Action Gamessys: bank foreclosure

"Any statements or actions by the OCC at this point are on the agency's own behalf and not in conjunction with the 50-state attorneys general," Iowa Attorney General Tom Miller said in a statement. "Regardless of any federal action, we intend to fully pursue all state claims and remedies."

Spokesmen for the OCC didn't respond to a request for comment e-mailed after regular business hours.

State and federal officials are trying to reach a global settlement that will deter future abuses in the way mortgage servicers modify delinquent home loans and foreclose on homeowners, as well as levy penalties as a measure of restitution and force lenders to restructure distressed mortgages. The OCC's efforts subvert the possibility of a unified settlement, officials said.

In December, Federal Reserve Governor Daniel K. Tarullo said the federal review had found "significant weaknesses in risk-management, quality control, audit, and compliance practices as underlying factors contributing to the problems associated with mortgage servicing and foreclosure documentation."

"We have also found shortcomings in staff training, coordination among loan modification and foreclosure staff, and management and oversight of third-party service providers, including legal services," he said.

In the wake of the worst housing crisis in generations, consumer advocates, housing analysts and bank regulators have heavily criticized the industry's performance.

In addressing the recent controversies of improper foreclosures during a speech last November, Fed governor Sarah Bloom Raskin said procedural flaws like robo-signing and other efforts that cut corners are "part of a deeper, systemic problem." She added that she was "gravely concerned."

"The complex challenges faced by the loan servicing industry right now are emblematic of the problems that emerge in any industry when incentives are fundamentally misaligned, and when the race for short-term profit overwhelms sustainable, long-term goals and practices," Raskin said. "I believe that serious and sustained reform is needed to address the larger problems in mortgage servicing."

Tarullo said the "problems are sufficiently widespread that they suggest structural problems in the mortgage servicing industry."

"The servicing industry overall has not been up to the challenge of handling the large volumes of distressed mortgages," he said in December. "It is clear that the industry will need to make substantial investments to improve its functioning in these areas and supervisors must ensure that these improvements occur."

But as of last week, nothing had changed, Raskin said in another speech.

"These problems existed before November and as far as I can tell they remain unaddressed," Raskin said. "How do I know this? Late last year, the federal banking agencies began a targeted review of loan servicing practices at large financial institutions that had significant market concentrations in mortgage servicing. The preliminary results from this review indicate that widespread weaknesses exist in the servicing industry."

"These deficiencies pose significant risk to mortgage servicing and foreclosure processes, impair the functioning of mortgage markets, and diminish overall accountability to homeowners," she added. "I'm sure this has been said, but I'll say it again because I have seen little to no evidence of improvement in the operational performance of servicers since the onset of the crisis in 2007."

Bank regulators will address the issue on Thursday during a Senate hearing.

On Wednesday, Federal Housing Administration Commissioner David Stevens said that a settlement would come in the next month. Options include penalties against the nation's largest banks, more mortgage modifications for borrowers, and the reduction of homeowners' mortgage principal, he said.

Stevens also touched on how regulators aren't on the same page.

"There's two ways we can go about coming to a conclusion here," Stevens said. "We can come up with one set of solutions, assuming the general findings are the same, or we can go individually. That process is being worked through right now."

The FHA chief added that the agencies would have to work together "to make this less disruptive in the market," an acknowledgement that a massive principal write-down scheme would likely impair the nation's largest financial institutions.

The OCC's actions in trying to derail a more substantial settlement raises questions over the Obama administration's delay in nominating the agency's next leader.

Its last chief, John C. Dugan, stepped down in August after his five-year term ended, and joined Covington & Burling LLP, where he leads the firm's financial institutions group. Dugan "advises clients on a range of legal matters affected by significantly increased regulatory requirements resulting from the financial crisis," according to the firm's Web site. One of his colleagues is Edward Yingling, who last year stepped down as president and chief executive officer of the American Bankers Association, the industry's largest trade group.

Consumer advocates pushed for the White House to nominate an outsider who was less connected to the OCC's prior failures. The agency came under withering criticism for its lax oversight of the industry in a report published by the bipartisan, Congressionally-appointed Financial Crisis Inquiry Commission.

Treasury Secretary Timothy Geithner picked Dugan's former chief of staff at the OCC, John Walsh, as Dugan's interim replacement. Obama has not yet named his successor. The nomination requires Senate approval.

But Democrats lost six seats in the Senate in last fall's election. The administration now faces an uphill battle to get a tough regulator in the role.

*************************

Shahien Nasiripour is a business reporter for The Huffington Post. You can send him an e-mail; bookmark his page; subscribe to his RSS feed; follow him on Twitter; friend him on Facebook; become a fan; and/or get e-mail alerts when he reports the latest news. He can be reached at 646-274-2455.

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At the time of the now famous Ibanez decision, in which the Massachusetts Supreme Judicial Court dealt the securitization industry a not-all-that-surprinsing loss by saying that lenders and servicers had to be able to produce reasonable evidence that the mortgage had indeed been transferred to the party that was trying to seize the house. The court wrote:

When a plaintiff files a complaint asking for a declaration of clear title after a mortgage foreclosure, a judge is entitled to ask for proof that the foreclosing entity was the mortgage holder at the time of the notice of sale or foreclosure…. A plaintiff that cannot make this modest showing cannot make this modest showing cannot justly proclaim that it was unfairly denied a declaration of clear title.

Also note this section of the concurring opinion by Judge Cordy:

Foreclosure is a powerful act with significant consequences, and Massachusetts law has always required that it proceed strictly in accord with the statutes that govern it….The plaintiff banks, who brought these cases to clear the titles that they acquired at their own foreclosure sales, have simply failed to prove that the underlying assignments of the mortgages that they allege (and would have) entitled them to foreclose ever existed in any legally cognizable form before they exercised the power of sale that accompanies those assignments.

We were reminded of an outstanding mystery in the Ibanez case by a story tonight by Abigail Field on the role of carelessness by lawyers in the mortgage mess. She mentions a stunning aspect of the Ibanez case, one that quite a few observers, including yours truly, discussed privately at the time: that neither of the banks involved in the case produced a decent set of transaction documents (US Bank didn’t even provide a copy of the pooling and servicing agreement).

It is hard to convey how surprising this revelation is. If you have participated in any kind of corporate transaction, even at the small business level, your attorney as a matter of course will keep a signed copy of the agreement and any important related documents. The servicers and trustees would know that full well. So why did no one call issuer’s counsel and get the paperwork?

Field puzzles through this lapse and comes up with an incomplete list of possibilities:

So, the issue of partial deal documents that came to light in Ibanez and continues to crop up elsewhere means one of three things:

1. Securitization deals were so carelessly done that, despite all the proper documents being created, closing sets don’t exist.

2. Securitization deals were so carelessly done that not all the proper documents were created (such as lists of the mortgages involved) and so closing sets don’t exist.

3. All the documents and closing sets are fine, and the big banks have grown so incompetent they can’t give their foreclosure attorneys deal documents that they do have or could get from their securitization counsel.

I have trouble with her theories 1 and 2. The firms that did securitizations were white shoe firms, some of them of the cusp of top tier, the others just a wee notch below. And this was a bread and butter business. The donkey work of making sure all the documentation is in order is junior level time, which is marked up fully and thus nicely profitable. There would be no reason for the law firm to scrimp on it, and no reason for the client to want the law firm to cut corners.

MBS Guy has an opinion much more in keeping with mine:

I am even more convinced that the failure of the banks’ attorneys to track down the actual legal documents was not “carelessness”. I find it too hard to believe that the attorneys were this incompetent on an appeal of a major issue to the state’s supreme court. They had plenty of time (over a year).

Every deal I ever worked on had a full set of closing documents prepared in a binder. The issuer’s counsel law firm typically sent all of the documents to us via CD. We had stacks of them.

I suspect the foreclosing attorneys requested the documents and the requests were rejected by clever attorneys for the issuers who saw the potential liability and didn’t want to create a clear paper trail back to them.

If the low level foreclosing attorney looks incompetent in assembling his case, that’s one thing. If a big Wall Street law firm made a major mistake about the legal basis for selling loans without proper title in Massachusetts or any other state, well, that’s a whole different story.

Professor Adam Levitin has similarly pointed out that the major securitization law firms are in a sticky position, since they have legal liability on opinion letters.

But how would that operate? Those opinion letters were in an “if-then” form, “if you followed the steps you set forth, then you have a true sale.” But it now appears that much if not all of the securitzation industry opted, sometime after 2002, to change its procedures for how it handled promissory notes and liens without changing its contracts. That means, as we have pointed out repeatedly, that the parties in the origination process made very specific commitments to investors that they violated repeatedly, as a matter of business practice. Yet astonishingly they didn’t change the agreements to reflect what appears to have been a widespread adoption of new practices. Instead, they let the disparity, and the attendant liability, go unremedied.

It seems inconceivable that some of the players involved did not get counsel’s advice on this issue (I’d be stunned if Goldman didn’t; the firm is obsessed with having legal cover for its actions). But the breakdown was primarily in the custodial/trustee end of the process, which is a particularly low fee activity. So it is possible that the trustees or custodians conferred with their attorneys and did not formally bring issuer’s counsel into the loop. At the same time, these bad practices appear to have become so deeply embedded that I find it hard to believe that everyone on the sell side of these deals did not know what was happening as the new procedures became widespread.

As Field intimates, and I’ve said separately, until we see lawyers disbarred and facing charges, we can be pretty certain that we are only scratching the surface of mortgage abuses. But it is beginning to look like that day is not too far off.

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Action Gamessys

Saturday, March 5, 2011

bank foreclosure

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