Mortgage Servicers in the Crosshairs
If it seems that mortgage servicers are paralyzed in their response to the foreclosure crisis, there are some good reasons. As defaults multiply and losses mount, these servicers are under pressure from all sides:
Consumer lawsuits against mortgage servicers have reached unprecedented levels-some consolidated into class operation suits. One recent suit against Bank of America will be going transmit after a federal judge refused to dismiss it. This action, attractive thousands of homeowners, alleges that the homeowners were improperly denied Hamp modifications. That's the tip of the iceberg, as borrowers across the country accuse servicers of improper foreclosures, misrepresentations, mishandled files and more. Many of these lawsuits finally fail, but enough are winning to make for an uncertain legal environment-which encourages more suits.
Regulators are clamping down on servicers as never before. On April 13, 2011, four federal agencies jointly issued Cease and end Orders against 14 of the nation's largest servicers This wonderful action, led by the Office of the Comptroller of the Currency (Occ) ordered the banks to yield "action plans" for revamping their servicing policies after noting "serious deficiencies" that "constitute unsafe and unsound banking practices."
The regulators' actions aren't limited to rhetorical rebukes: On July 20, 2011, The Federal maintain Board issued a consent cease and end order against Wells Fargo that carried an million civil penalty. According the Fed, Wells had falsified income facts on mortgage applications (a practice that became familiar in the boom years of 2002-2006), and steered borrowers that marvelous for prime mortgages into more profitable subprime loans. Beyond the penalty, Wells Fargo was ordered to compensate affected borrowers.
The actions of consumers and regulators are like twin pincers squeezing servicers from both sides. And they've drawn some blood out of the seemingly bloodless lending giants: Bank of America reported .9 billion in legal expenses for the second quarter of 2011-more than duplicate the previous quarter. The situation at Jpmorgan Chase was similar: .3 billion in legal expenses for Q2 2011-more than triple the 0 million reported for the previous quarter.
The division of Justice is pursuing changes in servicing policies with the major lenders, and unlike the regulators, the Doj doesn't just deal in fines and increased paperwork: it can file criminal charges too. Doj has taken the lead in the hamlet negotiations begun by attorneys general of some states. The negotiations are still in progress, and other federal entities are waiting for the terms that will emerge to decide their own postures toward servicing reform. Cost estimates for the resulting remediation have been settled at more than billion.
Investors are the parties the mortgage servicers indubitably work for. They're indubitably forgotten in the hubbub of competitive claims, but they hold the most foremost cards: their servicing contracts. Big mortgage players such as Fannie Mae, Freddie Mac and underground investor groups are pressuring their servicers to quit delaying foreclosures on loans that are beyond repair, and penalizing poor performance.
Mortgage Servicers in the Crosshairs
Meanwhile, investors who bought mortgage-backed securities from the major servicers have sued them for selling bad products-the most foremost example being the recent suit that Bank of America has agreed to decide for a whopping 8.5 billion dollars. Beyond the cash amount, BofA has agreed to replacement servicing of confident high-risk loans to subservicers, which presumably will be more aggressive in implementing remediation measures. As soon as that deal was announced, some of the plaintiffs announced their intention to withdraw-claiming the terms were too cordial to Bank of America.
On July 28, some big institutional investors announced a separate suit, alleging securities fraud on loans originated by Countrywide Financial, which Bank of America purchased in 2008. These players included the California public Employees' seclusion system (CalPers), BlackRock and T. Rowe Price. Then on August 8, amidst a general shop panic, insurance firm Aig announced it was also suing Bank of America on similar grounds. BofA stock prices instantly plummeted more than 20 percent. That same day also saw dramatic drops in the stock prices of the other major banks: CitiGroup (15.7%), Jp Morgan Chase (8.7%), and Wells Fargo (9%).
Big Trouble
An objective observer might end that these servicers are in big issue no matter what they do. The cacophony of demands from stakeholders, regulators and consumers could yield more paralysis rather than less. Julie Williams, First Senior Deputy Comptroller and Chief Counsel of the Occ, alluded to this in her testimony before a subcommittee of the House Committee on Financial Services on July 7, 2010. She stressed the importance of uniform servicing standards that would satisfy all the varied regulatory entities.
Few observers are considering what the mortgage giants might look like after the carcasses are picked clean. They deserve whatever happens to them, some critics say, and if they're brought down, good riddance. A more sober view might pose the question: If the nation's biggest banks are rendered insolvent, what happens then? One logical acknowledge is that the federal government would step in-again-to prevent an outright failure.
Tarp Two, anyone?
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