Mortgage Servicing Fraud
occurs post loan origination when mortgage servicers use false statements and book-keeping entries, fabricated assignments, forged signatures and utter counterfeit intangible Notes to take a homeowner's property and equity.
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Congress Seeks Clarity on FAS 140

Concerned about subprime mortgage defaults, lawmakers take a sudden strong interest in the details of securitization accounting.

Alan Rappeport,

June 21, 2007

Members of Congress sent a letter to Christopher Cox, chairman of the Securities and Exchange Commission, last week asking for clarification of an accounting rule that has hindered subprime mortgage borrowers from modifying the terms of their loans.

The rule in question is FAS 140, which governs accounting for securitizations (debt that is chopped up and sold to new investors as bonds). The letter, signed by 11 Democrats including Rep. Barney Frank, chairman of the House of Representatives Committee on Financial Services, asked, "Does FAS 140 clearly address whether a loan held in a trust can be modified when default is reasonably foreseeable or only once a delinquency or default has already occurred? If not, can it be clarified in a way that will benefit both borrowers and investors?"

The question comes as subprime borrowers seek ways of maintaining good credit and remaining in their homes despite the rising rate of mortgage foreclosures. Members of Congress seek clarity on what makes the likelihood of a default "reasonably foreseeable" so that institutions could make modifications to loans without violating FAS 140.

"Their motivations are understandable," says George Miller, executive director of the American Securitization Forum (ASF). "They, like industry participants, are interested in taking proactive steps to prevent foreclosures."

The ASF issued a report earlier this month suggesting that loan modifications should be made on a loan-by-loan basis, and that allowances should be made for changing interest rates, forgiving principal payments and extending the maturity date to reduce the risk of losses.

The letter comes as the Financial Accounting Standards Board (FASB) has been pushing ahead to make changes to FAS 140, potentially altering the treatment of qualified special purpose entities (SPEs) to create specific criteria for determining when assets and liabilities that arise from transfers of assets should be linked on a balance sheet.

As the rule stands, modifying the terms of a securitized loan could erode the notion that the transfer of debt to the SPE is an actual sale and make it appear more like a borrowing. Most institutions that service loans cannot alter them until a month after the borrower defaults.

At a House Committee on Financial Services hearing on subprime mortgage lending last month, Warren Kornfeld, managing director for the residential mortgage-backed securities at Moody's said that restrictions limiting servicers' ability to modify distressed loans are not beneficial to holders of bonds. "We believe loan modification can typically have positive credit implications for securities backed by subprime mortgage loans," he said.

Some have also expressed concern that allowing more liberal use of loan modification as a result of problems in the subprime mortgage market could have negative effects for other securitization markets.

At the same hearing, Larry Litton, CEO of Litton Loan Servicing, said that a "modify everybody" approach could harm investors who purchased mortgage-backed securities, as most borrowers are able to make their payments. "We believe that modifications have to be made one loan at a time as each borrower, his loan and his financial circumstances are different," Litton said. "Now, one problem we have is that more work needs to be done on accounting rules which prevent servicers from being more proactive in terms of reaching out to borrowers."

The ASF agrees, arguing that the accounting rules are intended to give servicers the ability to minimize losses and maximize recoveries. "You have an accounting standard which very clearly embraces, and within the SPE rules, acknowledges the existence of servicing rights," says Miller.

Although Congress sent its letter to Cox, the FASB remains responsible for setting the accounting standards. The letter asked to know if a clarification would be possible from the SEC, saying that if it was not they would evaluate "other options." Rep. Carolyn Maloney, chair of the House Financial Services subcommittee on financial institutions, has said that Congress will be "putting pressure and bringing pressure to bear" to get a FASB ruling clarifying the issue.

Congress Seeks Clarity on FAS 140 - Accounting -

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Subprime: Big talk, little help

Lawmakers are talking the talk, but mortgage lenders are having a hard time walking the walk when it comes to helping at-risk borrowers.

By Jeanne Sahadi, senior writer

NEW YORK ( -- The bullhorn message from the government to mortgage lenders has been: Bend. Do what you can to help struggling homeowners.

The message to troubled homeowners has been: Call your lender. You may be able to work something out.

Despite the persistent blare, there is not a whole lotta "loan modifying" going on yet.

A survey by Moody's found that most subprime-loan servicers this year had modified only about 1 percent of their adjustable-rate mortgages (ARMs) that had reset to higher rates by the end of July. Servicers, which may or may not be the original lender, collect mortgage payments and deal with defaults and foreclosures.

At the Consumer Credit Counseling Service (CCCS) of San Francisco, which has been working with borrowers referred by lenders, a loan modification is the rare exception rather than the rule.

In a modification, a loan servicer could, for instance, freeze the loan's introductory rate for 24 months or fix that rate for the remainder of the loan.

But based on what the credit counselors have seen from lenders' responses, "if a borrower is behind because of the rate hike, in general that is not enough of a reason to modify the loan. The borrower needs to have a reason [e.g., losing one's income or a medical crisis] and proof they can make the modified payment," said Erica J. Sandberg, CCCS of San Francisco's financial education and communications advisor.

And lenders are not likely to even consider a modification unless a borrower is already behind in their payments, Sandberg said.

There are competing reasons for why modifications are few and far between, and they don't necessarily speak to willful refusal on the part of lenders and servicers.

Swamped lenders. Lenders have been bombarded with requests for modifications and aren't adequately staffed to handle them, according to Mortgage Bankers Association spokesman John Mechem, who added that lenders are in the process of hiring more people.

Borrowers in too deep. Loan modifications don't make sense for some borrowers since they've already had trouble handling their mortgages before their rates reset higher. In those cases, Sandberg said, modifications "just stretch out the problem."

For those borrowers, a credit counselor might recommend they ask their bank to agree to a short sale in which the bank will forgive the debt not covered by the sale of their home. Or they might pursue a deed-in-lieu-of-foreclosure - whereby they sign over the deed of their house to the lender and walk away without further obligation. If they choose this option, they may be able to minimize damage to their credit if they ask the lender to remove the negative reference on their credit report, according to legal information publisher NOLO.

The "Mother, may I?" factor. Servicers who get loans in securitized bundles - say 3,000 to 5,000 loans per deal - may be restricted in how many loans they may modify without seeking the permission of investors in those securities, said Larry Litton, president of Litton Loan Servicing. A 5 percent cap on the amount of loans that may be modified is typical.

What's more, the servicers' contracts with investors may have rules governing when modifications may be made.

The "Are you my mother?" factor. Sometimes no one knows who to ask for permission to modify a loan. "The loans have been sliced and diced so many times, that the owners cannot be found," said Center for Responsible Lending senior vice president Eric Stein, in written Congressional testimony delivered this week.

No-shows. There has been a push by lenders to contact at-risk borrowers earlier and more frequently. But the borrowers are hesitant. Litton said that for every six letters he sends to at-risk borrowers, he might get one response.

In some cases, if borrowers overstated their income on their original loan application to buy more home than they could afford, they're reluctant to admit that to the servicer since lying on a loan is illegal, said Allen Hardester, a mortgage consultant in Maryland.

Why it pays to modify more loans

Some servicers, like Litton, have made a concerted effort to modify loans whenever they can.

Litton estimates his company will have modified 2,000 loans in September, up from 1,400 in August. Of those 2,000 loans, he said, roughly 1,500 are loans in which the borrowers are already delinquent in their payments and the other 500 are loans that were current but which would have reset within 90 to 120 days.

Of the loans he's modified so far this year, he estimates that about half were cases in which he opted to allow the borrower to keep their current rate fixed for the remainder for the loan.

Modifying loans in advance of their becoming delinquent makes good business sense, Litton said. It costs him six or seven times more to service a delinquent loan than a current one because of the added time and expense required to make calls to delinquent borrowers and to analyze the loans gone bad.

And foreclosure is a losing proposition altogether. A Federal Reserve study found that up to 60 percent of the outstanding loan balance can be lost to legal fees, foregone interest and property expenses.

-- Les Christie contributed to the reporting for this article Top of page

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That's how Stephen Roach put it. The Morgan Stanley (NYSE:MS) economist is in today's paper, explaining why the fall of the dollar is bad news. In its simplest form, a weaker dollar means it takes more dollars to buy things on the open market. This year, for example, Americans will probably buy about $2.5 trillion worth of goods from overseas. They would get a lot more for their money if the dollar were stronger. Specifically, if the dollar were still worth what it was in 2002, they'd get 20% more. In other words, the dollar has lost 20% of its value - against most foreign currencies - in the last five years.

Against other things, also imported from overseas, the dollar has lost even more value. Zinc has gone up 60% in the last year alone. Nickel is up 125%. Over the last five years, oil has risen 158%. Wheat is 126% more expensive. And the aforementioned nickel has zoomed up 415%.

The dollar fell again yesterday - to another record low against the euro (EUR). You now have to pony up $1.41 to buy a single euro.

Americans who think Bernanke's easy money policy is going to save the economy need to think harder. Lower interest rates are supposed to make credit more abundant. But more credit, we argue, is just what the U.S. economy doesn't need.

In the next 18 months, about 2.5 million households are supposed to be affected by mortgage rate adjustments. The total of the mortgages is about $350 billion. First think about this: If the dollar were still worth what was worth five years ago, Americans could save about $500 billion on their foreign purchases - in one single year! The value of all U.S. assets is about, say, $50 trillion. A 20% cut is equivalent to a loss of wealth equal to $12.5 trillion…it is almost as if every single publicly traded company in the United States had gone broke.

Fed rate cuts are supposed to avoid a recession…so Americans don't get poorer. But the lower dollar makes them poorer anyway.

Now, consider this: Most of those subprime mortgages will be adjusted, not based on the Fed funds rate, but on the London InterBank lending rate. And long-term mortgage rates are not the same as the short-term rates. When the Fed cuts rates, it signals to lenders that inflation will increase. This pushes up rates on long-term loans - such as mortgages. So, when the Fed announced its cut last week, long-term rates actually rose almost as much as the Fed's half of a percentage point cut. Now, according to the Financial Times, the typical subprime mortgage will be reset to a rate around 10% - a huge increase in monthly expenses for the poor homeowner…and the effects (as we have seen) will be felt throughout the global economy: The Subprime Ticking Timebomb

Meanwhile, so many negative indicators are coming into The Daily Reckoning headquarters that we feel we need to call in an exorcist. Is a recession on its way? It looks to us as though it has already begun:

  • Housing inventories are at an 18-year high.

  • Housing sales (resales) are at a 5-year low.

  • Housing prices, according to Case/Shiller, fell in America's top 20 cities last month - 3.9%.

  • Late payments are running well above the historical average.

  • More than 150 mortgage companies have closed up shop.

While the value of Americans' number one asset is going down, their living expenses are going up. And it looks to us as though they are going to go up a lot more. Why?

Remember, there's a war of prefixes going on. There is no doubt that we are living in a 'flationary' world. But what kind of 'flation'? "In" or "de"? Each time we approach the question, we hesitate; but now we can give you a definitive answer: Both.

The 'flation' in the housing market clearly needs a 'de' in front of it. And so does the entire subprime U.S. economy. Yes, dear reader, it is a subprime economy. Like the subprime homeowner, the whole U.S. economy has too much debt, and a lifestyle it can't really afford. The Fed's grand gesture (offering more credit) looks good on TV (the yahoos watching James Cramer must love it) but it doesn't make the debt go away…it can't really stop the inevitable deflation of U.S. financial assets…and it actually increases pressure on the typical household, because it forces up prices.

The U.S. economy now depends on consumers; never has any economy depended on consumer spending more. Nearly three out of four dollars in the GDP are consumer spending.

Last week, retailers' sales fell 1%. Consumers would like to spend. But where will they get the money?

Tax receipts are down. August employment numbers showed that jobs are disappearing. And there are 1.3 million real estate agents in the country whose incomes must be falling.

Meanwhile, over on the "in" side of the 'flationary' battlefield, the forces of rising prices are gaining firepower too.

A report at USA Today tells us that this winter's heating costs will probably average about 10% more than last year for the typical family.

Bill Bonner at the Agora
Financial Investment Symposium

Commodities will be "skyrocketing," says our old friend Jim Rogers - because now the world has turned. All those millions of people in Asia, who were willing to work for such low wages, are now becoming consumers. What does a consumer consume? Nickel…copper…wheat…soybeans…and Kevin Kerr can certainly vouch for that. His Resource Trader Alert subscribes have been racking up some pretty nice gains on these high commodity prices - in fact, they just closed their wheat position for 241% profit - in just 30 days! See the rest of his outstanding track record for yourself here: Learn the Trader's Code

"Inflation lurking on global horizon," says a headline in today's International Herald Tribune. "Globalization…" says the article, "is clawing back some of the benefits it delivered to Europe and the United Sates over the past decade, and higher prices are an increasingly likely result."

Yes…dear, dear reader. The world turns…and turns…and turns again. Every time you have the warm sun on your face and the breeze at your back…something happens. The world turns. The next thing you know, the sky is as dark as pitch…and a gale is blowing against you.

The poor subprime nation had it so good for so long. What a pity the world turns. Now, it seems to be at the twilight of a magnificent - if preposterous - era…in which Americans could spend money they didn't have on things they didn't need and not have to worry about what happened next. But now we find out. And we find ourselves in the worst possible situation - squeezed between the two prefixes like a skinny word in a fat dictionary. Deflation is taking the oomph out of our economy and the value out of our assets. Inflation, meanwhile, is increasing the cost of everything we buy.

When globalization was just getting going it was a great thing for the rich countries. They could outsource manufacturing and other labor-intensive industries. Even at home, they could import - or let sneak across the border - millions of foreigners to do the dirty work. Profit margins rose as labor costs fell. And even though the price of raw materials was edging up, the lower labor expenses more than made up for it.

But that darned planet…it just keeps turning! Now, the Asians have a little change in their pockets and they're getting uppity. They want to buy OUR oil…our wheat…our nickel…our copper…and our beef. So prices are rising - OUR prices.

And now, get this, Chinese producers say their labor costs are rising too. "This development," reports the IHT, "a long-time coming in China, has picked up as coastal regions full of cheap workers begin to experience labor shortages."

Yes, those millions of Asian schleppers and bussers…whom we were nice enough to employ in unheated sweatshops at $1 an hour…now want more money! The cheek.

The ingrates! If it weren't for our willingness to impoverish ourselves by buying things we couldn't afford and didn't really need anyway, with money we needn't have, they'd still be working in the rice paddies with wooden sticks.

But that is the way things go, dear reader.

The dollar is going down…along with the value of almost all U.S.-centric, domestic, dollar-priced assets. Stocks. Bonds. Wages. Houses. That's where the 'de' in deflation comes from.

But it could be worse. In fact, it is worse. There's the other kind of 'flation' too. Now, Americans will have to pay more for everything - energy, food, housing…and all those stupid gadgets from Asia.

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litton knew we had been lied about from our broker..asked us to send a lot of informatation to see if they might help, we did and they forclosed. we lost our home of 30 years..

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You should relay this information to your congressional lawmakers to let them know that Litton is not assisting you.
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