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Here Is a Reason Why Mortgage Modifications May Be Moving So Slowly, The Servicer Gets the Vig!
From an astute BoomBustBlogger that reads the fine print buried in the middle of a 250 page servicer agreement…
IF THIS IS A TYPICAL PSA, NO WONDER SO FEW LOAN MODS BECOME PERMANENT. THE SERVICER GETS 25% OF THE FORECLOSURE PROCEEDS.
http://www.secinfo.com/d1Ax6e.u1u.c.htm
3.12 Realization on defaulted
mortgage loans CitiMortgage will use its best efforts, consistent with
its customary servicing procedures, to foreclose upon or otherwise
comparably convert the ownership of properties securing any mortgage
loans that continue in default and as to which no satisfactory
arrangements can be made for collection of delinquent payments pursuant
to section 3.2. Consistent with the foregoing, CitiMortgage will use
reasonable efforts to realize upon defaulted mortgage loans in a manner
that will maximize the receipt of principal and interest by the
certificate holders, taking into account, among other things, the timing
of foreclosure proceedings.
If a deficiency action is available
against the mortgagor or any other person, CitiMortgage may proceed for
the deficiency. CitiMortgage may retain 25% of the net proceeds received
from a mortgagor pursuant to a deficiency action as compensation for
proceeding with the deficiency action.
Updated: The reader's interpretation was slightly off. The servicer get's to go
after the mortgagor in a delinquency action. Please let it be known that
this in know way alters the conflicting dynamic that allows for the
servicer to push certain mortgagors into foreclosure vs a mod work out.
If you are self-employed and judgment proof, you are more likely to get a
mod than if you are high income with a steady job with garnishable
wages. The profits could very well keep rolling in. Let's engage in some
chart porn...
As you can see, economic housing activity is horrible, and getting
worse. If you are a bank with a mortgage book or trying to lend, you’re
in the wrong business. If you can simply service the loans without
credit risk AND grab a 1/4 of the foreclosure delinquency action
proceeds as the vig, your doing better than most drug dealers. Look at
how the foreclosure business is panning out… [this line has been
modified to reflect the servicer entitlement to delinquency judgments vs
foreclosure proceeds]
Subscribers have access to all of the data and analysis used to
create these charts, in addition to a more granular application, by
state in the SCAP template and by region in housing price and charge
off templates – see
- Shadow Inventory worksheet for professional and institutional subscribers –
Shadow Inventory. - House price data, 2nd Quarter 2010
- Bank Charge-offs and Recoveries 2Q10
- The
very extensive SCAP Assumptions, showing the credit metrics banks
needed to submit for the stress tests of 2009, Updated for last
quarter on a state by state basis_09082010 Web
See the following posts for an extensive background on the topics discussed in the video:
- Is the US Government About to Forgive Mortgage Debt? Let’s Crowdsource Our Way Through a Scenario or Two!
- Why the Case Shiller Index, Although Showing Another Downturn Coming, is Overly Optimistic and Quite Misleading!
- Yes, Housing Prices Have Much Farther to Fall. We’re Talking Years…
- Because 105% LTV On Depreciating Property Wasn’t Good Enough for the US Taxpayer…
- I
Told You Housing Was Going to Take a Downturn for the Worse. I’ll
Tell You Something Else, We Are in a Housing Depression! It’ll
Get Worse Until Market Forces Rule Over Government Bubble Blowing! - As I Made Very Clear In March, US Housing Has a Way to Fall
- It’s Official: The US Housing Downturn Has Resumed in Earnest
- The Great Global Macro Experiment, BoomBust Cycles, and the Refusal to See the Truth: Bubble Economics in the Mainstream Media
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Augustus is right, this 25% clause is not the reason why servicers are reluctant to modify Remic-owned mortgages and prefer instead to foreclose. But there are lots of other reasons.
ABS holders as a group are resisting modifications and short sales. They don't trust servicers to stand up for their interests, and generally want to force the servicer to swallow at least part of the cost, which servicers of course reject out of hand. There are multiple cases moving through the courts in which ABS holders are trying to stick servicers or sellers with the cost of mods and short sales. The servicer and seller are usually one and the same big bank.
So for servicers of Remic-owned mortgages, agreeing to mods and short sales is a risky can of worms, as there's no guarantee the cost can be passed on to the ABS holders. By contrast, the servicer's rights in foreclosure are clear: the servicer gets to recover all its costs out of foreclosure sale proceeds, before the ABS holders get a penny.
Also, there are opportunities for corruption in the foreclosure process that can bring the servicers or employees of servicers extra income. They can pay friendly lawyers and other contractors inflated fees and then recover them out of the foreclosure proceeds. They can manipulate the foreclosure auction process to sell properties cheaply to friends.
That said, servicers have different incentives depending on the particulars of the borrower and the loan. If it's a broke borrower and cheap house, the servicer will want to foreclose quickly to ensure its out-of-pocket costs don't exceed the foreclosure proceeds. If the borrower is able to pay something and the house is at least decent, the servicer will usually drag out delinquency while racking up various fees.
The article is far off the mark in analysis.
First, the servicer is entitled to recover the costs of the foreclosure from the proceeds of the foreclosure sale. The balance goes to the mortgage holder / investor.
Following that, the mortgagor may have a deficiency balance remaining on the mortgage note. It is the servicer's responsibility and obligation, representing the mortgage investor, to attempt to recover the deficiency. Remember, the "service" is being provided to the mortgagee, not the mortgagor.
The charge for the recovery of 25% is fairly typical, maybe even low, for recovery on unsecured consumer loans. Considering that most of this stuff will be uncollectible, it does take a large percentage of the funds actually collected to pay the costs.
Until I see actual revenues minus expenses, I'm going with Reggie! Nice work RM!
Reggie...You are a national treasure. I love reading your work and sincerely appreciate what you do. I consider you to be as fine a human as humans can be fine. Love your self promotion too! I think it's awesome and I suspect that in reality you are likely pretty humble, but the shtick works.
You make me wish I had money.
All of the servicers are thieves. A few years back, I hired a servicer to make collections on a note for a land sale. The servicer sent all the paper work late to the buyers/borrowers. They sent their contract to me late too. What do you know? I find out in reading the contract that they gave themselves a big fee for late collection, and I don't get full payment plus interest for the land.
They gave me the run around when I called their office and demanded restitution and termination of their service.
So I sent out letters to the Department of Real Estate and Insurance to have their license pulled. Then, they were tripping all over to send me back late fees that they had intentionaly collected and triggered through their negligent late mailings.
Anyways, there is no money, and there is no debt. There's only debt-notes, and discharge of debt. Don't bother with a mod. We are living in a feudalistic system, and we've been tricked into voluntary serviture through adhesion contracts. You have to file the UCC 1 Financing Statement correctly to manage your own commercial affairs.
See my articles on Asymmetrical Warfare in the Mill Wars Based on UCC Practice (I) and II in the Contributors section for more info.
Oh, c'mon. It's not like they're setting up dummy companies and buying tax liens and foreclosing on people that way. Oh wait...
Great article! I post the great stuff I find here on other sites, mainly because we are not going to get any traction unless we disseminate what we have learned here. The one problem I had with this one was that the charts got buried under the sidebars. Maybe it's a browser thingy, but I went ahead and used the one under the market ticker website. I hate not giving credit to ZH, but sometimes I post so many ZH articles that I lose credibility. I would recommend everyone to please post these articles where ever you go. Don't go to your grave knowing you did not do everything you could have to ring those alarm bells..you sense the danger, you have to let your people know.
Motherfuckers won't stop at anything to earn (steal) a buck. Will anything less than lead delivered via an appropriate delivery system "work" to stop them?
Heads need to roll, but the proles aren't organized enough to do it.
http://www.youtube.com/watch?v=gLPIF3LVCJc&feature=related
*delete*
Awesome work product, RM
Congrats, Reggie, you are the only voice in the world to point to this servicer scam....even Denninger gave you a h/t today.
More sad tales will come as the housing depression accelerates. Makes me want to wash my eyes out just reading about it.
The other reason is that they make money on foreclosures. The Banks own Credit Default Swaps on the Mortgages. So, they get paid the entire loan thru their Credit Default Swaps and they do not even own the loan. So, if they lent $100,000. and sold that loan and then took out a Credit Default Swap they got paid twice for the same loan. $100,000 on the sale and $100,000 on the Default.
That is the reason they are not modifying loans and push them into Forclosure. How many Modifications after 3 months got reversed and they told the People they had to Pay all back payments, interest and Legal fees immediatly or get Foreclosed on. Because they make a huge profit on the Foreclosure.
Can you buy CDS on individual mortgages? Who would be so dumb as to write the other side of that?
Or does CDS on a mortgage pool make a partial payout if one or more of it's pass-through payments dries up due to an individual mortgage default?
ding.
Let's not forget great bankster rip offs of taxpayers like this one:
http://www.youtube.com/watch?v=ssl5yb7FewA
It's only 25% of any deficiency collections. In my experience, there is not much of a deficiency collectible from somebody who has just lost their home. Most file Chapter 7 to discharge it, those who don't are judgment-proof. Still, it might explain why some higher income employed borrowers in deficiency states can't get a mortgage mod (because they don't qualify for Chapter 7 under the means test and have a job with garnishable wages).
Good article Reggie. The real sales compared to the Case-Shiller index reveal the true trouble the market is in. It almost makes you wonder if the index is intentionally a leading indicator.