The mortgage industry is casting aside concern that its foreclosure practices are rife with unfixable errors, even as executives acknowledge inappropriate practices such as robo-signing, officials said at a conference.
The “number of attorneys that signed off on” the policies used when Wall Street firms packaged mortgages into bonds means it’s likely that the trusts used to hold the debt will be able to prove they own the loans in almost all cases, said Philip Seares, a managing director at Citigroup Inc. who run its trading of whole loans.
The industry also has faith that loan assignments handled by the Mortgage Electronic Registration System, or MERS, can’t be broadly contested, Seares and Mortgage Bankers Association President John Courson said at the group’s annual conference. They were countering claims from homeowner lawyers and academics such as Katherine Porter, a visiting professor at Harvard Law School, who say large numbers of borrowers that haven’t paid their mortgages may be able to avoid ever being foreclosed on.
“Everybody wants to believe in this Robin Hood scenario, where everyone is going to get a free house,” Seares said yesterday during a panel discussion at the mortgage group’s conference in Atlanta. “That’s not really plausible.”
Scrutiny of foreclosure practices intensified last month when a memo showed Ally Financial Inc.’s GMAC Mortgage unit halted evictions in 23 states to review its policies. An employee said in sworn testimony that he and his team signed 10,000 affidavits and other documents each month without checking the accuracy of files.
Additional loan servicers including Bank of America Corp. then began reviewing their practices, also acknowledging notaries may not have always been present during signings. Attorneys generals in all 50 states started an investigation. This month, Ally and Bank of America resumed processing defaults, saying they had fixed improper policies, would redo incorrect filings and were otherwise confident in their foreclosure work.
They shouldn’t be, according to Porter, whose 2007 research examined practices of lenders and servicers foreclosing on bankrupt borrowers.
“The robo-signing simply brought to light a whole array of impermissible practices,” she said in a telephone interview earlier this month. The “hardest problem” to solve, she said, stems from mortgage-bond trusts needing to have possession of both so-called promissory notes and mortgages, with full records of transfers of their ownership, to “be on solid ground when they foreclose.”
Joshua Rosner, an analyst at New York-based Graham Fisher & Co., has also questioned whether mortgage-bond trusts did enough to take ownership of loans. Typical practices, such as filling in the names of trusts on notes and completing missing links in assignment chains only after foreclosure work has started, may encourage investors to challenge whether the debt met the requirements for delivery under bond contracts, he said.
Ginnie Mae President Ted Tozer said he’s been given “no reason to believe” that securitizations didn’t include proper transfers of the ownership of home loans, though he plans to monitor how courts respond amid heightened scrutiny.
“Securitizations were fine,” Tozer, whose U.S. agency guarantees securities backed by federally insured mortgages, said during a panel.
The American Securitization Forum trade group, JPMorgan Chase & Co. bond analysts and law firm SNR Denton have also dismissed such talk. In a commentary posted on its website, SNR Denton says that most attempts to question the validity of practices can be trumped by items such as the fact that all parties involved “clearly intended” for the trusts to take ownership.
Legal ownership of the homeowners’ debt by the trusts is needed for foreclosures in their names, and for the trusts’ investors to qualify for tax benefits.
MERS, which was created to limit the costs and paperwork involved in assigning mortgages to new owners by serving throughout as the party named in government records, has withstood numerous legal challenges, said Courson of the Mortgage Bankers Association.
“Frankly, I’ve seen questions about the model but I haven’t seen anything that points me to there actually being anything wrong with it,” he said.
Seares, who handles New York-based Citigroup’s brokering of pools of soured mortgages, said trading of the debt has remained robust amid the questioning of foreclosure policies, partly because sellers promise the paperwork will be accurate.
While a lengthening of the time needed to complete foreclosures amid greater legal challenges by borrowers and the need to fix some items should in theory reduce prices for bad mortgages, there’s so much demand for the debt that values may be little affected, he said.
It’s ironic that Fannie Mae and Freddie Mac, the government-supported mortgage companies that have drawn almost $150 billion of U.S. aid since being seized in 2008, would be among those the most hurt if MERS were ruled invalid, he added.
“Fannie and Freddie were the ones who pushed MERS; pretty much everything they own is in MERS,” he said “So it’s the taxpayers that own pretty much all of the loans that are in MERS” and would pay if legal efforts challenging its validity ever succeed.
“I have too much to do to worry about” foreclosure- document speculation being dismissed by the industry, Fannie Mae Chief Executive Officer Michael J. Williams said in an interview at the conference.