Bankruptcy attorney on robo-signing fraud and mortgage mod litigation

This bankruptcy attorney in the video below says he has been fighting the robo-signing issue since 2007. He also shows how the signature of certain robo-signers is "comically" different from one document to the next, indicating fraud. (Hat tip Glen).

The interesting bit for me comes at about the 3:15 mark when he is asked whether he was able to keep home owners in their homes as a result of uncovering the fraud. This is the question everyone is grappling with: are we just delaying the inevitable? Are these homeowners squatters – deadbeats, if you will?

Mr. Shaev says he has been able to get banks to modify loans as a result of this (expensive) process and the home owners did stay in their homes. My conclusion is that if homeowners had the financial wherewithal to get counsel from people like Shaev, they would more often be able to stay in their homes via a mortgage modification. Take a look at the video.  I have some more comments below.

In my view, it is the lack of an identifiable and willing counterparty in mortgage modifications which is the key problem in the securitized mortgage arena.

What this has meant is that there is considerable distance between a homeowner and a mortgage holder, such that in the event of foreclosure, it is not a matter of picking up the telephone and calling Mr. Smith at the local Bank. Often times, there is a byzantine web of originating bank, mortgage holder (if loan is sold), mortgage servicer, MBS pooling/securitizing agent, and investors. Needless to say, the average person doesn’t have a clue as to who to call in order to get relief to avoid foreclosure. The obvious port of call is the mortgage servicer, who is the one party with whom a homeowner has ongoing contact.

Mortgage Servicer

Below is a research report written by the National Consumer Law Center just this past month on why consumers in jeopardy of suffering foreclosure cannot get loans modified.

It starts:

The country is in the midst of a foreclosure crisis of unprecedented proportions. Millions of families have lost their homes and millions more are expected to lose their homes in the next few years. With home values plummeting and layoffs common, homeowners are crumbling under the weight of mortgages that were often only marginally affordable when made.

One commonsense solution to the foreclosure crisis is to modify the loan terms. Lenders routinely lament their losses in foreclosure. Foreclosures cost everyone—the homeowner, the lender, the community—money. Yet foreclosures continue to outstrip loan modifications. Why?

Once a mortgage loan is made, in most cases the original lender does not have further ongoing contact with the homeowner. Instead, the original lender, or the investment trust to which the loan is sold, hires a servicer to collect monthly payments. It is the servicer that either answers the borrower’s plea for a modification or launches a foreclosure. Servicers spend millions of dollars advertising their concern for the plight of homeowners and their willingness to make deals. Yet the experience of many homeowners and their advocates is that servicers—not the mortgage owners—are often the barrier to making a loan modification.

See the problem?  This is exactly why loan modifications are not happening in large enough numbers.  This goes to incentives – mortgage servicers are not incentivized to make modifications. In fact the incentives go the other way – foreclosure.

Servicers have four main sources of income, listed in descending order of importance:

• The monthly servicing fee, a fixed percentage of the unpaid principal balance of the loans in the pool;
• Fees charged borrowers in default, including late fees and “process management fees”;
• Float income, or interest income from the time between when the servicer collects the payment from the borrower and when it turns the payment over to the mortgage owner; and
• Income from investment interests in the pool of mortgage loans that the servicer is servicing.

Overall, these sources of income give servicers little incentive to offer sustainable loan modifications, and some incentive to push loans into foreclosure.

–Why mortgages aren’t modified and what a ruling stopping foreclosures means, Oct 2009

So, there is a conflict then between the servicer and the MBS trust, the actual owners of the loan, the ultimate lenders. It is preferable from the lender’s point of view for a mortgage to be modified if it can be because the loan loss in foreclosure is significantly greater for the lender. An indebted and cash-strapped homeowner that still has a job and can modify is not going to be able to easily jump through the legal hoops that a securitized mortgage puts up in allowing a modification.

But, mods don’t happen and foreclosures do for many of the reasons identified above. The securitization process is a legal morass filled with conflicting interests that lead to foreclosure instead of loan modification. In the end, this is a drag on house prices, on pension fund asset losses and on bank balance sheets, and therefore bank lending, household net worth and the economy as a whole.