by Tanta on 5/06/2008 08:08:00 AM

Wherein voluntary non-binding criteria are established in order to forestall actual regulation. No, really. Saith the WSJ:

Officials have called a six-hour meeting Tuesday with banking officials to discuss adopting a uniform, but voluntary, set of criteria to speed the time it takes qualified borrowers to modify mortgages they can't afford. Officials also want to make the modification process more consistent across institutions. . . .

The new industry guidelines, if adopted, wouldn't be binding and couldn't be enforced by the government. But, if effective, they could help forestall aggressive action from congressional Democrats, who have lashed out at loan servicers for acting too slowly and threatened to push tougher oversight of the banking industry if results don't improve. . . .

One possible industry "best practice" would have lenders acknowledge the receipt of any request for a modification within five days of a request by homeowners. Some struggling homeowners have complained that it takes two months or longer to hear back from lenders. Also, the companies are considering a policy that would direct lenders to notify borrowers of a decision about whether to modify a loan within five days.

Another tricky issue slowing loan modifications has been the conflict between companies that hold the first and second mortgage on the same home. Treasury officials are also trying to broker a truce between these groups that would make it easier for borrowers with two mortgages on one home to modify the terms of their loans. . . .

Loan servicers are also looking for clarification about the role of Fannie Mae and Freddie Mac. The two government-chartered mortgage companies made it easier for lenders to modify the terms of certain qualified loans, such as the interest rate. But they have been stricter about writing down mortgage principals [sic], saying they will generally do so only on a case-by-case basis.

Let's see. Kicking out a form letter within five days to acknowledge the request? That's easy enough; servicing systems are superb at kicking out form letters. What will it say, other than "we got your request"? Until we finally work through this business about "across the board" versus "case by case" processing of these deals, putting a hard and fast timeline on them seems like a problem to me.

If you think there's one consistent mechanical approach that works for any and all loans and borrowers, and you assume that the hold-up is lack of direction from management, then all we need is for the mechanical process to be laid out and the big guys meeting with Treasury to come back to the office and hand out the memos to everyone.

If you think, as I do, that the vast majority of these things have to work on a case-by-case basis, and the hold-up is lack of senior loss mitigation staff who can manage cases all the way through with enough time in their day to take phone calls directly from borrowers in the process, plus the problem of first mortgage loss mit people trying to get somewhere with the second lien people, then we need to be setting "best practice" standards for how and with whom these loss mit departments are staffed at both shops (first lien and second lien).

Furthermore, I really don't see the point of continuing to talk about first mortgage servicers agreeing to do principal write-downs until we have talked more seriously than I have heard heretofore about what junior lien servicers are going to do, exactly, and how they're going to do it. I keep seeing plans--this includes Frank's FHA plan as well as Sheila Bair's "HOP" proposal--that go into great detail about the first lien holder writing down principal but just kinda mention junior liens as an afterthought. Practically speaking, this isn't doing anyone any good: first lien holders can "voluntarily" agree to do just about anything, but if the second lien holders don't agree to modify, subordinate, or charge off and release their liens at the same time in the same time-frame, the whole thing is pointless. But the economics of the two parties are very different: second lien lenders, by and large, don't have big loss mit staffs. You can't afford to on a second lien, not the way the business model of second lien lending was written in the recent past. If you're looking at 100% loss in a foreclosure, but only 110% loss if you spend a lot of time and money negotiating with a first lien lender who ends up pressuring you into charging off the loan anyway, you gain most by doing exactly nothing.

This is not a sympathy trip for second lien lenders; it's a reality trip. Unless this great summit meeting at the Treasury comes up with a public answer to what the second lien lenders are expected to do, and how they're expected to do it, this isn't going to work. Even with Barney Frank issuing none-too-subtle threats:

In a speech to the Mortgage Bankers Association in Boston, House Financial Services Committee Chairman Barney Frank (D., Mass.) warned Monday that if the industry doesn't do more to avert foreclosures, "you're going to see a much tougher set of rules" on mortgage lending emerge from Congress later. He said such changes would be "politically irresistible" if foreclosure problems continue to build up.

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 2/17/2008 11:25:00 AM

Mortgage servicers: this is called "reaping what you sow."

Spend decades building ever-larger, more consolidated servicing portfolios through mergers, acquisitions, and bulk purchases. Chase marginal improvements in efficiency with automation, out-sourcing and off-shoring. Wall yourselves and your "platforms" off in centralized compounds far from your customers and their local markets, withdraw behind consumer-proof phone menus, worthless web portals, and untrained "customer service representatives." Keep your performance statistics up with aggressive collection practices; keep your operating costs down with robo-calls and impenetrable scripting. Manage yourself quarter-to-quarter with frequent purchases and sales of loan servicing in rapid succession, confusing and alienating your current and former customers, losing track of payments and account numbers, cancelling automated payment provisions at a keystroke, performing three escrow analyses (with three payment increases) in a single year. Hire a subservicer to do the grunt work, adding another layer of impenetrability and forcing even more "cost-cutting" measures to keep the subservicer profitable. Outsource your default servicing and REO management functions to a third party who talks to your own staff via phone menus and searches for ever more creative ways to extract fees from consumers, since you don't pay much. Encourage an entire cottage industry of hucksters, scammers, and pick-pockets to grow up around you, like fungus, in the name of providing "counseling" or "negotiation" or "foreclosure avoidance" services, assuring that your customers will no longer be able to tell who is legitimate and who isn't. Demonize community-based homeowner-advocacy services until you need to co-opt them to bolster your own absent credibility.

Eventually you find yourself sending pleas to your customers to return your calls disguised as wedding invitations. You have borrowers who choose the lesser evil of losing their homes in silence rather than the greater evil of trying to deal with you. Your response is to use someone else's letterhead. This, you think, will make you look trustworthy. After all, most of us already associate deceptively-packaged mailers with the same fast-talking brokers who got us into these loans we don't understand. But if it worked once, it might work again. What other choice do you have? We installed our own caller ID technology to cope with your endless annoying solicitations and hostile collections department. Goose, gander.

Your biggest fear is that we, the borrowers, will re-brand ourselves as efficient exercisers of put options and make you eat that $50,000 per loan. We will hire consultants. We will use someone else's letterhead. Somewhere in the United States, at this very moment, a borrower is folding up his deed, stuffing it into a fancy engraved wedding-invitation envelope, and writing your address on it. You will be astonished.

by Tanta on 1/31/2008 12:26:00 PM

So far at least a dozen people have emailed me the link to Jonathan Weil's latest egregiousness in Bloomberg. I have no idea how many times it has come up in the comments. My response?

What P.J. said.

Weil's whole argument rests on the original assumption that pools of mortgage loans can be "wind-up toys" or "brain dead" from a servicing perspective. The reality is that they cannot, they are not, and anyone who pretended otherwise was an idiot (I'm lookin' at you, Wall Street). The prohibition on actively managed pools is there to prevent the issuer or servicer from buying and selling loans in and out of the trust and passing through gain-on-sale to investors while calling it "interest income," or securitizing loans with "putback" provisions that mean the issuer can repurchase loans out of the pools whenever it wants to at a price that is below market in order to take advantage of the bondholders. It was never and is not a prohibition on servicing mortgage loans. That is, in fact, what the SEC just said.

There is and has always been the recognition that mortgage loans, unlike, say, Treasury notes, need to be "serviced." There are therefore long and involved servicing agreements and absolutely not trivial servicing fees specified in all these deals. A couple minutes' worth of reflection would lead you to this: perhaps there is a debate about where you cross the line between servicing a pool and managing it. That would be a debate about when "loss mitigation" (working out a loan in order to minimize loss when loss is inevitable) becomes "loss creation" (a servicer creating a loss to the investor in order to increase servicing income or something like that). But to have that debate you'd have to accept that real loss mitigation is acceptable, and you'd have to look at more facts than just the presence of workouts as such. Such a debate doesn't have jack to do with the SEC handing out "accounting favors" to anyone.

I simply hope that someday Weil wants to drop escrows or make a curtailment and get a payment recast or deed off an easement or something on his home mortgage and he calls his servicer and the servicer says, "Sorry, dood. You're brain dead to us. All we do is collect your payment. Have a nice day. Click."

Maybe that has already happened to him, and it's making him bitter. Beats me. All I know is that a bunch of geniuses on Wall Street did, actually, fall for the idea that residential home mortgages were "wind-up toys," just "asset classes" instead of messy complicated things that involve real people (good, bad, and indifferent, lucky and unlucky, high-maintenance and low-maintenance) on the other side of the cash flow, who don't always behave the way your models said they would. And here we are. Demanding that we continue the delusion in order to make the accounting work out is mind-boggling. Demanding that issuers take it all back onto their balance sheets as punishment for trying to mitigate losses to bondholders is beyond perverse.

by Tanta on 1/16/2008 11:25:00 AM

From the Wall Street Journal:

In some cases, servicers are telling borrowers they will take 10 cents on the dollar to settle their claim, says Micheal Thompson, director of the Iowa Mediation Service, which runs a hotline for homeowners in financial distress. In other cases, they are selling these loans at large discounts to third parties, says Kathleen Tillwitz, a senior vice president at DBRS, a ratings agency.

Coming up with a plan that will get borrowers back on track is easiest if both the mortgage and home-equity loan are held by the same party. Countrywide will sometimes "whittle down" the payment on the second mortgage to come up with an amount that the borrower can afford to pay for both mortgages, or even eliminate that payment, Mr. Bailey says. The company doesn't publicize such efforts, he adds, because that might encourage "people not to make their payment and see what happens." In either case, "the borrower still owes the principal," Mr. Bailey says.

Solutions can be harder to come by when the two loans were made by different lenders and are held by different parties. "The people in the first position will say, 'Until you get a deal with the second, why should I make a deal with you?'" says Iowa's Mr. Thompson. Second-mortgage holders are often reluctant to approve a short sale or deed in lieu of foreclosure that could wipe out their claims, he adds.

FirstFed says it encourages borrowers in financial distress to contact the owner of their home-equity loan and sometimes offers to buy out a home-equity loan with no current value for a small sum -- $2,000, for example -- so that the entire mortgage can be restructured.

But the company says such offers are often rejected. "It's not worth their while to take the $2,000" because of the costs associated with evaluating the offer and releasing the borrower from the lien, says Ms. Heimbuch, the company's CEO. "The second forces you into foreclosure."

Scenario A: Expenses $0, Recoveries $0. Scenario B: Expenses $2,000, Recoveries $2,000. Amazingly enough, they're going for A.

Of course, eventually they'll be able to make it up on volume . . .

by Tanta on 1/13/2008 10:43:00 AM

And Gretchen Morgenson has real live scientific evidence to prove it:

BUT it is possible to get a feel for what is happening on the ground from a new survey of 2,400 real estate agents sponsored by Inside Mortgage Finance Publications. The survey taps into the outlook of people who see troubled borrowers firsthand, when they try to sell their homes before foreclosure occurs.

For example, agents participating in the survey confirmed what many borrowers say: that loan servicers are downright unresponsive. This is especially true when distressed owners try to sell their homes before being put through the trials of foreclosure. When they sell at a price that is lower than the outstanding mortgage debt, that is known as a short sale.

Asked how servicers could streamline such sales, one said: “Allow you to go directly to the loss mitigation department without having to speak or argue with eight people before they finally give in and transfer you.” Another said: “Respond to offers within five business days — they are killing the market by taking upwards of three months to respond to an offer.”

A third participant said: “Answer their phone, make it easier to talk with the appropriate people, instead of playing Mickey Mouse games. I have never understood why these companies who are owners of a defaulted loan do not make it easier to communicate with agents who are trying to sell these homes.”

Thomas Popick, principal at Geosegment Systems, the designer of the survey and a supplier of data to financial services firms, said its findings show that loan servicers are averse to short sales, even though they may be the best solution for many borrowers, lenders and the overall real estate market.

“In many cases, loan modifications — no matter how generous the terms — only delay foreclosures on properties where the mortgage balance far exceeds the current property value,” he said. Homeowners who try instead to sell “know they cannot afford the property and are trying to do the responsible thing — sell the property to someone else who can afford it.”

Mr. Popick, if they were selling the property to someone else who could "afford it," would we be talkin' short sale here? Do you folks actually listen to yourself talk?

It seems like a good time to discuss short sales in simple, basic terms that everyone can follow without moving their lips. First of all, anybody at any time can sell a home for less than the amount owed on it. There is no law against this. However, the buyer will not get clear title until the lender is either paid in full from other sources that make up for the shortfall, or agrees to "settle for less" and release the lien with less than full payment. So when we talk about "short sales," what we really mean are the ones where the lender is being asked to just take less than a full payoff of the loan while releasing the lien.

Why would any lender accept a short sale? Well, the idea is that a short sale is a form of loss mitigation or workout: the lender (investor) is presented with a choice between a smaller loss in a short sale or a larger loss in foreclosure, so accepting the short sale "mitigates the loss."

The first thing you need, then, is a lender who believes that it would have to foreclose, if it doesn't approve the short sale. Traditionally, you see, short sale offers come up when borrowers are already delinquent, and have probably already been having some contact with the servicer's collection department, and the idea of possible foreclosure isn't coming out of the blue for any party. In cases like this, even a cruddy servicer will probably have already given this borrower a contact in the default servicing department somewhere who, when reached on the phone, will have access to logs of the previous contacts and be able to respond to the idea of a short sale without being unduly startled.

What we seem to have going on, at least in some cases here, are borrowers who are not delinquent, who have attempted to sell the property, who have ended up with no offers except short ones, and whose Relitters therefore dial up the 800 number for the servicer, wanting someone who can make a deal, right now, soup-to-nuts in five days. Strangely enough, they're talking to your basic customer service rep who doesn't make short sale deals. And the CSR doesn't just transfer them to the Loss Mit Squad because, well, the loan isn't delinquent, which the CSR can see just by typing in a loan number and looking at the monitor. Are you likely to get someone saying, "Um, are you sure we're talking about the same customer?" Yes. You are likely to get that. Can you see why?

You can call this "Mickey Mouse" all you want, and we all know there's plenty of bureaucratic nonsense all over the corporate world, including but not limited to mortgage servicers. But the first necessary condition for "loss mitigation" is "evidence that loss will occur." Nobody takes the lesser of two evils unless both evils are on the table. If you have never been delinquent on your mortgage, and your financial situation has not changed since the loan was made (you still make what you made then, your non-discretionary expenses are still what they were), and you don't have some other circumstance like a forced job relocation, your servicer isn't exactly being dense by wondering why we're already supposed to be negotiating a short sale.

Every servicer, even the cruddy ones, has a process in place for dealing with this situation. If you "cannot afford the property," as Mr. Popick says, you are going to have to call your servicer and explain that you will very soon default, if you have not missed a payment already. The servicer will request financial information from you--possibly more of it than it asked for when the loan was made, but that's where we are. The servicer will also order an appraisal with an interior and exterior inspection. If you do not allow an appraiser (or broker for a BPO) access to the interior of your home, your case will go directly to the foreclosure department without passing "Go." If you have already listed the property, the servicer will need all the information from you about the listing date and the list price to determine whether your property has been "exposed to the market" adequately.

No servicer will ever, as far as I know, approve a short sale without asking you to pay something--even if it's just a token amount--in cash to offset the lender's loss. That might take the form of signing away your rights to your current escrow balance. It might mean you write an actual check. A large part of the reason that the lender makes you go through the part about sending copies of your bank statements to the Loss Mit people before a short sale is approved involves the lender making sure that you are either really a hardship case, or if not, that it removes some money from your pocket. Short sales are not actually "free puts."

You will absolutely be required to show evidence that the proposed short sale is an arm's length transaction. If the buyer of the property is getting "creative financing" from somebody in order to make the deal work, count on extra time while the servicer of your mortgage exercises its rights to examine the terms of the buyer's financing, even if the servicer of your mortgage isn't providing that financing. If the deal being contemplated involves this nice guy in a suit who came to your door and had you sign over title to your home with a promise that he could arrange a short sale for you for just a modest fee, your servicer is going to object.

If you, the borrower, are a real estate agent and plan on making a commission on the short sale of your own property, the servicer is going to double-object. If the buyer making the short offer is an LLC formed by a principal in another LLC who happens to be, um, you, the servicer will extra-triple-super object. This kind of thing happens--or tries to happen--often enough that investors do in fact demand a lot of details about the proposed transaction to prevent being scammed. Yes, we are aware that they should have been this vigilant when they made your loan to you, but they weren't and here we are. No deals are going to get made, start to finish, in five business days, just to make an RE broker happy.

If you have a second lien on the property with another servicer, you'll be dealing with two sets of negotiations. This will not speed things up any. If you have only one loan, but you originally had mortgage insurance, the MI will be a party to the negotiations as well. The MI takes most or all of the loss here. The MI gets to have an opinion.

Any sales contract you sign will have to have special contingencies in it reserving rights to the mortgage servicer. When the transaction actually closes, you will not be allowed to receive any funds directly. This will mean that the Settlement Statement will have to be sent to your mortgage servicer for review before your buyer gets the keys. It may all strike you as "Mickey Mouse." I can pretty much promise you that if you let that attitude show in your conversations with the servicer, the process will get even longer.

Is it the job of the Loss Mitigation Department to care about clearing your local RE market? No. Is it their job to care about keeping your buyer wiggling on the hook long enough to get papers signed? No. Is a short sale supposed to be a painless alternative to foreclosure for anyone involved? No. There are no painless alternatives. There shouldn't be. There cannot be.

Like anyone else with a functioning brain, I accept the principle of loss mitigation: a smaller loss on a short sale beats a larger loss on a foreclosure. However, I have a little bit of a problem with being told by an RE broker that I'd better hurry up and complete this short sale "before it gets worse." Are you telling me that the current transaction isn't, actually, short enough? In that case, are we transferring this property to "someone who can afford it," or are we just throwing in a "pinch borrower" who will be calling me up in six months with the same story I just heard from the former owner? Just exactly how often does an arm's length market produce a short sale price that is so much better than a foreclosure auction price? Why does it do that? You might want to think about it for a minute.

Real estate agents: you might want to be careful what you wish for. I don't know what all the various servicers will do--or will be forced by circumstances to do--but I know what I do every time someone tells me to hurry up and take a pig in a poke.

*From the CS Monitor:

But Dr. Baen of the University of North Texas is optimistic about their futures. "These people are hustlers, hard workers. They're used to getting on the phone," he says. "They'll end up in insurance, in mutual funds, in retirement planning, and commodities."

And this guy is one of your defenders, my friends on the RE sales side.

by Tanta on 1/07/2008 10:12:00 AM

And when the music stops, everyone has to sit down. Ours is a cliché business, but then again there may be some new life in the old saws at the ignominious ending of a "New Paradigm."

American Banker has an interesting piece out on troubles in mortgage servicing land (subscription only, alas):

In recent weeks problems at servicing units contributed to profit warnings by First Horizon National Corp. and Regions Financial Corp. If such hits were to develop into a full-blown trend, it might undermine the conventional wisdom on the inherent hedging that servicing provides originators, and it could cool some of the acquisition interest that servicers have continued to enjoy. . . .

On average, servicers are paid a fee of about 50 basis points annually for subprime loans in securitizations, Mr. Sepci said. "Traditionally in an adequately performing credit market, like 2004 or 2003 or even 2005," that rate "basically was fair and adequate compensation," but in the current environment, "for a lot of participants … maybe it's not enough."

For instance, "when you modify a loan, and you contact a borrower, basically re-underwrite the loan, and work with them through their issues, you're incurring costs of anywhere from $700 to $1,000 dollars per interaction," he said.

In addition to advancing principal and interest, servicers also typically are required to cover a variety of costs during foreclosure, though eventually they are reimbursed.

"The advances are going up in general, and for nonbanks, financing those advances has become more difficult and more expensive," said Jeffrey M. Levine, a managing partner with Milestone Advisors LLC of Washington. . . .

However, some observers said that rising servicer expenses have been counterbalanced by slower prepayments and late fees, and that much depends on the individual characteristics of the servicing portfolio and the servicer's capacities.

Delinquencies "can be very profitable for the servicer," said Charles N. McQueen, the president of McQueen Financial Advisors, a Royal Oak, Mich., investment advisory firm that performs mortgage servicing valuations. "It should work that way if you're a large enough servicer, due to economies of scale — your fees more than cover your expenses."

Mr. Levine said that it would be "fair to say" that servicing costs are increasing, "but in terms of the overall economic picture, you'd be telling an incomplete story if you felt that was just net negative on the value of servicing."

For example, a slowdown in prepayments and a revenue boost from late fees act as counterweights, he said.

But Mr. Sepci said late fees may not be enough.

"On average, late fees are approximately 10 basis points," he said, but those fees, even when combined with the standard 50-basis-point servicing rate, would not cover what some servicers are asking to take on some very high-delinquency portfolios.

And slowing prepayments also may have negative consequences for servicers.

The slowdown may be "contributing to the higher delinquencies as more accounts have a higher probability of default now, and therefore higher cost," said John Panion, a senior manager in KPMG's financial risk management practice.

I remain amused by the idea that 50 bps for subprime servicing is adequate in an "adequately performing credit market, like 2004 or 2003 or even 2005." If the height of an unprecedented boom is "adequate" for existing subprime servicing valuations, then you have a serious mispricing problem on your hands.

This does point to what I have always considered the basic function of the "Hope Now" teaser-freezer plan, with its distressing provisions for doing "streamlined" modifications. It has always been about servicers not being in any position to absorb the costs of responsible processing of workouts. If you don't really underwrite it up front, you have to really underwrite it in back, but apparently that's a challenge on 50 bps servicing. So the next big problem is going to be writing down the value of those MSRs (servicing rights as an asset on the balance sheet) if and when we blow through that relatively small number of mortgagors who qualify for the "streamlined" workout and get to the ones who will really eat operating expense.

Similarly, while 10 bps in late fees sounds like a lot (at least, it does to old prime lenders like me), one begins to suspect that late fee income, also, was calculated based on the kinds of collection costs you had in that "adequate" market of 2003-2005.

We're certainly seeing an interesting shift in assumptions here regarding prepayments. Historically, slowing prepayments have always been good for servicers, and that's why a servicing portfolio was always a "counter-cyclical" hedge for your origination platform: the lack of new refinance and purchase transaction income on the front end is made up for in longer loan life on the back end, and because so much of the cost to service a loan is front-loaded, and because new mortgage loans amortize pretty slowly, the longer it stays on the books the more money you make.

That conventional wisdom is being challenged by the fact that 2003-2005 might have been "adequate," but only because short loan lives (rapid prepayment) masked inadequate credit quality to the extent that servicers staffed themselves for acquisition and payoff processing--much cheaper operations than delinquent and default servicing--and prepared to greet a slowing prepayment environment with the usual cheerfulness of servicers. That cheerfulness wears off when extended loan lives produce not net servicing fee income but overwhelming collections, workout, and foreclosure costs.

Finally, we need to remember that servicer advances are one side of the coin, and float is the other. Servicers collect principal and interest payments for performing loans on and around the first of the month, but do not usually remit to the investor until around the 20th-25th. Advances have borrowing costs, too. So what's the value of the float on however many performing subprime loans we still have left? You'd have to ask Dr. Bernanke . . .

(Hat tip, Clyde!)

by Tanta on 12/18/2007 10:04:00 AM

Only a mere fifteen months after the eagerly-awaited Nontraditional Mortgage Guidance began closing the barn door slowly enough that the entire wretched 2006 subprime and Alt-A loan vintage still managed to get out, the Fed has deemed the time right to take decisive action on mortgage regulation:

Dec. 17 (Bloomberg) -- The Federal Reserve will make it harder for lenders to charge fees for early repayment of subprime mortgages, according to consumer advocates and a regulator.

The change will probably be one of several recommendations from the Fed's Board of Governors when it gathers in Washington tomorrow to respond to the collapse in the market for subprime home loans. . . .

Fed staff, with input from policy makers, will propose as many as four new requirements for lenders tomorrow before a Board of Governors meeting scheduled for 10 a.m. They may also set two new standards for disclosure.

The proposal will suggest limiting prepayment penalties for most high-cost loans, while giving lenders some flexibility through several exceptions.

``The consensus seems to be that they are going to do something on no-documentation loans, and they are going to ban prepayment penalties,'' said Brenda Muniz, legislative director in Washington at Acorn, a community advocacy group. ``The devil is in the details,'' she said. There may be several loopholes for lenders, Muniz added.

The staff memorandum will also probably recommend lenders be forced to include property taxes and insurance in monthly payments. They are already included in payments on most prime home loans, which banks make to their best customers. The proposal will also address standards for measuring whether borrowers can afford a loan for the duration of the mortgage, instead of just for an initial period of lower interest rates. . . .

"It is a common practice for these payments to be escrowed in the prime markets, and I see no reason that escrows should not be standard practice in the subprime markets too," Kroszner said in a Nov. 5 address in Washington.

In the real world, it is common practice for tax and insurance escrows to be required on prime loans only when the LTV is greater than 80%; if there's still a lender around who won't waive escrows for lower-LTV loans (usually for an additional 0.25% in points), I haven't heard about it. I can tell you that nobody complains more bitterly than a prime borrower with a low LTV forced to escrow; these are responsible folks who quite rightly consider escrows on a par with excess tax withholding. It is particularly galling when servicer escrow processes, in this day and age of frequent loan servicing transfers and stripped-down operations, are such a mess in so many respects. Escrowing your tax and insurance payments should at least guarantee that you'll never have a policy cancelled or get a late notice from the county assessor, but too many people are finding that not to be the case.

Practically speaking, what changed in the world of the last several years was the explosion of the piggyback loan. Purchase mortgages, especially for first-time homebuyers, that would a few years ago have had high LTVs and mortgage insurance (which is always escrowed), became 80% first mortgages and therefore fell under the escrow waiver rules. So at some level this problem is going to solve itself, as second-lien lenders exit the game and low-down loans have to secure mortgage insurance, which then require escrow accounts. I will be quite interested to see what gets proposed here by the Fed, however, as a rule.

The interesting thing is that the industry never knows what to think about escrow rules. Servicers like them, since in addition to the obvious risk reduction, escrow balances are a profitable source of float. Originators, however, have two important reasons to resist giving up escrow waivers: you lose low-LTV refi business (it's hard to talk a low-LTV borrower into refinancing an existing loan that doesn't require escrows into a new loan that does, if the low-LTV borrower wants to manage her own T&I), and you just can't play qualifying games with stretched borrowers. A high-DTI loan without T&I included in the payment is more than usually likely to fail eventually, but often not until the first or second tax bill comes due. A high-DTI loan with T&I included in the payment is more than usually likely to fail early, while it's in that nasty early default warranty period. So I expect the usual schizoid response from the lobbyists.

One thing that has been a particular problem lately is estimated tax payments--escrowed or just calculated for qualifying purposes--on new construction. A perfectly common slimy origination practice is simply to use the last actual tax bill on the parcel to calculate next year's tax bill, even though a moderately alert cub scout could tell you that as the property was unimproved acreage last year and will be assessed next year with a 3,000 square foot home on it, last year's tax bill is going to be a tiny fraction of what the borrower will actually have to pay. Every underwriter knows this practice is creating loan failure; every loan officer knows this practice is shoe-horning in marginal borrowers who wouldn't meet DTI requirements using sane numbers and hence is a way of keeping the party going.

I certainly wouldn't expect Fed regulations on mortgage escrows to include drilled-down rules on how to calculate taxes on recently improved property. But that's kind of the point: the industry has behaved in such perverse, self-defeating ways lately that you probably do have to actually write legislation including the kind of blindingly obvious rules on tax calculation that underwriter trainees used to master by the end of their first week. If you don't, then these self-defeating practices will continue as long as the industry is structured so that someone profits from it.

There's also the chronic problem of "de minimus" HOA assessments and ground rents. Servicers hate having to manage escrow accounts for HOA assessments of $50 a year, not to mention those $1.00 ground rents. Those things never get escrowed. But that means that the increasing number of loans with quite significant assessments are also going un-escrowed, as servicers just decide not to handle HOA dues across the board. That wasn't a huge problem back when we didn't put first-time homebuyers with no savings into gated communities with an absurd DTI. Now that we do, we're seeing the first foreclosure notice coming from the HOA, not the lender or the tax assessor.

The safe prediction is that as soon as the draft rules are announced, we'll get a press release from the MBA decrying the additional cost of mortgage financing that will result. What with the add-ons from cram-down legislation and prepayment penalty restrictions and eliminating no-docs and ending appraiser-shopping and everything else they've warned us about in dire tones, we can (should we choose to believe them) prepare for 12.00% mortgage rates by about March. Of course, by then your tax bills might actually start dropping a bit, once the assessor gets the new comps . . .

by Tanta on 12/14/2007 10:50:00 AM

BusinessWeek sums it up: "Dog Days at Cerberus."

Here's one for the Things You Have To Read A Couple of Times At Least To Assure Yourself That It's Not Just You File:

Now, say sources close to Cerberus, the $26 billion firm has slowed its pace of dealmaking with the credit crunch in full force. It's also focusing more rigorously on the troubled holdings in its portfolio—some of which may have blindsided the firm. The situation has prompted concern that Cerberus' returns may suffer. This comes at a time when all players are under pressure. "Industry returns have been extraordinary, 20% to 30% a year," says Katharina Lichtner, managing director of the private equity advisory firm Capital Dynamics. "Returns will come down, revert to a more normal 16%."

And what kind of socially redeeming value will Cerberus be adding to the mortgage biz for that perfectly normal 16%?

It's unclear just how much work it will take to fix GMAC, the financing arm of General Motors (GM). A Cerberus-led group paid $14 billion for a 51% stake in September, 2006. Cerberus wasn't exactly an industry newcomer. It had a front row seat at the subprime show with Aegis Mortgage, a lender it took control of in 1996. Yet Cerberus jumped into GMAC at exactly the wrong moment. Price defends the move: "There was one time to buy GMAC. We wanted it and took action."

The short story? Aegis filed for bankruptcy in August, and GMAC's mortgage group ResCap has been bleeding red ink. Cerberus watched GMAC continue to make subprime loans in the first quarter but has since reined it in. It wasn't fast enough to prevent the pain. ResCap has lost $3.4 billion so far this year, forcing GMAC to pump $2 billion into the business to help it survive the mortgage mess. And Lehman Brothers analyst Brian Johnson forecasts an additional $1.3 billion hit this quarter and $600 million in 2008. "I don't think anyone is panicked," says one Cerberus insider. But "we sure as hell didn't expect GMAC to be what it turned out to be."

Those problems may put a kink in the firm's strategy. Cerberus, which also owns 80.1% of struggling automaker Chrysler, wants to merge the lending operations of both companies. By doing so, it could reap massive savings on back office and loan processing operations, boosting returns at both GMAC and Chrysler.

Cut back office at a mortgage servicer. Put people who can service car loans in charge of mortgage loans. That's exactly what we need right now. Dog days at Cerberus, or just doghouse for the rest of us?

Let me just observe that GMAC's mortgage servicing unit was already pretty "stripped down" in its heyday. That was its business model: cheap servicing. I can't wait to see what happens when you make it cheaper.

by Tanta on 12/01/2007 11:30:00 AM

Another item sure to get some attention--or maybe not, since it kind of complicates the narrative of "predatory servicers." From the Wall Street Journal:

Law firms handling thousands of foreclosure cases on behalf of mortgage lenders and servicers are drawing criticism from judges, who say roughshod filing practices are trampling borrowers' rights.

Lawyers operating so-called foreclosure mills often are paid based on the volume of cases they complete. Banks and mortgage servicers often contract with such firms to handle foreclosures; the pay in Ohio, for example, is around $1,000 a case.

Um, is the pay based on volume, or is it just $1,000 a pop regardless of how many you do? My impression here is that it's the latter, and the problem is that this is a flat fee, not depending on how complex an individual suit is or--to the current point--how much time and effort might be needed just to assemble the documents and verify the liens in the land records to produce the original filing. It therefore becomes a matter of firms relying on volume because margins are skinny, and of treating every filing as a "no brainer" from the beginning. It's annoying when regular old newspapers don't get basic business practices. It's appalling when the WSJ doesn't.

Anyway, to continue:

The firms are typically small but may handle thousands of cases a year. Using computer software, they plug in variables such as a borrower's name, address and mortgage amount to generate a suit. Firms compete for business in part based on how quickly they can foreclose.

Um, no. They compete for business based on how quickly they can begin foreclosure proceedings. That's the problem here: a sloppy filing up front gets you onto the court's docket faster, but as we've seen, it tends to drag out the process and make foreclosures longer at the end of the day. And this description of the process ignores what's wrong with just "plugging in variables": we skipped the step of doing a search of the land records to verify that the last recorded assignment puts the foreclosing entity into current first-lien-holder status. And the step of going back to the servicer or trustee or whoever requested the foreclosure in the first place and reporting that an assignment needs to be recorded before the FC complaint can be filed.

"In general, most of the firms that practice this kind of law do a very good job," said Peter Mehler, a Cleveland-area lawyer who handles foreclosures on behalf of mortgage servicers. But in the "gold rush" to get a piece of the growing business, some firms "have cut corners."

Lately, judges are faulting law firms for what has become a common practice: filing a foreclosure suit, in states that require them, without showing proof that the plaintiff actually holds the mortgage and has the right to foreclose. (Such plaintiffs are often banks that act as trustees for investors of securities backed by mortgages.) The situation occurs in part because mortgage documents and the contracts between borrowers and lenders may change hands multiple times and may not be assigned to the plaintiffs at the time the suits are filed.

What this has really got to do with loans changing hands "multiple times" isn't very clear. If a loan changed hands exactly once, and no assignment was recorded in the land records exactly once, you'd have exactly the same problem. Of course the odds of having a missing assignment or a gap in the assignment chain go up when there are multiple assignments. But in that case, the problem is often not that the plaintiff--the last party in the chain--doesn't have an assignment. It's that the party who assigned to the plaintiff didn't have an assignment from the party who assigned to it, or something like that.

Why be so obsessed with the details here? Because way too many people have taken that unfortunate phrasing of the problem to mean that securities are purchasing delinquent loans just for the purpose of foreclosing. The WSJ, intentionally or not, falls into this kind of language:

This month, a state judge in Cincinnati dismissed a foreclosure lawsuit brought by Wells Fargo Bank because the bank filed the suit before it had acquired the mortgage. In dismissing the case, the judge sent a warning letter to the bank's law firm, John D. Clunk Co. LPA, in Hudson, Ohio. Judge Steven E. Martin wrote that it was "troubling" that the plaintiff "and its counsel filed the lawsuit with no basis whatsoever" and that firm must not do so again.

The law firm didn't respond to requests for comment. Wells Fargo declined to comment.

"Before it had aquired the mortgage" makes people think that Wells filed to foreclose a loan before it ever owned that loan, as if Wells saw, say, a bad loan at Podunk National and decided to buy it just for the pleasure of foreclosing it, but somehow managed to file first and buy later.

There is exactly zero reason to believe that this is what happened. Wells "acquired" the loan (or some security acquired the loan and Wells became the master servicer or trustee or something) back when the loan was fresh and new. What someone failed to do was to record the evidence of transfer of the beneficial interest in the collateral (known as an "assignment of mortgage") in the land records before the day the FC was filed.

It is quite common practice in the industry, as I have explained before, to execute assignments in "recordable form" when a loan is sold, and for the buyer or the buyer's custodian to take physical custody of that assignment, but to refrain from actually sending it to the county recorder of deeds for recordation in the land records unless and until it becomes necessary to foreclose. I know of no judicial opinion yet that has ever implied that the failure to record a document voids the loan sale; in fact, Judge Kathleen O'Malley's Order of November 14,* one of the several dismissals for inadequate documentation (along with Boyko's and Rose's) making the rounds, explicitly states that

The Court is only concerned with the date on which the documents were executed, not the dates on which they were recorded (if recorded) with the county recorder’s office.

The trouble with valid, executed, but unrecorded assignments is that even if a foreclosure attorney ran a records search before filing, in order to verify current lienholder, the assignment would not appear in the land records. It really is incumbent on the trustee or servicer to provide the original assignment for recordation, since the trustee or servicer is the one who has custody of it (or can get it from the custodian) and therefore the only one who can reliably vouch for its existence.

There are exellent reasons to record that old assignment first, then file your FC complaint. But as far as I can tell, judges aren't even asking for recorded assignments; they're just asking for valid assignments. What seems to have happened in at least one case--the Deutsche Bank case that Boyko went ballistic over--was that plaintiff's attorney, not having the real original assignments handy, simply executed new ones, after the fact. That's pretty amazing practice for an officer of the court, and His Honor reacted exactly the way one ought to. But it does not mean that the original assignments do not exist. Absence of evidence is not evidence of absence. Forging a new assignment because you can do that in twenty minutes, while just breaking down and requesting the originals from the custodian might take several days, is bad lawyering. It is not evidence that anyone is buying deliquent loans in order to foreclose them.

What reputable banks like Wells Fargo are learning here, I think, is a painful lesson in reputation risk. Wells hired some cheap corner-cutting law firm to handle its foreclosures (as did Deutsche Bank), and as a result, its name is now all over the press in association with practices that can be made to sound exceptionally sinister. Remember Boyko's "priceless" comment? Well, I'm here to suggest that Wells Fargo's good name is worth a whole lot more to it than $1,000. Legally, plaintiff is responsible for the actions of plaintiff's counsel.

Here, by the way, is the relevant part of Judge Thomas Rose's order** involving a number of foreclosure filings by several different trustees:

To date, twenty-six (26) of the twenty-seven (27) foreclosure actions based upon diversity jurisdiction pending before this Court were filed by the same attorney. One of the twenty-six (26) foreclosure actions was filed in compliance with General Order 07-03. The remainder were not.2 Also, many of these foreclosure complaints are notated on the docket to indicate that they are not in compliance. Finally, the attorney who has filed the twenty-six (26) foreclosure complaints has informed the Court on the record that he knows and can comply with the filing requirements found in General Order 07-03.

Therefore, since the attorney who has filed twenty-six (26) of the twenty-seven (27) foreclosure actions based upon diversity jurisdiction that are currently before this Court is well aware of the requirements of General Order 07-03 and can comply with the General Order’s filing requirements, failure in the future by this attorney to comply with the filing requirements of General Order 07-03 may only be considered to be willful. Also, due to the extensive discussions and argument that has taken place, failure to comply with the requirements of the General Order beyond the filing requirements by this attorney may also be considered to be willful.

A willful failure to comply with General Order 07-03 in the future by the attorney who filed the twenty-six foreclosure actions now pending may result in immediate dismissal of the foreclosure action. Further, the attorney who filed the twenty-seventh foreclosure action is hereby put on notice that failure to comply with General Order 07-03 in the future may result in immediate dismissal of the foreclosure action.

My boldface, there: it seems clear to me that this is an admission that the assignments really do exist, and can, in fact, really be produced. But what, we ask, has relying on this attorney done for the reputation of the lienholders? The story wasn't reported as "some worthless lawyer screwed up"; it was reported as Deutsche Bank and Wells Fargo and HSBC et al. screwed up. If you don't want your name in the headlines like that, hire a better lawyer. And pay for it. Oh, wait . . .

Allow me to close by observing that Curly and Larry (if not Moe) have lent some weight to a proposal that would basically mean servicers shoving through across-the-board modifications to "freeze" interest rates. I'm not here to argue the wisdom of rate freezes in this post. I am here to point out that a modification of mortgage is a legal document that has to be recorded in the land records in which the original mortgage was filed. If the modification is being executed by a servicer or trustee on behalf of the noteholder, then any intervening assignments up to the one to the modifying party need to be recorded first, so that the recordation of the modification is valid. Also, modification agreements are complicated documents; you want to be very careful with their wording, so that you are sure you are modifying only certain specified terms of the original mortgage and note. More than a few sloppy servicers have been haunted by a bad modification agreement that inadvertently waived rights or terms that servicer needed to keep.

So it really just sounds like a fantastic idea to push through a major effort to execute modifications really fast and cheaply, doesn't it? Frankly, the whole idea gives me goosebumps.

-------------------

*UNITED STATES DISTRICT COURT, NORTHERN DISTRICT OF OHIO, EASTERN DIVISION, In Re Foreclosure Actions 1:07cv1007 et al., November 14, 2007. No, I didn't go to law school and learn how to cite court orders in proper format. So sue me if you can find a decent lawyer.

**UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT OF OHIO, WESTERN DIVISION AT DAYTON, IN RE FORECLOSURE CASES 3:07CV043 et al., November 15, 2007.

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 Calculated Risk on 10/03/2007 03:26:00 PM

From the Financial Times: Mortgage lenders face subprime ‘traffic jam’ (hat tip James)

US mortgage companies are being overwhelmed by the large numbers of homebuyers who need to renegotiate their loans to avoid default, creating a “subprime traffic jam” that could frustrate efforts by regulators to prevent foreclosures, experts say.
...
“Servicers have failed because there’s a huge resourcing issue,” said Barefoot Bankhead, managing director at Navigant Consulting. “As lenders have gone out of business, the servicing arms have been in transition without the resources to handle the enormous number of requests for loan modifications and restructuring.”

The problem could grow more severe as more than $350bn in adjustable-rate mortgages reset at higher rates in the next 18 months.

by Tanta on 9/12/2007 11:25:00 AM

This is an absolute horror. It's the kind of thing I have had in mind when, in the last few months, I have expressed generalized terror over the idea of large servicer failures.

Thousands of homeowners face an "imminent risk" of losing their homes because of clashes between American Home Mortgage Investment Corp. and its former financial backers, according to Freddie Mac, a government-chartered housing financier.

In documents filed with the U.S. Bankruptcy Court in Wilmington, Del., Freddie Mac said it seized $7 million that homeowners sent to American Home to cover principal and interest payments, property taxes and insurance just before the company's Aug. 6 collapse. American Home quit making payments to tax authorities and insurance companies Aug. 24.

Freddie Mac said 4,547 loans valued at nearly $797 million are at stake. It said it doesn't have the loan files necessary to pay insurance premiums and property taxes on them, however. "Therefore, there is the imminent risk that borrowers' insurance policies may lapse for nonpayment, subjecting the borrowers to a risk of loss of their mortgaged properties," Freddie Mac said.

Property-tax bills will go unpaid, Freddie Mac said, "resulting in increased tax liabilities and possible tax-foreclosure sales." It added it needs a court order allowing it to seize American Home's loan files "to avoid these serious consequences stemming from AHM's inability to service the Freddie Mac mortgage loans." . . .

American Home has resisted demands that it give up loan-servicing files, hoping to auction its loan-servicing business intact in an effort to raise money for creditors. Loan-servicing businesses have proven to be among the few valuable assets left in the wreckage of the failed lenders. Some of Wall Street's biggest investment banks are fighting for control of them.

For ordinary homeowners, however, the results could be dire, consumer lawyers say. "Companies receive the loan files that they are supposed to be servicing, but the payments don't catch up," said Jill Bowman, an attorney with James Hoyer Newcomer & Smiljanich, a Tampa, Fla., law firm that represents consumers in class-action suits against mortgage companies. "Payments are being deemed late, even when they're not, because they can't catch up with the paper." The result is additional insurance costs and accumulating late fees. . . .

Just days before American Home's bankruptcy filing, Freddie Mac and Ginnie Mae terminated the company's loan-servicing rights. They also sent representatives to collect loan files from American Home's servicing facility in Irving, Texas.

In court documents, American Home said Ginnie Mae representatives "stood in a line in front of the doors and sat on the stairs, preventing AHM Servicing employees from entering the office." Freddie Mac said American Home "had its security personnel escort the Freddie Mac representatives out."

In addition to Freddie Mac and Ginnie Mae, several Wall Street banks are fighting to extract their loans from American Home's servicing operation. The list includes Morgan Stanley, Deutsche Bank AG, Credit Suisse Group and EMC Mortgage.

In an interview last week, Ginnie Mae's senior vice president, Theodore B. Foster, said Ginnie Mae had seized from American Home some of the insurance and tax payments collected from homeowners. "What's occurred is that we have the money, but AHM hasn't been able to or willing to pay the taxes and insurance, and they have the loan records," Mr. Foster said. "Therefore, we don't know who to pay, and we don't know how much."

HousingWire has more on the story here.

Bottom line: attempts to "preserve values" in bankruptcy proceedings pit the servicer's creditors against the interests of the borrowers. Investors like Freddie Mac have to seize custodial accounts to make sure they don't disappear, but without cooperation of the servicer they can't apply that money to customer accounts. The servicer presumably knows how to apply it, but the investors aren't willing to let them.

Oh yeah, and all that dope we've been smoking for years about how it's all electronic and online now and we don't have to actually have physical brawls in the corridors over actual physical loan files? That was, well, dope. It isn't clear to me why Freddie and Ginnie folks had to show up on the doorstep if all they needed were computer files. Of course, the problem is that Freddie and Ginnie don't use AHM's servicing software, so a computer file of loan data (including tax and insurance payment information) wouldn't help them any.

This makes people like me want to throw up, when you think about the number of times mortgage servicers screw up escrow payments when there is no BK and they use their normal systems. You have to imagine investors like Freddie getting ahold of a paper file, and then doing all this manual processing to cover the tax and insurance disbursements. Freddie Mac and Ginne Mae (and Fannie Mae) are not mortgage servicers; their capacity to handle this sort of thing is limited. But even if they could find a substitute emergency servicer, it looks like the substitute servicer would have been thrown out by AHM as well.

OTOH, the idea of Ginnie Mae reps forming a human chain across AHM's door and singing "We Shall Overcome" until someone handed over the damned files does warm the cockles of my pinko little heart. Ginnie Vive!