By Michelle Conlin
(Reuters) - Since the financial
crash, banks have been accused of wrongfully foreclosing on homeowners
because they failed to create and maintain proper mortgage paperwork.
Now, there are signs that chaotic document management is harming
investors in mortgage bonds, too.
A review of loan documents, property records and the monthly reports made available to investors show that mortgage servicers
are reporting individual houses are still in foreclosure long after
they have been sold to new buyers or the underlying mortgages have been
paid off.
These delays enable banks and other mortgage servicers to continue to charge monthly fees to investors in these mortgage-backed securities,
the banks' investor reports show. It means that investors are buying
mortgage bonds that may have billions of dollars of undisclosed losses
that will become apparent only at a later stage. It could also lead to a
new round of litigation for banks just when some appeared to have been
putting their mortgage problems behind them.
The review, conducted by foreclosure investigator Lisa Epstein,
found hundreds of instances across the United States where information
about the status of individual home loans was incorrect. The information
about the mortgages is sent from the mortgage servicer,
which handles tasks such as collecting monthly mortgage payments and
handling foreclosures, to the trustee of the mortgage bonds, which
administers monthly reports and makes sure investors get paid.
In 2009, Epstein helped uncover the robo signing scandal, in which
she discovered that banks had hired low-level workers to pose as
executives, signing hundreds of legal affidavits a day without verifying
a single word, as is required by law. The reporting lag issues she
identified in mortgage bonds involved many of the same mortgage
servicers who engaged in robo signing.
"This is all part and parcel of having servicers who are unable to
keep the documentation straight," said Linda Allen, a banking professor
at Baruch College, who specializes in mortgage servicing. She said
Epstein's methodology was sound.
Mortgage experts estimate these reporting delays could mean that
billions of dollars in losses may still be hidden in these bonds.
Mortgage servicers may have also been charging late fees, property
inspection fees, legal fees and other penalties against these loans long
after they have been paid off, inflating the losses, they said.
"The losses are building up inside these deals, and this is going to happen all over the place," said William Frey, founder of Greenwich Financial Services, which specializes in securitization.
Frey said his team analyzed about 500 mortgage-backed securities originated by every major bank and that he has yet to find a single bond where the accounting adds up as it should.
In one case, Reuters found that Bank of America Corp had been collecting a monthly servicing fee of $50.73 from investors on a loan that had been paid off nearly two years ago, investor reports show.
Bank of America
filed a document at a local county office on July 22, 2011 showing that
the $162,400 loan on a cream-colored duplex in Greenacres, Florida,
owned by a drywall hanger named Roman Pino, had been satisfied and "cancelled." But investors in Pino's loan and more than 6,700 other similar mortgages that are bundled together in a subprime mortgage bond still have not been informed that the loan no longer exists, according to the last investor report in May.
Bank of America spokesman Lawrence Grayson said reporting lags are not typical, and can occur because a sale or mortgage insurance
proceeds may not be finalized. Loans can sometimes be subject to
litigation, which could explain the ongoing charging of fees, he said.
The bank declined to comment on the specifics of Pino's loan.
According to Fitch Ratings, the loan did not have mortgage insurance.
Bank of New York Mellon Corp,
the trustee, said that in keeping with industry practice, it relies on
the information provided by the mortgage servicer.
Some of these latent losses are beginning to surface. Earlier this month, for example, investors learned of $1 billion in losses
on dozens of subprime bonds, containing more than 75,000 home loans
that were created during the housing boom. Many of the losses were not
reported for a year or more.
"For whatever reason, these losses were basically pending out there
for a while, and the reporting mechanism finally caught up and hit the
bonds in the trust," said Roger Ashworth, an analyst with mortgage
advisory firm Amherst Securities.
The bonds' trustee, Wells Fargo & Co, said that it relied upon the servicer, Ocwen Financial Corp, for the reclassification.
Ocwen said it stands by its
monthly reporting. It added that it has helped tens of thousands of
struggling families save their homes from foreclosure and significantly
lowered investor losses, benefiting investors in mortgage bonds.
SIDE DEALS
Latent losses could play a role in some of the settlements that
investors have already reached with banks over other mortgage
misrepresentations.
For example, many of the
mortgage bonds with reporting lags that Epstein identified are the same
securities that are at issue in ongoing litigation between Bank of America and investors in those securities.
Bank of America settled with 22 large investors, including two of the biggest - Pacific Investment Management Co and Blackrock Inc
- agreeing to pay $8.5 billion to end legal liability for more than one
million Countrywide Financial mortgages whose borrower histories and
credit quality were allegedly misrepresented by the bank.
Some other investors in the bonds, including American International Group Inc
and Grand Rapids Police and Fire Retirement System, have objected to
the settlement. They project the losses to be more than $100 billion.
An AIG spokesman said no one had reviewed the individual loans to
analyze the merits of the settlement, which was originally over what the
bank had told investors about the quality of the loans.
If opponents to the settlement prevail, the reporting lag issues could crop up in the discovery phase of the case.
BlackRock and Bank of America declined to comment on the case. PIMCO did not respond to a request for comment.
Estimates of latent losses in mortgage bonds vary. In a report on
Monday, Fitch Ratings said that it had talked to major servicers and
more such losses were possible, though it was unable to quantify the
amount.
In June last year, independent credit rating agency R&R
Consulting analyzed $1.4 trillion worth of residential mortgage-backed
securities that were not guaranteed by a government-sponsored entity
like Fannie Mae.
It found an estimated $300 billion in total expected future losses,
meaning borrowers who were either in foreclosure, bankruptcy or 90 days
delinquent. But of those, the firm says there are $175 billion that
investors haven't learned about.
"There is such a thing as gravity, and sooner or later you have to
do something with these numbers," said R&R founder Ann Rutledge.
(Reporting by Michelle Conlin in New York; Editing by Paritosh Bansal, Martin Howell and Leslie Gevirtz)
