For a long time, many reasons have been said as to why people are losing their homes in this economic downturn. But, this week, we have heard at some length in Congressional testimony that borrowers that do seek to stay in the home typically fall into one of three categories. First is that some homeowners are in a loan modification program, but find the foreclosure is moving apace despite the bank saying otherwise. Second is that homeowners believe that they are not in arrears and that the bank has been charging unwarranted and excessive fees. Third is that some homeowners filed for a Chapter 13 bankruptcy yet the bank is still improperly trying to take their house.
I had to wonder why the banks had been moving too quickly to foreclosure for homeowners rather than to seek loan modification to save homeowners from losing their home. From watching the Congressional testimonies with the bank representatives as well as the acting head of the Office of Comptroller of Currency (OCC) John Walsh, we now learn that there was no checks and balances for the banks and no accountability from the banks as well as federal regulators. In other words, no one was minding the store.
On Tuesday at the Senate Banking Committee hearing, Barbara Desoer President of home loan division of Bank of America, said that no homes were properly seized. Ms. Desoer said, “Thus far we have confirmed the basis for our foreclosure decisions has been accurate....” Then Ms. Desoer to say, “At the same time, however, we have not found a perfect process.”
On the other hand, David Lowman, chief executive of JPMorgan Chase & Co.’s home loan division admitted to mistakes in the bank, however, foreclosure is the last resort. Mr. Lowman said, “Our process was not what it should have been; quite simply, it did not live up to our standards...” Also, Mr Lowman said that didn't find any errors in its foreclosure process after completing a review. Click here to read more.
On Thursday, we turn to a hearing held by the House Financial Committee. From that hearing, more shoes had dropped that showed a very broken system in the housing crisis. In GMAC/Ally Financial CEO Thomas Morano’s testimony, Mr. Morano admitted that were flows in their foreclosure process. Mr. Morano said, “There were affidavits signed outside the immediate physical presence of a notary and without direct personal knowledge of the information in the affidavit…” “These flaws are entirely unacceptable to me.” Click here to read more on Mr. Morano's testimony.
However, R.K. Arnold, CEO of MERS Corp, the electronic mortgage registry system company that is in the midst of the foreclosure problems in this country and used so-called robo-signers, those who allegedly push forward foreclosure documentation without proper review, throws the mortgage servicers under the bus. In Mr. Arnold’s testimony, he stated MERS only begins a foreclosure when instructed by the bank servicer and does not receive financial compensation when it does so. In the testimony Harold Lewis, managing director of CitiMortgage, Mr. Lewis found problems in the foreclosure affidavits. Mr. Lewis is reviewing about 14,000 foreclosure affidavits, including 4,000 that may have been signed outside the presence of a notary. Interesting, CitiMortgage admits to foreclosure problems yet Bank of America and JP Morgan Chase stated no errors in their foreclosure process in their testimonies to the Senate Banking Committee on Tuesday.
And the Congressional hearings gets better. We now know that the departments in the government that were supposed to be responsible for holding the banks responsible weren’t minding the store.
In the testimony of Treasury Homeowner Preservation Office head Phyllis Caldwell hasn’t yet punished nor fined the banks any significant way For Failing To Comply With Mortgage Mod Program, even though it is outline in the guidelines of the Making Home Affordable Program to the banks in last year. Ms. Caldwell said to Rep. Maxine Waters, chair of the subcommittee on Housing and Community Opportunity "To date we have not gone back to take back incentives that have already been paid, but we have pursued many of the non-monetary remedies, including further actions and evaluations, and re-evaluations.”" Ms. Caldwell’s testimony didn’t go too well with Rep. Waters after Waters repeatedly asked her if she had "levied any penalties or sanctions." Office of Comptroller of Currency head’s testimony made this whole housing mess worse.
Acting Comptroller of the Currency John Walsh said that he is launching investigation into alleged documentation problems at Mortgage Electronic Registration System (MERS). Walsh said "[W]e are taking aggressive actions to hold national banks accountable, and to get these problems fixed.” Sounds great? Well, what Mr. Walsh left out is that Congressional Oversight Panel, an independent panel developed by Congress, called on the Treasury Department to investigate documentation problems in the mortgage industry. According to Housingwire, if this documentation problem has spread to the securitization process, banks may not know which mortgages they own according to the Congressional Oversight Panel.
Mr. Walsh’s testimony gets worse. Rep. Waters grilled Walsh on whether his agency had fined or imposed sanctions on any banks. Here an excerpt of the exchange:
Waters: Has OCC taken any enforcement action?
Walsh: We have certainly issued supervisory requirements on matters requiring….
Waters: Have you levied any fines?
Walsh: I do not believe that we have.
Waters: Have you issued any .. orders?
Walsh: I don’t believe there have been any public actions.
Waters: Have you threatened to revoke any charters?
Walsh: No.
Waters: Do you think the servicers really believe you mean business if they don’t fear consequences?
Walsh: I think the consequences are clear and ….
Waters: But you haven’t done that. You haven’t done any of that. Why should they take you seriously?
Basically, representatives of Bank of America and JP Morgan Chase were in complete denial on their failure to help homeowners to stay in their homes. Instead, Ms. Desoer said that decisions on loan modifications are made by the investor of the home and not from the bank servicer. And what was an eye opener from Ms. Desoer’s testimony is that Ms. Desoer said that 23% of mortgage loan are owned by Bank of America whereas 77% of mortgage loans are owned by investors and 66% of those loans are owned by Fannie Mae and Freddie Mac. Real scary. Read more of the testimonies of Ms. Desoer and Mr. Lowman and other testimonies of other witnesses on the Senate Banking Committee website.
As you can see that there is a blame game within the testimonies of the banks and the watchdogs that are supposed to hold banks accountable in the housing mess. MERS CEO says bank servicers have the say in a foreclosure process of a home. Yet, banks are claiming that the investors are the decision makers in the loan modification requests and foreclosure process. And we have the government that supposed to be the watchdogs to the banks and protectors of rights of the homeowners that has sat by the sidelines and did nothing.
This entire housing mess doesn't boil down to who did what and how and why. It all boils down to does the bank actually hold the note to all homeowners. We just learned from Bank of America representative's testimony that Bank of America only owns 23% of mortgage loans and 77% of mortgage loans are owned by investors. So, who really controls Bank of America? Not Bank of America but the investors. Back to the note. In the pooling and servicing agreement on a mortgage loan, the agreement governs who does what. It requires the note (the borrower IOU) to be endorsed (like signed by one party over to the next), showing the full chain of title. The chain of title looks like this:
A (originator) => B (sponsor) => C (depositor) => D (trust).
Now, if that chain is broken, that would mean a complete disaster to housing and the purchasing of a home as a whole. That would mean homeowners whose homes were foreclosed, homeowners who are delinquent of their payments, homeowners that are current on their mortgage payments, and homeowners are about to pay their entire house off in full may not know if their bank is the holder of their note. From this week's Senate and Congressional hearings and testimonies, there is certainly more More Evidence That many Mortgage Loans Were Not Properly Conveyed to mortgage Securitization Trusts. How many loans that weren't processed properly? We don't know. According to the Washington Post this week, lobbyists from financial services industry are on Capitol Hill to press lawmakers to protect its ability to package mortgages as securities and resell them around the world. Washington Post reported that companies "are flying top executives to Washington for one-on-one meetings with lawmakers...and they are blanketing Congress with white papers, memos and other documents that lay out their arguments."
With the OCC, Federal Reserve, Department of Justice, FDIC, and all 50 state Attorney Generals investigating the housing crisis, the question in people's minds will be whether the banks will be held accountable for their mistakes or will the banks get a free pass for their mistakes.
Finally, from the bank testimonies, there is certainly a mortgage servicing business model that needs a serious and extreme makeover. Last week, Sarah Raskin, a member of the Federal Reserve Board of Governors spoke in Boston at the Consumer Rights Litigation Conference hosted by the National Consumer Law Center said that mortgage servicing business model needs reworking. Ms. Raskin added that "because a servicer's interests are indirectly connected to the performance of a loan, they [bank servicers] maximize fees and minimize expenses while performing the bare minimum of tasks set by the investor." Ms. Raskin went on to say that "in the case, for instance, of a homeowner struggling to make payments, a foreclosure almost always costs the investor money, but may actually earn money for the servicer in the form of fees. Proactive measures to avoid foreclosure and minimize cost to the investor, on the other hand, may be good for the homeowner, but involve costs that could very well lead to a net loss to the servicer."
The bottom line is that the banks need to get out of the foreclosure business and more into the loan modification business. But, that is not going to happen until the entire bank servicing business model is fixed. We know that there will be a big price to pay for the banks, yet we just don't know how much. It will be interesting the outcome of all of these investigations as the homeowners, investors, and the world will be watching. What the banks should be really worried about is not the investigations, but the homeowners and investors teaming up to take down the banks since both investors and homeowners are victims of the blame game by the banks.
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