flat-fee basis. Fannie Mae's position is that without that rule, debtors/borrowers would be facing a "running meter" of legal fees that would eat up all their equity and then some if you let it go on. However, it appears that the law firms' response to the flat-fee thing is to just not bother with following up on things like stale or incorrect payment histories, because apparently they don't think they get paid enough to do things right.

Here's Judge Bohm on the conclusions he drew in this whole ugly miserable tale of idiocy, which I think are worth quoting at length:

Over the past several years, attorney's fees and costs have risen steadily--some clients would doubtless say astronomically. Corporations in particular have reacted by demanding concessions such as flat fee pricing for each file. In the consumer bankruptcy field, many financial institutions--for example, Fannie Mae in the case at bar--have negotiated flat fee engagements with certain law firms to avoid large fees that can accrue under an hourly rate system. In theory, this arrangement seems appropriate: fixed fees minimize costs that are primarily passed on to consumer debtors. In practice, this arrangement has fostered a corrosive "assembly line" culture of practicing law.

As the case at bar shows, attorneys and legal assistants at Barrett Burke and McCalla Raymer are filing motions to lift stay without questioning the accuracy of the debt figures and other allegations in these pleadings and appearing in court without properly preparing for the hearings. These lawyers appear in court with little or no knowledge because they have been poorly trained. Indeed, the case at bar shows that the attorneys from Barrett Burke and McCalla Raymer often appear in court ill-prepared to think or effectively communicate.

This fixed-rate fee business model appears to have been an overwhelming financial success. In Allen, Bankruptcy Judge Steen noted that Barrett Burke's revenues totalled between approximately $9.7 million and $11.6 million per annum. . . . Based upon the testimony at the show cause hearings, this Court estimates that McCalla Raymer has generated revenues of approximately $28 million over the past decade from representing solely Fannie Mae. Meanwhile, the profession has suffered from the ever decreasing standards that firms like Barrett Burke and McCalla Raymer have heretofore promoted.

This demise must stop. The problems at Barrett Burke and McCalla Raymer are not limited to training lawyers; there are other aspects of these firms' culture that is disconcerting. What kind of culture condones a firm signing an engagement letter which prevents its attorneys from communicating with its client? What kind of culture condones its lawyers preparing, signing, and filing motions to lift stay without having the client review the final version for accuracy? What kind of culture condones its attorneys signing proofs of claims without even contacting the client to review and confirm the debt figures? What kind of culture condones attorneys testifying to basic facts and then, at the next hearing, recanting the testimony on the grounds that the attorney had not sufficiently prepared to testify? And above all else, what kind of culture condones its lawyers lying to the court and then retreating to the office hoping that the Court will forget about the whole matter?

Countrywide's corporate culture is no better. What kind of culture condones blockading personnel from communicating with outside counsel? What kind of culture discourages the checking of outside counsel's work? What kind of culture promotes payment histories that are so confusing to the vast majority of persons, including attorneys and judges--not to mention borrowers--that it becomes necessary for legal assistants to "simplify" them--leading to more error and confusion? . . .

With respect to Countrywide, this Court would hope that this entity would reevaluate its policies and procedures in order to improve upon the accuracy of payment histories and to ensure that its actions do not undermine the integrity of the bankruptcy system. Countrywide's business is directly tied to a quintessentially American aspiration--homeownership. If Countrywide does not properly maintain payment histories and effectively communicate with its counsel, the consequences can be very harmful. . . .

This Court trusts that Barrett Burke, McCalla Raymer and Countrywide will mend their broken practices. This Court will continue to verify that its trust is well-placed.

by Tanta on 3/06/2008 02:55:00 PM

I feel a little vindicated by this, as I have been arguing something similar for months now. From the LAT:

A judge declined to sanction Countrywide Financial Corp. on Wednesday for its handling of a borrower's bankruptcy case, saying errors by the lender, including allegedly improper or unexplained fees, didn't reflect bad faith.

But Judge Jeff Bohm of U.S. Bankruptcy Court in Houston said he was disheartened that Countrywide and its lawyers showed "a disregard for the professional and ethical obligations of the legal profession and judicial system."

In a 72-page opinion, the judge said he did not find "clear and convincing" evidence that Countrywide's conduct "transcended from merely negligent bungling to full-blown bad faith." He urged the Calabasas-based company, however, to "reevaluate its policies and procedures" so that its actions wouldn't "undermine the integrity of the bankruptcy system."

Countrywide faces increasing pressure to clean up alleged excesses in servicing home loans, including those of borrowers in bankruptcy.

In the last week, a part of the Justice Department that oversees bankruptcy proceedings has sued Countrywide at least twice, seeking sanctions for alleged abuses.

Countrywide representatives couldn't be reached for comment, nor could a lawyer for the borrower, William Parsley, a resident of Willis,Texas.

Maybe now we can begin to take seriously the structural issues within the mortgage servicing industry that lead to this kind of negligent bungling? A girl can dream . . .

by Tanta on 2/01/2008 10:54:00 AM

BOSTON (MarketWatch) -- Beazer Homes USA Inc. before Friday's opening bell said it is shuttering its troubled mortgage-origination unit and exiting several underperforming markets as it tries to endure the housing downturn.
The Atlanta home builder said it would stop writing mortgages through a unit, cease building homes in five markets, and enter marketing partnerships with Countrywide Financial Corp. and St. Joe Co.

Beazer will discontinue mortgage-origination services through Beazer Mortgage Corp. And it will end its relationship with Homebuilders Financial Network LLC. Instead, it will market Countrywide, the Calabasas, Calif., mortgage company, to buyers of Beazer homes as the preferred mortgage provider. Beazer will take charges, which it can't yet calculate, as it ends the Beazer Mortgage operation.

After reviewing its markets to determine where best to put its resources, Beazer said the company will exit home-building operations in Charlotte, N.C., Cincinnati/Dayton and Columbus, Ohio, Columbia, S.C., and Lexington, Ky.

It said it will complete all homes that it's currently building in those markets and will determine how to dispose of its land holdings there. At June 30, 2007, Beazer had committed some 5% of its home-building assets in those markets. It'll take charges for closing these operations as well. And Beazer said it will enter the Northwest Florida market in cooperation with St. Joe, the Jacksonville, Fla., real-estate company. The companies already work together, with St. Joe selling home sites to Beazer.

So which is worse? Being the lender preferred by Beazer, or being the builder that prefers Countrywide? I have to think about that.

by Tanta on 1/11/2008 07:58:00 AM

LONDON (MarketWatch) -- Bank of America said on Friday it's buying Countrywide Financial for $4 billion, confirming rumors that first emerged Thursday, in a move that will make it the top mortgage lender and loan servicer in the U.S. . . .

Terms of the deal call for shareholders of Countrywide to receive 0.1822 of a share of Bank of America stock in exchange for each share they own.

At Thursday's close, that values Countrywide at $7.16 per share -- lower than the $7.75 closing price after news leaked of a possible deal.

Countrywide shares fell 15%, or $1.22 in pre-open trading Friday, to $6.53.

The purchase is expected to close in the third quarter. It's expected to be neutral to Bank of America earnings per share in 2008 and lift EPS in 2009, excluding merger and restructuring costs.

Bank of America expects $670 million in after-tax cost savings in the transaction, fully realized by 2011.

by Tanta on 1/08/2008 08:52:00 AM

Gretchen Morgenson catches Countrywide being nefarious again, and this one's a doozy. Long quote, but you want to get the whole story:

The documents — three letters from Countrywide addressed to the homeowner — claimed that the borrower owed the company $4,700 because of discrepancies in escrow deductions. Countrywide’s local counsel described the letters to the court as “recreated,” raising concern from the federal bankruptcy judge overseeing the case, Thomas P. Agresti.

“These letters are a smoking gun that something is not right in Denmark,” Judge Agresti said in a Dec. 20 hearing in Pittsburgh. . . .

Judge Agresti is going to get an MMI Citation if he isn't careful. But we digress.

The documents were generated in a case involving Sharon Diane Hill, a homeowner in Monroeville, Pa. Ms. Hill filed for Chapter 13 bankruptcy protection in March 2001 to try to save her home from foreclosure.

After meeting her mortgage obligations under the 60-month bankruptcy plan, Ms. Hill’s case was discharged and officially closed on March 9, 2007. Countrywide, the servicer on her loan, did not object to the discharge; court records from that date show she was current on her mortgage.

But one month later, Ms. Hill received a notice of intention to foreclose from Countrywide, stating that she was in default and owed the company $4,166.

Court records show that the amount claimed by Countrywide was from the period during which Ms. Hill was making regular payments under the auspices of the bankruptcy court. They included “monthly charges” totaling $3,840 from November 2006 to April 2007, late charges of $128 and other charges of almost $200.

A lawyer representing Ms. Hill in her bankruptcy case, Kenneth Steidl, of Steidl and Steinberg in Pittsburgh, wrote Countrywide a few weeks later stating that Ms. Hill had been deemed current on her mortgage during the period in question. But in May, Countrywide sent Ms. Hill another notice stating that her loan was delinquent and demanding that she pay $4,715.58. Neither Mr. Steidl nor Julia Steidl, who has also represented Ms. Hill, returned phone calls seeking comment.

Justifying Ms. Hill’s arrears, Countrywide sent her lawyer copies of three letters on company letterhead addressed to the homeowner, as well as to Mr. Steidl and Ronda J. Winnecour, the Chapter 13 trustee for the western district of Pennsylvania.

The Countrywide letters were dated September 2003, October 2004 and March 2007 and showed changes in escrow requirements on Ms. Hill’s loan. “This letter is to advise you that the escrow requirement has changed per the escrow analysis completed today,” each letter began.

But Mr. Steidl told the court he had never received the letters. Furthermore, he noticed that his address on the first Countrywide letter was not the location of his office at the time, but an address he moved to later. Neither did the Chapter 13 trustee’s office have any record of receiving the letters, court records show.

When Mr. Steidl discussed this with Leslie E. Puida, Countrywide’s outside counsel on the case, he said Ms. Puida told him that the letters had been “recreated” by Countrywide to reflect the escrow discrepancies, the court transcript shows. During these discussions, Ms. Puida reduced the amount that Countrywide claimed Ms. Hill owed to $1,500 from $4,700.

Under questioning by the judge, Ms. Puida said that “a processor” at Countrywide had generated the letters to show how the escrow discrepancies arose. “They were not offered to prove that they had been sent,” Ms. Puida said. But she also said, under questioning from the court, that the letters did not carry a disclaimer indicating that they were not actual correspondence or that they had never been sent.

A Countrywide spokesman said that in bankruptcy cases, Countrywide’s automated systems are sometimes overridden, with technicians making manual adjustments “to comply with bankruptcy laws and the requirements in the jurisdiction in which a bankruptcy is pending.” Asked by Judge Agresti why Countrywide would go to the trouble of “creating a letter that was never sent,” Ms. Puida, its lawyer, said she did not know.

But this is really the best part:

A spokesman for the lender, Rick Simon, said: “It is not Countrywide’s policy to create or ‘fabricate’ any documents as evidence that they were sent if they had not been. We believe it will be shown in further discovery that the Countrywide bankruptcy technician who generated the documents at issue did so as an efficient way to convey the dates the escrow analyses were done and the calculations of the payments as a result of the analyses.”

First, let's get one thing out of the way: there is no reason (yet) to believe that these payments were inappropriate or invalid. While CFC's counsel did agree to waive more than half the total amount, that still doesn't mean this didn't start with a legitimate payment increase after escrow analysis, caused most likely by an increase in Ms. Hill's tax or insurance bills over the previous year. Escrow increases are pretty routine events that happen to borrowers inside and outside bankruptcy all the time. Of course, if CFC increased the escrow amount not because the bills went up, but because it wanted to increase the allowable "cushion" in the account, that may be why CFC was so willing to back off. (Escrow "cushions" are legal, although they are highly regulated by HUD. Go here if you are confused about that.)

That said, you don't increase the required payment for a borrower on a court-approved repayment plan without clearing it with the court. That's Bankruptcy 101. First week, first semester. If the actual jurisdiction or trustee's agreement in question allows the servicer to levy escrow increases without a court order, you still have to send the written notice, with the details of the analysis, to the borrower (and her lawyer). This isn't just a matter of BK practice, it's a matter of staying on the right side of RESPA. If, that is, you don't really care about that "it's just fair to your borrower" thingy that seems to have some people confused.

So it really isn't yet clear to me that there was anything particularly nefarious about the additional payment CFC was asking for (assuming that they weren't trying to get around the judge's ordered repayment plan). Nor do I believe, or will I believe until someone supplies me with actual evidence to the effect, that CFC willfully and knowingly waited all those five years until the BK was discharged to suddenly throw out a $4,166 unpaid bill in order to force foreclosure. It might be more comforting, in a way, if this were true. We would like to believe that a $1.5 trillion servicer with an insured bank in its family is smart, not hopelessly sloppy. If the only way we can interpret them as "smart" is to assign them crafty but nefarious motives, we tend to do that. We will look for the "reason" they did this.

It would take me several days and the fingers of both hands to try to think up some set of facts that would make it economically beneficial to CFC to force this woman into FC now, after five years of BK repayment, over a $4,166 escrow shortfall. I don't know why I'd do that when Occam's Razor suggests going with the obvious explanation. Especially as the CFC spokesman did, in his inimitable corporate way, tell us what it is.

CFC uses a fancy computer system to handle its escrow analysis. A "technician" makes a few inputs, and the system generates a letter to be sent to the borrower. (I have never worked for CFC; this is just how they all work.) You print the letter and mail it to the borrower. If the loan is subject to BK proceedings, there should be a "BK code" on it that forces it into special processing, like checking with the court before you raise the payment or copying the borrower's attorney or whatever, not just spitting out a letter. Had those letters in question actually been printed and mailed, there should have been either a paper copy stuffed in a hard servicing file somewhere, or an image stored on a disk somewhere, or at least a comment on a workstation log somewhere indicating "escrow analysis letter sent" or something like that with a date on it. Why? Because this sorry little situation wouldn't be the first time since man walked upright that somebody demanded evidence that you sent out an escrow notice. We're talking elementary stuff here, as convolute as it may sound to you civilians.

My best guess is that these letters got "recreated" because there were no copies anywhere. Possibly they were lost. Possibly they were never generated. Possibly some human being "overrode" the system to keep them from being generated--which might have been appropriate during a Chapter 13--but never got around to telling the system what to do with that $4,166 it thinks it is owed.

Whatever happened, as soon as the BK "code" was lifted from the loan, somehow someone realized that there was what appeared to be a past-due escrow payment. Quite probably no person "realized" this; the system "realized" this and, without its restraining BK code, obediently spit out an NOD.

So far we're in the land of regrettable but not unforgiveable error. The appropriate response, when the borrower's lawyer called to complain, would have been "Oh, hell, that's a mistake. We're so sorry. We will correct that immediately, and make an adjustment to Ms. Hill's monthly escrow so that she can make up the past adjustments--without a cushion added to it--over a year, with no late fees or other charges. Plus we'll send you a nice pen with a logo. Would that be OK?"

But nobody has the sense or the guts to do that any more, it seems. No, someone kicked into high gear to "justify" that $4,166 charge. Someone went back into the system, made the correct inputs, and the system did the only thing it is programmed to do: it spit out some letters. It has, I am sure, no code that instructs it to spit out an after-the-fact memorandum not pretending to be consumer correspondence that would explain the situation fully. All it can do is produce what it was intended to produce: letters. In the mind of the "technician," these letters were an "efficient" way to do one thing, and one thing only: "prove" that the $4,166 number was "correct."

I believe this because I've been in the middle of these things before. I seriously doubt it ever for a moment occurred to the person responsible that it didn't matter whether the borrower actually owed $4,166 or not; the problem was that the notices were for whatever reason not sent three years ago and that somehow that NOD got loose and needs to be taken back. It didn't occur to this person that producing these "letters" would be construed by any normal person as an implied claim that they had in fact been sent years ago. If you find that hard to believe, then I suggest you've never been in a certain kind of corporate environment before, where internal processes become so "intuitive" to the people who work in them that those people lose all sense how the "external" world sees things. Internally, no manager would ever be confused about someone saying "Here, I regenerated those old letters to show the escrow calculations." Such things do happen internally. One quite often finds these "regenerated" things in loan files; I see them in due diligence. It is the alternative, in an "efficient" environment, of a photocopy or pdf image of the original.

But to cross the next line, and attach them to a court filing? Without a cover letter explaining that they are merely the text of the letters CFC either believed that it sent, or would have sent, or should have sent? That's the act of someone who thinks We're All Countrywide Now. A total loss of any sense that "internal processes" mean jack to the outside world. Or, rather, a sense--the consultants call it "inward-directed management"--that "customers" are "problems" to be "solved" by reference to the company's internal policies and procedures, not the customer's actual needs or situation.

I once ordered a book from Barnes & Noble online. It was supposedly shipped USPS, but it didn't arrive. I called the post office, who told me they'd never received it. So I called B&N, and a helpful person said the best thing to do was to credit my account for the missing book, charge me again for a new one, and ship the new one. We did that; the very next day the post office supervisor called me, apologetic, to explain that they had, in fact, located my package and a carrier would be bringing it to me within the hour. I called B&N back, thinking they could cancel shipment of the new book. The person I got on the phone the second time refused to cancel the second shipment, and told me that she would be charging my account again so I was paying for both books; I would have to return one to get a credit. It wasn't about the fact that the second book had already shipped; it hadn't. It was about her "procedures" being unable to handle an unusual situation (I have a small-town post office supervisor), and her initial reaction to my story, before she really understood it fully, suggesting to her that I was trying to cheat B&N. Only after I explained--to her boss, finally--that I was hardly trying to cheat B&N, who would never have known that I ended up with two books and only paid for one if I hadn't called them, that someone finally had the sense to just cancel the second order without refunding my money. I have never shopped at B&N since.

But mortgagors can't just stop doing business with their servicers, unless they can afford to (and qualify for) a refinance. They're stuck. A fairly widespread habit in the corporate world of considering your customers to be "problems" is intensified for mortgage servicers--and particularly default servicing divisions of mortgage servicers--because they can't stalk off and take their business elsewhere. And if they could, you might be happy to see them go, profit-wise. But you bought (or originated) that loan; you committed to servicing it fairly and accurately; you don't get out of your obligations even if the borrower doesn't pay as agreed. The note and mortgage give you certain legal rights if a borrower doesn't pay as agreed; you may exercise those rights in good conscience. You do not get to blow off RESPA or escrow rules or BK law or simple business courtesy because you have a borrower who is in BK. Even if the borrower is a jerk. Even if the borrower's lawyer is a double-dipped jerk. I have never read a mortgage or DOT with a "jerk clause." (Borrowers, as I used to remind my trainees, don't get to blow us off when we're jerks.)

You absolutely do not get to assume that the rest of the world gives a flying monkey about your internal processes, or who did what when, or whether Darlene took a longer break than Tyrone, or whether the tran code was truncated during a CICS cycle. Especially that last one. I would allow the people who worked for me to tell a customer "My system isn't set up to do that," but only as a way of explaining to the customer why it might take a bit longer to do what we need to do, and to request the customer's patience. Anybody who used that as an excuse to refuse a perfectly legitimate request could go talk to HR about COBRA.

I know this is all long and rambling and everything, but frankly it is time that CEOs and consultants and analysts start taking a good hard look at the "price" of certain kinds of "efficiency." I am not a Luddite, but I know from painful experience that a computer only does what it is programmed to do. They can handle most of the processes on a performing loan with almost no human intervention; they are efficient and they keep costs down for everyone. But I don't care what fancy consultant told you they can do default servicing without expert human beings controlling the process. This is why you get 50 bps on subprime servicing. You get 25 bps on prime paper. You cannot claim it costs you more to deal with loans in BK--a common enough occurence with subprime loans--and then expect to process them with the same efficiency as prime paper. Not. Gonna. Happen.

But we seriously have to get our heads out of that dark smelly cavern in which sloppy "internal processes" are expected to work out in the free world. Remember Judge Boyko going medieval on Deutsche Bank's lawyers, who "regenerated" a bunch of assignments in an FC filing? Same damn thing: a basic orientation to the world that says if it's enough to meet my internal processing standards, it's enough for everyone else in the world.

This is why I get worked up over leaping to the conclusion that CFC actually wants to foreclose this borrower, wants to enough to do it the underhanded way (saving up a tax bill to snare the borrower with as soon as BK is discharged). I just don't think they do want to. What they really want is just for the rest of the entire world, including a federal BK judge's courtroom, to become another little department in the CFC business model, one that can be brought to understand that hey, this is the efficient way to do things, so get with the program.

I think that's actually way more worrisome than "BK fraud." They don't think they're committing fraud; they believe their own stories. They have regenerated internal documents that "prove" their own stories. They do not see themselves as committing fraud; they see the rest of us as underperforming unpaid employees of the Empire. I am not defending them.

The usual word we use for a person who can't quite see why the rest of the world is unimpressed by unempathetic anti-social idiosyncratic ritualized behavior that evades rational analysis is, um, "psychopath." CFC isn't just an 800 Pound Gorilla, it's a crazy monkey. But we allowed a situation to develop in which it sets the business standards for the rest of the industry. Without minimizing the harm caused to Ms. Hill, this kind of thing is going to cost the rest of us a lot more than four thousand bucks for a lot longer.

by Tanta on 11/28/2007 09:38:00 AM

Given the tizzy certain segments of the press and internet commentariat went through over a handful of Federal District Court Judges sending foreclosing lenders back to the office to dig up the correct paperwork, I anticipate similar tizzy over this, from Gretchen Morgenson:

The federal agency monitoring the bankruptcy courts has subpoenaed Countrywide Financial, the nation’s largest mortgage lender and loan servicer, to determine whether the company’s conduct in two foreclosures in southern Florida represented abuses of the bankruptcy system. . . .

In court documents, the trustee said that it intended to examine the procedures Countrywide used to determine that it had a valid claim to the properties and that it had correctly calculated the amounts it said the borrowers owed. The trustee’s office asked Countrywide to produce a copy of the notes and mortgages, a payment history on both loans and the correspondence it had with the borrowers.

So what does this mean?

First, it is perfectly possible that the charges to the borrowers were intentionally inflated. If so, this action by the trustee will remove a major incentive for lenders to do that, and is therefore to be applauded.

Second, it is perfectly possible that the charges to the borrowers were wholly and completely effed up beyond all recognition by a servicing operation that doesn't bother to assemble all the right documents, review each item for accuracy, and cross-check with the payment history (the printout of all transactions on the account since inception). PJ at Housing Wire makes a good case that the foreclosure filing dustups in Ohio have a lot to do with the way the operations are structured and a "timeline" built into them that encourages attornies to file first, review the case later.

Item the second here is not, by the way, a "defense" of Countrywide or anyone else. Frankly, it'd be better news for all of us if this turned out to be a case of intentional misconduct. I'm betting, frankly, that it's probably a case of operational slovenliness, undertrained staff, bad "timeline" policies, and low-bid contract legal work on the ground being unmanaged by a huge national servicer headquartered a continent away. This is the worst case because, well, that's how the business model of the 800-pound gorilla mortgage servicer works.

Force the giant, "efficient" servicers to do their homework--which is what both the bankruptcy trustees and the foreclosure judges are doing--and you just "added back" the costs of doing business that the consolidation and automation and outsourced-legal work processes were supposed to subtract out of the whole thing. Do enough of that, and all of a sudden it's as expensive for a Countrywide to service a $1.5 trillion mortgage portfolio as it is for ten small regional servicers to handle $150 billion a pop.

Now is that bad news? It depends on your point of view. If you think deconsolidation would manage risk better, improve customer service, and slow down the magic refi machine by sending mortgage transaction costs back to their appropriate levels, then you probably don't think this is bad news at all. If you have a financial or political interest in keeping the punch bowl out, you will find this a distressing idea.

Please, let's be clear here. This kind of thing is going to do a real number on mortgage lending, servicing, and securitization profitability not, in my view, because that profitability has been exclusively due to inflated BK bills. That profitability has been due to "efficiencies" that result, among other things, in inflated BK bills (and insufficiently documented foreclosure filings). In other words, this is going to end up like Sarbanes-Oxley, I suspect: it'll hurt not because it will flush out a bunch of Enrons, but because it will force everyone to pay their risk management and operational control costs.

So let's please skip the uproar over "Countrywide has to prove it owns the loans!" That's not the point here with requiring copies of the notes and mortgages and payment histories and correspondence files. The point of all that is making Countrywide--and everyone else, eventually--"show its work" in its filings. If you present a bill to the trustee, you back it up with documentation of the charge. That's a perfectly unexceptional requirement. That the industry will spin as "red-tape paperwork burdens" is inevitable and should be dismissed as the usual defensive piffle.

What we are seeing here on both the foreclosure and the bankruptcy front is a movement toward having to deal with the true costs of secured lending: the costs involved in maintaining one's security and liquidating it in the event of default. That is going to change the math of securitization economics as well as the profitability of mortgage servicing operations, and that is going to directly impact the consumer in terms of curtailing easy credit and increasing the cost of mortgage financing. Not all of us think that's a bad outcome. If it means servicers hiring specialists with deep skill sets instead of paper-pushing temps, then I for one have no problems with it. I'd like to see the costs of that come out of executive bonuses and dividends rather than new fees to consumers, of course, but no bankruptcy trustee or foreclosure judge is going to make that happen. That'll take a shareholder revolt. Good luck.

by Tanta on 11/13/2007 08:43:00 AM

Countrywide's October operations numbers are out. You can see the score here.

The financial press will report on the headline numbers (loan production down year over year, no kidding!). I confess that this little thing down in "Loan Closing Services" caught my eye: AVM (automated valuation of a mortgaged property) services for October: 5,793,171 units. For context purposes, CFC's entire $1.4 trillion servicing portfolio is 8,999,292 units. AVM volume for October 2006 was 539,126 units, and was only 6,743,360 units for the first three quarters of 2006. This is reported under "loan closing services," but quite obviously not all these AVMs are being run for newly closed or closing loans.

So, is CFC running AVMs on everything it owns and showing those as "production" of its loan closing services division? Or, is CFC selling AVM services to some other big portfolio?

Why should anyone care? I don't know . . . there's been some stuff in the news lately about lawsuits and inflated appraisals . . . I'd sure love to know whether somebody is busy getting a AVM on every loan it's exposed to . . .

by Tanta on 10/03/2007 10:20:00 AM

I'm up late again this morning, and what do I have to show for it?

From the Wall Street Journal:

For Countrywide Financial Corp., this time it's personal. At least that's what a top executive says.

Having suffered a barrage of negative headlines while battling to shore up its finances and shrink its work force of 60,000 by as much as 20%, the nation's largest home-mortgage lender is launching a PR blitz aimed at repairing its reputation. And it starts inside the company.

For the demoralized employees who remain, the new campaign means wristbands with the phrase "Protect Our House" and pep talks promising to keep "amply" rewarding the most successful among them amid a struggle with the sharp drop in mortgage lending as defaults soar and house prices decline.

Leading the counterattack is Andrew "Drew" Gissinger III, a former offensive lineman for the San Diego Chargers football team who serves as executive managing director, residential lending, at Countrywide. . . .

"Let's call it like it is, as I mentioned earlier, it's gotten to the point where our integrity is being attacked. NOW IT'S PERSONAL!" says the transcript of a talk made last week by Mr. Gissinger. "... And, WE'RE NOT GOING TO TAKE IT!"

The transcript, prepared from a phone call with 250 "opinion leaders" at Countrywide on Sept. 26, offers a peek inside one of the biggest crisis-management efforts under way in an American corporation. Along with Mr. Gissinger on the call was Jason Schechter from WPP Group's Burson-Marsteller, a public-relations firm with a long history of crisis management.

"We wanted to assure you that my firm and I have brought companies through the worst type of publicity," Mr. Schechter said, according to the transcript. He added that a six-person Burson team was ensconced at Countrywide's Calabasas, Calif., headquarters, and about 25 people overall were working on the campaign.

Rick Simon, a Countrywide spokesman, said the transcript was sent to employees Friday. It says that employees are expected to sign a pledge to "demonstrate their commitment to our efforts," and Mr. Simon says about 11,000 have signed. Each employee who signs up receives the Protect Our House wristband made of green rubber. "We believe there's a great story about the strength of the business," says Mr. Simon.

To counter criticism that its lending practices are to blame for a surge in foreclosures, Countrywide plans to emphasize its "mission" of helping Americans become homeowners, the transcript says. "I want employees to look down at their wristbands and remember our fundamental mission to help customers achieve the American Dream, and to help them withstand those malicious outward attacks and to motivate them to continue on our journey with unwavering conviction," the transcript quotes Mr. Gissinger as saying.

The company also is reaffirming its pugnacious side. "We're competitive to a fault," he says in the transcript, adding: "Our divisions will have clear goals, built on our ruthless attack strategies to continue to grow profitably. Growing, winning and being the best is also hard wired into our DNA." . . .

"We're demonized something fierce," Mr. Mozilo said in an interview two weeks ago.

Mr. Mozilo, 68 years old, the self-made son of a butcher from New York's Bronx borough, knows how to fight back. He often has skewered his competitors as incompetent or irresponsible during conference calls with analysts. In a call last year, he said big Wall Street firms competing with Countrywide "don't know anything about the mortgage business."

According to trade publication Inside Mortgage Finance, Countrywide had a market share of more than 17% in this year's first half. And Mr. Mozilo's compensation last year, including the exercise of stock options, totaled $120 million. Even so, he said last month that he still sometimes feels like "a poor kid from the Bronx."

In the transcript, Mr. Gissinger takes up that viewpoint: "As always, we embrace the role of being the underdog. Our commitment and ability to win is demonstrated where it counts -- the scoreboard."He also warns employees to expect more "bad press." Some of that is likely on Oct. 26, when the company is due to report third-quarter results.

Kenneth Posner, an analyst at Morgan Stanley, has forecast that Countrywide will have a loss of $2.4 billion, or $3.47 a share, in the third quarter, compared with earnings of $647.6 million, or $1.03 a share, a year earlier. Countrywide hasn't provided a third-quarter forecast.

Mr. Gissinger sought to reassure employees about sticking with the company in the transcript: "I've made a lot of people rich or richer who have joined me on my past crusades. Please trust the same holds true here."

The WSJ links to the call transcript here.

by Tanta on 9/30/2007 11:50:00 AM

I don't know how many posts I've written on Gretchen Morgenson's terrible reporting. I guess I'm going to have to start keeping score. "Can These Mortgages Be Saved?" Can this "reporter" be saved?

Her latest attempt to go after Countrywide, for sins real and imagined, contains the following "reportage":

But on the billions of dollars worth of mortgage loans that have been sold to investors in the last few years, it is not the banks or lenders like Countrywide that are hit with big losses when homes go into foreclosure. It is the sea of faceless investors who own pieces of these trusts. Also, under the trusts’ pooling and servicing agreements, Countrywide and other servicers typically recoup any costs they cover in the foreclosure process, such as legal and appraisal fees.

Borrower advocates fear that fees imposed during periods of delinquency and even foreclosure can offset losses that lenders and servicers incur. Few borrowers know, for example, that when they make only partial payments on their mortgages, servicers do not credit those payments against the principal or interest on their loan. Instead, the partial payments are deposited into a so-called suspense account. Servicers can dip into these funds and make use of them as interest-free loans, although the funds have to be accessible when the borrower becomes current on payments. In the meantime, borrowers — whether or not they know it — are still zapped with fees and charges for delinquent mortgage payments.

“The foreclosure process is a profit opportunity for servicers and lenders, but there is very little oversight of the fees imposed,” said Michael D. Calhoun, president of the Center for Responsible Lending. “There are a lot of folks trying to squeeze distressed borrowers.”

I cannnot, literally, think of a better way to stir up sympathy for Countrywide than printing crap like this.

1. Servicers recoup foreclosure expenses because servicers are servicers. Investors are investors. Investors buy the credit risk; they therefore cover foreclosure costs. This is a perfectly normal arrangement. If you think there's a problem with it, can you explain how being reimbursed for an out-of-pocket expense, like a fee paid to a lawyer or an appraiser, is "making a profit"? Are you saying there's a markup in there? Do you have evidence for that?

2. Servicers are not now and have never been required to accept partial payments. Mortgage loans are not free-form Option ARMs where the borrower gets to decide how much principal or interest to pay this month; all of them, even the real OAs, have "minimum payments." If a distressed borrower talks a servicer into accepting a period of partial payments, to be made up later, that is called a payment plan or forbearance arrangement or some other "workout," and it takes the servicer's consent.

3. Putting partial payments in "suspense" means they don't get posted to the customer's account. It does not mean that the money goes into the servicer's own account. Those funds go into custodial accounts to which servicers cannot "dip in." Servicers do receive float income on those accounts, but of course in most cases they are also obligated to advance the full payment to the investor, out of their own funds, until it is collected from the borrower. So advances do offset the float. This entire paragraph is such an egregious mismash that it's unbelievable.

4. Foreclosure is a profit opportunity? What does that mean? That mortgage loan servicing--which unfortunately does include having to foreclose loans when they default--is a profitable business? Well, yes. That's why people engage in it. Is the claim here that an unfair or excessive profit is being made off of foreclosures (but not off of performing loan servicing)? How? Specifically? The "examples" in these three paragraphs don't make any sense.

And I cannot begin to make sense of the "Connor" loan example. With the hashed-up timeline and limited information given it's impossible to figure out. All I can say is bang-up job of reporting.

Ms. Morgenson, if you want to keep up on your mission to portray Countrywide in the worst possible light, you are going to have to get an education from a reliable source at some point about how the mortgage industry works.

by Tanta on 9/13/2007 09:17:00 AM

A lot of this we've already seen in various news reports, but since it always comes up for discussion, I thought it might be helpful to look at the various moving parts of CFC's operational changes:

Addressing liquidity and funding needs by accelerating our plans to migrate the funding of our mortgage originations to Countrywide Bank, and our borrowing of $11.5 billion under our lines of credit. Additionally, the Company recently arranged for $12 billion in additional secured borrowing capacity through new or existing credit facilities

I did an UberNerd post the other day on "origination channels," one purpose of which was to explain the difference between a mortgage banker and a bank. What CFC is doing is (attempting to) transform itself from primarily a mortgage banker (with a small bank) to a big bank. Instead of borrowing money to make mortages with in the capital markets, and selling them immediately, as a mortgage banker does, CFC is "migrating" to depository banking, using deposits and the kind of borrowing that is available to banks (interbank loans, for instance) to fund mortgages.

Materially tightening product and underwriting guidelines such that all loans the Company now originates are eligible for Fannie Mae, Freddie Mac or Ginnie Mae securitization programs, or otherwise meet Countrywide Bank's investment criteria.

This is more of the implications of moving from mortgage banking to banking: CFC will still sell loans, but only to the GSEs/Government-insured market. The "nonagency" loans will have to be "portfolio" quality (even if they do not always remain in the investment portfolio). What this excludes is, precisely, the kind of loans that you would be willing to sell but not to hold, or a big chunk of what got made in the last 5 years or so under the private-issue Alt-A/subprime rubric. That's one of the costs of being a bank. Of course, since the bottom fell out of the Alt-A/subprime market, it's not much of a "cost" today. Except that:

Taking advantage of reduced primary market competition to adjust pricing, which is expected to have a favorable impact on mortgage banking gain-on-sale margins and result in greater returns on the high-quality loans originated for our Bank's investment portfolio.

Profit margins for good old-fashioned GSE swap/portfolio hold depositories have never been quite as rich as the profit margins for high-rollin' Alt/Subprime mortgage bankers. What you are being told here is that CFC plans on being "the last man standing," and therefore to use the "pricing power" this provides to be a bank that makes money like a mortgage banker. However, that still requires something like a bank's expense load:

Announcing plans to reduce expenses in response to lower expectations for mortgage origination market volume. These plans include workforce reductions of up to 20 percent.

So. Welcome to Main Street, Countrywide. Lay off the high-flying sales force, hire tellers to take deposits, make Your Dad's Mortgage Loans, and start calculating your gain on sale and net interest margin in nickels and dimes. Just like the old fogie bankers on Elm and Maple you've been stomping all over for years. Hope it works for you. Can I get a free calendar?

by Calculated Risk on 9/11/2007 10:38:00 AM

From the NY Post: Countryslide, Mortgage Lender's Shares Plunge; Seeks 2nd Bailout

Note: You have to enjoy the Post headline. Countrywide is seeking more investments, not a bailout. This story is also on Dow Jones (not as colorful).

Countrywide Financial Corp. is putting together another multi-billion dollar bailout plan as the nation's largest home lender continues to struggle amid the global credit crunch and declines in the housing market ...
...
It's unclear at this point who exactly is involved in the investment, but sources said a group that could include J.P. Morgan and Citigroup as well as several hedge funds has expressed interest in Countrywide.

A final deal could be announced by the end of the month, sources said.
...
"The issues the economy is facing are worse than most people believe," Mozilo said in an interview last Friday with Bloomberg News.