OCC: Fixing Deficient Foreclosure Practices

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

The Office of the Comptroller of the Currency (OCC) issued a report on November 22, 2011 on the actions by 12 national bank and federal savings association mortgage servicers to comply with consent orders issued in April 2011 to correct deficient and unsafe or unsound foreclosure practices.

The report, entitled Interim Status Report: Foreclosure-Related Consent Orders, summarizes progress on activities related to the independent foreclosure review announced November 1, 2011, as well as other activities to enhance mortgage servicing operations, strengthen oversight of third-party service providers and activities related to Mortgage Electronic Registration Systems (MERS), improve management information systems, assess and manage risk, and ensure compliance with applicable laws and regulations.

Based on information in the relevant OCC issuances, much of the work to correct identified weaknesses in policies, operating procedures, various control functions, and audit processes would be substantially complete in the first part of 2012, but other, longer term initiatives will continue through the balance of 2012.

In addition to the interim report, please note that the OCC also released engagement letters that describe how the independent consultants, retained by the servicers, will conduct their file reviews and claims processes to identify borrowers who suffered financial injury as a result of deficiencies identified in the OCC's consent orders.

For those of you who have not had to respond to and implement a consent order, I would say that the engagement letters are generally pro forma and consistent with similar terms and conditions we require in our own commitments and proposals for such audits and due diligence reviews. As a general proposition, the review process being implemented at some companies may differ from that described in the engagement letters because of subsequent coordination with the OCC to ensure a consistent process among the servicers.   

The engagement letters identify the names of the independent consultants conducting the reviews and include language stipulating that consultants would take direction from the OCC throughout the reviews. In fact, the terms of engagement specifically prohibit servicers from overseeing, directing, or supervising any of the reviews. Limited proprietary and personal information has been redacted.

Newsletter Sections
Interim Report
Engagement Letters
Correcting Foreclosure Deficiencies
Professional Assistance
Library

Interim Report

The interim report summarizes actions taken by national banks and federal savings associations to correct deficiencies in mortgage servicing and foreclosure processing identified in consent orders issued on April 13, 2011, by the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) against 12 mortgage servicers.

The OCC took action against eight national bank servicers: Bank of America, Citibank, HSBC, JPMorgan Chase, MetLife Bank, PNC, U.S. Bank, and Wells Fargo. The OTS took action against four federal savings association servicers and two holding companies: Aurora Bank, FSB; EverBank (and the thrift holding company, EverBank Financial Corp.); OneWest Bank, FSB (and its holding company IMB HoldCo LLC); and Sovereign Bank.

The consent orders were based on examiner findings during an interagency review of major residential mortgage servicers conducted in the fourth quarter of 2010.

A summary of the findings of the interagency review is available in the "Interagency Review of Foreclosure Policies and Practices," produced by the OCC, Board of Governors of the Federal Reserve Board (FRB), and OTS.

Engagement Letters
Pursuant to 12 C.F.R. § 4.12(c), the listing order of the engagement letters at the OCC's election has no precedential significance.

The engagement letters were submitted by the independent consultants that were retained by servicers regulated by the OCC. These independent consultants will be conducting foreclosure reviews pursuant to the requirements of the April 13, 2011 consent orders. 

The engagement letters describe how the independent consultants will conduct their file reviews and claims processes to identify borrowers who suffered financial injury as a result of servicer deficiencies identified in the OCC's consent orders.  
Limited proprietary and personal information has been redacted from the engagement letters.

Since the acceptance of the engagement letters in September of this year, the independent consultants have further refined and made adjustments to the processes, procedures, and methodologies outlined in the engagement letters in consultation with OCC supervision staff.

For instance, there were a number of changes made to integrated claims processes to ensure a single, uniform process among the servicers.

Correcting Foreclosure Deficiencies

Independent Foreclosure Review

As part of those consent orders, federal regulators required servicers to engage independent firms to conduct a multi-faceted review of foreclosure actions in process in 2009 and 2010.

Under the orders, independent consultants are charged with evaluating whether borrowers suffered financial injury through errors, misrepresentations, or other deficiencies in foreclosure practices and determining appropriate remediation for those customers. Where a borrower suffered financial injury as a result of such practices, the agencies' orders require financial remediation to be provided.

As part of that program, 14 mortgage servicers covered by the enforcement actions will begin mailings November 1, 2011 that will continue through the end of the year. The mailings are intended to provide information to potentially eligible borrowers on how to request a review of their case if they believe they suffered financial injury as a result of errors, misrepresentations, or other deficiencies in foreclosure proceedings related to their primary residence between January 1, 2009 and December 31, 2010. The mailings will include a request for review form.

Borrowers may also visit the Independent Foreclosure Review for more information about the review and claim process. Furthermore, assistance with the form and answers to questions about the process are available at 1-888-952-9105, Monday through Friday from 8 a.m. to 10 p.m. (ET) and Saturday from 8 a.m. to 5 p.m. (ET).
Requests for review must be received by April 30, 2012.

The third-party consultant will assess whether any errors, misrepresentations, or other deficiencies resulted in financial injury to borrowers. Where a borrower suffered financial injury as a result of such practices, the consent orders require remediation to be provided. 

During the review, customers may be contacted by mortgage servicers for additional information at the direction of the independent consultant.

Professional Assistance

Library

Interim Status Report: Foreclosure-Related Consent Orders
November 2011

Interagency Review of Foreclosure Policies and Practices
April 2011

FRB: "Jumbo" Escrow Accounts - Final & Proposed Rules

On February 23, 2011, the Federal Reserve Board (FRB) issued a final rule and requested public comment on a second rule under Regulation Z to revise the escrow account requirements for certain home mortgage loans.

The revisions to the regulation, which implements the Truth in Lending Act (TILA), are being made pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The final rule implements a provision of the Dodd-Frank Act that increases the annual percentage rate (APR) threshold used to determine whether a mortgage lender is required to establish an escrow account for property taxes and insurance for first-lien, "jumbo" mortgage loans. (Jumbo loans are loans exceeding the conforming loan-size limit for purchase by Freddie Mac, as specified by the legislation.)

In July 2008, the Board issued final rules requiring creditors to establish escrow accounts for first-lien higher-priced mortgage loans (HPML). A first-lien mortgage is considered an HPML if its APR is 1.5 percentage points or more above the current average prime offer rate.

Under the final rule, the escrow requirement will apply to first-lien jumbo loans only if the loan's APR is 2.5 percentage points or more above the average prime offer rate.

The APR threshold for non-jumbo loans remains unchanged.

The final rule is effective for covered loans for which the creditor receives an application on or after April 1, 2011.

Proposals

PROPOSAL: Expanding the minimum period for mandatory escrow accounts for first-lien, higher-priced mortgage loans from one to five years, and longer under certain circumstances, such as when the loan is delinquent or in default. (The proposed rule would provide an exemption from the escrow requirement for certain creditors that operate in "rural or under served" counties, as authorized by the legislation.)

PROPOSAL: Implementing new disclosure requirements contained in the Dodd-Frank Act. Disclosures would be required at least three business days before consummation of a mortgage loan to explain, as applicable, how the escrow account works or the effects of not having an escrow account if one is not being established.

PROPOSAL: Requiring consumers to receive disclosures three days before an escrow account is closed. (The FRB is soliciting comment on the proposed rule for 60 days after publication in the Federal Register, which is expected shortly.)

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FRB: Truth in Lending, Proposed rule, Request for Public Comment
February 23, 2011
FRB: Truth in Lending, Final rule - Official Staff Commentary
February 23, 2011
FRB: Summary of Findings: Design and Testing of Escrow Disclosures
January 28, 2011

GMAC: Spectral Hand of "Robosigning"

COMMENTARY by JONATHAN FOXX

Jonathan Foxx is a former Chief Compliance Officer of two publicly traded financial institutions, and the President & Managing Director of Lenders Compliance Group, the nation’s first full-service, mortgage risk management firm in the country.

This past Friday, January 14, 2011, GMAC decided to cancel certain foreclosure actions in Maryland.

At a time in which foreclosure actions are expected to accelerate 20% in 2011, and 2.87 million properties were the subject of default notices, auctions, or repossession in 2010 (a 2% gain from 2009), and banks seized more than 1 million homes in 2010 (up 14% from 2009), the impact of the spectral hand of so-called "robosigning" has now apparently reached a new threshold.

GMAC and Maryland Foreclosures

In a move that should place renewed emphasis on loss mitigation and further curtail the headlong rush to foreclosure processing, GMAC has decided to cancel foreclosure proceedings on 250 properties in Maryland. There have been reports of perhaps 1,000 foreclosures affected and possibly many more.

The ostensible cause of this retreat is due to defective affidavits, executed by one Jeffrey Stephan, a "robo-signer" who has attested to, among other things, the authenticity of foreclosure documents without having had any knowledge about them.

By this point, we all should know the sorry story of robo-signing that has facilitated the massive foreclosure proceedings by banks. GMAC's decision was brought on by a class action handled through the University of Maryland Consumer Protection Clinic and Civil Justice, Inc., a nonprofit. Though there were other aspects tried in the case, the central position of the case argued that any foreclosure action which used Jeffrey Stephan as the "signer" was essentially illegitimate, and therefore must be dismissed.

I should point out that GMAC is not the only recipient of this argument: although not yet a settled matter, the University of Maryland Consumer Protection Clinic and Civil Justice also want dismissed any foreclosure actions with affidavits from Xee Moua, Wells Fargo employee and admitted "robosignor," who stated in a sworn deposition in a Florida case that she had signed foreclosure-related papers on behalf of the bank and that the only information she verified was whether her name and title appeared correctly on the relevant documents.

Stephan estimated that he signed 10,000 documents a month; Moua claimed to sign at the rate of as much as 500 documents each day.

Mediation

In Maryland, a judicial foreclosure state, GMAC will refile these cases, but will be required to do so under new laws that went into effect on July 1, 2010. Certain features of these laws probably should be adopted in those states where state law itself provides a means to implement them.

Pursuant to these new Maryland laws, for instance, banks seeking to foreclose must demonstrate in filings that they reviewed and considered foreclosure alternatives, and provided specific notices to the borrowers. Importantly, these laws permit borrowers to be eligible to pursue court supervised mediation. Obviously, this law will change the timing, method and cost for conducting residential foreclosures in Maryland.

So the foreclosure process, as I've mentioned in previous Commentaries, is not going to cease permanently; for the most part, it will slow down for awhile, regroup, gather up its standing, reinforce its procedural integrity, and then restart.

Here's a good article on the Maryland controversy by a fine reporter who has been tracking this story with clarity for some time.

Servicing and Foreclosure

All this brings me to remarks that will be made today in an "Opening Address by FDIC Chairman Sheila C. Bair" at the Summit on Residential Mortgage Servicing for the 21st Century, an event sponsored in DC by the Mortgage Bankers Association.

In her prepared remarks, Mrs. Bair states that "chaos in mortgage servicing and foreclosure is introducing a dangerous new uncertainty into this fragile market," and that the "persistent adversary has been inertia in the servicing and foreclosure practices applied to problem loans." Her speech centers on the "mortgage servicing problem."

I think this observation of hers pretty much sums up the situation:

"The mortgage crisis also has revealed a fatal flaw in this unbundling of the mortgage-lending process: the misalignment of incentives between the various parties and specialists involved. We have dramatically underappreciated the potential for what economists call "principal-agent" problems arising from misaligned incentives. Mortgage brokers and lenders had little or no incentive to worry about whether borrowers could repay their mortgages. Neither did the investment banks putting together securitizations and CDOs." (My Emphasis.)

Some Suggestions

Essentially, Mrs. Bair suggests a clearly delineated loss mitigation approach that enhances mediation. Perhaps this realization is dawning belatedly on her and the servicers part, but at least it is being discussed in some way.

The suggestions she outlines are well worth considering:

1) In order to remedy failures endemic to the largest mortgage servicers ... [there should be] "enforceable requirements that will significantly improve opportunities for homeowners to avoid foreclosure."

2) Servicers must commit to adequate staffing and training for effective loss mitigation ... [and] "establish industry benchmarks - based on a maximum number of delinquent loans per representative - and insist on a minimum standard of training to ensure that staff are up-to-date on the latest loss-mitigation programs."

3) [Servicers should] "expedite the loan modification process and help clear the market, [looking] for opportunities to greatly simplify loan-modification offers in exchange for waivers of claims."

4) Regarding second lien holders interests competing with first lien holder interests, "as part of any resolution of claims regarding large servicers, a fixed formula should be established to govern the treatment of first and second mortgages when the servicer or its affiliate owns the second lien" [a formula which should, at minimum] "require that the subordinate lien be reduced pro-rata to any change in the first mortgage."

5) There should be an "independent review of loss-mitigation denials" and "borrowers should have the right to appeal any adverse denial of a loan modification request to an independent party who has the proper information to conduct an immediate review and the power to correct erroneous determinations."

6) "Weak practices" in handling title documentation must also "cease" by assuring that banks and other servicers will be required to "foreclose in their own names instead of allowing MERS to foreclose [and] provide complete chain of title and note transfer history in the notice of default."

7) Settlements should eliminate "incentive payments to law firms for speedy foreclosures, as well as the use of lost-note affidavits, except where the servicer has made good faith efforts to obtain the note" [and such settlements] should "prohibit foreclosure sales when a loan is in loss mitigation, except in specific situations where delay would disadvantage the investor, violate existing contracts, or reward a borrower acting in bad faith."

Foreclosure Claims Commission

Mrs. Bair asserts a rather bold suggestion - one I have heard much about over the last few years, but now note that it has made its way into quotidian discourse: the creation of a foreclosure claims commission.

According to Mrs. Bair, this commission would be "modeled on the BP or 9/11 claims commissions, [and] could be set up and funded by servicers to address complaints of homeowners who have wrongly suffered foreclosure through servicer errors."

I think this will likely be resisted politically, legally, and financially for a number of reasons, but I'll let Mrs. Bair speak:

"Many in the servicing industry will resist a settlement such as this because it would impose much of the immediate financial cost on the major servicers themselves. But this would be short-sighted. The fact is, every time servicers have delayed needed changes to minimize their short-term costs, they have seen a deepening of the crisis that has cost them - and the rest of us - even more."

Resolutions

Somewhere in the interstitial fields of loss mitigation and foreclosure actions a resolution must be found.

And must be found soon!

What do you think?

I would welcome your comments.
Please feel free to email me at any time.

HAMP: Continues Downward Trend

The government program established to assist homeowners in distress continues to under perform, with 91,118 trial modifications under the Home Affordable Modification Program (HAMP) being canceled in June and of those more than 70% had been in a trial period for six months or longer.

Based on the June 2010 Servicer Performance Report (Report) issued on July 20, 2010, it appears that, more often than not, most borrowers aren't surviving the trial modification stage.

Servicers also converted 51,205 trials to permanent modifications, approximately 3,481 more conversions than occurred in May. During the same period, the number of trial modifications also increased from May, growing from 30,099 to 38,728.

The recidivism rates for HAMP modifications six months after converting to a permanent modification are 5.9% of HAMP loans are 60+ days delinquent and 1.7% are 90+ days delinquent. At nine months after conversion, the rates rise to 7.7% for 60-day delinquencies and 2.4% for 90+ day delinquencies.

The velocity of the program is slowing down considerably!

On a cumulative basis, trial modifications started in September-October 2009 were 156,019, but the number of trial modifications in May-June 2010 were 15,753 - about a 90% reduction!

If you have any questions about this matter or would like assistance with mortgage compliance, please contact Jonathan Foxx, Managing Director or call 516-442-3456 x 100.

Highlights

●Number of permanent loan modifications: 346,816 to 389,198 (Increase: 42,382)
●Number of trial modifications canceled: 429,696 to 520,814 (Increase: 91,118)
●Number of "active trials": 467,672 to 364,077 (Decrease: 103,595)

These statistics clearly show that the number of failed trial modifications to date are significantly greater than the number of successful, permanent ones, while the number of trials started has dropped precipitously.

As indicated above, the velocity of the program is slowing down considerably. On a cumulative basis, trial modifications started in September-October 2009 were 156,019, but the number of trial modifications in May-June 2010 were 15,753 - about a 90% reduction!

This is the slowest month-over-month pace since the program began.

Taken together, the above two charts indicate why trials modifications are probably slowing down: servicers are now pre-qualifying borrowers and are also running out of eligible borrowers.

The median front-end DTI before modification is 44.8% (which is about where it has remained for several months); and, the back-end DTI before modification is an astronomically high 79.9% (which, in any event, has been in this high range of 77.5% to 80.2% for several months).

That back-end DTI discloses an inescapable fact: nearly 80% of the borrower's income is going to servicing debt - and nearly 63.7% of income even after loan modification - a troublesomely high back-end ratio, which indicates likely defaults in the future.

It's no wonder that many borrowers never make it out of trial modification into permanent modification. Indeed, these are "median" characteristics - so many borrowers have even higher risk profiles.

Clearly, the program is not meeting with the kind of success predicted at its inception and is gradually coming to an end.

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Making Home Affordable Program
Servicer Report - June 2010 (07/21/10)

Fannie Mae: Loan Quality Initiative Summary

Overview

Since the introduction of Fannie Mae's Loan Quality Initiative on February 26, 2010 (LQI), several important updates and announcements have been issued.

On June 28, 2010, Fannie updated its matrix, entitled Loan Quality Initiative (LQI) Summary and Additional Information (Summary), which summarizes enhancements, and provides key calendar date, tools, and resources.

The Loan Quality Initiative has focused on several areas, including:

• policies that confirm the identity and occupancy of the borrower, validation of qualified parties to the transaction, and policies that address the borrower's credit profile;

• updated quality control requirements for lenders and an improved feedback loop;

• the delivery of additional information about the property and the appraisal;

• loan delivery enhancements, including,

1. validation of loan eligibility at delivery,
2. a new capability that enables lender validation of data before, during and immediately after loan delivery, and,
3. collection of additional loan data at delivery and transition to an XML format;

• reporting and validation of mortgage insurance coverage data.

Inasmuch as revisions and implementation dates related to the above-mentioned areas are also incorporated by reference into Fannie's Selling Guide, the Summary is an important information resource and guide.

At this time, the Summary contains columns for:

• Change or Enhancement: policy or procedure subject to revision

• Communications: references and citations

• Key Dates: effective dates for compliance implementation

• Tools and Resources: information and outreach facilities

The Summary also contains a conversion matrix for the Calendar of Key Dates, chronologically outlined, with correlating Loan Delivery descriptions, and areas affected (i.e., Communications, DU, and Other).
Monitoring Fannie's LQI is central to mortgage compliance implementation and should be regularly reviewed by all compliance personnel.

If you have any questions about this matter or would like assistance with mortgage compliance, please contact Jonathan Foxx, Managing Director or call 516-442-3456 x 100.

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Loan Quality Initiative (LQI) Summary and Additional Information
Revised 6/28/10
Fannie Mae

HAMP: APRIL LOAN MODIFICATION REPORT

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Overview

On May 17, 2010, the U. S. Department of the Treasury and the Department of Housing and Urban Development (HUD) released April 2010 data for the Obama Administration's Home Affordable Modification Program (HAMP) showing permanent modifications for almost 300,000 homeowners - an increase of 68,000 or almost 13 percent over March.

New in this month's report is information about servicer-specific conversion rates to permanent modifications and servicer performance in giving homeowners timely decisions. The data show that there is wide variation among servicers in these areas, further demonstrating the need for transparency regarding servicer performance.

Highlights

Almost 300,000 permanent modifications -
An Increase of 68,000

• Borrowers in permanent modifications are experiencing a median payment reduction of 36%, more than $500 per month.
• Over 68,000 trial modifications converted to permanent modifications in April, an increase of almost 13% from March.

Servicers Begin to Require Upfront Documentation

• In order to comply with Treasury guidelines that take effect on June 1, in March 2010 servicers began collecting upfront documentation from borrowers prior to initiating new trial modifications.
• Treasury is monitoring servicer performance closely to ensure that borrower demand is met and that servicers are reviewing modification requests in a timely manner.

Resolutions to Borrowers
Who Entered Trials Before January 1, 2010

• Common causes of cancellations include missed trial payments and incomplete or unverifiable documentation.

New This Month
Conversion Rates By Servicer

• Servicers show wide variation in conversion rates as measured against trials eligible to convert.
• Servicers who started trials with verified documents generally posted higher conversion rates than servicers who allowed borrowers to enter trials with stated income. With recent Treasury guidance, all servicers are now verifying borrower documents before trial start.
• Using stated income upon trial starts, the four largest participating servicers have conversion rates below 30%.

New This Month
Aged Trial Modifications by Servicer

• Servicers show wide variation in completing timely decisions on trial modifications.

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Making Home Affordable Program
Servicer Report
April 2010 (05/17/10)

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