Tag Archives: servicers

Systemic Servicing Failure

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Joseph A. Smith, Jr.

Joseph A. Smith, Jr.

Joseph A. Smith, Jr., the Monitor of the National Mortgage Settlement, issued An Update on Ocwen’s Compliance. It opens,

I filed a compliance report with the United States District Court for the District of Columbia (the Court) today that provides the results of my tests on Ocwen’s compliance with the National Mortgage Settlement (Settlement or NMS) servicing standards during the third and fourth calendar quarters of 2014. (2)

The Monitor found that Ocwen (which has been subject to numerous complaints) failed at least four metrics and a total of ten metrics are subject to some type of corrective action plan. As with many of these reports, the prose is turgid, but the subject is of great concern to borrowers who have mortgages serviced by Ocwen.  Problems were found with

  1. the timeliness, accuracy and completeness of pre-foreclosure initiation notification letters
  2. the propriety of default-related fees
  3. compliance with short sale notification requirements regarding missing documents
  4. providing the reason and factual basis for various denials

The Monitor concludes, “The work involved to date has been extensive, but Ocwen still has more work to do. I will continue to report to the Court and to the public on Ocwen’s progress in an ongoing and transparent manner.” (5) This sounds like bureaucratic understatement to me.  Each of these failures has a major impact on the homeowners who are subject to it.

The Kafka-esque stories of homeowners dealing with servicers gone wild are graphic and frightening when a home is on the line. And when I read the corrective actions that the Monitor is implementing, it reads more like my 6th grader’s report card than like a plan for a massive corporation. One of them is “ensuring accuracy of dates used in letters.” (Appendix ii) Hard to imagine a grown up CEO needing to be told that.

I have wondered before how a company under court-ordered supervision could continue to behave like this. I remain perplexed — and even a bit disgusted.

Servicer Safety & Soundness and Consumer Protection

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The FHFA’s Inspector General issued an audit, FHFA Actions to Manage Enterprise Risks from Nonbank Servicers Specializing in Troubled Mortgages. The audit identified two major risks in the current environment:

  • Using short-term financing to buy servicing rights for troubled mortgage loans that may only begin to pay out after long-term work to resolve their difficulties. This practice can jeopardize the companies’ operations and also the Enterprises’ timely payment guarantees and reputation for loans they back; and
  • Assuming responsibilities for servicing large volumes of mortgage loans that may be beyond what their infrastructures can handle. For example, of the 30 largest mortgage servicers, those that were not banks held a 17% share of the mortgage servicing market at the end of 2013, up from 9% at the end of 2012, and 6% at the end of 2011. This rise in nonbank special servicers has been accompanied by consumer complaints, lawsuits, and other regulatory actions as the servicers’ workload outstrips their processing capacity. (1-2)

The audit notes that “nonbank special servicers do not have a prudential safety and soundness regulator at the federal level for their mortgage servicing operations.” (6)

I think the important story here is more about consumer protection than it is about safety and soundness regulation. That is not to say that the Inspector General’s audit ignored consumer protection. Indeed, it it does spend a significant amount of time addressing that topic, noting that other federal regulators such as the CFPB have also zeroed in on the impact that non-bank servicers have on consumers.

But the safety and soundness risks may a bit overblown. A significant number of consumers, on the other hand, continue to be treated poorly, poorly, poorly by servicers.

Mortgage Market Trending in the Right Direction, but . . .

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The Office of the Comptroller of the Currency (OCC) released its OCC Mortgage Metrics Report, First Quarter 2014. the report is a “Disclosure of National Bank and Federal Savings Association Mortgage Loan Data,” and it “presents data on first-lien residential mortgages serviced by seven national banks and a federal savings association with the largest mortgage-servicing portfolios. The data represent 48 percent of all first-lien residential mortgages outstanding in the country and focus on credit performance, loss mitigation efforts, and foreclosures.” (8, footnote omitted) As a result, this data set is not representative of all mortgages, but it does cover nearly half the market.

The report found that

93.1 percent of mortgages serviced by the reporting servicers were current and performing, compared with 91.8 percent at the end of the previous quarter and 90.2 percent a year earlier. The percentage of mortgages that were 30 to 59 days past due decreased 20.9 percent from the previous quarter to 2.1 percent of the portfolio, a 19.8 percent decrease from a year earlier and the lowest since the OCC began reporting mortgage performance data in the first quarter of 2008. The percentage of mortgages included in this report that were seriously delinquent—60 or more days past due or held by bankrupt borrowers whose payments were 30 or more days past due — decreased to 3.1 percent of the portfolio compared with 3.5 percent at the end of the previous quarter and 4.0 percent a year earlier. The percentage of mortgages that were seriously delinquent has decreased 22.4 percent from a year earlier and is at its lowest level since the end of June 2008.

At the end of the first quarter of 2014, the number of mortgages in the process of foreclosure fell to 432,832, a decrease of 52.3 percent from a year earlier. The percentage of mortgages that were in the process of foreclosure at the end of the first quarter of 2014 was 1.8 percent, the lowest level since September 2008. During the quarter, servicers initiated 90,852 new foreclosures — a decrease of 49.1 percent from a year earlier. Factors contributing to the decline include improved economic conditions, aggressive foreclosure prevention assistance, and the transfer of loans to servicers outside the reporting banks and thrift. The number of completed foreclosures decreased to 56,185, a decrease of 7.5 percent from the previous quarter and 33.9 percent from a year earlier. (4)

These trends are all very good of course, but it is worth remembering how far we have to go to get back to historical averages, particularly for prime mortgages.  Pre-Financial Crisis prime mortgages typically have done much better than these numbers, with delinquency rates in the very low single digits.

The Second Frannie Bailout: Who Could’ve Known?

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There is a good chance that five or so years from now, Fannie and Freddie will be in the midst of another bailout. This next crisis will be directly caused by the Executive and Legislative branches of the federal government. But members of those branches will say, “Nobody could have known that this crisis was going to happen, nobody is at fault.” That won’t be true, but nobody will be punished in any case. That’s because the crisis will result from inaction, that most fearsome of government flaws.

Who is the Cassandra, warning us of this impending crisis? None other than Donald Layton, the CEO of Freddie. You may think that he is speaking merely from self-interest and you would probably be right. But his self-interest happens to align with the truth in this matter.

In a letter to FHFA Director Watt, Layton writes:

the ability of Freddie Mac to continue to support the mortgage markets and the U.S. economy duling an unprecedentedly lengthy transition period should be one of the most important objectives of a housing finance reform proposal, such as the Johnson-Crapo Bill. The existing Bill draft does not focus on this issue and so, in my personal but experienced opinion, leaves the risk of a failure in Freddie Mac’ss Core Policy Function unacceptably high. With certain specific changes, none of which alter the fundamental nature of the future state envisioned or even the key aspects of the transition, l believe this risk can be reduced, although it would still remain high. (7)

Layton highlights the extraordinary complexity of Freddie’s activities in an appendix to the letter. The highlights include the fact that Freddie Mac guarantees  “about  17% of all U.S. mortgage debt outstanding;” 1,400 Servicers and 2,000 Sellers work with Freddie; and Freddie manages 44,600 REO properties. (8)

Layton states that “It goes without saying that Freddie Mac cannot deliver upon its Core Policy Function, its support of the transition to a future state, or its support of Conservatorship initiatives without experienced and knowledgeable people in place at the executive level, at the Subject matter expert level and at the “been-here-a-long-time-to-know-how-everything-works level.” (3) He believes that departures are likely to cripple the company as experienced staff move on to other, more stable opportunities, leaving behind the quagmire that life in a GSE has become.

The Executive and Legislative branches are not really moving toward some kind of resolution of the Fannie and Freddie conservatorships, although we are now five years past the initial crisis. There is a good chance that the federal government will not move us to the next phase of housing finance in the next couple of years. Operations at the two GSEs will thus continue to suffer and will likely build up to a new crisis. And it will be a totally predictable crisis.

I am the kind of person who likes to say, “I told you so.” But the stakes here are so humungous and so important for the health of the economy, that I could take no pleasure in saying I told you in 2014 that our entire housing finance edifice was going to crumble a second time in a decade. But it will, if nothing is done to prevent it today.

CFPB Highlights: Leviathan Heeled

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The CFPB issued its Winter 2013 Supervisory Highlights.  Here are some mortgage highlights from the Highlights:

  • CFPB examiners found that two servicers had engaged in unfair practices in connection with servicing transfers. Specifically, these servicers failed to honor existing permanent or trial loan modifications after a servicing transfer. . . . These servicers also engaged in deception in connection with this practice by communicating to borrowers that they should have made the payments required by the original note, instead of acknowledging that the borrowers were to make reduced payments set by their trial modification agreements with the prior servicer. (5-6)
  • The Home Mortgage Disclosure Act (HMDA) is intended to provide the public with loan data that can be used: (i) to help determine whether financial institutions are serving the housing needs of their communities, (ii) to assist public officials in distributing public-sector investment to help attract private investment to areas where it is needed, and (iii) to assist in identifying possible discriminatory lending patterns and enforcing antidiscrimination statutes, such as the Equal Credit Opportunity Act (ECOA). The CFPB considers accurate HMDA data and effective HMDA compliance management systems to be of great importance.  . . . However, several HMDA reviews at financial institutions found error rates over the resubmission thresholds and Supervision directed the financial institutions to resubmit their HMDA data and improve their HMDA compliance systems.In October, the CFPB entered into Consent Orders with two lenders to address violations of HMDA. One entity, Mortgage Master, Inc., is a nonbank headquartered in Walpole, Massachusetts. The other entity, Washington Federal, is a bank headquartered in Seattle, Washington. (10-11, footnote omitted)

I’d have to say that the CFPB enforcement actions described in the Highlights are relatively small potatoes. One can read that in a couple of ways:

  • The industry is taking consumer financial protection far more seriously than it had before the CFPB was created; or
  • the CFPB is looking in the wrong place for regulatory noncompliance in the industry.

I think that the evidence bears out the former explanation. But I think that these highlights also demonstrate that the CFPB is not behaving like some out of control Leviathan, destroying all of the financial institutions in its grasp. Rather, it is taking very discrete actions based on documented misbehavior. Seems like a reasonable approach.

 

National Mortgage Settlement: Not Too Compliant

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The Summary of Compliance: A Report from the Monitor of the National Mortgage Settlement
documents just how hard it is for the big five mortgage servicers (ResCap parties (formerly Ally/GMAC), Bank of America, Citi, JPMorgan Chase and Wells Fargo) to comply with a settlement that they themselves had agreed to.
The report tracks, among other things, complaints by professionals who work for borrowers.  The top ten are
  1. Bank failed to offer loan modification/loss mitigation opportunity.
  2. Bank failed to provide single point of contact.
  3. Bank failed to make a determination on the borrower’s loan modification no later than 30 days after receiving the complete application.
  4. Bank foreclosed while a loan modification/loss mitigation was pending.
  5. Single point of contact failed to carry out responsibilities of working with borrower on loan modification/loss mitigation activities.
  6. Bank failed to notify borrower of any known deficiency in initial submission of information no later than 5 days of receipt.
  7. Bank failed to communicate with borrower’s authorized representatives.
  8. Bank failed to keep the same single point of contact assigned until all the borrower’s needs were met.
  9. Bank failed to provide one or more direct means of communication with the single point of contact.
  10. Bank failed to acknowledge receipt of first lien loan modification application within 3 business days. (8)

I assume that the servicers are not willfully flouting the settlement because of the negative publicity they would receive for doing so as well as the millions of dollars of fines that they could thereby accrue. So these complaints must reflect some kind of systemic incompetence.  Servicers must either continue to be dramatically under-resourced to handle their work or they are bloated bureaucracies that cannot consistently disseminate key information internally or externally. Taking just the most extreme example, it is shocking (if true) that in 2013 banks are still foreclosing while loan modifications are pending with homeowners.

The Monitor, Joseph A. Smith, Jr., concludes, “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. There continue to be issues with the loan modification process, single point of contact, and customer records.” (9) Amen to that.

Unhampered and HAMPered Mortgage Modifications

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The National Consumer Law Center has issued a thorough report, At a Crossroads:  Lessons from the Home Affordable Modification Program  (HAMP), which also provides some guidance for the way forward after we get past the foreclosure crisis.  The authors summarize their findings as follows:

The government’s Home Affordable Modification Program (HAMP) is our starting point. HAMP has reached more homeowners, and successfully modified more home loans, than any program in history. Created by the federal government in early 2009 as a temporary program in response to the foreclosure crisis, HAMP provided additional financial incentives to servicers and investors to modify mortgages at risk of ending in foreclosure. The result has been affordable, sustainable loan modifications that keep borrowers in their homes and maximize returns to investors. But HAMP fell short of its goals, which were inadequate to the scope of the crisis. HAMP has been justly criticized for its lack of transparency and its failure to provide for effective enforcement. (3)

Not pulling punches, the report squarely places responsibility for its failure on “one root cause: massive servicer noncompliance. Almost every official evaluation of HAMP has noted widespread servicer noncompliance and the concurrent failure of the U.S. Department of the Treasury (Treasury) to engage in meaningful enforcement.” (4)  Given that millions more foreclosures are on the horizon, this failure must be rooted out.

The report identifies five principles for effective loan modification standards:

  1. Loan modification evaluations should be standardized, universally applicable to all loans and servicers, and mandatory for all loans before the foreclosure process can go forward.
  2. Loan modification terms must be affordable, fair, and sustainable.
  3. Hardship must be defined to reflect the range of challenges homeowners face.
  4. Transparency and accountability throughout the loan modification process are essential.
  5. Homeowners must be protected from servicers’ noncompliance. Good rules on paper are not enough. (4)

I am intrigued by some of the particular proposals, although I am not sure how they actually work in practice.  For instance, the report states that “Provisions Must Be Made for Homeowners with Junior Liens and Others for Whom a Thirty-One Percent Monthly Mortgage Payment Is Not Affordable.” (58) At what point must we say that a particular situation is untenable?  The report also proposes that “A Servicer’s Violation of Servicing Standards Should Constitute a Defense to a Foreclosure.” (63) While this would no doubt be great for current homeowners, it would also be a radical role change for the foreclosure process.  If this idea gets any traction, it will be interesting to see the industry critique.