Fourteen U.S. mortgage servicers and their affiliates are making available a free, "impartial" Independent Foreclosure Review process (website - Independent Foreclosure Review) to certain of their borrowers, as part of certain consent orders entered into with federal bank regulators, the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), and the Board of Governors of the Federal Reserve System.

The review process was put into place by the regulators to determine how many borrowers were harmed by faulty procedures including: robo-signing, dual-track foreclosures, and a shortage of qualified staff to work with delinquent borrowers.  The process has been set up to identify customers who were part of a foreclosure action on their primary residence during the period of January 1, 2009 to December 31, 2010. The reviews will span nearly 4.5 million loan files and could take up to a year to complete, according to Acting Comptroller of the Currency John Walsh.

If eligible borrowers believe that they were financially injured as a result of servicer errors, misrepresentations or other deficiencies in the foreclosure process on their primary residence, they can request a review of their foreclosure file to verify that their foreclosure process was handled properly.

An estimated 4.5 million borrowers will be notified by a letter explaining the review process and a Request for Review Form. The mailings will be staggered to better manage volumes in stages beginning Nov. 1, 2011, with an ad campaign to follow. A 1-800 number has been established as well.  A review administrator will allegedly send a confirmation one week after the borrower sends in a five-page request form.

Joe Evers, deputy comptroller for large banks at the OCC, said a remediation plan is still under development to determine how borrowers will be paid. He added that it could take months to figure out how to do that and it was difficult to estimate when a borrower would receive a check.  "It will be a lengthy process," Evers said.

The OCC said it would release the names of the independent consultants soon. The consent orders did leave room for a fine, but Evers said the fine will be determined after the reviews are completed.

So, another government led program aimed at addressing the fallout from the financial crisis brought on by the ramp up of securitization of home mortgages.  It appears that the Independent Foreclosure Review will be a time-consuming procedural morass that has no pre-defined mechansim for determining what remedies will be made available to eligilble homeowners.  Let's hope the various attorneys general are able to reach a substantive settlement with lenders and servicers that has some meat to it.

The list of participating servicers includes:

• America’s Servicing Co.
• Aurora Loan Services
• Bank of America
• Beneficial
• Chase
• Citibank
• CitiFinancial
• CitiMortgage
• Countrywide
• EMC
• EverBank/EverHome Mortgage Company
• GMAC Mortgage
• HFC
• HSBC
• IndyMac Mortgage Services
• MetLife Bank
• National City Mortgage
• PNC Mortgage
• Sovereign Bank
• SunTrust Mortgage
• U.S. Bank
• Wachovia Mortgage
• Washington Mutual (WaMu)
• Wells Fargo Bank, N.A.

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The Mortgage Electronic Registration System ("MERS") is increasingly under attack from multiple angles.  MERS describes itself as "an innovative process that simplifies the way mortgage ownership and servicing rights are originated, sold and tracked."  Created by the real estate finance industry, including many of the largest lenders and Fannie Mae, MERS allegedly "eliminates the need to prepare and record assignments when trading residential and commercial mortgage loans."  This bypassing mechanism is what has garnered the attention of recording offices throughout the country.

Geauga County in Ohio just filed suit against MERS alleging that it bypassed the recording of mortgage assignments in local registry offices (as MERS was intentionally designed to do), thereby depriving numerous Ohio counties on revenue from filing fees.

The lawsuit comes only weeks after the Dallas County District Attorney sued MERS and its parent company, Merscorp. Inc., alleging the system acts as a shadow recording system that allows lenders to avoid local mortgage registration fees - this according to HousingWire.com.

HousingWire reports that the suit was filed by David Joyce, prosecuting attorney for Geauga County.

"The MERS business model and practices comply with the recording statutes and regulations of Ohio," a MERS statement of response reads. "This position has been upheld in numerous cases in Ohio courts and countless cases across the country on the state and Federal level. We are confident that MERS’ business practices will be upheld in court as complying with Ohio law."

The complaint also names various financial institutions as defendants – including Bank of American, Chase Home Mortgage, Citi, HSBC Bank, and others, all of whom used MERS to bypass the need to record transfers of the beneficial interest under deeds of trust on properties. 

In the suit, Geauga County claims "the defendants systematically broke chains of land title throughout Ohio counties' public land records by creating gaps due to missing mortgage assignments they failed to record, or by recording patently false or misleading mortgage assignments." The county claims MERS' failure to pay filing fees is a violation of Ohio state laws.

These suits may signal the opening of the floodgates by counties seeking to recoup lost revenue; though one must question the level of damages suffered, as each county also did not have to do the work necessary to receive the money they charge.  Makes me wonder how much it costs to record versus how much they charge for each recording. 

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When it rains, it pours.  The fallout from the artificially generated housing bubble and the attendant financial crisis is really starting to take hold against the various major players in the banking industry.  It seems everyone with any stake in the mortgage meltdown, from individual home owners to purchasers of mortgage-backed securities, are seeking their pound of flesh from the likes of Bank of America, JP Morgan Chase, CitiBank, Ally Financial, Wells Fargo, UBS, Goldman Sachs, Deutsche Bank, and others.

The New York Times broke the story yesterday that the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, the failed government agencies relegated to taxpayer-backed conservatorship three years ago, is set to file lawsuits against twelve of the major banks.  The suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under the nation's securities laws and missed evidence that borrowers' incomes were inflated or falsified.

The FHFA issued sixty-four subpoenas last year to issuers and servicers of mortgage-backed securities - one of the largest investigations to date of alleged securities fraud stemming from the housing bust.  The FHFA, with subpoena power, has a huge advantage over private investors, which have had a harder time gaining access to the loan files, critical to filing lawsuits against the banksters.  The suits are likely to be filed now because regulators are concerned that it will be much harder to make claims after a three-year statute of limitations soon expires.

In the heyday of loan originations and sales into the secondary market, Fannie and Freddie couldn't purchase those loans directly, but they were allowed to invest in slices of "private-label securities" that were backed by subprime and other risky loans, but were rated as safe AAA investments by the ratings agencies.  Indeed, Fannie and Freddie were among the largest investors in those securities.  Freddie and Fannie began increasing their purchases of private-label securities early last decade in order to boost profits while satisfying government mandates to support affordable housing.  By law, Fannie and Freddie were required to back loans to low-to-moderate income borrowers, and the private-label securities were counted toward those goals. In 2005 alone, Freddie Mac purchased $180 billion in private-label securities, up from $24 billion four years earlier.

In the the lead up to the financial crisis, “the market was so frothy then it was hard to find good quality loans to securitize and hold in your portfolio,” said David Felt, a lawyer who served as deputy general counsel for FHFA until January 2010. Moreover, the private-label securities carried higher yields at a time when the two mortgage giants could buy them using money borrowed at rock-bottom rates, thanks to the implicit federal guarantee they enjoyed.  According to Felt, “Fannie and Freddie thought they were taking AAA tranches, and like so many investors, they were surprised when they didn’t turn out to be such quality investments."  This despite the fact that Freddie was warned by regulators in 2006 that its purchases of subprime securities had outpaced its risk management abilities, but the company continued to load up on debt that ultimately soured.

Fannie and Freddie still hold billions of dollars in mortgage securities backed by more shaky home loans like subprime mortgages, Option ARM and Alt-A loans.  Sadly for the American taxpayer, these securities have been among the poorest performing mortgages.  The U.S. government has spent $141 billion to keep Fannie and Freddie afloat. Freddie Mac allegedly estimates its total gross losses stand at roughly $19 billion, while Fannie Mae allegedly estimates its losses at nearly $14 billion.

While the FHFA has been making noise about pursuing the banks for some time, as Naked Capitalism has reported, "the overarching story remains the same: the more rocks you turn over in mortgage land, the more creepy-crawlies emerge."  In Arizona, when you turn over rocks in the desert, you often find scorpions.  They creep and crawl and they pack a mean sting.  It remains to be seen just how many stingers the Too Big To Fail camp have.

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I took three different calls this past week from homeowners who have sought the assistance of Bank of America's servicing subsidiary, BAC Home Loans Solutions, for a loan modification.  What most unsuspecting homeowners do not realize is that BAC simply has no vested interest in actually making good on the false promises it continues to peddle to these homeowners.  Is it any wonder that the Arizona Attorney General has intervened.  In summing up the over 400 complaints it has received about Bank of America and its servicer BAC's handling of loan modifications, the A.G. states the following in its Complaint against these entities: 

"Defendants have continued to engage in widespread consumer fraud by misrepresenting to Arizona consumers whether they were eligible for modifications of their mortgage loans, when Bank of America would make a decision on their loan modification requests, whether Bank of America had approved their modification requests, why Bank of America declined their modification requests, and whether and when Bank of America would foreclose upon their homes."

BAC, like many other servicers, systematically lulls homeowners into believing that a loan modification is something other than a pipe dream.  However, and as noted in the A.G.'s Complaint, BAC, again, like many other servicers, has been "dual tracking" delinquent loans.  While BAC promises that it is working on a homeowner's loan modification, it is at the same time, in a different department, pushing forward with a foreclosure action.  Indeed, servicers habitually allow howeowners to make lower "trial modification" payments and then send the homeowner a Notice of Intent to Accelerate.  So the servicers accept the lower payment and then use the fact that the homeowner is paying less each month to create lump sum delinquencies that most homeowners cannot pay. 

Indeed, in one case I reviewed this past week, the homeowner had never missed a payment, but sought a loan modification to try and ease their struggle.  They sent in the requisite paperwork, then sent it in again, then sent it in again.  They were promised a lower trial modification payment, which they dutifully made each month for several months, and then they received word a Notice to Accelerate.  While BAC was happy to take the new trial modification payments each month and cash those checks, it was at the same time reporting to credit agencies that the homeowners were delinquent each month (due to the difference between the old payment and the lower trial modification payment).  BAC was again dual tracking this loan towards foreclosure.

We would have been far better off if the banks had just said to homeowners, "Sorry, we are not offering any loan modifications.  Make your payment or lose your house."  Instead, in no small part due to the federal HAMP program, howeowners are instead lulled into the very mistaken belief that they are going to receive a loan modification.  Well, guess what, BAC, like most other laon servicers, get paid whether they string you along or foreclose.  Indeed, it is best to "dual track" by stringing people along and then foreclosing on them.  That way, the servicer makes the most money - even if it is contrary to the best interest of the actual investor holding the mortgage.  Perverse times we live in, eh?

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A San Diego police officer and his wife recently pleaded not guilty to accusations that they trashed their foreclosed home in Riverside County, taking $44,000 in appliances and fixtures with them when they moved out.  Both have been charged with one felony count of damaging or carrying away items from a foreclosed property.  Damage was estimated at over $165,000.

If convicted, they could face up to four years in prison.  As reported in the Press-Enterprise and the Signon Sand Diego, the damage included stones smashed off the facade, dye poured on carpets, wiring pulled out of walls, spray-painted the walls, cut and chopped-down shrubs tossed in the backyard swimming pool, and pulled out electrical wires and cut them.

Supervising Deputy District Attorney Arthur Chang said the damage was "indicative of a great deal of maliciousness and bitterness."  Robert Acosta's attorney, Albert Arena, raised questions about the ownership of the property and the conduct of the Acostas' lender. He said it was "a stretch" to charge the couple with a crime

Robert Acosta is a 12-year veteran of the San Diego Police Department and served eight years in the U.S. Marine Corps.  San Diego police officials said Acosta is on administrative leave.

Riverside County authorities said this is the only case they can recall in which a former homeowner has been charged with a crime for damage to a foreclosure.

A witness saw the Acostas June 12 removing items from the home, court records state. Later, investigators recovered $7,920 in stolen property, including appliances, chandeliers, shutters, iron gates and exterior lights in the Acostas' storage units in San Diego County.

While a likely majority of homeowners in Arizona will be protected by the anti-deficiency statutes in the event of a foreclosure, if a homeowner causes "waste," the lender can seek recourse against those borrowers.  It will be interesting to see whether criminal charges become more prevalent as the foreclosure crisis continues.     

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MERS or the Mortgage Electronic Registration Systems, little known before the foreclosure tsunami struck, was developed in the early 1990's by a number of financial entities, including Bank of America, Countrywide, Fannie Mae, and Freddie Mac, allegedly to allow consumers to pay less for mortgage loans, streamline the mortgage process through electronic commerce, and eliminate the need to prepare and record assignments when trading residential and commercial mortgage loans.  MERS describes itself as "innovative process that simplifies the way mortgage ownership and servicing rights are originated, sold and tracked."  Sounds nice, right? 

Well, as detailed by Floyd Norris of the New York Times in his article "Some Sand in the Gears of Securitizing," and elsewhere, MERS has been under attack for its part in the massive securitization of the American housing market. 

Indeed, as alleged in a Nevada class action called Lopez vs. Executive Trustee Services, et al., MERS was a very serious contributor to the financial crisis: "Before MERS, it would not have been possible for mortgages with no market value . . . to be sold at a profit or collateralized and sold as mortgage-backed securities. Before MERS, it would not have been possible for the Defendant banks and AIG to conceal from government regulators the extent of risk of financial losses those entities faced from the predatory origination of residential loans and the fraudulent re-sale and securitization of those otherwise non-marketable loans." 

In other words, without MERS, transparency would have ruled the day, counties would have been paid their recording fees, consumers, attorneys, and title companies could easily track chain of title, and foreclosures would have been processed much more effeciently.  Instead, we have servicers with their own vested interests pitted against investors who cannot readily make decisions about their pooled notes; thus, the entire foreclosure process grinds away glacially, subject to legal attack at every turn.

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Bank of America, which bought Countrywide Financial for $4 billion in stock in early 2008, has come under pressure from the Massachusetts Attorney General, as a result of Countrywide's notorious lending practices.  Bank of America's move is part of an agreement to settle claims over certain high-risk loans made by Countrywide.  See link to Wall Street Journal article.

Bank of America's program is limited to Countrywide borrowers whose loan balance is at least 120% of the estimated home value, who are at least 60 days overdue, and who can show that financial hardship makes them unable to meet current payments. The bank estimated that 45,000 customers will qualify for principal reductions averaging more than $60,000.  In the end, only the riskiest loans will be eligible. They include sub-prime loans; "option adjustable-rate" mortgages entailing minimal payments now but big increases later; and certain loans that have a fixed rate for two years and then adjust annually.

Any thought that principal reduction is the path the lenders are heading in should consider the limited scope of the agreement between Bank of America and the Massachusetts Attorney General.  Nonetheless, the action by Bank of America is notable because it is the largest mortgage servicer, collecting loan payments on one of every five home loans in the U.S. At the end of last year, 14.76% of them were at least 30 days past due or in foreclosure, versus an industry average of 12.31%, according to Inside Mortgage Finance. 

Principal reduction is clearly the direction that the large majority of underwater borrowers clearly are hoping the major banks are leaning towards.  Given that lenders must incur substantial costs in foreclosing, only to take a wash when they sell the foreclose property as a Real Estate Owned property, it only seems practical to try and keep people in their homes by reducing the principal.  I have seen many properties where the bank ended up selling a foreclosed property for substantially less than they would have made had they just worked with the homeowner.  No one claims that reason is driving this ship. 

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