Which begs the question that I have been mulling all along: WHY are Treasury, Obama, the banks and seemingly everyone asking servicers to do something that they are not legally authorized to do by their PSAs?
Why is the government pumping tons of money into a servicing industry to do loan mods when they cannot legally do spit to stem the tide of foreclosures? Why does the government tell borrowers to "work with the servicers" when the servicers have no real authority to do anything?
It is interesting to see that bondholders have finally realized that servicers do not perform in their best interests. Borrowers have known for years that servicers do not work in their interests. It is beginning to be more evident that servicers perform best for the servicers.
Watch these lawsuits and the news reports. As the investors start firing the servicers (who probably don’t have any authority now anyway) and start hiring new servicers they will be performing due diligence. As they trace the paperwork and discover the incurable gaps in title, ownership, credit and money trails, you will find them changing the narrative considerably from blame the borrower to how can we work with borrowers to minimize our losses?
And wait until they figure out that millions of foreclosed homes are NOT being held for the investors in inventory and hundreds of thousands of homes “sold” have toxic titles where the proceeds of sale were not given to the investors either.
"With lawsuits against servicers grinding a slow path through the court system, investors are looking to make an end-run around the intransigent banks who are refusing to service mortgages in accordance with bondholder wishes. Their solution to break through the gridlock surrounding so-called "toxic" mortgage-backed securities? Use the mechanisms in their pooling and servicing agreements (PSAs)--the agreements that govern the creation, maintenance and payment streams of mortgage-backed securities--to remove conflicted servicers from their roles and insert friendly institutions willing to service the loans consistent with the best interests of the investors.
According to one group of prominent investors (hereinafter the "Securitization Syndicate"), who asked to remain anonymous because the plan is still in the works, investors with large holdings in mortgage-backed securities are beginning to join forces to petition securitization Trustees to relieve Master Servicers from their posts. Under the terms of most PSAs (which tend to vary little from trust to trust), the Master Servicer is required to service loans in such a way as to maximize investor returns. However, due to recognized conflicts of interest (such as significant holdings in junior mortgages and an interest in accumulating fees from delinquent loans), servicers instead have frequently breached these obligations and refused to liquidate or modify loans that borrowers are incapable of repaying.
The problem is that, under the terms of most PSAs, the only party with the power to do anything about a breach of an obligation by a Master Servicer is the Trustee. Trustees are generally large financial institutions that are paid a fee to oversee the flow of money through the securitization waterfall and to carry out certain administrative tasks. Though the Trustee may remove a Master Servicer, because the Trustee was designed to play a fairly passive role, it is not required to enforce servicer breaches on its own initiative.
Instead, bondholders must petition the Trustee to take action. In this regard, most PSAs require that at least 25% of the Voting Rights (evidenced by beneficial ownership of 25% of the bonds) give notice to the Trustee of a breach by the Master Servicer before triggering any obligations by the Trustee. Only when the Trustee fails to remedy the breach within 60 days after such a petition may the bondholders bring legal action on behalf of the Trust.
However, most PSAs also provide the following: "The Holders of Certificates entitled to at least 51% of the Voting Rights may at any time remove the Trustee and appoint a successor trustee." (quoted from the representative PSA for Countrywide Alternative Loan Trust 2005-35CB) Anticipating that the Trustee will not take action against the Master Servicer, and reluctant to engage in yet another protracted legal battle to enforce servicers' obligations, the Securitization Syndicate is shooting for a more ambitious goal: amass a 51% interest in one securitization so that they may remove the Trustee, appoint a friendly successor, and get that successor to fire the Master Servicer.
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