Servicer’s Advance Payments When Borrower Stops

The following message and article brings up questions that I have been receiving with increasing frequency as homeowners, their forensic analysts and attorney dig further and further. They are following the money and coming up with the fact that servicers are advancing payments to investors when the borrower stops paying. In fact, they advance those payments to investors after the declaration of default and even after the foreclosure is complete. Where do they get the money from?

The answer is that they either get the money from their own pockets or funds they “borrow” from the investment banker that did the underwriting on the mortgage bonds or they are taking money paid on other performing loans and using it to make payments on loans that are not performing. Either way, the payment has been made and the account receivable of the real creditor is not in default. The only way to conclude that it doesn’t make any difference is if you look at all the players in the cloud of so-called “securitization of debt” as one single venture — a view that would raise all kinds of questions as to why and when you can ignore the corporate veil or the existence of a separate entity.

When this gets litigated, and I am sure it will, Judges will probably tend to the easier cloud view. But on appeal, it is likely that the appellate court will look at each transaction, the pleadings and the proof. They will likely conclude that with the account receivable of the alleged creditor being current, there should have been no declaration of default, acceleration, foreclosure or sale of the house. But they will say that the borrower is not off the hook. The Servicer has a separate claim for contribution or unjust enrichment. But such claims are obviously not secured by a pledge of the house as collateral because no such documentation exists.

Which brings me back to the falsification of securitization as cover for a PONZI scheme. If the bankers had played fair, they would have had the notes payable to the REMIC trusts and the mortgages naming the trusts as mortgagees or immediately record assignments of both. They could have disclosed the securitization at closing but they didn’t. If they did, the advances by servicers could have been covered by the documents producing the cloud effect that the banks want to see from the courts.
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From Dan Edstrom, senior mortgage analyst for Livinglies.—

I am not sure if you are aware of a recent article from Martin Andelman. His position on servicer advances of principal and interest is that it has nothing to do with the Borrower and these are just loans. Jim and I talked with him on the phone for a short period of time, but he wasn’t convinced that these payments should be applied to the Borrower (not that we can convince him or have to convince him). But I just read the following article and the light bulb went on again. Martin said the servicer advance is a loan and is to be repaid. Possible, although this isn’t contemplated (that I know of) in UCC 3-602. But now consider the following article that just came out. The advance pays senior tranches in full. By the time the servicer goes to pull the money out of the trust, a lower tranche loses that money (that was paid by other borrowers) and it gets diverted to the servicer for reimbursement. The losing tranche agreed to take these losses. The Borrower did not agree to make a payment to one creditor, give that creditor a discharge, and then take out a new loan with a different creditor and owe that creditor money (the creditor who agreed to lose money). When did I transfer the right to others to open and close credit accounts (or transactions) on my behalf (paying off debt to one party and acquiring debt from another party)?

Investors Warned on Nationstar, Ocwen RMBS Cash Remit Differences
Analysts are warning investors about the impact of different servicing strategies on the cash flow generated by mortgage servicing rights on securitized delinquent loans.

A Moody’s Investors Service analysis of the loss mitigation practices of Nationstar and Ocwen, two of the nation’s largest and fastest-growing servicers, revealed “particularly different advancing rates on delinquent loans,” enable Nationstar to pay more cash from its securitized subprime residential loans than Ocwen.

Findings matter to investors involved in current and future servicing transfers from portfolios acquired by Nationstar and Ocwen as well as to other residential mortgage-backed securities trusts eyeing MSR market deals.

“Ocwen’s recent acquisition of GMAC’s RMBS servicing portfolio is credit negative for that reason, although GMAC’s performing loans will continue to generate strong cash flow,” explained Jiwon Park, a Moody’s analyst who specializes in the MSR market.

Comparatively, Park wrote in a recent report, Nationstar’s scheduled acquisition of certain RMBS loan portfolios from Bank of America Corp. “is likely to have a minimal impact” on affected loans and their securities because “Nationstar has generally remitted” the same amount of cash on these assets as B of A.

The trend persists across the board with subprime RMBS vintages securitized between 2005 and 2010. Data show Nationstar implements higher advancing rates for delinquent loans and consistently pays more cash than Ocwen. Higher cash payments help keep the RMBS credit positive “because they pay down senior bonds with priority and more quickly,” the analyst wrote.

For example, during the first two months of the third quarter of this year, Nationstar’s monthly cash flow remittances from principal and interest collections, net proceeds from short sales and foreclosure liquidations, voluntary prepayments and delinquent loan advances was at 0.82% of the servicer’s outstanding RMBS balance, compared to 0.77% for Ocwen.

Park finds advancing rate differences between the two servicers are significant. During the same time period the amount of cash generated from distressed securities by source, Nationstar paid 0.07% of the balances from delinquent loan advances, compared to only 0.02% paid by Ocwen.

Loss mitigation strategies also influenced the amount of cash remittances leading to higher revenue from Nationstar’s REO property liquidations, while Ocwen is more successful in generating cash from loan modifications.

In the long term, however, even though Ocwen stops generating advances much faster than Nationstar, its much lower cash flow advances on delinquent loans is not expected to have a long-term effect on the relatively large GMAC portfolio, which includes a larger percentage of performing loans.
frequency. As homeowners, their forensic analysis, and lawyers dig further and further Follow the movement of money, they are finding that the so-called real creditor continues to get paid long after the borrower stops paying, and even long after the actual foreclosure. The motivation for this behavior in my opinion is to keep the investors happy, not suing the investment banker and still buying more mortgage bonds.

But the question is what is the effect of these payments? It has been postulated that it changes nothing. I don’t agree. Using generally accepted accounting principles, we find that the the creditor’s receivable account shows no default because they received payment from the Servicer. Since they never receive direct payment from the Borrower, they are satisfied — the amounts payable under the mortgage bond are fully satisfied. And the mortgage bond obligation is based on payments from borrowers plus payments from third party obligors but no where in the PSA or prospectus does it provide that the Servicer has an obligation to continue making payments when the borrower stops.

If the creditor’s account does not show a default then there should be no declaration of default, acceleration, foreclosure and/or eviction — which is why the Banks are doing a two step and moving the goal post around the field on who has the right to initiate a foreclosure. It is also covers up the fact that the Foreclosures are merely a way to conclude the fraudulent PONZI scheme that is mistakenly referred to as securitization.

So does that mean that the debt of the borrower has been extinguished? The answer is yes and no. Yes it satisfies the payment requirement to the creditor on the mortgage. But no, that doesn’t mean that the borrower is off the hook like magic. The Servicer has an action against the borrower for contribution or unjust enrichment. The difference is that the servicer’s claim is not secured with the house because THAT debt has been paid pursuant to the note (readers are reminded that I don’t believe either the note or mortgage are valid instruments in most cases).

When this matter is litigated as I am positive it will be, Judges will want to look at “securitization” of loans as a cloud, and that what goes on in the cloud, doesn’t matter. So my prediction is that at the trial level there will be mostly decisions against the borrower. On appeal, with the issues properly preserved and a good record for the appeals court to see, I think they will be required to look into the cloud and see that if they ignore the existence of separate entities without any pleading or proof as to why the corporate veils should be ignored, they will open the door to a boatload of trail and other moral hazards. Taking the transactions one payment at a time, the payments by the Servicer converts the obligation from payment on a secured note to a liability to the Servicer that is unsecured.

The other question is where do they get the money from if not the borrower making payments? The answer by pure logic is one of two ways — either from payments received from other borrowers or money they have or “borrow” from a very willing investment banker who doesn’t want another investor lawsuit and who wants to sell that investor more mortgage bonds.
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From Dan Edstrom, senior mortgage analyst for livinglies.—

I am not sure if you are aware of a recent article from Martin Andelman. His position on servicer advances of principal and interest is that it has nothing to do with the Borrower and these are just loans. Jim and I talked with him on the phone for a short period of time, but he wasn’t convinced that these payments should be applied to the Borrower (not that we can convince him or have to convince him). But I just read the following article and the light bulb went on again. Martin said the servicer advance is a loan and is to be repaid. Possible, although this isn’t contemplated (that I know of) in UCC 3-602. But now consider the following article that just came out. The advance pays senior tranches in full. By the time the servicer goes to pull the money out of the trust, a lower tranche loses that money (that was paid by other borrowers) and it gets diverted to the servicer for reimbursement. The losing tranche agreed to take these losses. The Borrower did not agree to make a payment to one creditor, give that creditor a discharge, and then take out a new loan with a different creditor and owe that creditor money (the creditor who agreed to lose money). When did I transfer the right to others to open and close credit accounts (or transactions) on my behalf (paying off debt to one party and acquiring debt from another party)?

Investors Warned on Nationstar, Ocwen RMBS Cash Remit Differences
Analysts are warning investors about the impact of different servicing strategies on the cash flow generated by mortgage servicing rights on securitized delinquent loans.

A Moody’s Investors Service analysis of the loss mitigation practices of Nationstar and Ocwen, two of the nation’s largest and fastest-growing servicers, revealed “particularly different advancing rates on delinquent loans,” enable Nationstar to pay more cash from its securitized subprime residential loans than Ocwen.

Findings matter to investors involved in current and future servicing transfers from portfolios acquired by Nationstar and Ocwen as well as to other residential mortgage-backed securities trusts eyeing MSR market deals.

“Ocwen’s recent acquisition of GMAC’s RMBS servicing portfolio is credit negative for that reason, although GMAC’s performing loans will continue to generate strong cash flow,” explained Jiwon Park, a Moody’s analyst who specializes in the MSR market.

Comparatively, Park wrote in a recent report, Nationstar’s scheduled acquisition of certain RMBS loan portfolios from Bank of America Corp. “is likely to have a minimal impact” on affected loans and their securities because “Nationstar has generally remitted” the same amount of cash on these assets as B of A.

The trend persists across the board with subprime RMBS vintages securitized between 2005 and 2010. Data show Nationstar implements higher advancing rates for delinquent loans and consistently pays more cash than Ocwen. Higher cash payments help keep the RMBS credit positive “because they pay down senior bonds with priority and more quickly,” the analyst wrote.

For example, during the first two months of the third quarter of this year, Nationstar’s monthly cash flow remittances from principal and interest collections, net proceeds from short sales and foreclosure liquidations, voluntary prepayments and delinquent loan advances was at 0.82% of the servicer’s outstanding RMBS balance, compared to 0.77% for Ocwen.

Park finds advancing rate differences between the two servicers are significant. During the same time period the amount of cash generated from distressed securities by source, Nationstar paid 0.07% of the balances from delinquent loan advances, compared to only 0.02% paid by Ocwen.

Loss mitigation strategies also influenced the amount of cash remittances leading to higher revenue from Nationstar’s REO property liquidations, while Ocwen is more successful in generating cash from loan modifications.

In the long term, however, even though Ocwen stops generating advances much faster than Nationstar, its much lower cash flow advances on delinquent loans is not expected to have a long-term effect on the relatively large GMAC portfolio, which includes a larger percentage of performing loans.

White Paper: Many Causes of Foreclosure Crisis

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Editor’s Comment:

I attended Darrell Blomberg’s Foreclosure Strategists’ meeting last night where Arizona Attorney General Tom Horne defended the relatively small size of the foreclosure settlement compared with the tobacco settlement. To be fair, it should be noted that the multi-state settlement relates only to issues brought by the attorneys general. True they did very little investigation but the settlement sets the guidelines for settling with individual homeowners without waiving anything except that the AG won’t bring the lawsuits to court. Anyone else can and will. It wasn’t a real settlement. But the effect was what the Banks wanted. They want you to think the game is over and move on. The game is far from over, it isn’t a game and I won’t stop until I get those homes back that were ripped from the arms of homeowners who never knew what hit them.

So this is the first full business day after AG Horne promised me he would get back to me on the question of whether the AG would bring criminal actions for racketeering and corruption against the banks and servicers for conducting sham auctions in which “credit bids” were used instead of cash to allow the banks to acquire title. These credit bids came from non-creditors and were used as the basis for issuing deeds on foreclosure, each of which carry a presumption of authenticity.  But the deeds based on credit bids from non-creditors represent outright theft and a ratification of a corrupt title system that was doing just fine before the banks started claiming the loans were securitized.

Those credit bids and the deeds issued upon foreclosure were sham transactions — just as the transactions originated with borrowers were based upon the lies and false pretenses of the acting lenders who were paid for their acting services. By pretending that the loan came from these thinly capitalised sham companies (all closed with no forwarding address), the banks and servicers started the lie that the loan was sold up the tree of securitization. Each transaction we are told was a sale of the loan, but none of them actually involved any money exchanging hands. So much for, “value received.”

The purpose of these loans was to create a process that would cover up the theft of the investor money that the investment bank received in exchange for “mortgage bonds” based upon non-existent transactions and the title equivalent of wild deeds.

So the answer to the question is that borrowers did not make bad decisions. They were tricked into these loans. Had there been full disclosure as required by TILA, the borrowers would never have closed on the papers presented to them. Had there been full disclosure to the investors, they never would have parted with a nickel. No money, no lender, no borrower no transactions. And practically barring lawyers from being hired by borrowers was the first clue that these deals were upside down and bogus. No, they didn’t make bad decisions. There was an asymmetry of information that the banks used to leverage against the borrowers who knew nothing and who understood nothing.  

“Just sign everywhere we marked for your signature” was the closing agent’s way of saying, “You are now totally screwed.” If you ask the wrong question you get the wrong answer. “Moral hazard” in this context is not a term anyone knowledgeable uses in connection with the borrowers. It is a term used to express the context in which unscrupulous Bankers acted without conscience and with reckless disregard to the public, violating every applicable law, rule and regulation in the process.

Why Did So Many People Make So Many Ex Post Bad Decisions? The Causes of the Foreclosure Crisis

Public Policy Discussion Paper No. 12-2


by Christopher L. Foote, Kristopher S. Gerardi, and Paul S. Willen

This paper presents 12 facts about the mortgage market. The authors argue that the facts refute the popular story that the crisis resulted from financial industry insiders deceiving uninformed mortgage borrowers and investors. Instead, they argue that borrowers and investors made decisions that were rational and logical given their ex post overly optimistic beliefs about house prices. The authors then show that neither institutional features of the mortgage market nor financial innovations are any more likely to explain those distorted beliefs than they are to explain the Dutch tulip bubble 400 years ago. Economists should acknowledge the limits of our understanding of asset price bubbles and design policies accordingly.

To ready the entire paper please go to this link: www.bostonfed.org/economic/ppdp/2012/ppdp1202.htm

Wave of Voluntary Strategic Defaults Coming: 20% Under water

Editorial Comment: Actually the number is far higher. We compute it as around 45% when all is said and done. First of all there is consensus that property values are actually around 15% less than seller’s are asking. Second costs of selling the home makes up the rest, taking another 6-10% off the selling proceeds.

The break point where people go for “jingle mail” sending the keys back even if they are current is when that value is less than 75% of the principal due on the mortgage. In that sense, the 1/5 figure is right.

What has NOT been computed is what will happen if the growing trend toward strategic defaults (jingle mail) becomes a stampede. I think it will do just that — and further the trend will probably spread to other loans, especially those have been securitized like credit cards, auto loans, and student loans where the loan originator never advanced a penny toward the loan and just collected a large fee.

Investors and borrowers need to get together and work out the details, throwing the loss onto the “banksters” (Pecora term from 1930’s). Disinformation is being spread and believed. The creditors and the debtors are being intentionally blocked from knowing their relationship to each other. When they DO know, the ship will turn back over and start floating again — at the cost of those who perpetrated the largest fraud in human history.

There IS a way to work this out but not if the goal is to save the banks that created this mess. We have at least 7,000 other banks, TARP and other bailout money available, and an IT infrastructure that can be used today to provide the full range of services and conveniences that the “too big to fail” banks use to beat down the competition from community banks and credit unions.

Associations of community banks not controlled by large regional banks can play a pivotal role in this. Where the associations are controlled by the big banks like Florida bankers Association, the community bankers need to re-start their own association.

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One-Fifth of U.S. Homeowners Owe More Than Properties Are Worth

By Daniel Taub

Feb. 10 (Bloomberg) — More than a fifth of U.S. homeowners owed more than their properties were worth in the fourth quarter as the number of houses and condominiums lost to foreclosure climbed to a record, according to Zillow.com.

In the fourth quarter, 21.4 percent of owners of mortgaged homes were underwater, up from 21 percent in the previous three months and down from 23 percent in the second quarter, the Seattle-based real estate data provider said today in a report. More than one in 1,000 homes were repossessed by lenders in December, the highest rate in Zillow data dating back to 2000.

Underwater homes are more likely lost to foreclosure because their owners have a harder time refinancing or selling when they get behind on loan payments. U.S. home values dropped 5 percent in the fourth quarter from a year earlier, the 12th straight quarter of year-over-year declines, Zillow said.

“While the next few months are likely to bring further home value declines in most markets, we do expect to see a national bottom in home prices by the middle of this year,” Zillow Chief Economist Stan Humphries said in a statement. “Thereafter, home values are likely to bounce along the bottom with real appreciation remaining negligible for some time.”

There were 2.82 million foreclosures in the U.S. last year, according to RealtyTrac Inc., the most since the data provider began compiling figures in 2005. The number may rise to 3 million in 2010, the Irvine, California-based company said last month.

Bank sales of foreclosed properties accounted for a fifth of all U.S. home sales in December, Zillow said. Such transactions made up 68 percent of sales in Merced, California; 64 percent in the Las Vegas area; and 62 percent in Modesto, California, the company said.

Almost 29 percent of homes sold in the U.S. went for less than their sellers originally paid for them, Zillow said.

The closely held company uses data from public records going back to 1996. Its mortgage figures come from information filed with individual counties.

To contact the reporter on this story: Daniel Taub in Los Angeles at dtaub@bloomberg.net.

Last Updated: February 10, 2010 00:01 EST

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