Banks to AGs on Servicing Fraud: Drop Dead
Here's the banks' counterproposal for a servicing fraud settlement. I can sum it up in two words: drop dead. Or two letters: F.U. This proposals is so pathetically thin that it's not a good faith counterproposal. This document only deals with servicing standards--nothing in it whatsoever about penalties, modification quotas, etc. But even on servicing standards it is a bunch of empty promises to have internal controls and try harder.
The first point about this counterproposal is simply to note what's absent from it:
(1) nothing about principal reductions
(2) nothing about second liens and conflicts of interest
(3) nothing about MERS (reserved for later)
(4) nothing about in-sourced vendor fees or force-placed insurance to affiliates. This makes the fees and force-place insurance sections pretty meaningless.
(5) nothing about pyramiding of fees.
I'm sure I'm missing a bunch of important points that aren't addressed, but these seemed to be the most obvious ones.
Next, it's worth noting just how little it actually promises and how cagey the promises are. For many points it does not promise results. Instead, it promises "processes reasonably designed" or "procedures reasonably designed" to do something or another. Basically a lot of it boils down to promises to implement internal controls, reviews, and procedures to make sure things don't happen again.
Put differently, this is the servicers' saying "trust us." Ummm, that's the whole problem. No one trusts the servicers--not investors, not homeowners.
Let's look at some specific terms. Orwell couldn't have drafted these any better:
(1) Loan Modifications. What do the banks propose to do in the section entitled "loan modifications"? Principal reductions? Interest rate reductions? Forbearance? Nah. None of that stuff. Instead they says no fees for modifications and we'll toss in a free overnight envelope. So the counterproposal to principal reduction mods is a free Fed-Ex mailer.
(2) "Independent Review." Part of the document has a heading of "independent review." One might have thought that was from a disinterested outside reviewer. Nope. It just means that there is an internal review by another reporting chain within the bank. This is a worthless promise.
(3) Single point of contact.
Servicer will provide a single point of contact ("SPOC"), which may be more than one person, to any first lien, owner occupied, borrower suffering a hardship through the loss mitigation processes...
Wait a sec. What the hell is single-point of contact if it can be multiple people? A single phone number? A 1-800 number plus a loan ID accomplishes that. I get that SPOC is hard to do, but this sort of empty promise is insulting. It's already the situation. Also notice how this is contingent on the "borrower suffering a hardship through the loss mitigation processes"--what does that mean? Is that all borrowers or just ones with some unspecified special circumstances in the bank's discretion?
(4) End of Dual Track Process. A major complaint has been that banks simultaneously proceed with foreclosure while negotiating loan mods. So what do the banks propose to do about that here? They are offering that a loan will not be "referred" to foreclosure if (a) all documentation necessary for a mod review is submitted and (b) a mod decision has not been made. That's a really small concession. Notice what it doesn't cover. It doesn't mean that foreclosures in process will be halted, only that the process won't be started. There's also the question of whether the referral will have magically "happened" before the documentation is received. Oh wait, that document is an certified original, not an original certified copy, so your documentation isn't complete. Sorry....
(5) Borrower portal for electronic document submission. I actually like this idea and had this is something that the Congressional Oversight Panel had suggested in a foreclosure report. But there's absolutely nothing that prevents servicers from doing this right now. This is hardly some big concession. In fact, they've had just such a portal sitting in the garage for months via Hope Now.
(6) Forgiveness of short sale deficiencies. The banks are promising to try to forgive deficiencies associated with short sales. Uh, isn't that what a short sale is--the bank agrees to take the sale price in satisfaction of the debt? So what does is actually being promised here?
(7) Affidavits. The banks are promising that affidavits will be sworn out by affiants with knowledge of the facts and in compliance with applicable state law, etc. In other words, that they'll comply with the law. Note how that differs from the AG proposal, which would have required various affidavits not only when required by law (as in judicial foreclosures), but also in nonjudicial foreclosures. A lto of commentators wrongly criticized the AG proposal for simply requiring compliance with the law without recognizing that it was expanding the affidavit requirement. The AGs were requiring something more; the banks are just saying that they'll follow the law. Once again, "trust us."
(8) Chain of Title. I've saved my favorite for last. Here's what the proposal says:
Servicer shall implement processes reasonably designed to ensure that Servicer has properly documented an enforceable interest in the promissory note and mortgage (or deed of trust) under applicable state law, or is otherwise a proper party to the foreclosure action (as a result of agency or other similar status), including appropriate transfer and delivery of endorsed notes (which may be endorsed in blank) and assigned moretgages or deeds of trust at the formation of a residential mortgage-backed security, and lawful endorsement and assignment of the note and mortgage or deed of trust to reflect changes of ownership, all in accordance with applicable state law.
My initial read was, wow, they're saying that their going to make sure that chain of title is proper. But then I started to wonder about this. So it would require a process to document an enforceable interest. What does that mean? Does it mean that the servicer will provide the court with a statement of chain of title? That's not what's required, here, though. This seems to be an internal control process.
Then I read further. This would seem to giving a blessing to endorsement of notes in blank. As a generic matter, as I've said before, that's fine. But if the PSA calls for something different, that's a problem. So it looks as if the servicers are trying to use the settlement as a way to change the legal requirements regarding the transfers of mortgages. Neither the Feds nor the AGs have the power to grant that, however.
There is this interesting language about "appropriate transfer and delivery of endorsed notes and assigned mortgages...at the formation of a residential mortgage-backed security." Is that a concession that transfers that occur after the closing date are invalid? I can't imagine so, so I'm puzzled by this.
And then there's the "all in accordance with applicable state law." I might be seeing a problem where there isn't one, but I worry that this is an attempt to change the applicable law in foreclosure litigation. The "applicable state law" phrase is used twice in this paragraph. First it is used in reference to the promissory note and mortgage. That would be the state law of the state where the property is located. But the state law governing the "appropriate transfer and delivery" of the notes and mortgages is not the state law of the property situs. It's the state law of the state governing the PSA (most likely New York). The way this paragraph is phrased, however, one would think that "applicable state law" would refer to the same state both times its used, and by using it first in reference to the situs state for the property, it would prime a reader to think that the situs law governs the transfers.
There are lots of other points to criticize with this counterproposal, but it's hardly worthwhile doing so--it's such an obvious in-your-face document that it's really not worthwhile engaging with serious. This isn't the basis for a good faith discussion of mortgage servicing reform. It's simply another part of the banks' strategy to run the clock and thereby avoid doing principal reductions--that's what will cost them the big bucks, not a $20B fine.