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Attn: Trust Administration 4 New York Plaza, 6th Floor New York, NY 10004
Notification of and Request to Address Pervasive Issues in RMBS Trusts
To Whom it May Concern: On behalf of the Association of Mortgage Investors (―AMI‖), I write to inform you of pervasive issues that Certificateholders are encountering with respect to their holdings in residential mortgage backed securities (―RMBS‖), and to request your assistance in resolving the same. By way of background, AMI is a trade association representing solely investors in mortgage backed securities, and currently serves as the industry voice for institutions and investment professionals with an interest in these securities. AMI‘s members currently have approximately $300 billion of MBS assets under management, including a significant portion of the nation‘s first lien mortgages residing in private label RMBS. AMI‘s goal is simple: to develop and implement mortgage and housing policy that keeps homeowners in their homes while promoting the availability of financing for home purchases. We believe that a healthy securitization market is crucial to the American housing industry, the financial system, and United States‘ economy as a whole. Unfortunately, the markets for private label securitization have virtually ground to a halt since the financial crisis. To revive the U.S. housing market and restore the securitization market to working order, it is imperative that outstanding issues relating to 2005- to 2008-vintage mortgage securities be resolved in a manner that does not alienate private investors by disregarding their contractual rights or encouraging opacity. This letter serves to notify you of the substantial evidence that has emerged of abuses in the servicing and monitoring of private label securitizations. This evidence clearly demonstrates that the status quo with respect to RMBS Trusts is not working. As the mortgage market deteriorates, these problems worsen while the potential liabilities of
900 19th Street, N.W., #800, Washington, D.C. 20006 ∙202-327-8100 main ∙202-327-8101 fax
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the parties that have originated, securitized, and serviced the underlying collateral expand. Yet, so long as investors are having difficulty obtaining the information and the assistance necessary to enforce these potential claims, they will continue to suffer losses not contemplated in their contracts, causing them to invest their resources in other markets and thereby prolonging the recovery of the housing market. Given the overwhelming evidence presented in the attached Appendix, you can no longer ―look the other way‖ and remain uninvolved. Instead, as Trustee, you have certain obligations under the pooling and servicing agreements (―PSA‖) governing RMBS Trusts. You hold the collateral (e.g., mortgage loans and documents) for the benefit of the Trust and its beneficiaries – the Certificateholders. Your responsibilities include: You cannot be negligent in ascertaining the pertinent facts regarding the underlying collateral, which includes obtaining facts relating to well-known industry issues that are addressed in this letter. Upon discovery of Events of Default or representation or warranty breaches, you have to notify the appropriate parties. Given Certificateholders‘ interests in these trusts, it only seems appropriate to maintain transparency to these beneficiaries as well. You have obligations to provide investors with access to relevant deal documents, servicer notes, loan files, and other pertinent information. If a party is unwilling to share deal documents with the Trustee, this should highlight the potential conflicts, and the Trustee should exercise the appropriate steps to obtain such documents that are property of the Trust.1 Finally, upon discovery of, or when you have been presented with evidence of servicer Events of Default or breaches of any party‘s representations and warranties, you must comply with your obligations, as appropriate, to take action to remedy the servicer Events of Default in the best interests of the Certificateholders and/or to enforce the remedy of the subject loans by the breaching party within the cure period prescribed by the PSA. AMI is willing to work with Trustees to help them honor their contractual obligations by fostering open communication with Certificateholders and creating a framework and best practices to resolve these issues in a manner that is transparent, ethical, and fair. In particular, we would like to work together to create best practices for addressing two major problems we are encountering in RMBS Trusts: 1. Enforcement of repurchases based on the significant breaches of representations and warranties that have been discovered in the origination and underwriting of loans within these Trusts; and, 2. Remedying servicer defaults, including establishing processes for replacing servicers if they continually fail to comply with their obligations to service the Trusts in the best interests of the Certificateholders and ensuring that servicers take financial responsibility for damages caused to RMBS Trusts.
See, e.g., Bear Stearns Mortgage Funding Trust 2007-AR2 by Wells Fargo Bank N.A. as Trustee v. EMC Mortgage Corp., Case No. CA6132, (Del. Ch. 2011). 2
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These problems, apparent from the Trustee reports you send to Certificateholders as well as the evidence presented herein, are of great concern to the members of AMI and, we hope, to you, as the Trustee charged with protecting our interests. As we are both interested parties, we would like to work cooperatively with you to create best practices for resolving these issues. AMI is making the creation of such best practices a priority, and hopes to establish guidelines for the resolution of many of these issues by the third quarter of this year. We would welcome your input and involvement in this process, and hope that you take this opportunity to reach out to AMI to continue the dialogue initiated by this letter. Should you have any questions or comments with regard to the matters discussed herein, please contact me at 202-327-8100 or at firstname.lastname@example.org. Very truly yours,
/Chris J. Katopis/
Chris J. Katopis Executive Director Enclosure
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APPENDIX RMBS Trustees have certain important duties with respect to the Trusts they oversee – duties that are critical to preserving the core contractual rights afforded to investors under the relevant PSAs. These include i) ascertaining pertinent facts regarding the underlying collateral and notifying all parties upon discovery of a breach of any party‘s obligations; ii) providing investors with reasonable access to information regarding their investments; and, iii) remedying servicer Events of Default and enforcing the cure, substitution, or repurchase of loans that breach representations and warranties. The following constitutes evidence that the parties to RMBS Trust agreements are engaging in substantial breaches of their contractual obligations, and notice that such breaches have gone largely unaddressed by RMBS Trustees. These examples are divided into two sections: 1. Evidence of the egregious underwriting deficiencies that have been discovered across residential mortgage securitizations issued in the years leading up to the 2008 financial crisis; and, 2. Evidence of servicer breaches of their obligations to service loans in RMBS Trusts in compliance with their servicing agreements and the best interests of Certificateholders. Given the evidence detailed herein, AMI considers the Trustee to be on notice of serious threats to the assets and contractual rights underlying its RMBS Trusts. Breaches of Representations and Warranties The sale of loans into RMBS Trusts is typically governed by mortgage loan purchase agreements, which contain representations (―reps‖) and warranties made by the seller regarding the quality, underwriting process, payment history, and other fundamental characteristics of each loan. These reps and warranties were incorporated into the PSAs for the benefit of the Certificateholders. Pursuant to most PSAs, the seller must cure, substitute, or repurchase any loan that is found to contain a breach of reps and warranties that materially and adversely affects the value of the loan or Certificateholders‘ interest therein. As Trustee, you have an obligation to provide access to loan files, deal documents, and other pertinent information to investors upon receiving a request pursuant to the relevant terms of the PSA. Further, upon discovering or being notified of any such breach, it is your duty under most PSAs to notify the responsible party and to ―undertake commercially reasonable efforts to enforce the obligations‖ of the responsible party to cure, substitute, or repurchase such defective loans. It is these important contractual provisions that provided investors with comfort regarding the quality of the loans that would serve as the collateral for their investments in RMBS. While investors were prepared to accept certain risk with respect to this collateral—these reps and warranties constituted investors‘ fundamental protection against the risk of misrepresentation, fraud, and abject underwriting failures in the underlying mortgage loans—risks that were entirely within the control of the originators
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and sellers of these loans. For this reason, the following evidence regarding pervasive breaches of reps and warranties, and the Trustees‘ failure to enforce the same, is particularly troubling. The following findings are but a few examples of the egregious underwriting deficiencies that have been discovered across RMBS pools from the years leading up to the 2008 financial crisis. In April 2011, the United States Senate Permanent Subcommittee on Investigations released a bipartisan report detailing the findings of its two-year investigation into the causes of the crisis.2 The Subcommittee focused on Washington Mutual Bank (―WaMu‖) as a case study of lender conduct during this time, and concluded that WaMu had engaged extensively in improper loan underwriting practices, including steering borrowers into riskier loans than those they could afford; failing to verify borrower income or enforce compliance with its own underwriting guidelines; authorizing loans with multiple layers of risk, underwriting exceptions, and/or erroneous or fraudulent borrower information; and incentivizing loan personnel to quickly generate large volumes of higher risk loans without regard for loan quality.3 The Subcommittee concluded that, unacceptable lending and securitization practices were not restricted to Washington Mutual, but were present at a host of financial institutions that originated, sold, and securitized billions of dollars in high risk, poor quality home loans that inundated U.S. financial markets…These lenders were not the victims of the financial crisis; the high risk loans they issued were the fuel that ignited the financial crisis.4 Consistent with these findings, several bond insurers have reported discovering widespread breaches of reps and warranties in RMBS loan pools from the years leading up to the financial crisis. In a review of approximately 15,500 defaulted first lien loans and 37,500 defaulted second lien loans, Assured Guaranty found that 14,500 (93%) and 33,100 (88%), respectively, breached reps and warranties.5 Ambac Assurance Corp. conducted a review of 6,309 loans securitized by Bear Stearns and found that 5,724 (91%) breached reps and warranties; Ambac reports that out of the loans found to have breaches, Bear Stearns has agreed to date to repurchase only 52 (less than 1%), and has in fact not repurchased a single one.6 In separate lawsuits against Countrywide and Bank of America, MBIA Insurance Corp. reports having found that nearly 90%7 and
―Wall Street and the Financial Crisis: Anatomy of a Financial Collapse,‖ United States Senate Permanent Subcommittee on Investigations, April 13, 2011, available at http://hsgac.senate.gov/public/_files/Financial_Crisis/FinancialCrisisReport.pdf. 3 Id. at 3. 4 Id. at 4. 5 Assured Guaranty Ltd., Annual Report (Form 10-K), at 105 (March 1, 2011). 6 Ambac Assurance Corp. v. EMC, et al., Case No. 08-CV-9464 (S.D.N.Y. 2008) (First Amended Complaint ¶28). 7 MBIA Ins. Corp. v. Countrywide Home Loans, et al., Case No. 08602825 (N.Y. Sup. Ct. 2008) (Complaint ¶59). 5
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approximately 91%8 of the defaulted or delinquent loans in Countrywide securitizations show material discrepancies from Countrywide‘s reps and warranties. Other findings from across the industry suggest extensive underwriting deficiencies throughout RMBS Trusts. In 2007, Fitch Ratings conducted a review of subprime underwriting practices, in which it found that, [i]n many instances, misrepresentations and altered documentation are evident in the physical files... Often, loans containing misrepresentations have multiple problems that can be detected through a strong validation and reverification process.9 In particular, Fitch analyzed 45 loans with early payment defaults and found the results ―disconcerting at best, as there was the appearance of fraud or misrepresentation in almost every file.‖ In 2009, the Federal Home Loan Banks conducted a study of subprime and Alt-A loans in which they found that 54.5% of 2007-vintage loans, 49.1% of 2006-vintage loans, and 43.2% of 2005-vintage loans were eligible for repurchase based on breaches of reps and warranties.10 Due diligence or forensic loan auditing firms have noted similar findings, with the Barrent Group reporting that 69.9% of Alt-A loans reviewed from the 2006-07 period contained breaches of the underwriting guidelines while Recovco Management, LLC has found that over half of the several thousand loans reviewed from the 2006-07 period contained material breaches of reps and warranties. As the holder of the Trust fund for the benefit of Certificateholders, the Trustee has a duty under most PSAs to exercise reasonable care in ―ascertaining the pertinent facts.‖ As the Custodian of the relevant trust documents and loan files in many deals, or the as the party with the authority to direct the Custodian, the Trustee has an obligation to provide investors with reasonable access rights to information regarding their investments. The Trustee also has a duty to enforce the cure, substitution, and repurchase obligations of the parties to the PSA within the prescribed cure period when it becomes aware or should become aware of a material breach of reps and warranties. Pursuant to these contractual provisions, the repurchase price for any loans repurchased should include amounts for accrued interest and advances, and such repurchase amounts should be included in the remit provided to investors (requirements with which investors are seeing inconsistent compliance, at best). The Trustee may incur liability should it fail to comply with these duties, or act in a negligent manner in carrying out these duties. Given
MBIA Ins. Corp. v. Bank of America Corp., et al., Case No. BC417572 (Cal. Super. Ct. 2009) (Complaint ¶80) 9 M. Diane Pendley, et al., ―The Impact of Poor Underwriting Practices and Fraud in Subprime RMBS Performance,‖ Fitch Ratings US Residential Mortgage Special Report, Nov. 28, 2007, at 4-6, available at http://www.mortgagebankers.org/files/News/InternalResource/58467_TheImpactofPoorUnderwritingPracti cesandFraudinSubprimeRMBSPerformance.pdf. 10 Chris Gamaitoni, Jason Stewart and Mike Turner, ―Mortgage Repurchases Part II: Private Label RMBS Investors Take Aim - Quantifying the Risks,” Compass Point Research & Trading, August 17, 2010, available at http://api.ning.com/files/fiCVZyzNTkoAzUdzhSWYNuHv33*Ur5ZYBh3S08zo*phyT79SFi0TOpPG7klH e3h8RXKKyphNZqqytZrXQKbMxv4R3F6fN5dI/36431113MortgageFinanceRepurchasesPrivateLabel081 72010.pdf. 6
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the significant evidence that material breaches are prevalent within RMBS Trusts, and that Trustees have rarely exercised their duties to ascertain these facts or enforce repurchase obligations, these liabilities are potentially extensive. It is AMI‘s sincere goal to assist the Trustee in carrying out its duties and complying with its contractual obligations. This result would further the interests of both parties, in that it would preserve the integrity of Trust assets. At the same time, Trust assets should be used to cover the reasonable costs of enforcement, in that the Trustee should be entitled to reasonable indemnity and reimbursement from the Trust waterfall, consistent with the terms of the relevant PSAs. By working together to foster open communication and develop best practices surrounding the enforcement of loan repurchases, we can ensure that loan losses are absorbed by the parties that agreed to do so in the governing contracts. Servicing Breaches The conduct of mortgage servicers is governed by servicing agreements, which require these entities to service securitized mortgage loans in the best interests of the ultimate Certificateholders. However, many of the largest servicers are affiliates of the lenders that originated the loans at issue. These prior origination activities have created significant conflicts of interest for mortgage servicers, encouraging them to enrich their own interests over those of the Certificateholders they are contractually obligated to protect. For example, where a servicer controls the servicing for a borrower‘s first and second lien loans, but only owns the second lien, this creates conflicts that encourage the servicer to maximize the value of the second lien at the expense of the first. A study published by the National Bureau of Economic Research found that a modification program implemented by Countrywide Financial Corporation as part of settlement with state Attorneys General resulted in a substantial increase in voluntary or ―strategic‖ defaults by borrowers on first lien loans, without a corresponding increase in strategic defaults on second lien loans.11 As Countrywide no longer owns 88% of the first liens at issue, but holds a large majority of the second liens,12 these findings suggest that Countrywide is encouraging delinquent borrowers to pay second liens in lieu of first liens, thereby protecting its interests at the expense of the interests of investors. These conflicts and others have led to widespread servicer breaches of their obligations to service loans in RMBS Trusts in the interests of the ultimate Certificateholders. The following are just some examples of these breaches.
Chris Mayer, Ed Morrison, Tomasz Piskorski, and Arpit Gupta, ―Mortgage Modification and Strategic Behavior: Evidence from a Legal Settlement with Countrywide,‖ National Bureau of Economic Research, Working Paper No. 17065, May 9, 2011, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1836451. 12 Alex Ulam, ―The Bank of America Mortgage Settlement Fiasco,‖ The Nation, October 13, 2010, http://www.thenation.com/article/155380/bank-america-mortgage-settlement-fiasco?page=0,1. 7
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Failure to Report Rep and Warranty Breaches When servicers discover any material breach of a loan seller‘s reps and warranties, they are obligated by most PSAs to ―give prompt notice thereof to the other parties.‖ Servicers are also in the best position to determine whether there has been any such breaches because they regularly (i) interact with borrowers in collecting loan payments and are privy to borrower statements that may contradict information in their loan files; (ii) conduct in-depth reviews of loan files in the course of evaluating potential loan modifications; and, (iii) are put on notice of potential breaches by bond insurer and investor lawsuits, such as those discussed in this letter. Nevertheless, servicers have failed to give notice to Trustees or investors of any breaches, primarily because the servicers, as affiliates of the loan originators and/or sellers, would often be the ones required to buy back any deficient loans.13 This conflict of interest has led to the failure by servicers to report findings of clear fraud and misrepresentation relating to mortgage loans held in securitization.14 This conflict is illustrated by the discrepancy between the manner in which servicers handle loans in their own portfolios and the manner in which they service loans on behalf of investors or Government Sponsored Enterprises (―GSEs‖). For example, the OCC and OTS issued a Mortgage Metrics Report for the third quarter of 2009 that found that, ―[s]ervicers continue to modify more loans held in their portfolios than they did [sic] for the GSEs, government-guaranteed loans, or for private investors… Loans serviced for the GSEs accounted for 18.7 percent of all modifications despite making up 63 percent of the servicing portfolio.‖15 These findings demonstrate that banks are more willing to engage in loan modifications (especially principal loan modifications) when they hold loans in portfolio. In contrast, when they service loans for others, servicers earn higher servicing fees if loans remain in delinquency with higher principal balances, and are neither repurchased nor resolved. The Trustee should not permit servicers to subordinate investors‘ interests to their own. If servicers discover breaches of reps and warranties in the portfolios they service for others, they can and should be reporting these breaches to the other parties to the PSA, just as they should be modifying loans in these portfolios, where appropriate. The Trustee must ensure that servicers comply with their obligations to service such loans in the best interests of Certificateholders, and should exercise its right to declare a servicer Event of Default and replace any servicer that is too conflicted to do so.
See, e.g., Letter from Kathy Patrick to Countrywide Home Loans Servicing and Bank of New York, October 18, 2010, available at http://www.businessinsider.com/bondholers-letter-to-bank-of-america-over-countrywide-loans-2010-10; Deutsche Bank National Trust Co. v. FDIC, et al., 09-CV-1656-RMC (D.C.D.C. 2009) (Complaint ¶82); Laurie Goodman, Roger Ashworth, Brian Landy, and Liclan Yang, ―The Elephant in the Room—Conflicts of Interest in Residential Mortgage Securitizations‖, Amherst Mortgage Insight, at 15, May 20, 2010 (only 37% of early payment defaults have been repurchased out of the trust). 14 U.S. Representative Brad Miller, Letter to JPMorgan Chase Home Lending, June 17, 2010, at 2 n.4 (citing sources) (letter on file with AMI). 15 U.S. Department of the Treasury, ―OCC and OTS Mortgage Metrics Report: Disclosure of National Bank and Federal Thrift Mortgage Loan Data,‖ December 2009, 25, available at http://www.occ.gov/publications/publications-by-type/other-publications/mortgage-metrics-q32009/mortgage-metrics-q3-2009-pdf.pdf. 8
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Improper Servicing of Delinquencies Servicers encounter additional conflicts with their obligation to service in the best interests of Certificateholders when servicing delinquent mortgages. Servicers often earn more fees from foreclosing than they would from engaging in loan modifications, thereby creating incentives for servicers to foreclose on borrowers that might qualify for a workout.16 AMI supports effective, long-term solutions for responsible homeowners seeking to stay in their homes, including sustainable loan modifications, where appropriate. Unfortunately, mortgage investors are often powerless under the operative PSAs to offer such support to the homeowner, as the implementation of loan workouts is entirely with the purview of the servicers. By all accounts, servicers are failing miserably in this capacity. In April 2011, the U.S. Treasury announced that it was withholding incentive payments to three servicers – Bank of America, Wells Fargo, and JPMorgan Chase – based on noncompliance with the Making Home Affordable Program.17 This decision stemmed from a report of the Treasury compliance team that found, among other things, that servicers were making income calculations errors (defined as a difference of at least 5% between the income calculated by the servicer and the Treasury compliance team) on a substantial percentage of modification assessments.18 In particular, Bank of America was found to have made income calculation errors on 22% of assessments, Wells Fargo on 27% of assessments, JPMorgan on 31% of assessments, and Ocwen on 33% of assessments. These numbers suggest that servicers are not conducting their servicing duties in investors‘ best interests. Of course, if no arrangement can be made to recover delinquent payments and/or modify the loan, servicers have an obligation to use reasonable efforts to foreclose. Instead, as widely reported by research analysts, servicers are often keeping mortgages in delinquency for extended periods, which maximizes servicing fee proceeds.19 Further, with respect to such delinquent loans, servicers have been increasingly disregarding their obligation to advance principal and interest payments to RMBS Trusts, despite the fact that these payments are recoverable from liquidation cash flows, borrower repayments upon cure, or deal cash flows in the case of workouts with principal and interest recapitalization. In general, the servicer should stop advancing payments on a loan only if it deems the loan in good faith to be ―non-recoverable.‖ However, since there is no
Kurt Eggert, ―Limiting Abuse and Opportunism by Mortgage Servicers,‖ 15 HOUSING POL‘Y DEBATE 753, 757 (2004) available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=992095. 17 ―Obama Administration Releases May Housing Scorecard Featuring New Making Home Affordable Servicer Assessments,‖ U.S. Department of the Treasury, press release, June 9, 2011, available at http://www.treasury.gov/press-center/press-releases/Pages/tg1205.aspx. 18 U.S. Department of the Treasury and the Department of Housing and Urban Development, ―Making Home Affordable‖ Program Performance Report Through April 2011,‖ June 9, 2011, at 16-36, available at http://www.treasury.gov/initiatives/financial-stability/results/MHAReports/Documents/April%202011%20MHA%20Report%20FINAL.PDF. 19 See, e.g., ―The Elephant in the Room,‖ at 23. 9
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clear definition of ―non-recoverable‖ in most PSAs, servicers have begun to deviate from accepted and established servicing practices to limit their financing costs at the expense of investor interests. Indeed, stop advance rates have been steadily increasing over the past 12-18 months (particularly with respect to subprime mortgages), thereby depleting cash flows to investors, lengthening repayment timelines, and resulting in significant value destruction in RMBS.20 Pursuant to governing PSAs, servicers must implement loss mitigation efforts, if appropriate, in a timely fashion, and must continue making servicing advances should loans remain in delinquency. Certificateholders are entitled to Trustee assistance to research and preserve these important contractual rights, and the failure to take such actions could lead to irreparable harm to the Trust and Certificateholders. Robosigning In August and September 2010, evidence emerged that many of the nation‘s largest servicers were submitting sloppy or downright fraudulent documentation to state courts in an effort to churn delinquent properties through the foreclosure process. In particular, deposition testimony in two separate foreclosure cases revealed that employees of major servicers were regularly signing and submitting summary judgment affidavits to courts to justify foreclosures, without reading the affidavits or verifying the truth of the statements made therein.21 These so-called ―robosigning‖ problems and other faulty foreclosure documentation practices led several servicers to enact voluntary foreclosure moratoria in October 2010.22 Thereafter, all fifty state Attorneys General launched an investigation into these revelations, and are in the process of negotiating a settlement with servicers to address this conduct.23 The prevalence and detrimental impact of these practices has now been confirmed. In February 2011, John Walsh, Acting Comptroller of the Currency, testified before the Senate Committee on Banking, Housing, and Urban Affairs that federal examinations of the nation‘s 14 largest servicers found critical deficiencies and shortcomings in foreclosure governance processes, foreclosure document preparation processes, and oversight and monitoring of third party law firms and vendors. These deficiencies have resulted in violations of state and local foreclosure laws, regulations, or rules and have had an adverse affect on the functioning of the mortgage
Barclays Capital, ―Securitisation Research: Stop Advances – Trends and implications,‖ June 3, 2011. Andy Kroll, ―A Crack in Wall Street‘s Foreclosure Pipeline?,‖ Mother Jones, September 22, 2010, available at http://motherjones.com/mojo/2010/09/gmac-foreclosure-stephan-halt. 22 Debra Cassens Weiss, ―Bank of America Extends Foreclosure Moratoria to All 50 States,‖ ABA Journal, October 8, 2010, available at http://www.abajournal.com/news/article/bank_of_america_extends_foreclosure_moratorium_to_all_50_sta tes. 23 ―Foreclosure Probe ‗Closer‘ to Settlement, Iowa Official Says,‖ Bloomberg Businessweek, June 21, 2011, available at http://news.businessweek.com/article.asp?documentKey=1376-LMJS171A74E9012J38IJ16V5IG830MBDDTN1FVFG. 10
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markets and the U.S. economy as a whole. By emphasizing timeliness and cost efficiency over quality and accuracy, examined institutions fostered an operational environment that is not consistent with conducting foreclosure processes in a safe and sound manner.24 On April 13, 2011, the OCC announced formal enforcement actions against eight national mortgage servicer banks and two third-party service providers for unsafe and unsound practices related to residential mortgage loan servicing and foreclosure processing.25 In conjunction with these findings, the OCC and the Federal Reserve entered into Consent Orders with 10 servicers while the OTS entered into Consent Orders with four other servicers. Based on the agencies‘ findings that servicers engaged in deficient and unsafe practices such as signing affidavits without personal knowledge, failing to obtain proper notarization, and failing to ensure that the note and/or mortgage were properly endorsed and assigned, these Consent Orders required servicers to establish new foreclosure processes.26 Suffice it to say, AMI is extremely concerned by these revelations. Namely, the corrective actions already undertaken by federal regulators and the prospective actions by the state Attorneys General to reform servicing practices will likely require a significant expenditure of additional resources by the servicers of RMBS Trusts. Under most PSAs, the Trustee has an obligation to act in the best interests of the Certificateholders in enforcing servicer obligations, including ensuring compliance with servicing agreements. These servicing agreements generally include a rep and warranty by the servicer that the documents prepared and furnished by the servicer do not include any untrue statement of material fact, in addition to the general obligation of the servicer to service mortgage loans in the best interests of the Certificateholders. The Trustee has a responsibility to enforce these contracts and ensure that costs associated with robosigning and other foreclosure documentation errors, which plainly violate several provisions of standard servicing agreements, are born by the banks that engaged in such practices, and not passed along to the Trust and to Certificateholders. Unreasonable and Unnecessary Expenses Evidence has emerged of servicer abuse in connection with another aspect of the foreclosure process – the advancing of expenses such as homeowners insurance and maintenance fees. Under the terms of most PSAs, servicers are only entitled to recover advances that are ―customary, reasonable and necessary.‖ Yet, according to an investigation conducted in November 2010 by American Banker, when homeowners stop
United States Senate Committee on Banking, Housing and Urban Affairs, Testimony of John Walsh, Acting Comptroller of the Currency, February 17, 2011, at 15, available at http://www.occ.treas.gov/newsissuances/congressional-testimony/2011/pub-test-2011-19-written.pdf. 25 Office of the Comptroller of the Currency, ―OCC Takes Enforcement Action Against Eight Servicers for Unsafe and Unsound Foreclosure Practices,‖ press release, April 13, 2011, available at http://occ.gov/news-issuances/news-releases/2011/nr-occ-2011-47.html. 26 Jon Prior, ―Feds sanction mortgage servicers for foreclosure debacle,‖ HousingWire, April 13, 2011, available at http://www.housingwire.com/2011/04/13/fed-sanctions-mortgage-servicers-for-foreclosuredebacle. 11
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making mortgage payments, many of the country‘s largest servicers frequently move the insurance policy on the home to an affiliated company, potentially costing investors billions of dollars per year.27 This loss is based on the fact that this so-called ―forceplaced insurance‖ can be 10 times as costly as regular insurance policies, and servicers frequently receive kickbacks in the form of ―commissions‖ for offering these affiliated insurance companies the rights to the servicer‘s force-placed business.28 Investigations and court filings reveal that servicers often place excessive or unnecessary insurance on these homes, improperly include expenses for retroactive coverage, and/or receive additional premiums for reinsuring part of the homeowner policy.29 These expenses are then passed along to RMBS Trusts, and ultimately Certificateholders, in the form of higher loss severities on foreclosed properties. Similar problems have been discovered with servicer advances of maintenance fees. In June 2010, the Federal Trade Commission (―FTC‖) announced that it had reached a $108 million settlement with Countrywide over charges that the servicer had deceived cash-strapped homeowners into paying inflated fees for default-related services.30 According to the FTC‘s complaints, Countrywide set up subsidiary vendors for the sole purpose of increasing its revenues by overcharging homeowners for everything from appraisals to lawn care.31 By funneling excessive default-related services through subsidiaries, servicers such as Countrywide have substantially and improperly eroded the value of Certificateholder investments. The Trustee has a duty to ascertain when this type of abuse is taking place in an RMBS Trust and enforce servicer compliance with the PSA and servicing agreements when it is. The servicing breaches described herein, by engendering excessive fees and servicing in their own interests rather than the interests of the RMBS Trusts, enrich servicers while generating significant costs for investors. In addition, these practices directly harm individual homeowners by subjecting them to wrongful foreclosures and/or denying them the opportunity for loan modifications for which they might be eligible. The Trustee should be aware that these breaches constitute potential servicer Events of Default under standard PSAs, creating fiduciary obligations for the Trustee, subjecting the servicer to removal, and potentially placing the Trustee in breach of its contracts should it fail to act. AMI has a strong desire to see that Trustees take part in the solution to these problems and avoids engendering unnecessary liability. Further, though actions to research these issues and compel servicer compliance with their contractual duties would certainly be warranted and welcomed by investors, AMI recognizes that certain servicers are hopelessly conflicted based on their prior
Jeff Horwitz, ―Ties to Insurers Could Land Mortgage Servicers in More Trouble: Force-placed policies impose costs on both homeowner, investor,‖ American Banker, November 10, 2010, http://www.americanbanker.com/issues/175_216/ties-to-insurers-servicers-in-trouble-1028474-1.html. 28 Id. 29 Id. 30 Federal Trade Commission, ―Countrywide Will Pay $108 Million for Overcharging Struggling Homeowners; Loan Servicer Inflated Fees, Mishandled Loans of Borrowers in Bankruptcy,‖ press release, June 7, 2010, http://www.ftc.gov/opa/2010/06/countrywide.shtm (May 18, 2011). 31 ―Countrywide Will Pay,‖ June 7, 2010. 12
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origination activities. In these situations, AMI advocates turning the servicing of loans that are delinquent or at high risk of delinquency over to a special servicer or subservicer that would work with Certificateholders to mitigate losses. We look forward to working with Trustees to establish procedures and practices for transitioning loans to nonconflicted servicers, including the possibility of establishing a committee of affected investors to identify high risk loans, select appropriate servicers, and authorize loss mitigation activities on behalf of all Certificateholders.
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