To mark it to market: Part 4, reverberations
[Continued from Part 1, Part 2 and Part 3]
The balls keep clacking, borrower to servicer to lender to trustee to security holder
In the previous post we reached the point where the trustee enters:
Enter the trustee
A trustee is necessary because securitization creates a new financial instrument — the security — issued by an institution and backed by a pool of mortgage loans.
This fission of one loan into a loan and a security, and then its radioactive particles — the A, B, or C tranche — releases financial energy and introduces new players.
A fee at every collision!
Once a trust is sold, a trustee bank oversees its operations on behalf of investors. The trustee makes sure that the terms of the pooling and servicing agreement are met; this document determines what a servicer can do to help distressed borrowers.
The agreements require that any modifications to loans in or near default should be “in the best interests” of those who hold the securities.
This is the basic fiduciary duty standard, known and Delphically interpreted for decades if not centuries.
What is fiduciary duty in the morning?
Trustees are a cautious lot. ‘Best interest’ is always interpreted in hindsight, after the train wreck, when everything seems obvious.
The trustee’s instinct is typically to freeze, and ask for orders. Bond trustees are especially cautious, infuriatingly so.
Dealing with a stodgy trustee is just the early stage. Eventually somebody will take real action. Then looms another problem:
But there is wide variation in how many loans can be modified. Some trusts have few curbs; others allow no more than 5% of mortgages to be changed.
That could be a problem if a whole tranche of loans goes south in a hurry.
Some trusts limit the frequency with which a loan can be modified or dictate a minimum interest rate. The variations help explain why borrowers are having difficulty.
Why they’re having difficulty now. There’s a market-clearing solution — sell the securities, at a discount, to somebody who wants to buy them, recombine the B and A pieces, and then work it all out.
This is happening now — it just takes a while, and as it does, the trustees sit frozen, awaiting a new master.
Ira Rheingold, executive director of the National Association of Consumer Advocates, says companies in the chain should be held responsible.
Gosh, who’s going to hold them responsible? Perhaps — crusading trial attorneys!
The National Association of Consumer Advocates (NACA) is a nationwide organization of more than 1000 attorneys who represent and have represented hundreds of thousands of consumers victimized by fraudulent, abusive and predatory business practices
Send the attorneys, that’ll solve the problem.
“Because Wall Street is responsible for the mess we are in, they need to bear some of that burden,” Mr. Rheingold said. “Why should people who have been funding these bad loans get a free pass?”
Mr. Rheingold, pick up the newspaper.
Even Bibendum knows there’s more to the story
Who has been getting pounded so far? Only Wall Street.
Now it’s Wall Street getting clacked
Here’s a secret, sophisticated tip from a professional financier: Nobody makes money buying bad loans at par.
I bought a bad loan at par!
For now, the burden falls on people like Ms. Brimmage –
The burden hasn’t fallen on Ms. Brimmage yet. It may, or it may not.
– a former forklift driver at an Owens-Brockway Glass Container plant in Godfrey, Ill., that closed last fall. A borrower in good standing since 1998, she said a local broker persuaded her to combine her debts in a fixed-rate loan of $65,000 in 2003.
So Ms. Brimmage, in addition to having had debts pile up, lost her job. That’s certainly unfortunate, and not her fault that the plant closed
But at the closing, she was presented with an adjustable-rate mortgage from the Argent Mortgage Company, carrying a low teaser rate for two years. When she objected, the broker assured her that rates would fall and she could get a better fixed-rate loan later. She said she believed him.
If that’s true — we have only Ms. Brimmage’s word, and memory is fickle — then her broker’s statement is consumer fraud, and actionable. In
Three times the damages
Rates did not fall. Still, Ms. Brimmage made her payments until illness struck in 2005. She then had difficulty paying the mortgage and liquidated part of her 401(k) retirement fund to keep current. Last September, she received a foreclosure notice from AMC Mortgage Services.
AMC is the legacy of Ameriquest,
Previously operating as the Loan Servicing Division of Ameriquest Mortgage Company, we will now be operating under the new name of AMC Mortgage Services, Inc.
which got itself into hot water amid allegations of questionable lending practices, leading to a multi-million dollar settlement:
“Doing the right thing for the people we serve has always been one of our core values. We regret those occasions when our associates have not met this ideal to our customers’ expectations,” said Aseem Mital, chief executive officer of ACCCH. “This agreement is good for consumers and fair to the company. It provides a framework for new lending policies that improve and enhance our ability to serve our customers and are a model for the industry.”
Striking here are the specific steps Ameriquest agreed to take:
We’re taking all necessary steps
Ensuring that borrowers receive a simple one-page form clearly describing all loan terms at least three days before closing.
Centralizing the appraisal process and instituting random selection of appraisers.
Requiring sales associates to follow approved scripts to describe loan terms and conditions and ensure that competitive claims regarding interest rates are accurate.
Implementing measures requiring customers to sign a statement at closing certifying that the information they provided to Ameriquest regarding their stated income is true and correct.
Ensuring that Ameriquest will only refinance a non-prime loan if there is a benefit to the borrower.
Using third-party closing agents to help prevent conflicts of interest.
If Ms. Brimmage’s memory of events is at all accurate, under the new procedures she would never have received the loan on which she is now delinquent. In fact, she’s eligible for relief — lots of relief:
Under the agreement, ACCCH has allocated $295 million over the next year to compensate borrowers. The funds will be designated for borrowers who obtained loans from Ameriquest between
Ms. Brimmage got her loan in 2003, smack dab amid the interval.
In addition, the company will provide $30 million to reimburse the states for legal fees and other costs related to the states’ inquiry. Distribution of the funds will be handled by an independent settlement administrator.
If so, was this really a story about the evils of securitization, New York Times, or was it a story of rogue originators?
Clarissa P. Gaff, a lawyer for Ms. Brimmage at the Land of Lincoln Legal Assistance Foundation, hopes to cut her client’s loan and reduce the interest rate. The monthly payments have risen to $691 from $414, as the rate has jumped to 11.25% from the original 6.3%.
Certainly a plausible request, given the rate hike and Ms. Brimmage’s allegations of deception.
Ms. Gaff said some documents indicate that the mortgage broker who arranged the loan may have violated truth-in-lending requirements. The broker’s employer has been barred from doing business in
There should be a defense based on fraud, not on the securitization instrument.
“We have run into this in any number of cases,” Ms. Gaff said. “The bank that holds the note as trustee claims to have no information relating to the servicer or the loan originator in spite of the fact that documents show all the parties have been working together for ages. It insulates them from liability.”
As I noted earlier in this post, that’s only liability from fraud, which is a meaningless distinction in this situation, where the servicer and the lender are actively on stage.
“I don’t think there is anything in the entire securitization process that is at all focused on the borrower’s interest,” said Kirsten Keefe, executive director of Americans for Fairness in Lending.
Except lower rates, lower closing costs, a cornucopia of new loan products such as interest-only that consumers eagerly took up.
“Everything they do is, ‘How are we going to make a profit, and how are we going to secure ourselves against risk?’ ”
In so doing, they have delivered very low interest rates and a multiplicity of options. And now that housing’s in its crumple zone, they’re backing up, but slowly and awkwardly. We need to keep pursuing the right policy questions.
“It is difficult to understand. It seems brutal, it seems harsh …”
“It is life and it is death. It is the greatest blessing and the greatest curse in the universe. You do not have to understand it. Your comprehension or lack of it, your approval or your disapproval, will in no way alter its operation.”
Roger Zelazny, Creatures of Light and Darkness, page 25
Which is good, which evil? Which is life, which death?
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