Showing posts with label Picking On Poor Gretchen. Show all posts
Showing posts with label Picking On Poor Gretchen. Show all posts

Wednesday, October 28, 2009

In re Olga: of Bankruptcy and Foreclosure

by Calculated Risk on 10/28/2009 09:23:00 PM

CR Note: This is a guest post from albrt.

In re Olga: of Bankruptcy and Foreclosure.

An article by a person named Morgenson appeared in the New York Times last weekend, calling to our collective attention a New York bankruptcy case that adds to our collective knowledge of our collective foreclosure problem. Driven by a suspicion that the article would have helped us understand more if it had been written by someone other than the aforesaid Morgenson, your intrepid foreclosure correspondent dug into the record and filed the following report.

Picking on Poor Gretchen

First, for recent arrivals, there is a long and honored history at this site of Picking on Poor Gretchen. In this case I want to congratulate Morgenson, as it appears she did break this story herself rather than picking it up, unattributed, from bloggers. Let me also say I am not necessarily the best person to carry on the tradition of Picking on Poor Gretchen. I experimented with journalism in my youth, and I know how difficult it can be to get enough actual facts in a short time to fill up the number of column inches your editor is expecting from you.

But the more I thought about the Times article, the harder it was to escape the conclusion that Brad Delong is right – the print dinosaurs are doomed, and they have done it to themselves. The first few paragraphs of Morgenson’s purported article are appallingly fact-free and hyperbolic, or as Tanta put it, “Morgenson’s valid points are drowning in a sea of sensational swill.

The article begins:

FOR decades, when troubled homeowners and banks battled over delinquent mortgages, it wasn’t a contest. Homes went into foreclosure, and lenders took control of the property.

On top of that, courts rubber-stamped the array of foreclosure charges that lenders heaped onto borrowers and took banks at their word when the lenders said they owned the mortgage notes underlying troubled properties.

* * *
But some judges are starting to scrutinize the rules-don’t-matter methods used by lenders and their lawyers in the recent foreclosure wave.
Morgenson deserves credit for finding this story, but it is hardly the first foreclosure-gone-wrong story of the decade, or even of the “recent foreclosure wave.” Morgenson has apparently forgotten the redoubtable Judge Boyko, who dismissed some Ohio foreclosure complaints in 2007 based on somewhat similar facts. We know Morgenson covered that story, so it is not clear to me whether the “decades” of judicial neglect and rubber stamping occurred before 2007 or after. But, well, whatever.

So What Happened In This Case?

Most of the sensational swill is in the first few paragraphs of this Times story. Once you get past the first third, Morgenson’s facts are basically correct. Unfortunately, much of the context is missing. For example, one of the things you would never guess from reading the Times article is that it matters whether you’re talking about a bankruptcy case or a foreclosure case. That is Takeaway Lesson Number One from this case: Bankruptcy is different from foreclosure.

The purpose of a foreclosure case is usually to allow a lender to take back collateral after the borrower stops paying on a loan. It should not be a surprise that lenders often win such cases, frequently by default. By contrast, the purpose of a bankruptcy case is to allow the debtor to restructure debt, distribute the available assets fairly among creditors, and extinguish debt that can’t realistically be paid. It should not be surprising that debtors “win” bankruptcy cases more often than foreclosure cases, especially if the debtor can show the lender has not followed the rules.

I will call the debtor in this case “Olga.” Her last name is redacted because she doesn’t seem to be seeking publicity. Olga filed bankruptcy under Chapter 13, which is a section of the bankruptcy code allowing individuals with regular income to develop a three or five year plan to pay their debts under supervision of a trustee. The debtor is protected from bill collectors, and most debts that can’t reasonably be paid are discharged. Chapter 13 theoretically allows the debtor to keep a mortgaged home if the debtor can catch up on payments within the plan period. The bankruptcy judge does not have the power to change the loan contract much, though, so many people can’t keep their homes using Chapter 13 unless the lender can somehow be “persuaded” to modify the loan.

But Olga was willing to try. She gave notice to creditors and filed a plan, among other things, and her mortgage servicer (PHH Mortgage Corp.) filed a proof of claim with a schedule stating how much was allegedly owed on Olga’s house. Olga’s lawyer noticed that PHH’s paperwork was not very complete, so he sent some information requests. He was not satisfied with the response, so he filed a motion to have PHH’s proof of claim expunged.

Olga’s Motion to Expunge

Mortgage servicers have important rights under the various contracts associated with the loan, but the servicer frequently is not, and PHH in this case was not, the actual owner of the note or the mortgage. In addition, the paperwork provided by PHH was woefully incomplete. Woefully incomplete paperwork can mean something different in bankruptcy than it does in foreclosure.

When your paperwork is woefully incomplete in a foreclosure case, you can ask for a delay or you can drop the case or have it dismissed, and you usually get another chance. Bankruptcy, by contrast, is kind of a one-shot deal by nature. The judge will add up all the debts, add up all the money available, approve a plan, and that’s it. Very limited do-overs.

Olga’s motion listed a number of problems:

  • PHH didn’t own the note.
  • The owner of the note was not joined in the proceeding.
  • PHH did not file all the documents necessary to show that it was authorized to bring the claim by the holder of the note.
  • PHH therefore is not the real party in interest and had no standing.
  • The documentation for the securitization trust that probably owns the note probably severely limits the way notes and mortgages can be handled, but
  • The mortgage documentation was not provided, so there is no way to know if it was assigned properly.
  • The note was provided, but it had an endorsement dated after the bankruptcy filing.

    These items are explained a little bit more in Olga’s Response to the lender’s objection to her motion to expunge the proof of claim, which is a pretty good summary of things borrowers might want to think about when they are considering whether to contest foreclosures. MERS was a nominee at some point, but was not directly involved in the case.

    My impression is that Olga’s lawyer did not expect the proof of claim to be expunged, and was primarily interested in getting more information and forcing the lender to negotiate. Bankruptcy Judge Robert Drain had other ideas – he expunged the claim.

    The Aftermath

    This is probably not the end of the story because, as Olga’s lawyer explained, a title company probably will not insure the title if Olga tries to sell the house without taking any further action. Judge Drain did not explain much in his order, but what seems to have gotten his attention is the likelihood that the note and mortgage really never were properly assigned to the securitization trust.

    Takeaway Lesson Number Two from this case is that, if Judge Drain is right, this is not a nothingburger. This could apply to a large number of securitized mortgages based on the language of the securitization documents themselves, not on the quirks of local law. The decision has been appealed to the district court, so we will likely find out more unless the case settles.

    Morgenson also noted that this decision was by a “federal judge.” It is probably worth noting that bankruptcy judges are not quite the same as U.S. District Court judges. Bankruptcy judges are not appointed for life, they only have jurisdiction over matters that are related to bankruptcy, and their decisions are appealable to a District Court judge, as happened in this case. But bankruptcy judges have a lot of power over core bankruptcy matters. This particular judge was the one who slashed executive compensation in the Delphi case.

    In my opinion, Takeaway Lesson Number Three is this: lenders would probably have been better off with a reasonable cramdown provision in the bankruptcy laws. As Tanta explained in her cramdown post, home mortgages were often modified in bankruptcy proceedings before 1993. Morgenson’s claim that all types of court proceedings have uniformly favored lenders “for decades” is wrong, but the bankruptcy laws got a lot worse for consumers in 1993 and again in 2005. In the absence of reasonable solutions imposed by a bankruptcy judge, lawyers for debtors and home mortgage lenders sometimes act like Reagan and Brezhnev, threatening each other with nuclear options and hoping none of the tactical warheads go off prematurely. Which is what seems to have happened in this case.

    CR Note: This is a guest post from albrt.

  • Saturday, July 04, 2009

    Report: Subprime and Alt-A Loss Severity Hits 64.7% in June

    by Calculated Risk on 7/04/2009 10:52:00 PM

    From Gretchen Morgenson at the NY Times: So Many Foreclosures, So Little Logic

    Alan M. White, an assistant professor at the Valparaiso University law school in Indiana analyzed data on 3.5 million subprime and alt-A mortgages in securitization pools overseen by Wells Fargo.
    ...
    In June, the data show almost 32,000 liquidation sales; the average loss on those was 64.7 percent of the original loan balance.

    Here are the numbers: the average loan balance began at almost $223,000. But in the liquidation sale, the property sold for $144,000 less, on average. ...

    Loss severities, like foreclosures, are rising. In November, losses averaged 56.1 percent of the original loan balance; in February, 63.3 percent.
    Well, it is an article by poor Gretchen, so we need to highlight a funny...
    Loan modifications occur when a lender agrees to change terms of a troubled borrower’s mortgage; the most common approach is to reduce the loan’s interest rate. ... Lenders and their representatives, however, don’t like to modify loans through interest rate cuts ...
    I guess they don't like doing the most common approach!

    Note: the database analyzed by Professor White is for subprime and Alt-A only, whereas the OCC data includes prime loans - so it is hard to compare. Here is the OCC report for Q1: OCC and OTS: Prime Delinquencies Surge in Q1
    And a couple of earlier posts on the OCC report:
  • OCC and OTS: Prime Delinquencies Surge in Q1
  • Modifications and Re-Default

  • Monday, September 15, 2008

    Gretchen's Modest Proposal

    by Tanta on 9/15/2008 04:28:00 PM

    I thought maybe we'd need some comic relief on a day like today. And there's nothing like Gretchen Morgenson for comedy.

    This may be the single dumbest thing Morgenson has ever written. I had to read this over several times, aloud, to make sure I wasn't misreading it:

    Here is a modest suggestion for James B. Lockhart, chairman of the F.H.F.A., to consider: Do the new owners — us deep-pocketed taxpayers — a favor, and open up Mac ’n’ Mae’s books so we can see exactly what we own.

    Also, force both companies to disclose details on every mortgage they guaranteed or purchased in the last 10 years. This would include loan type, the year when the loan was made, the original rating on the security and its originator.

    That way, the new owners would be able to see how deep into the subprime loan swamp Fannie and Freddie waded during the lending spree. After all, according to Inside Mortgage Finance, an industry publication, Mac ’n’ Mae bought almost $170 billion in subprime mortgage-backed securities in 2005, roughly one-third of the total issuance that year. And they bought an additional $120 billion in subprime mortgage securities in 2006, or 27 percent of the total amount issued.
    I can't even start with the fact that after all this time, Morgenson still can't keep straight on the difference between the rating of a security (or a tranche of one) and the "rating" of a mortgage loan. She has been making that mistake for about two years now, as far as my memory serves, and she will apparently never stop.

    No, today we must contemplate the "modest" suggestion that Fannie and Freddie report loan-level data on every loan purchased or guaranteed in the last ten years, so that the taxpayers can see for themselves what we've got here.

    By my rough calculation, the two GSEs purchased about $10.013 trillion in mortgage loans between 1997 and 2007. (Data here, Figure 26.) I do not have average loan size figures for all of those years, but in 2002, the midpoint, the average loan size was $160,000. Using that average, we get 62,581,250 loans.

    (Wait, you say. The total mortgage debt outstanding for all holders of mortgage loans for the whole country at the end of 2007 was only $12 trillion. And total Fannie and Freddie portfolio (retained and MBS) at the end of 2007 was only about $5 trillion. Well, yes. But Morgenson wants data on every loan ever purchased in those years, whether they are still outstanding or not.)

    So how are Billy Joe and Bobby Sue Taxpayer going to examine a database of 62.5 million loans? Fairly slowly, I'd guess. Since the Taxpayers don't generally run mainframes, it just wouldn't do to "disclose" this information on magnetic tape. A lot of them do have PCs, of course, and many of those PCs run Excel. Excel 2003 has a maximum number of rows per spreadsheet of 65,536, so you could get 62.5 million loans into no more than about 950 separate spreadsheets.

    Maybe this could just be for the Taxpayers who run Access. Access has no limit for the number of records, although the database size is limited to 2GB. We don't really know how much data per 62.5 million loans Morgenson wants, so I don't really know how many separate databases we'd need here. I just know I wouldn't want to try to manipulate one on my home PC; I'd guess that it wouldn't exactly run very fast.

    Of course there's always paper, which can be made available online as pdf. With a limited number of columns and a small font, you might be able to get 100 loans on a page. That would only require a 625,812.5 page "disclosure." That shouldn't create any server problems, and we could all go long on manufacturers of toner cartridges.

    Now that I think about it, it would be sort of fun if Lockhart decided to take Morgenson up on her modest suggestion. That is, if he generated a 625,812.5 page report and emailed it to Morgenson. The Times must have pretty big servers, no?

    You know you are in the presence of a not very well hidden agenda when someone proposes something this dumb. "The taxpayers" do not have the time or the expertise or the technology to browse through a disclosure regarding 62.5 million loans. Most sophisticated institutional investors don't have it, either. The GSEs disclose summary data because life is too damned short for anyone to get anything but summaries. All Morgenson is doing here is making a ridiculous demand that won't be met, so that she can then claim that Fannie and Freddie "refuse to disclose fully."

    Sunday, July 27, 2008

    If This Is Victory

    by Tanta on 7/27/2008 12:21:00 PM

    Then I don't want to know what defeat would be. Even I am getting tired of writing about Gretchen Morgenson columns, but this one cries out for demystification. Anyone who wants to claim that any homeowner who stops foreclosure and keeps her home has necessarily "won" anything or received any particular financial benefit needs to read this post. This is a profoundly important issue: the whole "stop foreclosure" movement is based on the assumption that stopping a foreclosure is always and everywhere a "win" for homeowners. Morgenson appears to buy this idea so much that her reporting crosses the line from its typical tendentiousness to outright distortion in order to sustain the myth. I suggest that no actually useful and successful response to the "foreclosure crisis" will ever come about as long as this kind of distortion goes unchallenged.

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

    Here's Morgenson:

    MAMIE RUTH PALMER isn’t a celebrity. People magazine doesn’t chronicle her every move. The paparazzi don’t wait for a photo op outside of the modest Atlanta home where she has lived since 1987.

    But in some mortgage circles, Ms. Palmer, a 74-year-old former housekeeper, has earned her moment of fame. After enduring six years in foreclosure hell, almost losing her home twice, Ms. Palmer has escaped intact.

    Last month she received a settlement from the Bank of New York, the trustee for a vast pool of mortgages that included hers. Under the terms of the deal, the bank reduced Ms. Palmer’s loan balance to $59,000 from about $100,000 and has agreed to accept the proceeds of a reverse mortgage in full satisfaction of her obligation.

    The settlement also eliminated about $12,000 in foreclosure fees added to her debt and called for the installation of central air-conditioning in Ms. Palmer’s home.

    Roughly $10,000 in legal fees billed over five years by Ms. Palmer’s lawyer, Howard D. Rothbloom, will be covered by payments she has made toward her mortgage while she was battling foreclosure.

    “I feel good,” Ms. Palmer said last week. “It’s been a long time coming.” To celebrate, she said, she is going to Florida to fish with her nephew.

    Ms. Palmer’s case is hardly unique. It’s just one of a swelling number that revolve around the thorny issue of who owns the note on a home when it’s forced into foreclosure proceedings.
    This case is not "about" who owns a note. It just isn't. Certainly, among the tens of thousands of dollars worth of objections and motions made by Palmer's attorneys over the course of six years, there was some question about the standing of the mortgage servicer. It appears that the servicer produced some pretty sloppy paperwork for the court. It appears that the Debtor's attorney also filed some pretty sloppy paperwork with the court, too, which dragged out the challenge to the servicer's standing for months. (If you want to read a first-rate judicial slapdown and you have a PACER account, don't miss Judge Massey's "Order Directing Debtor's Counsel to Withdraw Objection to Claim of HomeEq Servicing Corporation or To Litigate The Objection Properly," In re Palmer, Case No. 02-81333, docketed 3-31-03, US Bankruptcy Court, Northern District of Georgia.)

    At the end of it, the mortgage servicer withdrew its proof of claim and the trustee of the security owning this loan (Bank of New York) entered the case directly. I do not see from my review of the documents on PACER that there was ever any question that Bank of New York as trustee for the MBS had standing in bankruptcy or was owed money.

    The final complaint that resulted in a settlement of this case alleged that Bank of New York charged inappropriate fees. There was no challenge at all to BNY as the creditor.

    At no time, it seems, was there ever any question about the fact that Palmer had a mortgage loan and did not make payments either pre- or post-petition. Documents in this case indicate that the mortgage loan in question was originated in October of 1996, and that Palmer began making late payments by June of 1997. Palmer failed to pay taxes and insurance on the property. She filed prior bankruptcies in 1999, 2000, and 2002, each of which was dismissed. When this $52,000 loan was first originated on what was then a $78,000 property, the monthly payment exclusive of taxes and insurance was $554.97, and it became clear within a year that Palmer could not afford that.

    By November of 2005, Palmer owed (according to her servicer) $50,611.70 in principal, $10,104.98 in escrow advances, $19,802.60 in accrued but unpaid interest, and $11,379.90 in legal fees, late charges, etc. During most of this period she does not appear to have made any mortgage payments, or any payments for taxes and insurance.

    The final complaint made by Palmer's attorneys alleged that some fees were inappropriate. By this time there was no question that Bank of New York had a proof of claim; the argument was about how much the debtor owed. I have no idea whether the $10,000 Morgenson reports as being the cost of Palmer's own attorney's efforts is "appropriate" or not. It appears that BNY just got seriously tired of all of this and did, indeed, decide to settle. But Morgenson's description of that settlement leaves a lot to be desired. I quote from Judge James E. Massey's Interim Consent Order of May 5, 2008:
    The parties have reached a settlement of any and all claims that were or could have been raised in this case.

    Plaintiff has been approved by Financial Freedom, a subsidiary of Indymac Bank, for a reverse mortgage to be secured by her residence. Plaintiff will receive approximately $79,530.00 in a principal limit. The lender will deduct approximately $6,436.00 for the cost of closing the loan and approximately $5,946.98 for servicing the loan. Approximately $7,300.00 must be set aside for repairs to be made as a condition of the loan. After all deductions, Plaintiff will receive approximately $59,847.02.

    From the proceeds of the reverse mortgage, Plaintiff will pay the sum of $57,800.00 to Defendants and Defendants shall accept the sum of $57,800.00 in settlement and as full and final satisfaction of the entire debt owed by Plaintiff to Defendants. Upon receipt of these funds, Defendants shall cause the deed to secure debt on Plaintiff’s residence to be released and will withdraw the proof of claim filed by them in this case.

    The Trustee shall not disburse any additional funds whatsoever to Defendants for ongoing mortgage payments or for any proof of claim filed by Defendants in the case.

    The parties shall bear their own respective costs incurred in this adversary proceeding.
    So this is how Mamie Palmer came out "intact": she began her case owing $51,000 in principal and around $76,500 in total, including interest, escrow, and legal fees. She now owes $79,530. She will also have to pay $10,000 to her attorney out of payments she made to the bankruptcy trustee. She gets $7300 worth of repairs to her home. Although her new mortgage, being a reverse mortgage, will not require her to make monthly payments, she will still have to pay taxes, insurance, and maintentance out of pocket, since the initial disbursement for this loan was equal to its full principal limit. If she does not make those payments, she can face foreclosure from IndyMac. Or, well, the FDIC. If the FDIC is willing ever to foreclose on any IndyMac loans.

    I guess that punishes the investors in Palmer's mortgage loans and her mortgage servicer for having made an error on a mortgage assignment: they'll be writing off most of their accrued interest and all their legal expenses.

    I suppose it's just more of the crashing irony of this story that Palmer's new loan now belongs to us taxpayers, unless the FDIC can find a buyer for IndyMac. That and the fact that a homeowner left the bankruptcy system owing more, not less, than she did when she started. One of our regular commenters likes to tell me this is called "rough justice," and I should "get used to it."

    I'm not sure I'd call this "rough justice." I certainly will not call this a "victory" for a homeowner in "foreclosure hell." Whatever Morgenson is smoking, she needs to give it up.
    Read On ..

    Sunday, July 20, 2008

    Duelling Discourses of Debt

    by Tanta on 7/20/2008 02:44:00 PM

    Gretchen Morgenson has another wowser in today's New York Times. This one comes with not just a lengthy narrative packed with details about her "exemplary" borrower, but a video in which we hear the borrower's own version of events, as well as seeing her in her "natural habitat."

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

    I confess that I find this video utterly fascinating. The story it tells is all too common; the "analysis" is trite; the implied but never explicitly suggested "solution"--that people like Diane shouldn't be "allowed" to borrow more than they can "afford"--undoubtedly stays unarticulated because the reporter has no intention of being forced to unpack or defend her assumptions about borrower agency, lender paternalism, or the economics of consumer spending.

    Indeed, what is fascinating about this video is precisely the near-total contradiction between what the interviewee, Diane, has to say about herself, and what the voiceover and commentary by Morgenson has to say about Diane. That and the loving camera focus on class cues--the repeated panning on the tchochkes, the six! perfectly unnecessary shots of chubby Diane smoking, the capture of the chain-link fence--which tries but never quite succeeds in erasing the impact of Diane's articulate, polite, rather engaging self-presentation. It is as if the camera must keep reassuring itself--the reporter, us--that Diane is "really" an unsophisticated dupe of the lenders, a perpetual victim of circumstances and missteps, by making sure we (the Times reader) see her as "tacky." All the while the camera also records Diane's voice, telling a candid, crisp story that utterly contradicts the reporter's.

    The very first thing we hear and see in the video is Diane saying, "I'm not good with money." Immediately, in an apparently unscripted moment, she then deals with the interruption of a collection call from a credit card lender by dropping her phone into the dishwasher and shutting the door on it. "Better?" Diane says, ruefully, quite clearly suggesting to us that she is highly self-aware. Her playful little over-the-top dramatization of her pattern of dealing with mounting debt (hiding the phone in the dishwasher rather than simply hanging up or turning off the ringer), combined with her forthright claim that she is "not good with money," establish from the very beginning that Diane sees her situation as mostly about her own choices, her own habits, and her own willingness to deny certain realities.

    Yet the very first voiceover, immediately following this scene, says "Diane McLeod's debt is the result of financial missteps, unfortunate circumstances, and a lending industry willing to extend her more credit than she could possibly repay." Here we have the classic conceit of journalism: there is the interviewee, telling her story in her own words and gestures, a "little picture" story that focuses unswervingly on her necessarily parochial view of her own behavior--her impulsive spending, her inability to avoid traps even when she recognizes that they are traps, her ability to make denial of reality look and feel like a rather charming insouciance. And there is the reporter, "adding context" by moving the story into the "big picture," forging the connections to the "larger issues" about the finance industry and the economy that the interviewee never makes, "limited" as she is to her own subjective experiences.

    However, it's a journalistic technique that works better, in my view, when the journalist's narrative doesn't outright contradict the interviewee's narrative. If it does, we have the right to expect some explanation: why is the journalist's narrative more plausible than the interviewee's? How is it that the journalist both relies on the facts provided by the interviewee to build a story, but also concludes that the interviewee's version of events is dubious? Without having these questions answered, we begin to fear that the journalist simply is unable to see the contradiction.

    Morgenson, breaking into Diane's narrative, tells us that "more and more Americans like Diane McLeod are facing financial ruin. For years, they've spent more than they earned, and they've used credit cards and other debt to do so, and now they're really under a mountain of borrowings. It leaves them in a position where only one incident, whether it's a job loss, a divorce, an illness, can push them right over the edge."

    This claim is followed immediately by a gratuitous scene of Diane heading into the backyard for a smoke with the dogs. (In America in 2008, nothing labels you "underclass" more than being a smoker.) The voiceover says, "Diane's financial troubles began back in 1996. Her husband's business was failing, and ultimately her marriage failed as well. Diane . . . grew depressed."

    Diane herself then picks up the narrative: "I paid gas, electric, and telephone on the credit cards because there was no income. If we had a fight sometimes I would go out and shop and buy something to make me feel good."

    The reporter doesn't seem to notice that Diane actually reverses the sequence here: in her telling, the job loss/marital troubles predated the debts, and in fact caused them, in two ways. She used the cards as "emergency money" to pay utilities during an income gap, but she also gets depressed and starts buying stuff to "feel good." In Morgenson's version, the overspending and debt happens first, and then the job loss/marital troubles force it to stop.

    In the very next segment, Morgenson takes us "big picture" again to talk about credit card company practices that exacerbate debt. "These companies would levy late fees and overlimit fees on her," Morgenson says, "because they allowed her to spend more than her limit." The implication is that if the credit card lenders had taken control of the situation and cut Diane off, she wouldn't have spent so much. (Somehow I can imagine the credit card lender calling Diane to tell her she was over her limit, and the phone ending up in the dishwasher.)

    What does Diane herself say? Apparently, she became depressed again early this year and just stopped paying bills. Her credit card lenders cut her off. "Old habits still weren't dead. I didn't have credit cards, but when I got paid, I would be buying things . . . shoes, clothes, handbags. . . ." Throughout the video, we find Diane repeatedly attributing her spending not so much to her too-high credit card limits, but to the entertainment value of QVC and eBay and her use of buying as therapy, to the point that when there is no more credit limit she simply spends her paycheck. A detail that isn't in the video but is in the accompanying article is of interest here:

    Almost immediately after she refinanced, in late 2005, the department store where she worked her second job, as a jewelry saleswoman at night and on weekends, cut back her hours. She quit altogether. . . .
    The implication, again, is that the loss of the second job was one of those "unfortunate circumstances" that "sent her over the edge." But several paragraphs above that, we discover that Diane is paying 27% on a $1,500 account "at a local jewelry store." Diane certainly wouldn't be the first person in the world to discover that a part-time job in retail is simply more exposure to seductive consumer goods that she ends up purchasing, spending as much or more than she makes, and that losing a job like that is probably good news for the household finances.

    What are we to make, ultimately, of these duelling narratives? Morgenson glances off the issue only once, in the article (not the video):
    Ms. McLeod, who is 47, readily admits her money problems are largely of her own making. But as surely as it takes two to tango, she had partners in her financial demise.
    What does this mean, exactly, beyond the truism that there has to be a creditor for every debtor? My sense is that Morgenson's biggest concern is simply to make sure we don't mistakenly feel sorry for these creditors; she goes to some length to show that they made profits on Diane (although whether those profits will survive the coming charge-offs when she declares bankruptcy is hardly certain). I guess if any of you were in danger of feeling sorry for lenders, this is a useful corrective. As far as I can tell, Diane never lied to a lender or induced anyone to extend credit by fraudulent means; anyone who can read a credit report could have seen that she has been a serial debt pyramider since the mid-90s and she never tried to hide that. It frankly never occurred to me for a moment to feel sorry for her creditors.

    The contradiction that continues to concern me, though--which remains unresolved--is the total mismatch between the consumer's own explanation of her behavior, which is a psychological one of the "shopping addiction" variety, and which implies that her experience has involved a lot of miserable life events that can only be relieved by compensatory spending, and the reporter's "economic" explanation which focuses on what lenders do to Diane, and that implies that her "bad times" only threaten her continued spending rather than inspiring it. In one narrative, debt-funded consumer spending is "sustainable" until you lose your job or get sick or get divorced. In the other narrative, unsustainable debt-funded consumer spending is the response to losing your job or getting sick or getting divorced.

    I think getting a handle on this problem matters. We are continually being treated to this kind of schizoid message in the media as a whole. Morgenson herself wrote an angry article just a few months ago on frozen HELOCs that didn't simply grossly overstate the cost of unused credit lines. It explicitly chastised lenders for lowering credit limits:
    Reeling from losses on their wretched loan decisions of recent years, lenders are preventing borrowers with pristine credit and significant equity in their homes from tapping into credit lines that they paid dearly to secure. . . .

    [B]orrowers who have contacted Mr. Kratzer say they are in the middle of home improvement projects that they can no longer finance, or have college tuition bills that they were going to pay using the credit lines. Now they can’t.

    Medical expenses, another reason that borrowers tap their equity lines, are also posing problems for some homeowners.

    And small-business owners who use home equity lines to bridge cash-flow gaps throughout the year are also being stricken by these curbs, Mr. Kratzer said. He has also heard from people who paid down some of their home equity lines, expecting to be able to draw on them again. Now they are out of luck.
    Diane McLeod once had "good credit," according to the Times. She once used credit to "bridge cash-flow gaps" of her self-employed husband's. She once felt entitled to continue to spend as she expected to when the account was opened, even down the road after she had spent too much, because the credit company "allowed her" to. She once believed that the appraised value of her home had nowhere to go but up. Isn't it possible to conclude that these mean lenders who are lowering people's credit lines are actually doing folks a favor, by preventing another crop of Dianes? Why is it that in one case we have irresponsible (and highly profitable) lenders who should have taken the responsibility to cut off the credit but didn't, and in the other case credit tightening is "unfair"?

    I can't help but think part of the problem here is a class issue. The video goes out of its way to portray Diane as a working-class woman who simply cannot be trusted with credit. (And she certainly helps with that.) The "real" middle class, who have "pristine credit" and are going to be sending their kids to college, not adding their kids to the mortgage so that money can be spent on knick-knacks and $70 handbags, have the right to be outraged when the lender forces them back to spending only what they earn or have saved. I really think the "class cues" in the video are just too heavy-handed to miss.

    Whether derived from certain assumptions about class or not, though, these contradictions floating around--Morgenson is just the one who is best at distilling "conventional wisdom," not the sole source of it--are at the heart of our inability to decide how to regulate the lending industry, and have been for a long time. Arguments over fiduciary responsibilities and lender obligations to offer only "sustainable" or "affordable" credit always crash on our unwillingness to accept lender paternalism, our belief that at least some of us have the "right" to borrow and spend as much as we want to as long as the bills are "paid on time" (but the balances aren't necessarily "paid down"). They also, of course, tend to fall on the competing responses to the threat of recession: as we approach the possibility that a lot of us might suffer job loss, illness, and divorce, as it were, is it time to "stimulate" things by continuing to offer easy credit for the purchase of $70 handbags, or time to cut off the credit spigot so that the debt load doesn't get any worse?

    The metaphor of "Two Americas" is getting a touch cliched, but I am nonetheless tempted by it. It's as if there's an America in which spending is "healthy" and is only interrupted by "misfortune," and another America in which spending is always "unhealthy," a dysfunctional attempt to compensate for the rather frequent experience of lost jobs, failed businesses, divorces, illness. One America should be allowed to decide for itself how much it wants to borrow and spend; the other needs to be cut off or turned down by "responsible" lenders because they cannot control themselves.

    Where I part company with Morgenson, I suspect, is really that I don't think this distinction is as easy to make as she does. My suggestion first made some time ago that "we are all subprime now" was an attempt to resist the division of the world into "prime" and "subprime," the "pristine" HELOC borrowers of Morgenson's earlier piece with the irresponsible bankrupts typified by Diane McLeod. The irony is that I actually largely agree with Morgenson that lenders should take much more responsibility for denying applications that don't make sense or cutting off credit limits on existing accounts that have clearly become unsustainable. I just think that this sort of behavior will inevitably disappoint some of the "pristine" borrowers as much as it does the shopaholics. It has to; if the point is to cut off borrowing before it ends in disaster, then you have to cut off more than a few borrowers who don't happen to think they're anywhere near disaster yet, thank you very much. Or who think of themselves as engaging in "good spending" (home improvements, tuition, small businesses), not "bad spending" (anything from QVC), the assumption being that only "bad spending" should be cut off, even though debt is debt. I cannot see how asking lenders to exercise the discipline that consumers don't (or won't) can possibly be "painless." Prevention is indeed generally worth a pound of cure, except that you have to listen to a lot of whining from those being "prevented." Nobody much likes seeing the punch bowl go away when the party is still going strong. Nobody much likes seeing the punch bowl stay on the table until everyone has passed out and thrown up on each other, either.

    That, ultimately, is what makes me feel like this video is "cheap." It's just too easy to get readers of the Times to agree that the Dianes of the world should have their credit cut off before they buy more junk. What is difficult is getting the New York Times demographic to agree that its own credit should be cut off. The fact that even so set up, Diane manages to come across as a real, complex, rather appealing person in spite of it all, rather than a self-pitying passive "victim of predators," is to me the video's real redeeming quality. After too much exposure to people like this, courtesy of the media, I found myself ready to take Diane, warts and all, on her own terms and actually wish her well, even while I hope it's a long, long time before she buys another house. Good luck, Diane.

    By clicking here I give informed consent to being exposed to a very long post.

    Wednesday, June 25, 2008

    Illinois Sues Countrywide

    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.

    Tuesday, April 29, 2008

    Another "Unnecessary" Foreclosure? No.

    by Tanta on 4/29/2008 02:52:00 PM

    As our wise commenter Markel observed the other day, the great thing about stories from the RE front is that, the more you poke at them, the more it becomes clear that everyone involved is the bad guy. It is not inspiring or uplifting reading.

    Of course “bad guy” is ironic here, at least for those of us who do not trade in simplistic concepts of heroes and villains, white hats and black hats. Everyone is implicated; every story has another side that complicates our understanding of what is going on. Getting at the complicated truth of the matter, it seems to me, is an important undertaking. Not because it “defends” or “convicts” any party to the tale, but because if the truth of these things is in fact quite complicated and uneasy, we need to know that. No one can suggest a possible “fix” for a problem he or she does not understand fully—to do so is to leave the land of unintended consequences, to which any policy solution is susceptible, and arrive at barking up the wrong tree.

    By and large, the press does not share this view, if we may judge by what they actually write, as opposed to whatever it is they tell themselves about what they write. Some days I cannot decide whether the media requires a simple, black and white morality tale, and therefore wittingly or unwittingly filters and distorts the details of events in order to present this a priori narrative, or if they are, indeed, such incompetent and uninformed reporters that they really do accept only half a tale to begin with, duly typing it up as presented by an unhappy borrower without any attempt to verify facts or arrive at the other side. That would, given a borrower’s frequent need to self-justify, rather inevitably produce a tale of an innocent victim preyed on by an unscrupulous lender. (Of course the opposite case would be equally a problem; it's just that these days we're not pushing the lender's need to self-justify.)

    I really want to make it clear why I am going through this exercise of examining in detail a recent “villain” story. I have no particular desire to heap blame on the borrowers or defend the lender (or its attorneys). As far as I can tell, everyone involved—including, I think, the bankruptcy court and the U.S. Trustee reporting on this case—dropped the ball at least once. It is simply that there has been too much rhetoric expended, in my view, on this business of “unnecessary foreclosures” and servicers profiting from foreclosure fees. We might as well let Gretchen be our poster child, since she regularly volunteers for the task:

    As the mortgage crisis has spread, an army of law firms, loan servicers and foreclosure management companies has developed a highly profitable business by assessing legal fees and other charges on imperiled borrowers, calculating what they owe and drawing up the documents required to remove them from their homes.

    For years, consumer lawyers say, bankruptcy courts routinely approved the claims and fees. But a number of bankruptcy judges and officials representing the United States Trustee, a unit of the Justice Department that oversees the bankruptcy system, have grown increasingly concerned that lenders and their representatives are running roughshod over borrowers.

    Among their concerns are excessive fees imposed on homeowners and actions taken to seize the homes of borrowers who are not delinquent on loans. Most foreclosures are uncontested by homeowners, who typically rely on what the lender or its representative says is owed, including fees assessed during the process.

    In late February, for example, the United States Trustee for the Atlanta region sued Countrywide Home Loans, a unit of Countrywide Financial, as a result of actions the company took against John and Robin Atchley, borrowers in Waleska, Ga. Twice in 2006, the Atchleys were almost forced from their home when Countrywide and its law firm claimed erroneously to the court that the borrowers were delinquent on their mortgage.

    Citing a pattern of questionable practices, the trustee asked the bankruptcy judge overseeing the case to enjoin Countrywide “from engaging in bad faith and abusive practices.” [Emphasis added]
    Forget the fact that we need more than one example to back up “an army.” Forget the fact that no particular evidence that any of this is “highly profitable” has been tendered (here or in any other Morgenson article I’ve read on this subject). We are not here today to demand a distinction between revenue and profits, although we will at least note that if Countrywide is currently running “a highly profitable business,” they’re disguising it well.

    What we are going to do is look at the claim that Countrywide “claimed erroneously to the court that the borrowers were delinquent on their mortgage.” Does this not sound to you all, my experienced readers of idiomatic English, as if it means that the borrowers were not, in fact, delinquent, while Countrywide said they were? That’s what it sounded like to me, and I was certainly interested: if there ever is such a thing as an “unnecessary foreclosure,” it would be one filed against a non-delinquent borrower. So I did some digging on Mr. Internet. Pieced together from an article in the Atlanta Journal-Constitution, the U.S. Trustee’s Complaint, and the Cherokee County public deed records, I have the following incomplete story. There is information still missing; in some cases we can only speculate in the absence of further documents. What information we do have suggests that Morgenson’s characterization of the case is willfully misleading. I call that journalistic bad faith.

    It is, actually, true, per the BK trustee, that at least once Countrywide did file a motion to lift stay that was inaccurate about the borrower’s delinquency status. (I am not as convinced as the trustee is that it happened twice, but we’ll get to that.) But there appears to be no question at all the Atchleys were, in fact, delinquent at the time; the question was how many post-petition payments were behind. But let’s start from the beginning.

    Per the Journal-Constitution:
    Robin and her husband, John, a utility lineman, put $22,000 down in 2004 when they moved out of their single-wide mobile home and bought the brand-new house in Waleska, about 50 miles from downtown Atlanta.

    The next year, they refinanced with American Freedom Mortgage to pull out enough money to put up a fence and finish the basement. The project allowed their two daughters and two sons — today ages 14, 12, 11 and 5 — to each have their own rooms.

    When the first payment book arrived, it had Countrywide's logo on the front.

    The family kept up with its payments until a personal tragedy hit. Robin's sister died unexpectedly, prompting Robin to take a few weeks of unplanned leave from her job. They got behind with their bills.

    To buy time to catch up, the Atchleys filed for bankruptcy in October 2005 under a Chapter 13 reorganization plan. . . .

    The family had no significant debt other than their mortgage and auto loans. When their bankruptcy plan was filed, they were three months behind on the mortgage, which amounted to about $5,000. The Atchleys immediately started making payments after their plan was filed.

    In February and then again in May of 2006, Countrywide's attorney, McCalla Raymer, came to court seeking permission to foreclose, saying the family had not been making its required payments.

    But payment receipts proved Countrywide's action was improper.

    Fighting off the foreclosure actions, however, didn't solve all the problems. Countrywide planned to up the family's monthly payment to cover "escrow" charges, even though the family covered its own homeowners insurance policy and property tax payments.

    "I made four payments in two months, and they were still telling me I owed them an outrageous amount of money on late payments and stuff," Robin Atchley said. . . .

    The Atchleys couldn't keep up. Their budget was so tight, their sons offered to pay for gas using money they had earned doing odd jobs working for relatives.

    They decided they didn't have the resources for a lengthy fight against Countrywide. They also didn't have the money to pay a mortgage balance that continued to climb.

    When they entered bankruptcy, Countrywide said the Atchleys owed just under $185,000. When it came time to pay off the loan, Countrywide said their pay-off total would be $199,000. The Atchleys still do not understand how Countrywide came up with such a high mortgage balance, given their payment history. The sale price of the house was about $2,000 short of what the family needed to pay commissions and Countrywide.

    "We had to pay to get out of the home after we had put everything we had in it," Robin said.
    According to county public records, the Atchleys bought the home in March of 2004. (The sales price is not on the deed.) They took out a $161,910 mortgage from Indy Mac, a 2/28 ARM with an initial interest rate of 7.75% and a monthly payment of $1,159.94 by my calculation. In March of 2005, they refinanced the loan (which was apparently immediately sold to Countrywide) for $180,200, in a 3/27 ARM with a start rate of 10.10% and a monthly payment of $1,594.72. I have no idea why the Atchleys increased their monthly payment by over $400 in order to borrow less than $20,000 in new money. Perhaps they did not qualify for a HELOC. In any case, it appears that the payment on the second loan did not originally include a tax and insurance escrow.

    The Atchleys filed for banktruptcy on October 3, 2005. If, as the Journal-Constitution reports, they were 90 days delinquent at the time, the latest possible last paid installment would have been due July 1, 2005. Their first payment date on the loan in question was May 1, 2005. I do not doubt Mrs. Atchley’s account of the reason for the delinquency; I simply note that “a few weeks of unplanned leave” from her job, “no significant debt” other than auto and mortgage loans, and a brand-new cash-out refinance that increased the monthly housing cost by over one-third, resulting in a 90-day delinquency within six months of loan origination, strongly implies to me that we have borrowers who cannot afford their house payment. We are not informed what the Atchleys’ household income was when the loan was made or thereafter, or if it was ever verified. We are not informed whether any attempt was made on either side to work out a repayment plan prior to the bankruptcy filing. We do not know what the likely sales price of the home would have been at the time the bankruptcy was declared.

    We do know that on February 21, 2006, Countrywide filed a First Motion to lift the BK stay (and proceed with foreclosure) on the grounds that the borrowers were delinquent in post-petition payments by two months. There would have been four post-petition payments falling in that period (November 1 through February 1). According to the Trustee’s Complaint:
    The Atchleys disputed Countrywide’s contention that they were two months delinquent on their postpetition payment obligations. On February 23, 2006, the Atchleys’ attorney transmitted documents to Countrywide’s local counsel by facsimile that purported to demonstrate that they were not two months delinquent. . . . . These documents purported to demonstrate that when Countrywide filed the First Motion, the Atchleys allegedly had made postpetition payments to Countrywide totaling $6,295. These documents included Western Union Quick Collect receipts and U.S. postal money orders dated November 21, 2005, January 18, 2006, and February 20, 2006, all before the filing of the First Motion. Based on the figures set forth in the Proof of Claim, the total amount of postpetition payments that had become due to Countrywide as of its filing of the First Motion was $6,380. The documents transmitted to Countrywide’s attorney on February 23, 2006 also included a payment history prepared by Countrywide. This payment history is dated February 22, 2006, which is the day after Countrywide filed the First Motion. The payment history demonstrates that on the day after Countrywide filed the First Motion, it was holding an “unapplied” balance of $1,581.66 with respect to the Atchleys’ account.
    We are not given the amounts of these three payments; it does however appear that the December 1 payment was not made until January 18. I confess to being a bit surprised that the BK Trustee is quite as hard on Countrywide about this First Motion as it is; the Motion was filed only the day after the date of the borrower’s payment receipt (which presumably shows the date sent, not the date received, which may be different). It is perfectly possible that Countrywide sent instructions to file the motion to its attorneys on or before February 20; indeed, it would be quick turnaround to have the Motion filed the day after the servicer sent the information to the attorneys. Such payments-crossing-filings do occur, and in this case I’d be inclined to give Countrywide the benefit of the doubt. Nor is it shocking, it seems to me, that there was an unapplied balance on February 22; the trustee’s report makes clear that the amounts sent by the Atchleys, per their receipts, fell short of four full payments. Servicers do indeed have the legal right to hold partial payments in an “unapplied” status until the borrower remits the full amount due. In any event, a payment history dated February 22 doesn’t tell us what the payment history showed on the date Countrywide instructed its attorneys to file the motion.

    That, in any case, was the “first” episode of an “erroneous” Motion of Countrywide’s. Note that these motions concern themselves solely with “post petition” payments. The “pre petition” past due amount, presumably, is being paid a few hundred dollars a month out of the monthly installments of the Chapter 13 repayment plan. There is no question that the Atchleys were still delinquent on these dates; the specific question was whether they were at least 60 days past due on the post-petition payments alone. That First Motion was withdrawn; the Second Motion was not filed until May 24, 2006.
    In its Second Motion, Countrywide alleged that the “Debtors have defaulted in making payments which have come due since this case was filed. Through the month of May 2006, two (2) payments have been missed.” . . . Countrywide also alleged that the debtors had a “clear inability to make all required payments.” . . . The Atchleys again contested Countrywide’s allegations that they were two months delinquent on their postpetition payment obligations. On June 6, 2006, the Atchleys’ attorney transmitted additional documents to Countrywide’s counsel. . . . These documents included a Western Union Quick Collect receipt dated May 20, 2006 in the amount of $1,600. This receipt demonstrates that, four days before Countrywide filed the Second Motion, the Atchleys were one month delinquent, rather than two months delinquent, as represented in the Second Motion. These documents also included a Western Union Quick Collect receipt dated June 2, 2006, less than two weeks after the previous payment, in the amount of $1,748.92.
    I note for the record that May 20, 2006 was a Saturday. It seems only reasonable to assume that Countrywide would have processed that payment to the Atchley’s account no earlier than May 22; it might have been after that, depending on what kind of "Quick Collect" transaction the Atchleys used. Did that give Countrywide reasonable time to cancel that Motion before the attorneys filed it on the 24th? Yes, I think you could say that it did. But to be fair, only just.

    I see a pattern forming here of borrowers who have made post-petition payments late since the very first one and who tend to remit payments at the last possible moment. Any servicer is in a bind with borrowers like this: if they are making post-petition payments and repayment plan payments, nobody particularly wants to foreclose, especially if the borrowers have little to no equity. On the other hand, without the repeated threat of foreclosure, it’s hard to assume with any confidence that those payments would have kept coming in, late as they were.

    The picture is also muddled by the absence of any clear documentation on the escrow issue (this lack, it seems, is Countrywide’s error in failing to amend its Proof of Claim properly). While there may have been no escrow account on the loan when it was originated, it seems clear that at some point after that Countrywide demanded that the borrowers begin paying into a tax and insurance escrow. The Atchleys indicate that they do not understand the escrow amounts charged, but then again they don’t actually explicitly claim they were keeping up with their tax and insurance payments during this period, either. I note only that the public records show a lien filed against them by their homeowners’ association for past-due assessments in November of 2006. Any servicer with evidence of unpaid taxes, insurance, or assessments has the right under the mortgage to require escrow payments, even if that requirement was waived when the loan was originated. I also note that while the Trustee’s Complaint notes that Countrywide did not amend its Proof of Claim properly in order to reflect the addition of escrow payments to the amount owed, it does not proffer any evidence that such charges were improper.

    The Atchleys asked for court approval to sell their home in March of 2007 and received the payoff statement from Countrywide in May. The Trustee’s concern is that the payoff statement includes $2,793 in aggregated fees. Whatever those fees were for—legitimate or illegitimate charges—there would have been a problem, since it appears that Countrywide never amended its Proof of Claim since the original one filed in January of 2006. On that original Proof of Claim, only $242.50 in fees had been indicated. It is not demonstrated by the Trustee that the additional fees would have been determined to be improper by the court if the Proof of Claim had been amended properly; there is no way to know if the fees were proper or not since Countrywide erred Big Time in not submitting the required proof to the court.

    I note that we are given no information at all about when the Atchleys made their last post-petition payment to Countrywide. Without knowing how much past-due interest, taxes, insurance, and assessments there were, we have no way of measuring whether that $199,000 payoff was really a surprising number or not. We have the Atchleys’ claim that they did not understand it. I will hereby opine that servicers who provide payoff statements that do not clearly itemize all fees and charges are asking for borrowers who do not understand them, and that if the servicers had a lick of sense they’d quit doing that. But I’m afraid there’s no reason not to assume that this case legitimately racked up a couple thousand in legal fees and escrow shortages between January of 2005 and May of 2007.

    Could those fees be padded or incorrect? Sure they could. This is Countrywide we're talking about. Did those fees themselves drive the Atchleys into BK and threaten them with foreclosure? Are we kidding? They weren't even assessed, it appears, until two years or so after the first delinquency on this loan.

    Countrywide continued to screw up even after the sale of the property—it seems that they never withdrew their Proof of Claim after the payoff in full, and so they continued to accept payments from the court (out of the repayment plan funds) for several months. I observe that the court didn’t notice the problem either, but the Trustee’s Complaint solely faults Countrywide (and/or its attorneys) for this problem. In any case, Countrywide did return the improper payments to the court. It remains to be seen whether the court will determine that any of the fees collected in the payoff of the loan were improperly charged and must be returned to the Atchleys.

    To sum up, then: there is evidence here of gross incompetence on Countrywide’s or its attorneys’ part in failing to amend its Proof of Claim (probably on several instances). Its behavior in not refunding improper payments from the court until the debtors filed motion is indefensible. They should collectively get their butts kicked for that, and it appears that they will.

    Given the facts presented, I do not find the two motions for lifting of stay grossly improper. It seems to me that the fact that the borrowers’ (late) payments so closely preceded the filings is insufficient evidence that the servicer was acting in bad faith. I suspect that Countrywide’s law firm—the infamous McCalla Raymer—probably does not have a good process for re-verifying updated payment histories just prior to filing motions, and perhaps the court should admonish them for that. I probably would.

    It is also possible that the legal fees charged to the borrowers in the final payoff will be considered improperly charged because those two motions were deemed erroneously filed. If that is the case, I think that’s probably slightly unfair. The borrowers were either unable or unwilling to make their post-petition payments until literally the eleventh hour before a 60-day delinquency, which pretty much automatically results in a motion to lift stay. Nothing that I can see (remember, I do not have the exhibits to the Complaint) suggests unambiguously to me that Countrywide acted in bad faith when it believed that the borrower was two months past due and that, crucially, the borrower was unable to continue to make payments on an on-going basis. On that last part, events seem to have born that out.

    I’m sorry that the Atchleys lost their home. However, unless they owed money on a lot of very expensive cars—we aren’t given any information about that—it seems clear to me that the mortgage payment was in fact the root of their financial problems. They were budgeted so tightly that a few weeks of the loss of one borrower’s income put them 90 days down; they struggled throughout the bankruptcy to stay current on post-petition payments and appear to have made most of them late; they were unable to keep up with their HOA assessment; they were lucky, it seems to me, to eke out enough sale proceeds to nearly cover the mortgage debt and broker commission. (If Countrywide ends up returning $2,000 or so to them in “improper” legal fees, that would bring them to break-even.) Neither the 10.10% loan they ran out of steam on or the 7.75% loan they started with (that was a pretty high ARM interest rate in 2004) implies that their credit records were stellar before the home was originally purchased. With hindsight, they’d have been much better off to have sold rather than declaring bankruptcy back in late 2005. These folks are an object lesson in why struggling to hold onto your home can be the worst thing you can do to yourself.

    In fact, the Atchleys sound to me like classic subprime borrowers—which phrase I insist on using as a matter of fact description, not an insult. Many, many of those borrowers don’t make it. That is why subprime lending—and borrowing—is so risky. That is why the big boom in subprime lending in the period in which the Atchleys got their loans was such a disaster. But they are not, as far as I can tell, evidence that servicers are foreclosing on non-delinquent borrowers, and if anybody involved made all that much of a “profit” on them except the lender who originated their loan and the builder who sold them the house, I’ll be shocked. Indeed, the fact that servicers are racking up so much operational expense in foreclosures and bankruptcies right now is, well, part of the subprime disaster. Pretending that it's a way for these Bad Guy lenders to practically print money is a very bad joke.

    Sunday, April 13, 2008

    HELOC Nonsense

    by Tanta on 4/13/2008 10:21:00 AM

    Wow. Yesterday I disagreed with PJ over at Housing Wire. This morning I find myself taking issue with Barry Ritholtz at The Big Picture. If this keeps up, tomorrow I'll be arguing with God.

    Yes, children, it's time for another installment of Picking on Poor Gretchen. And what a doozy it is this time, "You Thought You Had an Equity Line":

    IT was the nation’s lending institutions and mortgage originators that got us into this credit mess, but it is consumers, taxpayers and those companies’ shareholders who will end up shouldering most of the costs.

    The latest example of this is in the mass freezing of home equity lines of credit going on across the country. Reeling from losses on their wretched loan decisions of recent years, lenders are preventing borrowers with pristine credit and significant equity in their homes from tapping into credit lines that they paid dearly to secure.
    I see. The inability to make a withdrawal from the home ATM is . . . "shouldering most of the costs" for the credit crash. Yeah, right.
    In the last 30 days, lenders have sent several hundred thousand letters advising borrowers that their home equity lines of credit are frozen, estimated Michael A. Kratzer, president of FeeDisclosure.com, a Web site intended to help consumers reduce fees on home loans.
    You'll want to pay attention to Mr. Kratzer, since he's The Sole Source for most of the real nonsense in this article. I'd suggest pausing for a moment to read what Mr. Kratzer has to say about himself on his own website. You may also ask yourself how FeeDisclosure.com makes its money, since "intending to help consumers" does not, as far as I can see, mean that this is a non-profit. You could also ask why the website is identified as "beta." Don't worry, I'll wait here for ya to come back.

    Well, then.
    Banks have the right, of course, to rescind these credit lines at any time under the terms of the contracts they struck with borrowers. And as home prices have tumbled in many parts of the country, banks are undoubtedly trying to protect themselves from exposure to additional losses.

    But these actions are being taken even in areas where property prices are rising, Mr. Kratzer said. What’s worse, the letters provide no explanation for how the lenders determined that the property values underlying the equity lines had fallen.
    This Kratzer--unless he's lying about his credentials on that website--has to have heard of this thing called an "AVM," or automated valuation model that a HELOC servicer can run on a specific property, to determine current value. What's with kicking up sand here? In fact, if he wasn't born yesterday he has to know that most HELOCs were originated with an AVM used to establish value, not an old-fashioned formal appraisal (unless they were originated at the same time as a first lien, and the appraisal for that loan--paid for in that loan's closing costs--was re-used for the HELOC).
    One especially exasperating aspect of now-you-see-them, now-you-don’t equity lines is that borrowers are not receiving refunds for fees they paid to secure the credit in the first place.

    These fees can be significant, Mr. Kratzer said: on a $50,000 line, for example, fees of $1,500 are common. If the line is being frozen at, say, $25,000, why shouldn’t the borrower be entitled to receive a refund of $750?
    Where, when, in what dimension of physical space was it "common" to pay THREE HUNDRED BASIS POINTS to get a HELOC? Gretchen printed that claim in the Times?

    Consumer Reports, from last August:
    HELOCs generally have few if any fees because the market is so competitive. According to HSH Associates, a publisher of financial information, the average closing fee charged for HELOCs is about $60. Some lenders make you pay a maintenance fee, typically about $50 per year, if you don’t keep an outstanding balance.
    The Mortgage Professor:
    Upfront costs are also relatively low. On a $150,000 standard loan, settlement costs may range from $ 2-5,000, unless the borrower pays an interest rate high enough for the lender to pay some or all of it. On a $150,000 HELOC, costs seldom exceed $1,000 and in many cases are paid by the lender without a rate adjustment.
    Go ask Mr. Google for more, if you want. But I'm still convinced that most people with a recently-originated HELOC didn't pay ANY closing costs on the HELOC itself over about $100. That's not even pointing out that the "LOC" part of the name, meaning "Line of Credit," implies that these lines revolve. Somebody with a "current balance" of $25,000 may have borrowed $25,000 six times. You know, like your credit cards. Whatever.
    Borrowers who have an excellent credit score may also find that status hurt when a home equity line is frozen. That is because when a lender suddenly caps a $50,000 line at $25,000, the borrower will appear to have tapped the entire amount of the loan, a factor that can reduce a person’s credit score. Never mind that, based on the original amount of the credit line, the borrower is using only half of it.
    First of all, if you have this "pristine credit" thing here, the hit to your FICO for having a high "balance to limit ratio" on your HELOC all of a sudden might take you from 800 to 780. That's from "infinitesimal probability of default" to "infinitesimal probability of default." Only if you just assume that lenders' calculation of the value of the property is flat-out wrong--that there really is this "equity" there--is that somehow "unfair." You went from owing a smaller percent of the value of your home to owing a larger one, because the value of your home changed. This is called "marking to market," and I thought Gretchen liked that idea. I guess only when it's banks. When it's middle-class people with their "pristine credit," fantasy should be allowed.
    Mr. Kratzer said he had heard from frozen-out borrowers in 11 metropolitan areas where the median home price actually increased in the last quarter of 2007, the most recent figures available from the National Association of Realtors. They include Yakima, Wash.; Appleton, Wis.; Raleigh-Cary, N.C.; and Champaign-Urbana, Ill. Borrowers in areas where prices remained flat have also contacted him.
    Oh, well, sure, if the median price in a region is going up, that must mean that the value of all homes is going up. What, you say? It might be a function of no sales at the low end and a few sales at the highest end, pushing up that median? What is that, some kinda statistical wankery you're trying to confuse us homeowners with?

    The whole article, besides depending on Kratzer's unsourced assertion of "common fees" and his innuendoes about lender valuations, merely begs the question: this is "unfair" because the equity is there, even though the lenders say the equity isn't there. There isn't one homeowner quoted who actually got an appraisal or AVM that shows something other than the bank's valuation. Kratzer seems to think the bank is obligated to pay for a new appraisal and send you a copy when they lower your line limit. For him, I got bad news: that would, indeed, bring average closing costs on HELOCs up to 300 bps.

    Maybe it will help everyone who is all up in arms about this to ponder the fact that since 2005 the federal regulators have required banks to engage in exactly the behavior Gretchen thinks is so unfair. We will stare into the pitiless gaze of the Board of Governors of the Federal Reserve's "Credit Risk Management Guidance For Home Equity Lending":
    Effective account management practices for large portfolios or portfolios with high-risk characteristics include:

    · Periodically refreshing credit risk scores on all customers;
    · Using behavioral scoring and analysis of individual borrower characteristics to identify potential problem accounts;
    · Periodically assessing utilization rates;
    · Periodically assessing payment patterns, including borrowers who make only minimum payments over a period of time or those who rely on the line to keep payments current;
    · Monitoring home values by geographic area; and
    · Obtaining updated information on the collateral’s value when significant market factors indicate a potential decline in home values, or when the borrower’s payment performance deteriorates and greater reliance is placed on the collateral.

    The frequency of these actions should be commensurate with the risk in the portfolio. Financial institutions should conduct annual credit reviews of HELOC accounts to determine whether the line of credit should be continued, based on the borrower’s current financial condition. 10 Where appropriate, financial institutions should refuse to extend additional credit or reduce the credit limit of a HELOC, bearing in mind that under Regulation Z such steps can be taken only in limited circumstances. These include, for example, when the value of the collateral declines significantly below the appraised value for purposes of the HELOC, default of a material obligation under the loan agreement, or deterioration in the borrower’s financial circumstances.
    Claiming or implying that the only reason a lender can or should reduce or freeze a HELOC is when the borrower's ability to repay has changed is not just a total misunderstanding of federal banking regulations, it's dumb. The "HE" in "HELOC" stands for Home Equity. This is not just any old revolving line of credit, it's secured credit.

    If you have problems with paying a grand or two for a line of credit you may never use, I suggest not doing it. If you wish to consider that you paid an option fee and your option expired, well, you can feel like one of the professional hedgers. If you think any closing costs you paid should be refunded to you because you're now "out of the money," I posit that you do not understand finances enough to get quoted in a newspaper.

    Tuesday, March 04, 2008

    GM Watch: How Not To Tell A Story

    by Tanta on 3/04/2008 09:30:00 AM

    She's at it again.

    Now, listen: this post isn't about defending actual incidents of fee-gouging. It isn't clear to me that the article in question has its hands on a case of actual fee-gouging. This post is about the idea that while people can write stuff for the NYT that makes no sense and get it published, the rest of us don't have to buy it.

    It's a story that makes a claim:

    Every home foreclosure is different, of course. But the Wellmans’ case shows the uphill battle facing many troubled borrowers who believe that they are losing their homes for questionable reasons, like onerous fees.
    At minimum, I would expect a story about the reason for a foreclosure being onerous fees. I would also expect a story about how hard it is for borrowers to get a day in court ("an uphill battle").

    What we got is a jumbled, fragmented narrative, told out of order, which is fashionable in the newspapers these days. I tend to suspect that this is because told in order, with full details, the story doesn't back up the headline. But I am cynical. Perhaps the real reason is that everyone else likes Faulkneresque conventions of narrative dislocation and evocative allusion rather than declarative sentences and Aristotelian unity. Stranger claims have been made before.

    Whatever. To aid us old farts, I tried to put together all the actual facts reported in chronological order. This is what I got:

    Our borrower, Wellman, built the house himself. He started in 1990 and finished in 1992.

    In 1996 Wellman lost his job and got behind on "the mortgage." I don't know when the mortgage was made. I don't know who made it. Between 1996 and today, at some point, the Wellmans have filed BK five times. Have they ever completed one? Beats me.

    In 2002, Nat City started foreclosure against the Wellmans. Apparently there was a problem with the assignment of mortgage having been filed subsequent to the FC filing. The judge seems to have slapped Nat City around a little, but did not dismiss the FC filing.

    Apparently it got straightened out who owns the loan, because in 2003 the Wellmans signed a "forbearance agreement" with Nat City, the terms of which are undisclosed.

    In 2004, Wellman asked a local accountant to look over his loan records, and the accountant said Nat City was off by $38,612. Wellman stopped making payments and got a lawyer.

    It went to court, and in 2006 the accountant testified that the charges were improper. Nat City apparently testified that the charges were proper. The judge "found that the Wellmans were bound by the agreement they signed in 2003." It isn't spelled out what that means; I can only assume it means that agreement signed stipulated that the Wellmans would pay these charges that they subsequently objected to. I suspect it also means that the folderol about who really owns the note is no longer an issue, since signing an agreement to repay Nat City would mean the borrowers acknowledged that they owe Nat City. But we don't get that spelled out.

    The thing apparently went to an appellate court, who apparently also found in favor of Nat City.

    As of today, it appears that Mrs. Wellman has a job and Mr. Wellman is a self-employed inventor.

    As of today, Gretchen Morgenson is still worried about the fact that a person testified to something in 2006, and the trial court didn't buy it. I'm wondering how often that happens.

    So, anyway. The Wellmans have a history of financial distress going back for more than ten years. They got an accountant to work for them, and they have had a lawyer working for them for free for three years. They got a day in trial court and a day in appellate court. It appears that they have not made any mortgage payments--even regular payments, ignoring those contested fees--since 2004.

    What is the obvious conclusion to draw?

    Okay, now you can read the appellate decision.

    A note to anyone in trouble with a mortgage: if you are asked to sign something, read it. If it stipulates that you have been represented by an attorney, don't sign it unless you are really represented by an attorney. If it has a dollar amount on it you are agreeing to repay, demand an itemization before you sign, not afterwards. If you really aren't sure that the other party to the agreement owns your loan, don't sign it. If it says that foreclosure will commence if you stop paying, it means it.

    Best possible thing you can do: see a lawyer.

    Worst possible thing you can do: read the New York Times.

    Wednesday, February 20, 2008

    GM Watch: Credit Default Swaps

    by Calculated Risk on 2/20/2008 02:20:00 PM

    Portfolio.com's Felix Salmon takes his turn at correcting the NY Times' Gretchen Morgenson, this time with regards to her article on credit default swaps. (hat tip Martin)

    From Salmon: A Misleading Chart on Credit Default Swaps

    This graphic ... from Gretchen Morgenson's front-pager in the NYT ... shows the market in credit default swaps, at $45.5 trillion, dwarfing the markets in U.S. stocks ($21.9 trillion), mortgage securities ($7.1 trillion), and U.S. Treasuries ($4.4 trillion).

    Morgenson's article makes it clear that it's reasonable to directly compare market sizes like this. Indeed, she refers to CDSs as "securities" in the third paragraph of her piece:
    The market for these securities is enormous. Since 2000, it has ballooned from $900 billion to more than $45.5 trillion -- roughly twice the size of the entire United States stock market.
    But of course a credit default swap is not a security, it's a derivative. The $45.5 trillion is a notional amount; the size of the stock market is a hard valuation. There's an enormous difference.

    Morgenson is right that there are problems in the CDS market. But she over-eggs her pudding so much that it's very hard to separate the good points from the bad.
    The bad news is there are serious issues with the CDS market. The good news is we've outsourced the GM Watch feature!

    Tuesday, November 06, 2007

    GM Watch, Again: Foreclosures and Fees

    by Tanta on 11/06/2007 11:10:00 AM

    I know how disappointed everyone would be if I passed on an opportunity to publically describe Gretchen Morgenson as a tendentious writer with only a marginal grasp of her subject matter and what appears to be an insatiable desire to make uncontroversial facts sound sinister. So here we go again.

    Obligatory declamation: I hate sloppy mortgage servicers, I think fee gouging is criminal, and nothing would make me happier than to see bankruptcy judges slapping some servicers around a little. Morgenson's article, "Borrowers Face Dubious Charges in Foreclosures," brings up one particular thing, payoff fees, that I have been bitching about for fifteen years and that I'd be happy to see outlawed. (News flash: those fees are charged by servicers to everyone who requests a payoff quote, including everyone who has ever refinanced a mortgage. This isn't just something that happens in bankruptcy or foreclosure. If there is a more normal course of business process than calculating what one is owed, which should therefore be a matter of general servicing fee compensation, I can't think of one. Total Ick.)

    As usual, though, Morgenson's valid points are drowning in a sea of sensational swill:

    Because there is little oversight of foreclosure practices and the fees that are charged, bankruptcy specialists fear that some consumers may be losing their homes unnecessarily or that mortgage servicers, who collect loan payments, are profiting from foreclosures.
    The article presents exactly zero evidence, anecdotal or otherwise, that any of the foreclosures or bankruptcies in question were "unnecessary." There is certainly the implication here that servicers profit more from a foreclosure than from simply servicing a performing loan. That idea could use some evidence. It may be true that once a loan defaults, the servicer loses less by foreclosing (where its costs are reimbursed by the noteholder out of the liquidation proceeds) than by working the loan out; this is a big problem with the modification thing, in which servicers generally have to absorb the costs of the modification. But if the accusation here is that servicers drive borrowers into default in order to foreclose, I'd like to see some evidence for that. (Really, I would. That would be a serious indictment of the servicing industry.)
    Bankruptcy specialists say lenders and loan servicers often do not comply with even the most basic legal requirements, like correctly computing the amount a borrower owes on a foreclosed loan or providing proof of holding the mortgage note in question.
    Perhaps our attorney friends will tell me how it is that servicers have to prove that they are noteholders in a bankruptcy. I suspect that's news to all investors in mortgage bonds, who think they are the noteholders. Are we talking about sloppy filings, in which the servicer failed to include a copy of the note? Or are we really talking about servicers who cannot cough up an assignment of mortgage or deed of trust to show standing to foreclose? Is this predation by servicers who don't even have the right to collect on the debt, trying to worm their way into BK court, or botched paperwork?
    In an analysis of foreclosures in Chapter 13 bankruptcy, the program intended to help troubled borrowers save their homes, Ms. Porter found that questionable fees had been added to almost half of the loans she examined, and many of the charges were identified only vaguely. Most of the fees were less than $200 each, but collectively they could raise millions of dollars for loan servicers at a time when the other side of the business, mortgage origination, has faltered.

    In one example, Ms. Porter found that a lender had filed a claim stating that the borrower owed more than $1 million. But after the loan history was scrutinized, the balance turned out to be $60,000. And a judge in Louisiana is considering an award for sanctions against Wells Fargo in a case in which the bank assessed improper fees and charges that added more than $24,000 to a borrower’s loan.
    These are not impressive examples of servicer competence, and I don't object to public humiliation of any servicer who can make errors like that. But does anyone seriously think that these were attempts to "raise millions of dollars for loan servicers at a time when the other side of the business, mortgage origination, has faltered"? (Keep reading to get to the details of the Wells Fargo case, and notice that the inappropriate charges were overwhelmingly fees or charges that would not be payable to Wells as servicer but would be passed through to the investor or someone else.)

    But that's the thing: once again, Morgenson displays her profound ignorance of the industry she spends so much time writing about:
    Loan servicing is extremely lucrative. Servicers, which collect payments from borrowers and pass them on to investors who own the loans, generally receive a percentage of income from a loan, often 0.25 percent on a prime mortgage and 0.50 percent on a subprime loan. Servicers typically generate profit margins of about 20 percent.
    I have no idea where the 20 percent "profit margin" comes from or what it means in this context. I also do not know what "extremely lucrative" means in the context of a 25 bps servicing fee. But here's the kicker:
    Now that big lenders are originating fewer mortgages, servicing revenues make up a greater percentage of earnings. Because servicers typically keep late fees and certain other charges assessed on delinquent or defaulted loans, “a borrower’s default can present a servicer with an opportunity for additional profit,” Ms. Porter said.

    The amounts can be significant. Late fees accounted for 11.5 percent of servicing revenues in 2006 at Ocwen Financial, a big servicing company. At Countrywide, $285 million came from late fees last year, up 20 percent from 2005. Late fees accounted for 7.5 percent of Countrywide’s servicing revenue last year.

    But these are not the only charges borrowers face. Others include $145 in something called “demand fees,” $137 in overnight delivery fees, fax fees of $50 and payoff statement charges of $60. Property inspection fees can be levied every month or so, and fees can be imposed every two months to cover assessments of a home’s worth.
    When other sources of revenue go down, servicing revenue does, in fact, make up a larger percentage of total revenue even if servicing revenues are unchanged. Remember that you get that lordly 0.25-0.50% in servicing fees only as long as you have a loan to service. No new originations, no new servicing fees.

    But of course, we are talking revenue here. For instance, those late fees are revenue: they aren't "income" until you back out the expenses of collecting on late loans and the carrying costs of the payments servicers have to advance to the noteholders on time regardless of whether they're collected or not. Do servicers actually make a profit, at the end of the day, on late fees? I suspect most do. Is it less than 100% of revenue? Yes. How much less? Pity Morgenson didn't ask.

    You get no argument from me that junk fees like payoff fees, fax fees, demand fees, and unnecessary overnight charges are a horror. I am less convinced that doing away with periodic property inspections for a home in the foreclosure or bankruptcy process is such a great idea: you need to know that the home is still occupied and that it hasn't been vandalized. There's surely a reasonable argument that inspection costs should come out of general servicing revenue, not pass-through fees to the borrower. If you did that, of course, I'd guess that servicing fees would probably go up, so you'd pay it anyway. However, unless the servicer owns the inspection company and makes a big markup (which is possible, although no evidence is presented here), then it's "revenue" with a matched expense. Mortgage servicers can be amazingly dumb at times, but if they're beefing up income with that strategy, you can rest assured it won't last long.

    Here's the part of the article based on actual data from a researcher:
    In 96 percent of the claims Ms. Porter studied, the borrower and the lender disagreed on the amount of the mortgage debt. In about a quarter of the cases, borrowers thought they owed more than the creditors claimed, but in about 70 percent, the creditors asserted that the debt owed was greater than the amounts specified by borrowers.

    The median difference between the amounts the creditor and the borrower submitted was $1,366; the average was $3,533, Ms. Porter said. In 30 percent of the cases in which creditors’ claims were higher, the discrepancy was greater than 5 percent of the homeowners’ figure.

    Based on the study, mortgage creditors in the 1,733 cases put in claims for almost $6 million more than the loan debts listed by borrowers in the bankruptcy filings. The discrepancies are too big, Ms. Porter said, to be simple record-keeping errors.
    Well, we don't know what the total amount of the loan debts listed is. Let's assume an average loan debt of $200,000. That gives us $346,600,000 in debts. A $6 million discrepancy is 1.7%. You have to assume that at least some of these are "discrepancies" because the borrowers simply have no idea how much back interest they owe (like all those folks who thought the accrual rate on their OA was 1.00%). There certainly seem to be some big outliers there, given a median of $1,366 and a mean of $3,533. I'm guessing that the one loan of $60,000 with a servicer balance of $1MM is probably throwing that off. End of the day, the discrepancy due to intentional servicer padding of fees has to be less than 1.0%.

    Is that an impressive track record for the servicing industry? No. Are we relieved that bankruptcy judges are challenging these charges? Yes, we are: $1,366 might be small beer for a trillion-dollar servicer, but it's money no one needs to squeeze out of a bankrupt consumer. Does it support the contention that servicers are making up for a drop in origination income by loading up on inflated revenues that have no offsetting expenses? Not as far as I can see.

    I realize that this will hurt the feelings of the conspiracy-minded, but I do believe that high rates of foreclosure and bankruptcy are money-losers for mortgage servicers, not profit centers. This is not a plea for sympathy for the servicing industry: I have wasted eleventy-jillion of your pixels on the subject of how the industry created this mess with ridiculous lending standards and dereliction of risk management duty. No one is happier than I am to see the little punks take it in the bottom line, and my enthusiasm for things like cram-downs and workouts--the cost of which is borne by the parties who got us into this mess--is an example of that.

    It strikes me as quite plausible that some servicers are trying to make some lemonade by charging every fee they can think of. In a foreclosure of an upside down loan, of course, those fees come out of the investor's or insurer's pockets, not the consumer's. In a Chapter 13, these are fees borrowers are expected to repay, and with the cram-down prohibition, there's little incentive for servicers to control costs. So cram the damned things down.

    The sad fact of the matter is that there are many businesses and industries that "profit off misfortune." There's money to be made in divorce lawyering, funeral parloring, and broken bone-setting, as well as default mortgage servicing. When profiting becomes profiteering, then yes, that should be punished to the fullest extent of the law. I suggest it also helps to create legal and regulatory structures that remove as many incentives for profiteering as possible in the first place. In order to do that, we have to understand how the business works. Nerdiness matters.

    Are we to believe that payoff quote fees were OK until now? That late fees have never until the bust been a money-maker for servicers? That favorable bankruptcy treatment for mortage lenders was fine until 2007? That sloppy business practices have nothing to do with outsourcing, temping, mass layoffs, misguided technology projects, and any of the other myriad forces that corporate America has unleashed in its endless quest to enrich CEOs and keep you on hold for ten hours as you struggle to understand all that crap on your phone bill or locate your lost luggage? Mortgage servicing isn't any better or any worse than the rest of corporate America when it comes to half-assed business practices. It is, however, beginning to suffer the consequences of a huge boom, and I for one predict that we will get to see just how poorly managed a lot of these operations really were: there will be more than a few lost copies of promissory notes and misapplied payments. I'm sure it's too much to hope that everyone who bought shares of these outfits based on their impressive "cost management" will have to pay for it all.

    Until justice does finally arrive, I guess we'll have to remember these words of wisdom:
    No one likes to face ugly realities like financially ailing borrowers who are so strapped that nothing can save them. Not the lenders, not the Wall Street firms that sell the securities, not even the holders. But experienced investors know that a reliance on fantasy will only prolong the pain that is racking the huge and important mortgage market.