Monday, March 31, 2014


Thank you, Deontos!

Posted on March 31, 2014 by 
I once had a good opinion of bank analyst Chris Whalen, despite having some reservations about him. But his error-filled screed against mortgage servicing regulations means he can no longer be taken seriously on the subject of banking. Whalen has become a textbook illustration of the Upton Sinclair saying, "It is difficult to get a man to understand something when his salary depends on his not understanding it."
In his former incarnation as the purveyor of a large bank database, and lead author of the website, Institutional Risk Analyst, Whalen did a very good job of assessing the health of banks generally and calling out the weaknesses in particular institutions, such as flagging that while the traditional bank at JP Morgan indeed looked healthy, its risks were dwarfed by those of its derivatives book. But Whalen also had a tendency to rely overmuch on sources outside his core beat and neither master nor verify what they were telling him. At IRA, I'd see posts that had serious errors on macroeconomics, and were garbled or just wrong on technical but nevertheless important issues, such as on CDOs and credit default swaps. So Whalen has a history of not recognizing the limits of his knowledge.
Whalen is also close to Paul Jackson, the publisher of Housing Wire, which has run pro-mortgage-serivcer propaganda for years. I do not know if it is true now, but when the robosigning/chain of title issue was hot, the bank/servicer foreclosure management service provider (more accurately, liability shield) Lender Processing Services, was Jackson's most important client. And industry ties go even deeper. Jackon's father, who runs a major California  foreclosure mill, is a major investor in Housing Wire. Needless to say, its coverage of servicing abuses made Pravda look like a paragon of objectivity. As Dave Dayen wrote in "The Corruption of the Financial Press: A Look at Housing Wire" that mortgage "news" site had extensive business and financial connections with firms and individuals at the frontlines of dubious mortgage industry practices and has repeatedly gone to bat for its biggest advertiser even in the face of criminal investigations.
Whalen joined Carrington, which has a mortgage servicing arm (note that Whalen was not in that operation). And he also writes regularly for Breitbart, and his pieces over time have become screechier, ideology-dominated and at best thinly connected with facts.
However, Whalen's post at Housing Wire on the servicing industry represents a new low. It's rife with errors and misinformation. For instance, Whalen treats the servicers as if they are the same as the lenders. They aren't; they are agents for the lenders (who are typically securitized investors). Whalen falsely claims that the lenders have incentives to care about maximizing the value of the real estate asset (the mortgaged house, which often winds up being REO, or real estate owned). I challenge Whalen to point to the section of the pooling and servicing agreement that compensates servicers for doing a good job of maximizing the value of the house for investors, either during the foreclosure process or afterwards.
Whalen completely skips over how servicers cheat investors as well as homeowners. And note this isn't an ideological issue; uber-conservative mortgage investor Bill Frey of Greenwich Capital has worked hard, but will little success, to organize investors to combat servicer abuses. And from what I have seen in investor reports, servicers run ever scam in the book. One uncovered by Lisa Epstein: servicers will tell the trust (investors) that it has sold a property out of REO anywhere from 2 to as many as 8 months after court records say it has been sold. Why the delay? It allows servicers to collect servicing fees to which they are not entitled.
And servicers have engaged in much bigger abuses, such as modifying second liens (when they own them) ahead of first mortgages they service (and don't own), which serves to increase the cash flow to the second liens out of borrowers that look terminal.
As reader MBS Guy notes:
Servicers have been trotting out the argument that they don't profit from pursuing foreclosures for decades. It just isn't true anymore. As an employee of Carrington, Chris should know this better than anyone.
The Federal government economically incents servicers to push borrowers into default, so the servicer can then offer a modification and get a direct payment from Treasury under Hamp.
This is a direct government subsidy to servicers, but servicers don't get it for performing mortgages. Ocwen was the industry leader in boosting their company share price through government susbsidized earnings. Everyone else has followed.
In addition, Carrington was the leader in manipulating the servicer advancing function so that they could get paid for defaults. Carrington reimburses itself for advances on defaulted loans from the cashflow of performing loans. When Carrington did it, investors were shocked. Now, I understand it is industry standard for non-bank servicers.
Stock prices on non-bank servicers have sky-rocketed over the past year because of the perceived profit in foreclosures (even after the impact of Lawksy's scrutiny on Ocwen, share prices of Ocwen, its affiliates, and similar companies are up dramatically).
The share prices of these companies aren't up because consumers or MBS investors are happy with them or think they are good at their jobs. They are up because stock investors think non-bank servicers are good at squeezing profits out of the distressed servicing business.
Even more bizarrely, Whalen's post tried to blame servicing reform (to the extent it has happened) on Georgetown Law School professor Adam Levitin, but made apparent that he either didn't read his (and Tara Twomey's) paper on mortgage servicing, or possibly worse, did and chose to misrepresent. Basic mistakes, like misspelling author names repeatedly and getting the publication date wrong, suggest the former rather than the latter.
From Levitin's takedown (which I strongly suggest you read in full):
Whalen claims that the basic thrust of our paper "is that mortgage lenders and services want to push home owners into foreclosure, gain control over the homes and thereby profit."
Nope. Wrong. First, Tara and I make no claims about lenders. Our paper is about servicers. Their incentives are distinct from lenders, and that's part of the problem, we argue. Second, our argument is not about servicers wanting to push homeowners into foreclosure, nor is it about servicers wanting to gain control over the homes (via foreclosure sale purchases). Some of that does happen, but that's not our argument. Our article is about how servicers are compensated, and our argument is that servicers' compensation structures mean that when a homeowner defaults, then the servicer is not incentivized to modify the loan. The servicer isn't looking to trigger a default if the loan is performing in most cases. And Tara and I barely mentioned the REO aftersale market in the article…
Putting aside Whalen's mischaracterization of our argument, what about his claim that servicers are not interested in foreclosing? He writes:
"If you actually know the world of distressed servicing, there are three golden rules when it comes to a non-performing loan. First is keep the owner in the house. Second is protect the asset and make sure that maintenance, taxes, and insurance are current. And third is to preserve the cash flow of the loan via loan modification, if possible."
Whalen is playing games here. First, he fails to acknowledge that the servicing market has changed a LOT over the past few years, primarily in response to regulation and litigation. In 2008-2010, when Tara and I were writing, there were around 1 million completed foreclosure sales occurring per year in a market with perhaps 50 million mortgages. There was also precious little "distressed servicing", which is mainly special servicing. Instead, there were large master servicing shops that had no ability or expertise in handling huge volumes of distressed loans. The idea that these shops were just stumbling into 1 million plus foreclosures per year despite these "golden rules" is preposterous. Whalen also fails to mention all of the illegal, fraudulent activity done by servicers that resulted in stuff like the National Mortgage Servicing Settlement, as milquetoast as the settlement was. To the extent that foreclosures have dropped, it isn't just out of the goodness of servicers' hearts.
In fairness, Housing Wire did post a critique of Whalen's post by Tom Cox, the one-time bank attorney in Maine who won a pivotal case against MERS which put it in the national spotlight. Cox wrote a more detailed treatment which he has given me permission to publish below. Again, it demonstrates how utterly dishonest and inaccurate Whalen's piece was. Notice, for instance, how often Whalen misrepresents the state of the law.
Last week Housing Wire was kind enough to publish my immediate response
to the March 28, 2014 article
 of Christopher Whalen subtitled "Regulatory pressures amount to legalized extortion." My initial response was a broad overview what I saw as an unjustified attack by Mr. Whalen on present efforts to regulate the mortgage servicing industry. Here I would like to set out a point-by-point series of responses to a number, but by no means all, of the inaccurate statements in Mr. Whalen's article. In preparing this response, I have tried to inform myself more about Mr. Whalen's perspectives by reviewing some of his writings, including one that I have just read entitled "Dodd-Frank and the Great Debate: Regulation vs. Growth" published in February 2014. Interestingly, the title of that article displays Mr. Whalen's bias well—in his view regulation and growth are antagonistic and cannot co-exist.
In his "Regulation vs. Growth" article, Mr. Whalen states that "off-sheet finance was the chief cause of the 2007 subprime crisis." He may well be correct in that, but he never once mentions the collateral fallout—the enormous harm inflicted upon the homeowners caught up in that crisis, or the even more enormous harm to individuals and businesses across the country as a result the destruction of the US economy by the industry for whom Mr. Whalen advocates. He never once makes any reference in that article to the follow on abuse of American homeowners by a mortgage servicing industry, that developed after 2008, and that proved itself to be rotten to the core. Yet he states "it seems self-evident that increased levels of regulation and government intervention in the consumer credit markets are not likely to prove to be positive factors for the economy." He finds "no apparent purpose" to regulations arising out of the Dodd-Frank act. Interestingly, to those of us work with the individual human beings who have been harmed by Mr. Whalen's financial industry, the need for increased regulation of the financial industry is what is self-evident, and the purpose of the regulations that he criticizes is fully apparent.
Mr. Whalen concludes his "Regulation vs. Growth" article by stating that "[h]ouseholds can only reflate if consumers have access to credit." He concedes that 20 to 30 percent of residential mortgages are underwater. Analysis by Martin Andelman, whom Whalen lauds in his March 28, 2014 HW article, suggests that the percentage of underwater homes is far above 50% if you take into account that, for a family to be able to move, in addition to paying off its mortgage, they must pay a 6% real estate commission, pay moving expenses, and come up with a 20% downpayment for a new home. Add to this the millennial generation living with its parents, suffering under the weight of enormous student debt and not forming new households, and there is another huge drag on the economy. It is odd that Mr. Whalen cannot see that the present problem is not so much lack of access to credit for consumers, as it is their inability to deal with the credit that they already have. He never mentions the lack of jobs as a problem, except that at one point he seems to suggest that more consumer credit will lead to more jobs. How can an underwater homeowner, or a young college graduate with an unbearable load of student loan debt possibly benefit from increased access to credit? To Mr. Whalen, lack of unregulated access to credit is the root of our problems. The absurdity of that claim is what is self-evident.
Mr. Whalen's March 28, 2014 post on HW is focused primarily upon his complaints about regulation of the mortgage servicing industry, although he is also broad in his attacks upon regulation of the lending side of the finance industry. Not to be found in that article is any acknowledgement by Mr. Whalen of the past six years of abuses of the mortgage servicing industry. In a case of mine brought on behalf of a Maine homeowner, the Maine Supreme Court called some of those practices "fraudulent" and "ethically indefensible" and stated that they represent "a serious and alarming lack of respect for the nation's judiciaries." The National Mortgage Settlement with Bank of America, JPMorgan Chase, Wells Fargo Bank, GMAC Mortgage, and Mr. Whalen's former employer, Citi Group, while woefully inadequate, addressed some of these abuses. Mr. Whalen completely misses that point, complaining in his March 28, 2014 article that this settlement, along with the new CFPB regulations would make one "believe that the problems with consumers were the sole cause of the 2008 financial crisis. He fails to grasp that the National Mortgage Settlement and the new CFPB servicing rules were never intended to address the cause of 2008 financial crisis; instead they were implemented to address some of the fallout from that crisis—abusive mortgage servicing.
Mr. Whalen asserts that "anybody with even the slightest idea about the world of distressed serving knows that the law now requires that loan modification is the first order of business when a borrower gets in trouble." There is no such law—it is Mr. Whalen who hasn't "the slightest, idea about the world of distressed servicing." The CFPB regulations that went into effect on January 10, 2014 explicitly state that they do not require any servicer to offer a loan modification. All that they require is that when a loan owner for whom a servicer is acting, the servicer itself, has existing loan modification programs, that the borrower be informed of the availability of those programs.
Mr. Whalen then goes on to recite the "three golden rules when it comes to a non-performing loan: (1) try to keep the homeowner in the house, (2) protect the property, and (3) preserve cash flow by a modification when possible. Whalen fails to recognize that, while these incentives surely are those of the loan owners, logic does not dictate that these incentives apply to mortgage servicers. The servicers have no stake in whether any particular loan goes into default, whether the homeowners stay in the house, whether the property is protected or whether the loan is modified. These are not their loans and my practical experience for six years across hundreds, if not thousands, of cases is that servicers simply do not care about Mr. Whalen's "three golden rules." They routinely act contrary to Mr. Whalen's golden rules and routinely deny homeowners for loan modifications for which they qualify and instead push to foreclose.
Mr. Whalen then comes to the defense of Nationstar Mortgage and Ocwen Loan Servicing. He references the "extraordinary expenses" of Nationstar as it tries to absorb its huge purchases of MSRs. Yet Mr. Whalen is oblivious to the suffering of individual homeowners caught up in the outrageous inability of Nationstar to do even a marginally competent job of servicing the loans already in its servicing portfolio. Nationstar has become the worst servicer that we face in foreclosure mediation and its inability to properly handle loan modification applications and make timely decisions is being repeatedly sanctioned by our courts. Ocwen used to be not so bad, now it has become awful to deal with. Yet, Mr. Whalen complains about the regulations designed to stop this abuse because the regulations make it difficult for these servicers to accurately predict their earnings for their investors. Real human beings are suffering at the hands of Nationstar and Ocwen, yet all that Mr. Whalen cares about is predicting earnings for investors. To him the CFPB rules are "nonsensical regulations."
Mr. Whalen comments about the problem of zombie mortgages. Yet again, it is Mr. Whalen who displays a fundamental failure to understand the law. He asserts that "when a lender makes a decision to abandon a home, they are supposed to release the lien and notify the debtor." There is no such law! That is the major source of the problem and that is why the CFPB is looking into this problem. In fact, in the absence of any such law, the loan owners abandoning these foreclosures affirmatively refuse to release their mortgages, thus leaving these properties in limbo—the lender drives the homeowner out by its foreclosure, then abandons the foreclosure, but refuses to release its mortgage while also refusing to take control of and maintain the property. Whalen pleads: "if the debtor has abandoned the property what is the lender or servicer supposed to do?" It is sad that Whalen cannot answer his own question. The lender should either complete its foreclosure and sell the property to get it back into the hands of an owner who will care for it, or it should discharge its mortgage and get out to the way of efforts to achieve a rehabilitation of the property.
The statements in Mr. Whalen's article that utterly destroy his credibility are his assertions that the new CFPB regulations "prohibit the lender/servicer from contacting the borrower in default for as much as a year," and that the borrower can "basically live in the house rent free for a year before the lender/servicer is allowed to contact them." Instead of prohibiting borrower contact, the CFPB 120 day post default standstill period is intended to force the lender to contact the borrowers. The CFPB rules mandate the sending by lenders and servicers of notices to borrowers during this standstill period warning of the coming foreclosure, notifying them of housing counseling options, and providing information about available modification programs. The CFPB rules specifically sets up a window of time for the servicers to follow the golden rules that Mr. Whalen lauds before they push to foreclosure.
From this misunderstanding of existing regulations, Whalen leaps to the conclusion that this is the reason that "large banks don't want to touch a new borrower with less than a mid-700 FICO score." Possibly there is a link between the CFPB ability to repay rules and acceptable FICO scores, but there is no observable link between the CFPB servicing rules, about which Whalen is complaining, and FICO scores. Mr. Whalen certainly fails to provide any such link.
Whalen concludes his article by the absurd assertion that CFPB director Richard Cordray is "not interested in fixing the mortgage market, but instead seem[s] only to be interested in extracting settlements and payments from banks and nonbanks alike." Mr. Whalen's credibility in making this statement is about equal to his credibility when he asserts that the CFPB regulations prohibit lender/servicer contact with borrowers. The CFPB went to extraordinary lengths in reaching out to the financial industry as it prepared its new mortgage servicing regulations. All that one has to do is review the 753 page "Final rule: official interpretations" document published by the CFPB relative to its new rules at 12 CFR 1024 to see the great lengths to which the Bureau went to consider and accommodate financial industry reaction to the new rules. Mr. Whalen's article demonstrates that he has not read either the new regulations themselves or this commentary. As he accuses Richard Cordray of having a political agenda, Mr. Whalen vividly demonstrates his own. He pleads in his February 2014 "Regulation vs. Growth" article for the financial industry to be less regulated and to be given "more freedom to experiment with new types of financial products." We had abundant such experimentation in the last decade and investors, homeowners and the country at large were the losers. It is clear from Mr. Whalen's article that is only concern is for the investors (and the investment banking industry from which he derives his livelihood), and that he has none for the homeowners.
Yves again. Whalen did attempt to defend himself in the comments section of Levitin's post, and its invective to content ratio works against him. It also elicited objections commentors who actually had worked in servicing and begged to differ.
But the evidence stands on its own. Whalen got so much so astonishingly wrong (and essential elements, not just mere misspellings, which yours truly is guilty of way too often) that he can't be taken seriously on this topic. But he seems to be willing to run on brand fumes and sell out what is left of his reputation to dubious causes.

And how many times can a man turn his head,
and pretend that he just doesn't see?

And how many ears must one man have,
before he can hear people cry ?

And how many deaths will it take till we know,
that too many people have died?

The answer my friend is blowing in the wind,
the answer is blowing in the wind.

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