FDIC: Servicers Are Advancing Funds on Loans Supposedly in Default

“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.”

EDITOR’S NOTE: MISSING THE FOREST. As we have been saying for years here, the so-called creditors are receiving payments on loans that have been declared in default. The premise is that if a borrower misses a payment, there is a default. But that is not the law. A default occurs when a borrower misses a payment that is due and the payment is NOT RECEIVED BY THE CREDITOR. If my aunt Sally pays the debt, the creditor can’t come back to me and say that even though they received the money I still owe. Aunt Sally can say that was no gift and come after me but that is not a secured debt. That is a claim for unjust enrichment. In  short the entire scheme here defeats the default claim at its inception. And that is why you need the title and securitization search to show that the creditor, whom they now claim to be the trust, is receiving payments on schedule. And that is why I have insisted that there are co-obligors on the debt  owed to the investors — the servicers must pay, guarantors must pay etc.

And by the way, while you are chewing on that, think about this: where is the money coming from that the servicer is using to pay the trust or investors and why are they reporting to the trust that the loan is performing and how did they acquire the liability for those payments? The answer lies in former articles here — it’s in the securitization documentation. As Max Gardner said in an interview on PBS last night, we are using the securitization documents against them. If they didn’t follow the documents they are in trouble, there is no asset. If they did follow the documents there is no default.

Home > Servicing/Default > FDIC’s Bair says robo-signing points to incentives issue in mortgage servicing
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FDIC’s Bair says robo-signing points to incentives issue in mortgage servicing
by KERRY CURRY
Wednesday, October 13th, 2010, 5:08 pm

 

The robo-signing controversy points to poorly aligned incentives in the mortgage servicing business that must change, said Sheila Bair, chairman of the Federal Deposit Insurance Corp.

“Because the pricing of mortgage securitization deals did not adequately provide for special servicing, servicers were not funded or adequately staffed to address problems,” she said.

“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.”

Bair made her statements Wednesday in a speech to the Urban Land Institute in Washington.

The FDIC recently adopted a new rule on securitizations that requires that servicer incentives be addressed to obtain safe-harbor status. Servicing agreements must provide servicers with the authority to mitigate losses in a timely manner and modify loans to address expected defaults.

“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.”

The new FDIC rule, however, is limited to banks. But Bair said the Dodd-Frank financial reform law provides a chance to improve incentives across the market, whether or not the securitization is issued by a bank. Dodd-Frank requires regulations governing the risk retained by a securitizer, and those regulations may reduce the standard 5% 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,” she said. “We want the securitization market to come back, but in a sustainable manner.”

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 one in four of those with mortgages, were underwater, owing more than their homes are worth.

JPMorgan Chase (JPM: 37.43 -3.33%) leads the big banks in residential foreclosure volume. JPMorgan  has $19.5 billion, 7.5% of its residential mortgages, in foreclosure.

Write to Kerry Curry.

21 Responses

  1. FYI – Litton Loan Servicing is owned by Goldman Sachs.

  2. […] See also fdic-servicers-are-advancing-funds-on-loans-supposedly-in-default […]

  3. Tony Brown- Our servicer did the same thing to us! After more than 2 years of timely payments we received a change in servicers AND a brand new loan number. The day they opened the account it was done with a – 1.20 deficiency. Nothing we ever sent them was credited to the account as it was never a full P&I payment! This of course was never disclosed to us on any bill
    or on the first request for servicing records. On the second request for servicing records with a Qualified Written Request we received a completely different servicing record showing the -1.20 the account was opened with along with nearly 30,000$ in FEES. Property Inspection, property maintenance,statutory advances,lawyer fees,interest on taxes I paid…etc.

    In conclusion…we were fed to this servicer to put the loan into default. We are not deadbeats…we are victims of mortgage servicing FRAUD. The Trust foreclosing was NEVER formed but the REMICS to avoid taxes on 1.8billion worth of loans were!!

    Everyone make sure your case is ready PRIOR to sending a Qualified Written Request!! This is why we are getting sued “In response to your QWR we WILL proceed with foreclosure”. The servicer may or may not give you the info you are requesting…I have 3 different and unique servicing statements, 4 HUD disclosure statements(none of which describe our loan),3 copies of settlement statements(all signed on closing date)…We signed a 30year conventional loan that we deserved with credit scores near 800. Our signatures were forged onto a 2/28 ARM with a Balloon payment equal to the amount of the loan. The broker received more than 4000 POC because he switched the loans.

    Sorry for being so winded but I know the press is reading this Blog and the TRUTH about these CRIMES needs to be told!

  4. Lucy
    WE are being played…

    Tony Brown …have you been charged for insurance..NOT PMI but property insurance?
    insurance where only the building is covered with the servicer as Beni.?
    check – I would bet you are & have been along. I’m guessing this is a form of money laundering,and @ 16K a year per house all profit for the servicer…this adds up fast to major $$.

  5. Tony cheers

  6. A quote from bill black ” the best way to rob a bank is to own one”. Indymacs loans were at least 80 percent toxic

  7. I made payments was not behind and never been late, the servicer told the trustee that I had not been making payments, the trustee / investors said foreclose. the servicer made money on the manufactored default and kept the payments plus the fees where they would so call advance money for property inspections and property perservation, which by the way property inspections is when they drive by and photo the home , property perservation is where they claim to fix the property, cut the grass , put locks on the door , fix broken windows or just board up the property all of which has been charged to my loan and I live here. the grass is always cut, I replaced a sliding glass door with french doors, the pool , the deck is always maintained so who’s coming to my home and doing all those things.Simple answer NO ONE!!! Manufactored Default!!!!

  8. lucy,
    I have US Bank N.A and Ocwen … if I can help you in any way and/or trade info my email is mrsdiamond@msn.com

  9. Yes – Lucy. Want to ask you something.

  10. Anonymous, don’t you think Angelo Mozilo is looking slightly pale? He should really work on his tan.

    On the serious side, why do I get this uneasy feeling that we’re being played?
    I think you are absolutely correct that we need to be extra vigilant and keep up the pressure to inform EVERYONE
    about the real truth that are being down played.

  11. Does anyone know if it would be possible to file a Qui Tam against the big banksters for the Fannie/Freddie empty pools or on behalf of the IRS due to the tax evasion from the REMICs?

  12. I estimate that funds from each foreclosure sale covers approximately 60 payments, on 60 ‘non-performing’ loans, FOR one 30-day period at a time. This is how the servicers avoid scrutiny of just how bad they stole from the investors. They shuffle these funds and keep their AAA ratings, while getting bailed out by the taxpayers.

    FRAUD compounded!

    Instead – Cancel all bank residential mortgages for Fraud and Nullity. Liquidate ALL of the foreclosing banks including Goldman Sachs, AIG for FRAUD. Nullify all their foreclosures, transfer their remaining liquid assets to the depositors, and then transfer any remaining profits, assets, & buildings pro-rata to the cheated pension funds.

    Save America!

  13. Lucy

    Watch the video for Masschuettes case – posted on this blog.

    Most of the foreclosures under done under a Trustee’s name – appears no one has halted them. What about the Chase and Bank of America halted foreclosures – under whose name did these foreclosures proceed???

  14. So if BAC refused my payments and continue o refuse my payments is that why theyare not foreclosing????

  15. The Mortgage Fraud Scandal Is The Biggest In Human History
    L. Randall Wray, Benzinga | Oct. 14, 2010, 9:30 PM | 5,181 | comment 48

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    L. Randall Wray

    L. Randall Wray is a professor of economics at the University of Missouri — Kansas City.
    Recent Posts

    * Bernanke’s Experiment Has Failed, More Quantitative Easing Is Not…
    * Obama’s Economic Team May Be Disbanding But They’ve Already Done…
    * Pension Funds Are So Big They’ll Create A Bubble In Any Market

    * Examining Google’s Earnings And Conference Call (GOOG)
    * Kyle Bass On Macro Themes
    * Chilean Miners Escape, Chile ETF Celebrates! (ECH)

    We have long known that lender fraud was rampant during the real estate boom. The FBI began warning of an “epidemic” of mortgage fraud as early as 2004. We know that mortgage originators invented “low doc” and “no doc” loans, encouraged borrowers to take out “liar loans”, and promoted “NINJA loans” (no income, no job, no assets, no problem!). All of these schemes were fraudulent from the get-go. Property appraisers were involved, paid to overvalue real estate. That is fraud. The securitizers packaged trash into bundles that ratings agencies blessed with the triple A seal of approval. By their own admission, raters worked with securitizers to provide the rating desired, never looking at the loan tapes to see what they were rating. Fraud. Venerable investment banks like Goldman Sachs packaged the trashiest securities into collateralized debt obligations at the behest of hedge fund managers–who were allowed to choose the most toxic of the toxic waste—then sold the CDOs on to their own customers and allowed the hedge funds to bet against them. More fraud.

    Indeed, the largest financial institutions were run by their management as what my colleague Bill Black calls “control frauds”. That is, the banks used accounting fraud to manufacture fake profits so that they could pay huge bonuses to top management. The latest data out on Wall Street bonuses show that these institutions are still run as control frauds, with another record year of bonuses paid by cooking the books. The fraud continues unabated.

    This is the biggest scandal in human history. Indeed, all previous scandals from around the globe combined cannot even touch this one in terms of scale and scope and stench. This is the mother of all frauds and it will be etched into the history books for all time.

    Many have called for a national moratorium on foreclosures. Even some of the banks that have been run as control frauds have voluntarily stopped foreclosing. And yet President Obama, ever the centrist, has taken sides with the Securities Industry and Financial Markets Association, which warns that “it would be catastrophic to impose a system-wide moratorium on all foreclosures and such actions could do damage to the housing market and the economy”.

    No, it would expose the securities industry, itself, as the chief architect of the biggest scandal in human history.

    Now we know that it was not just the mortgage brokers, and the appraisers, and the ratings agencies, and the accountants, and the investment banks that were behind the fraud. It was the securitization process itself that was fraudulent. Indeed, the securities themselves are fraudulent. Many, perhaps most, maybe all of them.

    Some are trying to argue that this is just a matter of some missing paperwork. A moratorium would allow the banks to get all their ducks in a row so that they can supply all the documents needed to foreclose.

    However, as reported by Ellen Brown (at Web of Debt) and by Yves Smith (at Naked Capitalism), the paperwork does not exist. Worse, as Yves has discovered, the banks are furiously working to manufacture documents, aided and abetted by companies like DocX that specialize in “document recovery solutions”—for a fee they will create fraudulent documents that banks can use in court.

    The banks would like us to believe that in the speculative frenzy of the real estate boom they “forgot” to do some of the required paperwork. That is not likely. The absence of the documents was required to run the scam.

    Recall that the banks invented “no doc” mortgages. This was not at the behest of no-account borrowers, high school dropouts with bad credit histories who were duping investment bankers into making mortgage loans they could not repay. No, these mortgages were created and endorsed by originators and securitizers and credit raters to create a patina of “plausible deniability” to be used later in court when they were sued for fraud by investors who bought the securities and by the borrowers who could not possibly service the mortgages. Because if the originators had ever requested the documentation from borrowers it would have demonstrated that the mortgages and the securities were frauds.

    Similarly, the paperwork required for the securities was never done because the securities were fraudulent. Yves helps to explains why. The trust that purportedly underlies a mortgage backed security must hold the “note”—the borrower’s IOU (in 45 US states the mortgage that is a lien on the property is an “accessory” to the note, and is not sufficient to do a foreclosure). If the note is not conveyed to the trustee (usually before closing but sometimes up to 90 days after signing) the securities are no good.

    This is not just some pesky little rule imposed by a pin-headed regulator. This is IRS code. As reported by Brown, MBSs are typically pooled through a Real Estate Mortgage Investment Conduit (REMIC) that must according to the Internal Revenue Code hold all the paperwork demonstrating a complete chain of title. Done properly, taxes are avoided. Since a number of intermediaries are usually involved from the mortgage originator through to the trustee of the REMIC, there must be endorsements all along the line. However, it now appears that most of the original notes are still held in the loan originator warehouses. There are no endorsements. The trustees do not have the notes. Can anyone say “tax fraud”?

    So why weren’t the notes conveyed to the REMICs? There seem to be two possibilities—probably both of them correct. Karl Denninger at MarketTicker believes it was because the REMIC trustees feared an audit by investors in the securities. If the documentation existed, it would show that the mortgage loans were fraudulent. Far better to “lose” the docs, then later manufacture new ones for the foreclosure.

    According to Brown (quoting Steve Liesman and Neil Garfield), the other possibility is that the tranching process actually prohibited assignment of the notes to the REMICs. Bundles of mortgages of varying quality would be tranched into a variety of securities, say from AAA to BBB. But no individual mortgage is actually assigned to a particular tranche—until it defaults. When one defaults, it is assigned to a lower tranche security and then the foreclosure process begins. This means that from inception of that BBB security, there was no way to assign a note to the trustee because the trustee did not know in advance which mortgage would default. The REMIC trustees tried to get around that by using a dummy conduit called MERS (Mortgage Electronic Registration System) that would “hold” the mortgages and assign them to the proper tranches later. But they do not have the paperwork either, and some courts have rejected their claims as owners.

    This is a complete mess. What President Obama must understand is that fraud is endemic at every level of the home finance food chain. We were long told that securitized mortgages cannot be modified because of the complexity involved—modification of most mortgages would require consent of the holders of the securities that each have a piece of the mortgage. But actually it is impossible to tell how many—if any—of these securities holders have a legitimate claim on any of the mortgages. Simply imposing a moratorium will not be enough—it will just give the banks time to manufacture false documents, encouraging even more fraud. Meanwhile, half of all homeowners with mortgages are already underwater or are within spitting distance of being underwater. Many of these are drowning because the epidemic of fraud perpetrated by financial institutions destroyed our economy and caused housing prices to collapse.

    The President needs to try a different approach, consisting of the following series of steps:

    1. Declare a national bank holiday that would close the biggest financial institutions—say, the top dozen or so. Send in the supervisors to examine their books to uncover fraud. Determine which ones are insolvent and resolve them. While resolving them, net their claims on one another (including derivatives). Do not allow any insolvent institutions to reopen, and do not use the resolution process to merge institutions (we don’t need even bigger “too big to fail” banks). Prosecute the crooks and jail the guilty.

    2. Stop all foreclosures. Investigate and prosecute all institutions that have been selling or buying fake documents to be used in foreclosures. Prosecute the crooks and jail the guilty.

    3. Announce that all homeowners who occupied their homes on October 1, 2010 will be allowed to remain in their homes indefinitely. Create a national mediation board to adjust all mortgage payments to “owner’s equivalent rent”—the fair value of rent for the home. Establish a fund to provide rental assistance to keep low income homeowners in their homes.

    4. Give purported mortgage holders 30 days to produce the original notes; if they cannot find them, hand the homes over to the owner-occupants—free and clear of debt.

    5. Create a process to allow securities holders to sue for recovery of value. This must be national—state courts will not be able to handle the case load.

    6. Direct the GSEs to refinance mortgages at a low fixed rate. Mortgages would be provided against real estate appraised at fair market value to any borrower for a primary residence. The GSEs would pay holders of existing mortgages only current fair market value. Those holding these mortgages can seek redress through the process outlined in step 5. Only in the case of borrower fraud would the homeowner be held responsible for losses attributed to the refinancing.

    7. There will be fall-out from losses. It is better to deal with the collateral damage directly than to prop up the control fraud banks. For example, pension funds hold toxic waste securities as well as equities in the control fraud banks, and by all reasonable accounting the Pension Benefit Guarantee Corporation is already insolvent. But it is better to directly bail-out pensions than to maintain the charade that fraudulently created securities have value.

    Bill Black likes to joke that economists are afraid to use the “F” word (fraud). The President must come to realize that there is no other word that can be applied to the US home finance system. Until we deal with the fraud we will never resolve this financial crisis.

    (Go to http://www.nakedcapitalism.com for Yves Smith, “4ClosureFraud posts lender processing services mortgage document fabrication sheet”, October 3, 2010; and to http://www.webofdebt.com for Ellen Brown, “Foreclosuregate and Obama’s ‘pocket veto’”, October 7, 2010.)

    L. Randall Wray is a Professor of Economics, University of Missouri—Kansas City. A student of Hyman Minsky, his research focuses on monetary and fiscal policy as well as unemployment and job creation. He writes a weekly column for Benzinga every Tuesday.

    He also blogs at New Economic Perspectives, and is a BrainTruster at New Deal 2.0. He is a senior scholar at the Levy Economics Institute, and has been a visiting professor at the University of Rome (La Sapienza), UNAM (Mexico City), University of Paris (South), and the University of Bologna (Italy).

    Read more: http://www.businessinsider.com/mortgage-fraud-scandal-2010-10#ixzz12SFTHIus

  16. Can anyone tell me what is happening with the US Bank N.A.?

    Argent mortgage is our original lender and Ocwen is our servicer. We closed on Oct. 2006

    They are the plaintiff that is foreclosing on us as a trustee for the asset back …….?
    It’s been over 3 months and we are still waiting for the final summary judgement.

    Neil, if the trustee initiate foreclosure shouldn’t there be an assignment from the original lender, to the depositor, then to the sponser, and then to the servicer..?

    What if we only got an assignment from the original lender to the Us bank na abs…..along with an allonge, and this was done and recorded at the county weeks after the lis pendens and foreclosure summons was issued.
    .
    Should we wait for the final written SM or file motion to vacate or dismiss SM.

    Our attorney keeps informing us to wait for the final SM, what do you think? I would appreciate everyone’s advice.

    I’m in NJ.

    Thank you,

  17. Oh for anybody that has a INDYMAC securitization loan you might want to check out DBNTC vs FDIC #09-3852 in the Federal District Court Central District Western Division.

    The FDIC striped all 240 trusts of there assets and sold only servicing rights to OneWest Bank. If you check the servicing agreement with Indymac Ventures on fdic website (which is owned by OneWest) it states that they will NEVER be given any original notes.

    To understand the case you must understand what QFC’s are to non QFC’s. So read FASB 140

  18. CO MINGLING OF FUNDS
    PONZI SCHEME
    IF YOU CANT DO THE TIME DONT DO THE CRIME BANKSTERS.

  19. FASB 140 paragraph 114 explains what Neil is talking about

    Extinguishments of Liabilities

    114. If a creditor releases a debtor from primary obligation on the condition that a third party
    assumes the obligation and that the original debtor becomes secondarily liable, that release
    extinguishes the original debtor’s liability. However, in those circumstances, whether or not
    explicit consideration was paid for that guarantee, the original debtor becomes a guarantor. As a
    guarantor, it shall recognize a guarantee obligation in the same manner as would a guarantor that
    had never been primarily liable to that creditor, with due regard for the likelihood that the third
    party will carry out its obligations. The guarantee obligation shall be initially measured at fair
    value, and that amount reduces the gain or increases the loss recognized on extinguishment.

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