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Wednesday, September 12, 2007

WSJ on AHM Servicing

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!