Another illuminating post from Yves Smith at Naked Capitalism. Excerpt:
Let’s get one thing clear. Despite the enormous media hype presenting a struggle between banks and borrowers on the mortgage front, the reality is that the overwhelming majority of investors favor mods. And it’s easy to understand why. Loss severities (finance speak for losses as a percentage of original par amount of mortgage) are currently running at over 70%. A principal mod of 50% for viable borrowers should be an easy win-win.
Ah, but there is one party that wins, big time, from foreclosing, and it’s the servicers. Servicing a mortgage that is current is a breakeven, at best a thin profit business. Late fees and foreclosure-related fees pad a servicer’s bottom line. Moreover, if a borrower becomes delinquent, the servicer advances principal and interest to the investors. In normal times, when foreclosure volumes are low and homes can be sold readily, the servicer can recover these outlays fairly quickly. But now, with foreclosures and liquidations attenuated, the amount of these advances have become very large, and the only way for the servicer to recoup is to foreclose. Hence foreclosure isn’t an option, it’s an institutional imperative.
And we also have the fact that deep principal mods to viable borrowers would force the biggest banks to write down their second mortgage portfolios, which means again the banks are putting their interests before those of the investors.
And on the posturing piece by SIFMA released just prior to the hearings on these issues beginning tomorrow, regarding the industry argument that it is kosher to create the missing assignment of mortgage at any time, Smith says:
I’ve heard this argument before, and none of the five experts who advise New York state on trust matters (and virtually all mortgage securitizations use New York trusts) accept that point of view. New York trusts can accept assets only as stipulated in their governing agreement. The pooling and servicing agreement made very specific provisions as to how the notes (the borrower IOUs) were to be endorsed and further required that the process be completed by specific dates, typically no later than 90 days after the trust was closed, with only very limited exceptions. And the trustee, on behalf of the trust, was required to provide multiple certifications that all these steps had been taken.
Let’s put it another way: the industry position is that the underlying contract, the pooling and servicing agreement, can just be ignored if the industry screws up on a grand enough scale. Would any servicer tolerate this argument if someone, say Treasury, tried to cut their fees? Funny how the “sanctity of contract” argument is nowhere to be found when adherence to contracts might crimp industry profits.
1. Why did firms like SNR Denton’s predecessor, Thatcher Proffitt, have specific requirements in the PSAs if they didn’t have to be followed?
2. Why did the trustee certify that they had the notes and mortgages endorsed and assigned in the specified form when they appear never to have checked this information? Isn’t this a significant misrepresentation particularly since investors and rating agencies relied on these certifications?
3. While the electronic records of the PSA may indicate that a mortgage loan is part of the trust, what proof is there that another party could not also own the mortgage loan? Isn’t this exactly why there are recording requirements?
4. Were the attorneys and parties unaware that intent to sell the collateral is not sufficient if the steps to demonstrate conveyance were not followed?
5. Doesn’t the failure to have conveyed the notes as stipulated expose the trust unnecessarily to subsequent confusion and challenges in foreclosure court?
There is more clever positioning in the pretending-to-be-impartial SIFMA piece.