Is MetLife's Foreclosure Process Review By Moody's A Harbinger Of The Excrement Show To Come?

As observant readers will recall, the one proximal catalyst that brought down the financial system last time around was something as innocuous as a rating agency downgrade of AIG, which precipitated a waterfall of margin calls and liquidity deficiencies, resulting in the near collapse of capitalism. This in itself was not surprising: it is always the least expected events (i.e., Moody's performing its function honestly and ethically) that tend to have the most adverse impact in a precarious scenario. Which is why when Moody's put MetLife's Home Loan Servicer ratings on downgrade watch it resulted in a chorus of fear and incredulity: after all Wall Street had seen this scenario all too recently. One person whose phone line off the hook was Morgan Stanley's Nigel Dally who sent out a letter to clients today trying to calm everyone down that this was not the apocalyptic event many are fearing it could be. True, as Nigel pointed out, MetLife only has $1.5 billion in mortgages serviced for others per SNL (whose data we presented yesterday when discussing exposure at JPM, WFC and BofA), but the fact that this is sufficient for Moody's to look at the company vis-a-vis its foreclosure practices should set red light everywhere. After all, in all the talk of gloom and doom, has anyone actually done any work to find out just what a home loan servicer downgrade means for the system? We didn't think so. And while MetLife is just $1.5 billion, recall that the Big Three share a quarter of a trillion among them. And yes, they are also about to be downgraded. Here is Morgan Stanley's unsuccessful attempt to make uber-nervous investor feel safe. Alas, it can only get worse from here, and what's worst, with consequences that nobody can really anticipate (ref: AIG).

This morning we've received a lot of questions over MetLife mortgage servicing operations.  The below table provided by SNL helps put the issue into perspective -- as of June 30, MetLife currently has $1.5 Bn mortgages that it services for others that are in foreclosure.  Given the size of these operations versus other financial institutions, we do not believe it is of sufficient size relative to the total organization to impact the fundamental outlook, although it remains a topic which we will continue to closely monitor.  We have also included below the text from the Moody's rating action, which highlights the concerns over the foreclosure actions for your review.


New York, October 14, 2010 -- Moody's has placed on review for possible downgrade MetLife Home Loans' Servicer Quality ("SQ") Rating of SQ2- as a primary servicer of prime residential mortgage loans. Additionally, Moody's has lowered the timeline assessment to average from above average.
 
The rating action is due to irregularities in MetLife Home Loans' foreclosure processes, specifically that employees signing affidavits did not have full personal knowledge of every item in the affidavit.  Additionally, MetLife Home Loans temporarily postponed foreclosure sales in some states. According to MetLife Home Loans, refiling affidavits, if necessary, would be completed by November. The foreclosure process irregularities and postponing of foreclosure sales could result in delayed foreclosures and longer REO timelines. The review for possible downgrade considers that the irregularities in foreclosure processes could result in legal challenges to previously completed foreclosures and reputational risk for the servicing operation. During the review period, Moody's will primarily focus on determining the increase to foreclosure and REO timelines and the effectiveness of any new procedures, if applicable. Furthermore, we will review MetLife Home Loans' quality control processes and the oversight of the foreclosure document execution department.
 
MetLife Home Loans is a division of MetLife Bank N.A., a wholly owned subsidiary of MetLife, Inc. MetLife Inc. is rated A3, on negative outlook by Moody's. MetLife Home Loans' servicing operations are located in Irving, Texas.