Independent Foreclosure Review: Case Closed?

The Federal Reserve Board issued its Independent Foreclosure Review. By way of background,

Between April 2011 and April 2012, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (“Federal Reserve”), and the Office of Thrift Supervision (OTS) issued formal enforcement actions against 16 mortgage servicing companies to address a pattern of misconduct and negligence related to deficient practices in residential mortgage loan servicing and foreclosure processing identified by examiners during reviews conducted from November 2010 to January 2011. Beginning in January 2013, 15 of the mortgage servicing companies subject to enforcement actions for deficient practices in mortgage loan servicing and foreclosure processing reached agreements with the OCC and the Federal Reserve (collectively, the “regulators”) to provide approximately $3.9 billion in direct cash payments to borrowers and approximately $6.1 billion in other foreclosure prevention assistance, such as loan modifications and the forgiveness of deficiency judgments. For participating servicers, fulfillment of these agreements satisfies the foreclosure file review requirements of the enforcement actions issued by the OCC, the Federal Reserve, and the OTS in 2011 and 2012. (1)

The government’s actions regarding the Independent Foreclosure Review have been its controversial, with some believing that it was completed too hastily. I am less interested in that debate than in FRB’s sense of the the servicing sector going forward.

The report states that “the initial supervisory review of the servicer and holding company action plans has shown that the banking organizations under Consent Orders have implemented significant corrective actions with regard to their mortgage servicing and foreclosure processes, but that some additional actions need to be taken.” (24) Overall, the report reflects an optimism that endemic servicer problems are a thing of the past.

drumbeat of reports and cases seems to be at odds with that assessment, although there is obviously a significant lag between the occurrence of  problems and the report of them in official sources. As a close observer of the mortgage industry, however, I am not yet convinced that regulators have their hands around the problems in the servicer industry. Careful monitoring remains the order of the day.

National Mortgage Settlement Update

Joseph A. Smith, Jr., the Monitor of the National Mortgage Settlement (NMS), has issued his Second Compliance Report (I blogged about an earlier report here) which has been filed in the District Court for the District of Columbia. According to the Monitor, Ally Financial and Wells Fargo were not in violation of the settlement at all during 2013 and BoA’s and Chase’s deficiencies were not widespread. Citi had a widespread deficiency.

The Monitor’s conclusion echoes his earlier report although his tone is more optimistic than last time:

It is clear to me that the servicers have additional work to do both in their efforts to fully comply with the NMS and to regain their customers’ trust. The Monitor Reports that I have just filed with the Court show, however, that the Settlement is addressing shortcomings in the treatment of distressed borrowers.

CAPs [corrective action plans], including remediation efforts when required, have been implemented or are in process. If the CAPs are not successful, the Monitoring Committee and I will take additional action, as dictated by the Settlement. In addition, we have applied what we have learned to enhance our oversight of the servicers by creating four new metrics to address persistent issues in the marketplace. (16)

The big five banks appear to be improving their compliance with the settlement, which is obviously a good thing. But there is still work to be done to improve loan servicing. The monitor notes the top ten complaints about servicers that were submitted by elected officials on behalf of their constituents:

1 Single point of contact was not provided, was difficult to deal with or was difficult to reach.

2 Single point of contact was non-responsive.

3 Servicer did not take appropriate action to remediate inaccuracies in borrower’s account.

4 Servicer failed to update the borrower’s contact information and/or account balance.

5 Servicer failed to correct errors in the borrower’s account information.

6 The borrower was “dual-tracked.” In other words, the borrower submitted an application for loss mitigation, and although it was in process or pending, the borrower was foreclosed upon.

7 Servicer did not accept payments or incorrectly applied them.

8 Servicer did not follow appropriate loss mitigation procedures.

9 The borrower received requests for financial statements they already provided.

10 The completed first lien modification request was not responded to within 30 days.

Total Executive Office complaints for all servicers: 44,570 (n.p.)

Obviously not every complaint is valid, but these numbers suggest that the settlement is not being fully complied with.

Rating Agency 1st Amendment Defense Weakened, Again

Federal District Judge O’Toole (D. Mass.) issued an Opinion and Order in Federal Home Loan Bank of Boston v. Ally Financial Inc. et al., No. 11-10952 (Sept. 30, 2013)  relating to the potential liability of S&P and Moody’s (the Rating Agency Defendants) for their ratings. The case “arises from the purchase of private label mortgage-backed securities” (PLMBS) by the plaintiff, FHLB Boston. (1)  FHLB Boston alleges that the rating agency defendants knew that their ratings “were inaccurate and based on flawed models, and that their conduct gives rise to” a claim for fraud as well as other causes of action. (1) The Rating Agency Defendants sought to have the claims dismissed for failure to state a claim. The Court rejected this as to the fraud claim:

The Rating Agency Defendants’ argument that their ratings are non-actionable opinions is unconvincing. As discussed in Abu Dhabi I, “[a]n opinion may still be actionable if the speaker does not genuinely and reasonably believe it or if it is without basis in fact.” 651 F. Supp. 2d at 176 (internal citations omitted). Here the Bank has pled with sufficient particularity that the Rating Agency Defendants issued ratings that they did not genuinely or reasonably believe. For example, the Amended Complaint alleges that the Rating Agency Defendants diluted their own standards and carried out their ratings procedures in an intentionally lax manner as to PLMBS while maintaining higher standards in other contexts. The Bank has also sufficiently pled scienter, alleging that the Rating Agency Defendants competed for business by artificially inflating ratings, as they were only paid if they provided high ratings. (4)

Rating agencies were able to avoid liability for decades, claiming that their ratings were like min-editorials that were protected by the First Amendment. A number of recent cases reject that defense in a variety of contexts (See here, here and here for instance). It is unclear what will happen when these cases are appealed, but for now it appears that a number of courts have identified situations where an opinion can be more than an opinion — it can amount to actionable fraud.