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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Joe B

Once again Jim Jubak nails it. Ask yourself (I know countless on this board already have) why the banks get a bailout fund, but the homeowners are on the hook? Why do we have to 'help ourselves' or get no help at all? Why is the fed ready to bail out the banks, but turn their back on the homeowners?

I still wish he would turn his attention to MS Fraud!! He is still talking mostly about origination fraud, and teaser rates, ARM's etc. He hasn't quite caught on to the MSFraud issue. If he ever does, we may just have a serious ally!!

Who'll rescue homeowners in the housing mess?

Big banks and the feds are working to throw an $80 billion lifeline to companies holding bad loans. But no one seems interested in rescuing families who need just a little help.

By Jim Jubak

Banks to customers: Drop dead!!

Nobody in the financial industry is saying that in so many words. But their actions speak volumes. While bankers have plenty of time to negotiate the terms of an $80 billion fund to rescue their own mortgage portfolios, customers are getting a busy signal if they want to fix a problem mortgage before it explodes into foreclosure or bankruptcy.

According to a Moody's (MCO, news, msgs) survey of the mortgage companies that service about 80% of all subprime mortgages, lenders have eased terms on just 1% of the subprime mortgage loans that reset to higher interest rates in January, April and July of this year. That's a huge problem, again according to Moody's, because data indicate that between 5% and 15% of subprime loans that are current before they reset will go into default after reset they if they are not modified.

And this is before the mortgage resets really hit the fan. Adjustable mortgage resets are projected to hit $55 billion in October, up from $22 billion in January, and then continue to climb until the market hits a peak of $110 billion in adjustable mortgage resets in March 2008.

A deluge of foreclosures

In other words, without some kind of modification of the terms, we're about to see an explosion of delinquency and foreclosure rates for subprime mortgages far above the 10% rate during the housing market's boom years. And the mortgage industry is doing almost nothing to head off the problems.

Nobody disputes that homeowners with less than sterling credit -- the so called subprime and Alt-A segments of the mortgage market -- who used adjustable-rate mortgages to finance the purchase of a house over the past year or two face a crisis. Many of these mortgages are about to reset, from low teaser interest rates and monthly payments to much higher rates and payments.

Look at how that works on a 2/28 mortgage, one of the most common types of adjustable subprime mortgages, with interest-only payments -- no payments to reduce principal -- over the first two years. With a low 5.375% teaser interest rate and the interest-only feature, payments on a $300,000 30-year loan would be $1,344 a month for the first two years.

But then at the end of two years comes the reset -- often 2 percentage points or even 3 percentage points annually. With a two-point reset and the expiration of the interest-only period, the interest rate jumps to 7.375% and monthly payments rise $769 to $2,113. That's a 57% increase. The next year, the reset could take the interest rate up to 9.375% and the monthly payment to $2,549, an increase of $1,205, or 90%, in two years.

Who's to blame?

And because these loans were so often used to shoehorn buyers into more house than they could actually afford with a conventional mortgage, that kind of increase is more than enough to produce delinquency and then foreclosure.

The Mortgage Bankers Association reported that as of December 2006, delinquency rates for prime mortgages remain near their historical rate since the early 1990s of 2% (for fixed loans) and 4% (for adjustable loans). But in that same month, 14% of adjustable subprime mortgages were delinquent.
What happens when someone goes into default and then forecloses on a home mortgage? MSN Money's Jim Jubak details three scenarios and provides tips for investors looking at debt instruments.

Why did these borrowers get into this mess? Some were greedy, figuring that a rising real-estate market would let them sell the property before the mortgage reset. Some were overly optimistic, hoping that home prices would keep rising and that they could refinance before the reset hit. Some were foolish and didn't do the math for the years after the reset.

(Never underestimate good old time-honored human stupidity. According to a recent survey by Peter D. Hart Research Associates for the AFL-CIO, about 75% of borrowers didn't have a clue about how much their payments would climb after a reset.)

And some were defrauded by mortgage lenders and mortgage brokers who guaranteed that house values would climb and refinancing was a lock, and then hid extra costs and the full size of the monthly payment from those signing on the bottom line.

The industry has changed

Traditionally, though, the debt markets don't care why a deal has gone bad. The saved and the damned are all offered a chance to work out a deal. It's simply good business. Better to get 70 cents on the dollar than 60 cents; better to slow down payment increases so the borrower doesn't go into default; better to take a slightly lower monthly payment than to have to go to the expense of foreclosing and reselling.

So, for example, mortgage lenders could extend initial teaser rates for a year or three, or stretch out the reset by setting a lower annual cap to interest-rate increases, say one percentage point a year instead of 2 or 3 percentage points. Mortgage lenders would still get paid -- less than if they didn't modify the loans, it's true, but more than if borrowers go into default and then foreclosure.

So why, then, has the mortgage industry been so slow off the block in working out deals with the borrowers facing resets and foreclosure?

Because the structure of the modern mortgage industry, which has sliced and diced each part of the mortgage process and then farmed out each of those slices to separate companies, has destroyed much of the incentive to work out solutions with mortgage borrowers.

Here's how it works

Think about the life history of the average mortgage.

  • Some company originates it. That could be a mortgage broker, who qualifies a potential borrower and then puts that borrower together with a mortgage lender, or it could be a mortgage lender itself that also serves as the originator.

  • That mortgage is usually then sold to another mortgage company, to a quasi-governmental entity like Freddie Mac (FMC, news, msgs) or to an investment bank.

  • After purchase, those mortgages are most commonly bundled into securities, called residential-mortgage-backed securities, that are then sold to investors such as insurance companies and pension funds.

  • Even that's not the end of the road for many mortgages because many residential-mortgage-backed securities, a bundle of, say, 1,000 or more mortgages, are then themselves bundled and then re-sliced into pieces of varying risk. These are then sold as collateralized debt obligations (CDOs) that might own as many as 100 residential-mortgage-backed securities, or 100,000 mortgages.

  • There are even CDOs made up of CDOs that might own as many as 10 million mortgages.

  • A separate part of the mortgage industry, the mortgage service companies, collect payments from mortgage borrowers and then make sure that the right number of dollars gets to the right party.

So who has an incentive to work out a deal with that mortgage borrower before he or she gets into trouble? Not the mortgage service company. These companies operate on the slimmest of margins, and any mortgage that requires extra work eats into that profit. Not the mortgage broker, certainly. Many brokers have gone out of business in the housing slump. Those that haven't, having already been paid for originating the mortgage, have no incentive to help with any debt workout.

What happens when someone goes into default and then forecloses on a home mortgage? MSN Money's Jim Jubak details three scenarios and provides tips for investors looking at debt instruments.

That leaves the mortgage lenders. And here's where it all gets very ugly.

Oh, that fine print

Typically when a mortgage lender sold its loans to investors, the deal came with fine print that discussed the mortgage lender's obligations to buy back the loans from investors. For example, the $122 billion in mortgages sold by Countrywide Financial (CFC, news, msgs) from 2004 to 2007 often included a buyback provision that would be triggered if the terms of the mortgages purchased by investors were changed to help borrowers remain current.

The decision on when to change the terms of a mortgage to help borrowers remain current is left to the mortgage service company. In this case, that's usually the home-loan servicing unit of Countrywide Financial itself.

Any wonder that the Office of Thrift Supervision has been looking into claims that servicing representatives at Countrywide Financial have failed to follow through on offers to restructure the mortgages. (Countrywide Financial disputes those charges.)

And there's no reason to think that Countrywide Financial is the only mortgage company feeling this squeeze. Remember, 1.3 million subprime adjustable-rate mortgages are due to reset between October 2007 and the end of 2008.

What a difference

Contrast the barriers to working out problem mortgages for borrowers who owe a few hundred thousand dollars with all the energy going into an effort to work out the problems of borrowers who owe billions:

A plan put together by big banks -- with the U.S. Treasury nodding approval -- would create an $80 billion "conduit" that would buy distressed paper before sellers strapped for cash are forced to sell their asset-backed debt securities in the public market. These sellers have been forced to the wall because they used money borrowed in the short-term commercial paper market to buy long-term assets. They depended on their ability to roll over the commercial paper into new borrowing in that market when it expired every 90 days or so, but the commercial paper market is still shut tight for this class of borrowers. If they can't access that market for capital, they have only two choices:

  • Sell their assets for whatever the market will give them.

  • Go to the big banks that are on the hook to lend them money that the commercial paper market won't.

About 30 structured investment vehicles, or SIVs, holding about $320 billion in assets have found themselves in this pickle. For the big banks like Citigroup (C, news, msgs) and JP Morgan Chase (JPM, news, msgs) that have so far signed on to fund this $80 billion conduit, the plan represents a chance to work out a debt problem before it gets toxic.

Protecting the pricing

First, by creating a conduit that would buy these assets from distressed SIVs before they go to the public market, the banks and other investors who hold big amounts of these assets in their own portfolio avoid creating a distressed public market price that would require them to mark down the value of their own assets. Right now, without public prices, investors have wide discretion on how to price their portfolios.

Second, by creating this conduit, the banks that created these SIVs -- and that are on the line to fund them -- avoid having to shell out big dollars or take these assets onto their own balance sheets. The SIVs were set up as off-balance-sheet vehicles so that banks could invest in these markets without putting the risk of these deals on their own books. This is especially important for Citigroup, which, as the largest creator of SIVs, is on the hook for about $100 billion.

What happens when someone goes into default and then forecloses on a home mortgage? MSN Money's Jim Jubak details three scenarios and provides tips for investors looking at debt instruments.

This workout for SIVs and the big banks (and investment companies such as Fidelity Investments and Federal Investors that hold a lot of asset-backed commercial paper in their money market funds) is turning out to be a hard sell. Some big banks and investment companies are balking at the idea of ponying up money to buy risky assets that don't have market prices. How can they be sure, they ask, that the conduit will pay a reasonable price for these assets when there is no public market for them and no accurate method of assessing their risk?

Very good question. Perhaps good enough to sink the conduit plan completely. Which could be good news for mortgage holders on the edge of delinquency or default.

Maybe then mortgage lenders, the investment banks and institutional investors would be willing to turn their attention to offering home-mortgage borrowers who owe hundreds of thousands the same kind of workout that they're so willing to offer big debtors who owe billions.

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