Register O’Brien said, “Knowing what I now know, it would be a dereliction of my duties as the keeper of the records to record these documents and any other documents that contain questionable signatures. To do so, would make me a willing participant in a continuing scheme which has corrupted the chain of title of thousands of Essex County property owners. I have decided to put a stop to this reckless behavior and hold these lenders and their agents accountable for the authenticity of what they are attempting to record in my Registry. I do not believe this to be unreasonable.”
Mistakes happen, of course. And loan servicers like to contend that if errors occur, they are rare and honestly made. But after sifting through the data produced by this investigation, Mr. White disagreed that problems are rare. “In Senate testimony, an executive from Countrywide said its error rate was 1 percent,” Mr. White recalled. “The mortgage servicer industry error rate might be 10 times higher, based on the number of cases we are looking at.”
“There are continued flaws in the process, and they are not merely technical,” Mr. White continued. “Those flaws undermine the integrity of the bankruptcy system. Many homeowners have been harmed, including where the lender has come in and said ‘we want to lift the stay and go back into foreclosure proceedings,’ even though they lacked a sufficient basis to do it.”
The investigation conducted by the OCC and the Fed included a review of just 100 foreclosure files.
Housing Wire-
When mortgage servicers signed consent orders with the Office of the Comptroller of the Currency and the Federal Reserve, these companies were required to hire outside firms to conduct “look back” evaluations of questionable foreclosure practices.
But these reviews will not be made public, according to an OCC spokesman.
To: Members of the Media
Fr: Massachusetts Register of Deeds John O’Brien and North Carolina Register of Deeds Jeff Thigpen
Re: FDIC Chair Shelia Bair concurs with O’Brien and Thigpen that damages to consumer’s “has yet to be quantified”
This story has to be told: No settlements with the Big Banks until we know the “extent of the problem” and until the amount of exposure is “quantified”.
Bloomberg News
FDIC Chairman Sheila Bair
The head of the Federal Deposit Insurance Corp. is warning that flaws may have “infected millions of foreclosures” and questioned whether other regulators’ inquiries into problems at the nation’s mortgage-servicing companies have been thorough enough.
“We do not yet really know the full extent of the problem,” FDIC Chairman Sheila Bair said Thursday in written remarks submitted to a hearing of the Senate Banking Committee. “Flawed mortgage-banking processes have potentially infected millions of foreclosures, and the damages to be assessed against these operations could be significant and take years to materialize.”
Federal and state officials launched numerous investigations last autumn after revelations that, to process foreclosures, banks used “robo-signers” who didn’t review documents prepared by their colleagues. Banking regulators’ have said their reviews of a sample of 2,800 foreclosure cases have found a small number of improper foreclosures.
Acting Comptroller of the Currency John Walsh said last month that the problems were limited in scope. They include cases that shouldn’t have gone forward under a law blocking foreclosures on military personnel, ones in which the borrower was in bankruptcy and cases in which borrowers were already on the verge of having their loans modified.
But Ms. Bair, who is departing her position in July, argued that other regulators likely missed homeowners who should have been provided loan assistance but who were improperly denied such help. The FDIC, she said, has found a “not insignificant” number of such cases. “There needs to be much more aggressive action,” she told lawmakers.
Under consent orders that 14 banks and thrifts reached with regulators in March, financial institutions are required to hire a consultant to review their foreclosures over the past two years to identify any borrowers who were harmed by foreclosure-processing problems.
Ms. Bair, however, questioned whether those reviews will truly be independent. Such consultants “may have other business with [banks] or future business they would like to do with them,” Ms. Bair said. “This is a huge issue.”
Federal Reserve Chairman Ben Bernanke, in response to questions from lawmakers at the hearing, didn’t address this criticism directly, but reiterated that regulators plan to fine banks as a result of the inquiry into foreclosure problems. He noted that the foreclosure crisis is “at some level” a problem of bank regulation, but noted it is “also a macroeconomic problem.”
Ms. Bair also raised the possibility that banks may be forced by government-controlled mortgage giants Fannie Mae and Freddie Mac to buy back more defaulted loans.
Fannie and Freddie have been pressing banks to do so, and numerous investors have filed lawsuits with similar demands. “A significant amount of this exposure has yet to be quantified,” she said in her prepared remarks.
REGISTERS O’BRIEN & THIGPEN SAY “PUT THE BRAKES ON ANY SETTLEMENT WITH THE BIG BANKS … REGISTERS OF DEEDS NEED TO BE AT THE TABLE”
Southern Essex County (MA) Register of Deeds, John O’Brien and Guilford County (NC) Register of Deeds, Jeff Thigpen, are today publicly asking Iowa’s Attorney General, Tom Miller, who has been coordinating the National Association of Attorneys General (“NAAG”) investigation into the banks’ improper mortgage dealings to stop settlement negotiations until there is a full accounting of the damage that the bank’s practices have inflicted upon the land recordation system and consumers chains of title across the nation and have again asked for the Registers of Deeds to have a seat at the negotiation table.
O’Brien and Thigpen, wrote to Miller in early April, asking that the Registers of Deeds be represented at any settlement talks. They have not heard back from Miller, and they find that very disturbing. “We represent Main Street, in contrast to Wall Street, and that constituency needs to be heard” said O’Brien.
Register O’Brien, who is leading the nationwide effort against the Mortgage Electronic Registration System (“MERS”) and its member banks said, “We need to take a long hard look at the damage that these banks have caused, not only to our economy but also to people’s chains of title. There can be no settlement for pennies on the dollar.” O’Brien points to MERS and their failure to record documents in the local registry of deeds in order to avoid paying billions of dollars in recording fees, thereby corrupting the chains of title of hundreds of thousands of homeowners across the country, as well as the alleged fraud associated with the robo-signing, as reasons for putting on the breaks. “That is why it is so important that the Registers of Deeds be brought into the room. We need to bring our knowledge of the land recordation system and consumer’s problematic chain of title issues to the table.” Common sense mandates that if a bridge collapses and there is a meeting to re-build that bridge, that the structural engineers must be invited to the table. “Why the Registers of Deeds have not been involved in these negotiations is puzzling” according to O’Brien and Thigpen
Thigpen’s office sent Attorney General Miller and Federal Regulators 4,500 potentially fraudulent and/or forged documents recorded in his Registry by Doc X. Doc X is owned by Lender Processing Services, which was acting on behalf of Wells Fargo, Bank of America, and MERS, among others. “I am but one county, however I feel confident based upon my research that this is a disaster of epic proportions, for homeowner’s chains of title in the United States. As a result, it needs to be clearly established that citizens can no longer be harmed by the reckless disregard that the major banks and MERS have had for the American consumer and the integrity of public recording offices. People need to be assured that their ownership rights are secure and protected, that people who sign legal documents are who they say they are, and that there is transparency and fair dealing by all. I don’t think we are there yet.” stated Thigpen.
In addition, O’Brien and Thigpen are concerned about the reports that Miller has received hundreds of thousands of dollars in campaign contributions from banks, finance, insurance, and real estate contributors since he announced that he was leading the NAAG investigation. O’Brien and Thigpen said, “Without questioning Millers integrity, Miller should consider either returning the contributions or voluntarily stepping aside so that there would not be even the slightest appearance of a conflict of interest.”
These Registers want to know “Why is there such a rush to have a settlement? “How can the consumers be fully protected when the extent of the damages are still unknown?”
The head of the Federal Deposit Insurance Corp. is warning that flaws may have “infected millions of foreclosures” and questioned whether other regulators’ inquiries into problems at the nation’s mortgage-servicing companies have been thorough enough.
“We do not yet really know the full extent of the problem,” FDIC Chairman Sheila Bair said Thursday in written remarks submitted to a hearing of the Senate Banking Committee. “Flawed mortgage-banking processes have potentially infected millions of foreclosures, and the damages to be assessed against these operations could be significant and take years to materialize.”
The Federal Deposit Insurance Corporation (FDIC) today announced Chairman Sheila C. Bair’s official departure will be effective July 8th, 2011. Consistent with previous public statements, Chairman Bair has announced her intention to depart the agency following the expiration of her term as Chairman. The FDIC will hold a board meeting during the first week of July. This will be Chairman Bair’s final board meeting.
John E. Bowman, Acting Director
Office of Thrift Supervision
Sheila C. Bair, Chairman
Federal Deposit Insurance Corporation
This report presents the results of our review of the failure of Washington Mutual Bank (WaMu), Seattle, Washington; the Office of Thrift Supervision’s (OTS) supervision of the institution; and the Federal Deposit Insurance Corporation’s (FDIC) monitoring of WaMu for insurance assessment purposes. OTS was the primary federal regulator for WaMu and was statutorily responsible for conducting full-scope examinations to assess WaMu’s safety and soundness and compliance with consumer protection laws and regulations. FDIC was the deposit insurer for WaMu and was responsible for monitoring and assessing WaMu’s risk to the Deposit Insurance Fund (DIF). On September 25, 2008, FDIC facilitated the sale of WaMu to JPMorgan Chase & Co in a closed bank transaction that resulted in no loss to the DIF.
Section 38(k) of the Federal Deposit Insurance Act requires the cognizant Inspector General to conduct a material loss review (MLR) of the causes of the failure and primary federal regulatory supervision when the failure causes a loss of $25 million to the DIF or 2 percent of an institution’s total assets at the time the FDIC was appointed receiver. Because the FDIC facilitated a sale of WaMu to JPMorgan Chase & Co without incurring a material loss to the DIF, an MLR is not statutorily required. However, given WaMu’s size, the circumstances leading up to WaMu’s sale, and non-DIF losses, such as the loss of shareholder value, the Inspectors General of the Department of the Treasury and FDIC believed that an evaluation of OTS and FDIC actions could provide important information and observations as the Administration and the Congress consider regulatory reform.
Congresswoman Jaime Herrera Beutler today sent a letter to the Federal Deposit Insurance Corporation (FDIC) seeking answers regarding a troubling pattern of Clark County foreclosures resulting from the failure of the Bank of Clark County.
What has been particularly troublesome to Congresswoman Herrera Beutler is what she learned from several Bank of Clark County borrowers: they made all of their scheduled payments on time, in full. Why Rialto Capital has chosen to foreclose on borrowers who have honored their loan agreements remains unclear.
[…]
“I’m deeply concerned by what I’ve learned so far about FDIC’s deal with Rialto Capital,” said Herrera Beutler. “If borrowers who have lived up to the terms of their original loans are facing foreclosure, I want to know why. It certainly seems like the FDIC has a responsibility and moral obligation to ensure entities like Rialto act in a decent and ethical manner.
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“The FDIC has not been completely forthright about its decision-making process, even after multiple requests for information by my office. While Southwest Washington families and businesses suffer the consequences of its decisions, the FDIC may have made it possible for real estate investor Rialto to end up with large tracts of Clark County land at a bargain price by breaking contracts. That doesn’t seem right.
“I am going to remain vigilant with FDIC and with Rialto until we get answers.”
The text of Congresswoman Herrera Beutler’s letter to the FDIC is below, and attached:
Chairman Sheila C. Bair
Federal Deposit Insurance Corporation 3501 N. Fairfax Dr. Arlington, VA 22226
Chairman Bair,
In recent weeks I have been contacted by a number of my constituents with concerns about the closing of the Bank of Clark County in Vancouver, Washington. More specifically, the concern is with the FDIC’s decision to sell many of the bank’s outstanding loans to Rialto Capital Management LLC and the management of those loans by Rialto and the FDIC.
Since the closing of the Bank of Clark County a large number of construction properties have been forced into foreclosure. Many of these foreclosures are due to Rialto Capital’s refusal to work with builders in honoring the existing loan agreement, even when the builders are current in their loan payments. Instead, Rialto moves to simply collect on collateral.
In order to understand the FDIC’s role in these procedures I respectfully request that you answer the following questions:
•To my knowledge when the FDIC sells a loan package it retains a certain percentage of the package in order to ensure a return on investment. What oversight does the FDIC perform on Rialto Capitol and its management of the loans?
•Numerous builders with whom my office has spoken had not missed a single payment on their loans when Rialto Capital took over. What consideration, if any, is given to the lendee’s payment record when deciding to terminate loans?
•As a holder of a percentage of the loan package, does the FDIC require Rialto to honor the conditions of previous contracts made and carried out in good faith? What steps has the FDIC taken to ensure that any ensuing foreclosures are not directly attributable to changes in contract conditions made without the consent of the customer by Rialto?
•How many construction loans did Rialto Capitol take over from the Bank of Clark County? Of those contracts how many have Rialto and the FDIC continued to honor?
•Rialto Capitol calls itself a real estate investment management company. It is my understanding that typically other banks buy these loans. Why is the FDIC selling bank loans to non-banks?
I realize the FDIC closed the Bank of Clark County due to poor performance and bad loan approvals played a role in that. However, many of the people Rialto and the FDIC have decided to foreclose on made sound loan decisions, made their payments on time, and through no fault of their own still lost their loans. In some cases those loans were worth millions of dollars, and in many cases the loss of loans cost people their livelihood.
I do not know what Rialto ultimately intends to do with the large tracts of land it would hold as a result of these foreclosures, but it is clear the company purchased these loans with no intention of working with the citizens of Southwest Washington. Surely the FDIC did not close the Bank of Clark County in order to give real estate investors the opportunity to obtain land for pennies on the dollar by breaking contracts signed and honored by local builders.
The FDIC has a responsibility and moral obligation to ensure the companies that obtain loans as the result of a bank closure act in an ethical and decent manner toward their customers. I strongly urge you to take a hand in this matter and review with great diligence the actions of Rialto Capital.
I appreciate your attention to this matter and look forward to a response. Please contact Chad Ramey in my Washington, D.C. office at (202) 225-3536 for further detail or clarifications.
“Today’s action is another significant step toward leveling the competitive playing field and enforcing market discipline on all financial institutions, no matter their size,” Sheila C. Bair, the F.D.I.C. chairwoman, said in a statement. Under the Dodd-Frank regulatory overhaul, “the shareholders and creditors will bear the cost of any failure, not taxpayers.”
The Honorable Timothy Geithner Secretary of the Treasury Department of the Treasury 1500 Pennsylvania Avenue, N.W. Washington, D.C.
The Honorable Edward DeMarco Director (Acting) Federal Housing Finance Agency (FHFA) 1700 G Street, N.W. 4th Floor Washington, DC 20552
The Honorable Sheila Bair Chairman Federal Deposit Insurance Corporation 550 17th Street N.W. Washington D.C., DC 20006
The Honorable Ben S. Bernanke Chairman Board of Governors of the Federal Reserve System 20th Street and Constitution Avenue N.W. Washington, DC
The Honorable Mary L. Schapiro Chairman Securities and Exchange Commission 100 F Street, N.E. Washington, DC 20549
The Honorable John Walsh Comptroller of the Currency (Acting) Administrator of National Banks 250 E Street, S.W. Washington, DC 20219
Dear Secretary Geithner, Chairman Bair, Chairman Shapiro, Acting Director DeMarco, Chairman Bernanke and Controller Walsh:
We are writing to urge that any exception to the credit risk retention requirements of section 941 of the Dodd-Frank Act include rigorous requirements for servicing securitized residential mortgages.
The Act requires that securitizers retain five percent of the credit risk on mortgage-backed securities. The requirement is the subject of a study by Christopher M. James published by the Federal Reserve Bank of San Francisco dated December 13, 2010, and entitled “Mortgage-Backed Securities: How Important Is ‘Skin in the Game’?”, which finds that the requirement will have the intended effect of reducing “moral hazard” and significantly reducing the loss ratios on mortgage-backed securities.
The Act provides for an exception, however, for “qualified residential mortgages” and for other “exemptions, exceptions, and adjustments” to the risk-retention requirement. We strongly urge that you use great care in allowing any exception to the risk retention requirement, and that you be vigilant in assuring that any exception not defeat the purpose of the requirement. Recent experience in financial regulation has been that seemingly modest, reasonable exceptions have swallowed the rules and allowed abusive practices to continue unabated. In considering any requested exception under section 941, please remember that the advocates for rule-swallowing exceptions to other financial regulation have not been entirely candid with regulators or legislators on the likely effect of those exceptions.
The rules adopted pursuant to section 941 must, of course, require rigorous underwriting standards for “qualified residential mortgages” or any other mortgages excepted from the risk retention requirement, but underwriting requirements are not enough. The rules must also address the servicing of securitized mortgages. Much of the turmoil in the housing market, which is largely responsible for the painfully slow recovery, is the result not just of poorly underwritten mortgages, but of conduct by mortgage servicers.
We direct your attention to the “Open Letter to U.S. Regulators Regarding National Loan Servicing Standards” dated December 21, 2010, and signed by 51 people with extensive knowledge of mortgage servicing (the “Rosner-Whalen letter”). We strongly urge that you consider closely the recommendations included in that letter.
The Rosner-Whalen letter makes sensible recommendations regarding the treatment of payments by homeowners, “perverse incentives” in servicer compensation, mortgage documentation, and foreclosure forbearance during mortgage modification efforts.
We especially urge that any exception require that servicers modify mortgages pursuant to established criteria to avoid foreclosure where possible. The statute governing “Farmer Mac” mortgages provides a useful example of such criteria. See 12 U.S.C. 2202a (“Restructuring Distressed Loans”). Foreclosures are catastrophic for homeowners, holders of mortgage-backed securities, the housing market, and the economy as a whole.
The conduct of servicers is largely responsible for much unnecessary hardship. A requirement that servicers modify mortgage according to established criteria to avoid foreclosure can avoid that hardship in the future. Neutral, established criteria will also avoid “tranche warfare” between classes of investors.
We also especially urge that any rule for securitized mortgages require that servicers not be affiliated with the securitizer. There are obvious potential conflicts of interest, and no apparent countervailing justification. At a recent hearing of the House Financial Services Committee, several witnesses from major servicers were unable to offer any advantage in being affiliated with securitizers, other than to offer “full service” to customers. That justification is entirely unpersuasive. Homeowners may select the bank with which they have a credit card or a checking account, but they have no say in who services their mortgage.
In fact, community banks and credit unions have been reluctant to sell the mortgages that they originate to “private-label securitizers” for fear that the mortgages will be serviced by an affiliate of a bank, and the servicer will use that relationship to “cross market” other banking services to the homeowner. Requiring that servicers be independent of banks, therefore, would advance the goal of increasing the availability of credit on reasonable terms to consumers.
The Dodd-Frank Actives provides you ample authority to reform servicing practices, and regulation of mortgage securitization will be ineffective without such reform.
We the undersigned write to you regarding the urgent need to develop national standards for originating, selling and servicing mortgage loans. The private residential mortgage securitization market is frozen as to new issuance. The housing market is suffering from a dearth of credit, which is causing a serious lack of confidence among potential homebuyers.
Widely reported servicer fraud, whether in the foreclosure process or in the systematic assessment of illegal fees against homeowners, is also a serious problem. It’s bad for investors, it’s bad for homeowners, and it’s ultimately bad for a sustainable residential mortgage securitization market and the U.S economy. Fraud is also a symptom of the disease affecting our broader financial system, namely the lack of accountability in the loan servicing industry and the resulting impairment of the value of securities sold to investors.
Remarks by FDIC Chairman Sheila C. Bair to the Urban Land Institute, Washington, DC October 13, 2010Opener
Good afternoon. Thank you for inviting me to speak. The real estate sector has played a leading role in the recession and financial turmoil we have experienced in the past few years. The downturn in residential real estate markets and the ensuing financial crisis plunged the country into deep recession.
The economy is now recovering, but progress is slow, and the effects of the recession — including high unemployment — are likely to persist for some time. Once again, the health of the real estate sector will be crucial in determining the path of the entire economy. Restoring stability and normalcy to residential and commercial real estate markets will be essential to establishing a more robust economic recovery. But we still have a lot of work to do to repair our system of mortgage finance.
What I would like to discuss with you today is the work that needs to be done — in the short term and over the long term — to restore the vitality of real estate finance and the stability of our financial system.
Outlook for Housing and the Mortgage Market
After three long and difficult years for the housing sector, we’ve begun to see positive signs — but also continue to see hurdles to overcome. Home prices have largely stabilized in most markets. The Case-Shiller 10-city home price index, which declined by some 33 percent from the height of the crisis, has risen by just over 4 percent in the past year.
Federal policy initiatives — including tax credits for new buyers, the Treasury’s Home Affordable Modification Program, and the Federal Reserve purchases of mortgage-backed bonds — have played an important role in helping to restore stability to U.S. housing markets. But these initiatives come at the price of unprecedented government intervention. Through the FHA and the GSEs, nearly 60 percent of all mortgages outstanding today have government backing. Of the nearly $2.5 trillion in loan originations since 2009, about 94 percent were guaranteed by the GSEs, the FHA or the VA. In addition, the Federal Reserve has purchased more than $1 trillion of mortgage-backed securities.
And despite this unprecedented intervention, many challenges exist. Expiration of the homebuyer tax credit in April led to a second-quarter slump in new home sales and building-related retail sales that helped to slow the pace of economic growth over the summer.
Mortgage Foreclosures Trends
Meanwhile, a sustained high volume of mortgage foreclosures has been adding to the number of vacant homes and distressed sales. Some 2.4 million mortgages remained in the foreclosure process at the end of June, while another 2.7 million mortgages were at least 60 days past due. As of June, an estimated 11 million homeowners, or nearly 1 in 4 of those with mortgages, were underwater, owing more than their homes are worth. Not only are these borrowers generally unable to take advantage of today’s record low mortgage rates to refinance, but they become more likely to walk-away from their mortgages.
We also need to move away from incentives that encourage the lax underwriting that we saw prior to the crisis.
Sometimes I wonder: Have lenders really learned their lessons?
Just a few days ago, I received a flier from a mortgage lender offering 3.75% fixed rates programs up to 125% of value, and 24-hour underwriting.
And now we have the added concern that lenders may have been foreclosing on homes without proper documentation. The “robo-signing” of foreclosure documents is a serious matter for loan servicers, homeowners, and the entire industry. Upon initial review, it appears that FDIC supervised non-member state banks did not engage in this behavior and have limited exposure to loans signed by “robo-signers.”
We continue to closely monitor the situation, including working with other regulators through our backup examination capacity where the FDIC is not the primary federal regulator. We are also requesting certifications from loss share participants in our failed bank transactions that their foreclosure activity complies with all legal requirements.
The robo-signer situation underscores how wrong things went in the financial crisis and that there is still a lot of work to do. Foreclosure is a costly, unpleasant, and emotional process. It hurts communities and families alike. It should be a last resort. Loan modifications should be considered whenever possible. Foreclosure should only come after careful thought, thorough analysis, and good documentation.
Properly Aligning Incentives and the “Safe Harbor” Rule
The robo-signing issue also points to the poorly aligned incentives that have existed in the mortgage servicing business. Because the pricing of mortgage securitization deals did not adequately provide for special servicing, servicers were not funded or adequately staffed to address problems.
Not only that, servicers are often required to advance principal and interest on nonperforming loans to securitization trusts — but are quickly reimbursed for foreclosure costs. These incentives can have the effect of encouraging foreclosures, while discouraging modifications.
To address these and other problems, the FDIC recently adopted a new rule on securitizations. The new rule requires that the issue of servicer incentives be addressed in order to obtain safe-harbor status. Servicing agreements must provide servicers with the authority to act to mitigate losses in a timely manner and modify loans in order to address reasonably foreseeable defaults. The agreements must require the servicer to act for the benefit of all investors, not for any particular class of investors.
The rule also addresses a recurring problem in servicing: the obligation for servicers to continue funding payments missed by borrowers. Under most current servicing agreements, this obligation has the effect of accelerating foreclosures as servicers seek to recover these payments by selling the home. Our new rule strictly limits advances to just three payments unless there is a way to repay the servicer that does not rely on foreclosure.
While the FDIC’s new rule will help create positive incentives for servicing, it is, by the nature of our authority, limited to banks. The Dodd-Frank financial reform law now provides a chance to improve incentives across the market, whether the securitization is issued by a bank or not. Dodd-Frank requires regulations governing the risk retained by a securitizer. Those regulations may reduce the standard 5 percent risk-retention where the loan poses a reduced risk of default.
Given the important role that quality servicing plays in mitigating the incidence of default, I believe that the new regulations should address the need for reform of the servicing process. We want the securitization market to come back, but in a sustainable manner.
Its return should be characterized by strong disclosure requirements, high-quality loans, accurate documentation, better oversight of servicers, and incentives to assure that servicers act to maximize value for all investors.
The Government’s Footprint in the Mortgage Market
Looking down the road, the big question on everyone’s mind is what to do about federal government involvement in mortgage lending. For now, federal involvement is needed to keep credit flowing on reasonable terms to the housing market as the economy and the financial system recover. But going forward, there needs to be a broader debate about the future role of government in mortgage finance and the housing sector.
In hindsight, the implicit government backing enjoyed by the mortgage GSEs, where profits were privatized and the risks were socialized, was an accident waiting to happen. The time has come to take a hard look at the full range of housing policies and programs, including the size and nature of tax breaks and other subsidies to owner-occupied and rental real estate. As a nation, we must shift our focus away from narrow, short-term political interests and toward policies that create long-term sustainable improvement in the living standards of all Americans.
Commercial Real Estate Lending
We also face significant challenges in commercial real estate. Average CRE prices are down by 30 to 40 percent or more from their peak levels of 2007, and rents continue to drop for most property types and in most geographic markets.
Credit availability has also been limited as lenders have tightened standards, issuers have virtually stopped offering commercial mortgage-backed securities, and the credit standing of many borrowers has declined. FDIC-insured institutions hold about half of the $3.5 trillion in CRE loans outstanding, which means we’ve been focused on commercial real estate for a very long time. Lenders will continue to face some tough choices when loans come up for renewal with collateral values that have declined significantly from peak levels.
The federal regulatory agencies issued guidance last Fall designed to provide more clarity to banks on how to report those cases where they had restructured problem loans. This was an important step to reduce uncertainty as to how restructuring efforts would be viewed and reported for regulatory purposes.
Some have criticized these loan workouts as a policy of “extend and pretend.” But, as on the residential side, the restructuring of commercial real estate loans around today’s cash flows and today’s low interest rates may be preferable to the alternative of foreclosure and the forced sale of a distressed property. And going forward, as is the case with residential mortgage lending, we need better risk management and stronger lending standards for bank and nonbank originators to help prevent a recurrence of problems in commercial real estate finance.
Conclusion
Obviously, these remain very challenging times for the real estate industry, and for our economy at large. Recovery of the U.S. real estate sector will take time. Problem loans will need to be worked out or written off, and credit channels will have to be re-established around a sounder set of market practices.
As this is taking place, the FDIC and other regulators will be doing our part to promptly and carefully implement the various elements of Dodd-Frank. We are committed to transparency and openness in this process, and have established an open-door policy to make it easier for the public to give input and track the rulemaking process.
I know there is a lot of concern out there right now that Washington and the business community are at cross purposes, and that financial regulatory reform could become an impediment to the economic recovery. I understand these concerns.
But I want to emphasize to you, as I said at the outset of my remarks, that I firmly believe that we share the same basic goals: to restore the vitality of real estate finance and the stability of our financial system. The American people have paid a high price for the mistakes, excesses and abuses of the past. And there is plenty of blame to go around.
I think they are looking for us, as leaders in government and business, to work together and come up with common sense approaches that will put our financial system on a sounder and steadier path for the future. I have outlined some of my thoughts on what needs to be done, and I am looking forward to hearing your thoughts as well in the Q&A session.
We have many challenges before us. But we are Americans. And that means that when the challenges are the greatest, we work together to resolve differences, find solutions and fix the problem. That knowledge, of who we are and what we’re capable of, should give all of us confidence that the future remains bright despite the challenges of the present. Thank you.
“JPMorgan CHASE is in the foreclosure business, not the modification business’.” That, according to Jerad Bausch, who until quite recently was an employee of CHASE’s mortgage servicing division working in the foreclosure department in Rancho Bernardo, California.
I was recently introduced to Jerad and he agreed to an interview. (Christmas came early this year.) His answers to my questions provided me with a window into how servicers think and operate. And some of the things he said confirmed my fears about mortgage servicers… their interests and ours are anything but aligned.
Today, Jerad Bausch is 25 years old, but with a wife and two young children, he communicates like someone ten years older. He had been selling cars for about three and a half years and was just 22 years old when he applied for a job at JPMorgan CHASE. He ended up working in the mega-bank’s mortgage servicing area… the foreclosure department, to be precise. He had absolutely no prior experience with mortgages or in real estate, but then… why would that be important?
“The car business is great in terms of bring home a good size paycheck, but to make the money you have to work all the time, 60-70 hours a week. When our second child arrived, that schedule just wasn’t going to work. I thought CHASE would be kind of a cushy office job that would offer some stability,” Jerad explained.
That didn’t exactly turn out to be the case. Eighteen months after CHASE hired Jared, with numerous investors having filed for bankruptcy protection as a result of the housing meltdown, he was laid off. The “investors” in this case are the entities that own the loans that Chase services. When an investor files bankruptcy the loan files go to CHASE’S bankruptcy department, presumably to be liquidated by the trustee in order to satisfy the claims of creditors.
The interview process included a “panel” of CHASE executives asking Jared a variety of questions primarily in two areas. They asked if he was the type of person that could handle working with people that were emotional and in foreclosure, and if his computer skills were up to snuff. They asked him nothing about real estate or mortgages, or car sales for that matter.
The training program at CHASE turned out to be almost exclusively about the critical importance of documenting the files that he would be pushing through the foreclosure process and ultimately to the REO department, where they would be put back on the market and hopefully sold. Documenting the files with everything that transpired was the single most important aspect of Jared’s job at CHASE, in fact, it was what his bonus was based on, along with the pace at which the foreclosures he processed were completed.
“A perfect foreclosure was supposed to take 120 days,” Jared explains, “and the closer you came to that benchmark, the better your numbers looked and higher your bonus would be.”
CHASE started Jared at an annual salary of $30,000, but he very quickly became a “Tier One” employee, so he earned a monthly bonus of $1,000 because he documented everything accurately and because he always processed foreclosures at as close to a “perfect” pace as possible.
“Bonuses were based on accurate and complete documentation, and on how quickly you were able to foreclosure on someone,” Jerad says. “They rate you as Tier One, Two or Three… and if you’re Tier One, which is the top tier, then you’d get a thousand dollars a month bonus. So, from $30,000 you went to $42,000. Of course, if your documentation was off, or you took too long to foreclose, you wouldn’t get the bonus.”
Day-to-day, Jerad’s job was primarily to contact paralegals at the law firms used by CHASE to file foreclosures, publish sale dates, and myriad other tasks required to effectuate a foreclosure in a given state.
“It was our responsibility to stay on top of and when necessary push the lawyers to make sure things done in a timely fashion, so that foreclosures would move along in compliance with Fannie’s guidelines,” Jerad explained. “And we documented what went on with each file so that if the investor came in to audit the files, everything would be accurate in terms of what had transpired and in what time frame. It was all about being able to show that foreclosures were being processed as efficiently as possible.”
When a homeowner applies for a loan modification, Jerad would receive an email from the modification team telling him to put a file on hold awaiting decision on modification. This wouldn’t count against his bonus, because Fannie Mae guidelines allow for modifications to be considered, but investors would see what was done as related to the modification, so everything had to be thoroughly documented.
“Seemed like more than 95% of the time, the instruction came back ‘proceed with foreclosure,’ according to Jerad. “Files would be on hold pending modification, but still accruing fees and interest. Any time a servicer does anything to a file, they’re charging people for it,” Jerad says.
I was fascinated to learn that investors do actually visit servicers and audit files to make sure things are being handled properly and homes are being foreclosed on efficiently, or modified, should that be in their best interest. As Jerad explained, “Investors know that Polling & Servicing Agreements (“PSAs”) don’t protect them, they protect servicers, so they want to come in and audit files themselves.”
“Foreclosures are a no lose proposition for a servicer,” Jerad told me during the interview. “The servicer gets paid more to service a delinquent loan, but they also get to tack on a whole bunch of extra fees and charges. If the borrower reinstates the loan, which is rare, then the borrower pays those extra fees. If the borrower loses the house, then the investor pays them. Either way, the servicer gets their money.”
Jerad went on to say: “Our attitude at CHASE was to process everything as quickly as possible, so we can foreclose and take the house to sale. That’s how we made our money.”
“Servicers want to show investors that they did their due diligence on a loan modification, but that in the end they just couldn’t find a way to modify. They’re whole focus is to foreclose, not to modify. They put the borrower through every hoop and obstacle they can, so that when something fails to get done on time, or whatever, they can deny it and proceed with the foreclosure. Like, ‘Hey we tried, but the borrower didn’t get this one document in on time.’ That sure is what it seemed like to me, anyway.”
According to Jerad, JPMorgan CHASE in Rancho Bernardo, services foreclosures in all 50 states. During the 18 months that he worked there, his foreclosure department of 15 people would receive 30-40 borrower files a day just from California, so each person would get two to three foreclosure a day to process just from California alone. He also said that in Rancho Bernardo, there were no more than 5-7 people in the loan modification department, but in loss mitigation there were 30 people who processed forbearances, short sales, and other alternatives to foreclosure. The REO department was made up of fewer than five people.
Jerad often took a smoke break with some of the guys handing loan modifications. “They were always complaining that their supervisors weren’t approving modifications,” Jerad said. “There was always something else they wanted that prevented the modification from being approved. They got their bonus based on modifying loans, along with accurate documentation just like us, but it seemed like the supervisors got penalized for modifying loans, because they were all about finding a way to turn them down.”
“There’s no question about it,” Jerad said in closing, “CHASE is in the foreclosure business, not the modification business.”
Well, now… that certainly was satisfying for me. Was it good for you too? I mean, since, as a taxpayer who bailed out CHASE and so many others, to know that they couldn’t care less about what it says in the HAMP guidelines, or what the President of the United States has said, or about our nation’s economy, or our communities… … or… well, about anything but “the perfect foreclosure,” I feel like I’ve been royally screwed, so it seemed like the appropriate question to ask.
Now I understand why servicers want foreclosures. It’s the extra fees they can charge either the borrower or the investor related to foreclosure… it’s sort of license to steal, isn’t it? I mean, no one questions those fees and charges, so I’m sure they’re not designed to be low margin fees and charges. They’re certainly not subject to the forces of competition. I wonder if they’re even regulated in any way… in fact, I’d bet they’re not.
And I also now understand why so many times it seems like they’re trying to come up with a reason to NOT modify, as opposed to modify and therefore stop a foreclosure. In fact, many of the modifications I’ve heard from homeowners about have requirements that sound like they’re straight off of “The Amazing Race” reality television show.
“You have exactly 11 hours to sign this form, have it notarized, and then deliver three copies of the document by hand to this address in one of three major U.S. cities. The catch is you can’t drive or take a cab to get there… you must arrive by elephant. When you arrive a small Asian man wearing one red shoe will give you your next clue. You have exactly $265 to complete this leg of THE AMAZING CHASE!”
And, now we know why. They’re not trying to figure out how to modify, they’re looking for a reason to foreclose and sell the house.
But, although I’m just learning how all this works, Treasury Secretary Geithner had to have known in advance what would go on inside a mortgage servicer. And so must FDIC Chair Sheila Bair have known. And so must a whole lot of others in Washington D.C. too, right? After all, Jerad is a bright young man, to be sure, but if he came to understand how things worked inside a servicver in just 18 months, then I have to believe that many thousands of others know these things as well.
So, why do so many of our elected representatives continue to stand around looking surprised and even dumbfounded at HAMP not working as it was supposed to… as the president said it would?
Oh, wait a minute… that’s right… they don’t actually do that, do they? In fact, our elected representatives don’t look surprised at all, come to think of it. They’re not surprised because they knew about the problems. It’s not often “in the news,” because it’s not “news” to them.
I think I’ve uncovered something, but really they already know, and they’re just having a little laugh at our collective expense… is that about right? Is this funny to someone in Washington, or anyone anywhere for that matter?
Well, at least we found out before the elections in November. There’s still time to send more than a few incumbents home for at least the next couple of years.
I’m not kidding about that. Someone needs to be punished for this. We need to send a message.
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