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Repeated Foreclosures on an On-Time Borrower Demonstrates Failure to Fix Servicing and Fallacy of "Save Banks at All Costs" Policy

Posted on June 17, 2014 by Yves Smith 

It was obvious at the time of the various mortgage "settlements" that the Administration's policy was to make only cosmetic fixes in a badly broken servicing model. And despite evidence of continuing mortgage servicing abuses, from significant errors in records to failure to implement required reforms, like ending dual tracking, the public is being subjected to Big Lies from Timothy Geithner (in his new book) and Larry Summers (in a Financial Times opinion piece) that the only approach possible to the crisis was the one that was taken, of coddling the banks and leaving the greater public bearing the costs in numerous ways, from rising inequality, a lousy job market and weak growth, to a mortgage market that is destined to remain on government life support.

The last point is not as well understood as it needs to be. The failure to make servicers clean up servicing means that there is virtually no private mortgage securitization market. Prior to the crisis, it was 40% to 60% of total mortgage originations.

Mortgages made now are overwhelmingly either government guaranteed or retained on bank balance sheets. Except for a very few deals (jumbos with very large down payments), investors, who were badly burned by servicing abuses, are not willing to be fooled again. As a result, it's a virtual certainty that new mortgages will depend on government guarantees. The housing-industrial complex has sufficient clout to insist that the Federal government continue to absorb mortgage credit risk, since having banks retain mortgages on bank balance sheets would result in much higher interest charges, and as a result, lower housing prices. We'll discuss shortly why the failure to force servicers to clean up their shoddy records and procedures means we won't see a meaningful private mortgage securitization market any time soon, which means government guaranteed mortgages will continue to dominate housing finance.

A new book, House of Debt, is fomenting a re-examination of the Team Obama party line that favoring the banks over the rest of the economy was the right policy choice. Economists Amir Sufi at the University of Chicago and Atif Mian at Princeton have performed extensive empirical work that shows that over-indebted consumers, particularly the lower-income ones targeted by aggressive and often predatory lenders, had markedly cut back on spending before the fourth and final acute phase of the crisis

Sufi and Mian also stress that there's no precedent for this response to a financial panic. Past responses recognized that bank failures were the result of bad lending decisions, and that they needed to bear the cost of their recklessness. Restructuring loans thus was not seen as charity to borrowers, but just like the Chapter 13 process for corporate bankruptcy, a pragmatic recognition that getting half a loaf from the borrower is better than trying to bleed him into failure (or in the case of individuals, penury). And in this case, restructuring mortgages would also have lowered losses to private mortgage securitization investors. But the reason the Administration couldn't let that happen was that the biggest had written second liens (mainly home equity lines of credit) that they would have had to write off, producing serious hits to their earnings and capital. Couldn't hurt those precious banks, now could we?

As a result, one of the most serious missed opportunities of the crisis was cleaning up pervasive problems with mortgage servicing. That was supposedly addressed in the various mortgage settlements, particularly the OCC settlement that produced the embarrassingly botched Independent Foreclosure Review. But as Adam Levitin and others explained at the time, the OCC consent orders were regulatory theater. Similarly, as Abigail Field explained,the national/state mortgage settlement institutionalized large permitted error rates (including 1% wrongful foreclosures) so as to assure nothing much would change.

The media keeps finding reminders that servicing is broken. Even after California passed a Homeowner Bill of Rights that barred dual tracking (continuing with a foreclosure while negotiating a modification with a borrower), the California monitor, Katie Porter, found that the practice continued.

Repeated, erroneous foreclosure efforts against a single borrower illustrate how nothing has been remedied. This sorry example is so chock-full of mistakes and missing records that our summary gives an incomplete picture of the magnitude of errors and how many times the official story changed.

The homeowner, Brent Bentrim, received letter from Wachovia Bank in late 2008 saying he was in arrears by over $4900 and the bank intended to foreclose. Nine days later, the bank sent a past due notice demanding $2300. This was troubling since Bentrim had made his payments in full, on time. When he got his payment history, through RESPA, he found both payments that had not been applied and incorrect application to principal and interest.

Wachovia initiated a foreclosure in 2009. The case was eventually dismissed in 2010, since Wells Fargo, which acquired Wachovia, failed to produce an expert witness to substantiate that the bank's principal and interest calculations were accurate.

Nevertheless, Wachovia and then Wells Fargo continued to charge interest on the loan at a penalty rate of 27.34%, resulting in over $25,000 of additional charges.

Less than a week after having its foreclosure case dismissed, Wells sent a letter urging Bentrim "act now to save your home" by taking loan modification (presumably to pick up the extra interest), and sent another letter urging him to take a modification six weeks later. Around this time, Wells Fargo also force placed a $250,000 insurance policy on Bentrim's house.*

Bentrim then sent in a QWR (Qualified Written Request) asking who held his mortgage and for a computation of his principal and interest due, and also asked Wells to provide proof that the bank had asked whether he had home insurance before force placing a $250,000 policy. Bentrim got a partial answer, and saw that the principal and interest statement was different than the one he received in 2008, including having the a different principal balance and not applying any payments that he had made for 18 months.** The bank also provided only a copy of the note as of closing, which showed the originator, First Union, as the lender. The "original" note should show an unbroken chain of endorsements from First Union through Wachovia, with either an endorsement from Wachovia to blank or specifically to Wells Fargo.

Via e-mail, Bentrim explained why the interest and principal calculations were wrong:

We have figured the late payments demands were based on two items. First, the loan was overfunded by $2700.00, which was returned to them to apply to principal (about 3 months' worth of payments) but booked as an origination fee. But the real reason is failure to follow the adjustable rate disclosure statement (entire reason I got the loan).

The documents have a loan with set payments for 60 months at a time based on principal balance, current WSJ prime rate and term left. However, the interest rate applied could change monthly, with the prime rate. Therefore, it is assumed that if rates rise, payment required will not cover all the interest due on that payment. The disclosure says that the unpaid interest will be deferred and collected at the end of the loan by extending the loan. Instead, the bank would collect the unpaid interest in the next payment instead of deferring it. (We have been told by an expert with the servicing platform, ACLS, that it could not do as the documents intended). The conflict between the unpaid interest due in the system and the payment due would cause the default letters. They were trying to collect both.

A great example of servicing platforms not meeting loan criteria.

Bentrim also provided a section of the annual report that showed that KPMG had identified this type of calculation error as a "material noncompliance with minimum servicing standards".

Bentrim has sued Wells over the issue of whether it has standing, the failure to ascertain whether the force placed insurance was justified and whether the policy amount was proper, its failure to remedy its computation errors.

During discovery, Wells admitted it was unable to produce crucial records. From Bentrim (who provided court documents supporting this account):

…we got our first batch of discovery from Wells Fargo. We specifically asked for all contracts, documents, servicing agreements, etc. They answered 'NONE.' This is a huge point – unlike an objection, they claim no servicing or assignment documents exist. They also produced WF 150-153 and WF 187. WF 150-153 is another payment history that does not match up. All of a sudden the principal balance is back, but the original interest rate is wrong.

Long-time readers may recall that Wells Fargo (and US Bank) tried the "no we don't have any documents" strategy in the famed Ibanez case, and the Massachusetts Supreme Judicial Court didn't take too well to that. As we wrote in 2011:

[T]he Massachusetts Supreme Judicial Court dealt the securitization industry a not-all-that-surprinsing loss by saying that lenders and servicers had to be able to produce reasonable evidence that the mortgage had indeed been transferred to the party that was trying to seize the house. The court wrote:

When a plaintiff files a complaint asking for a declaration of clear title after a mortgage foreclosure, a judge is entitled to ask for proof that the foreclosing entity was the mortgage holder at the time of the notice of sale or foreclosure…. A plaintiff that cannot make this modest showing cannot justly proclaim that it was unfairly denied a declaration of clear title.

Also note this section of the concurring opinion by Judge Cordy:

Foreclosure is a powerful act with significant consequences, and Massachusetts law has always required that it proceed strictly in accord with the statutes that govern it….The plaintiff banks, who brought these cases to clear the titles that they acquired at their own foreclosure sales, have simply failed to prove that the underlying assignments of the mortgages that they allege (and would have) entitled them to foreclose ever existed in any legally cognizable form before they exercised the power of sale that accompanies those assignments.

Yves again. So it should be no surprise that as the case advanced, Wells, which was trying to foreclose based on a Lost Note Affidavit, suddenly had a "tah dah" moment and found the missing note…just when the former Pizza Hut employee who supplied the Lost Note Affidavit was about to be deposed.

Again, this account only skims the surface of the records gaps and errors (just going over the number of times Wells has provided inconsistent and clearly inaccurate records of what Bentrim owes on the mortgage would take thousands of words). Keep in mind that Bentrim has spent $50,000 on this fight and is still in court (he had yet another hearing last week).

Look at what his case reveals. Two banks calculated Bentrim's interest and principal charges incorrectly. Neither could be bothered to remedy the error; both proceeded to foreclose. He was also subjected to what looks like unjustified forced placed insurance (retaliation for fighting the foreclosure?), penalty interest charges that are not permitted under his original mortgage, and harassing phone calls made to his place of work about modifying his mortgage (a debt collection abuse). And while we have not focused on the standing issue in our account, Wells Fargo has not been able to substantiate the transfers that it claims took place to give it the authority to foreclose.***

We've repeatedly discussed that the servicing platforms themselves are broken. Loans are "boarded" from other servicers, and too often, the servicer's own conventions are applied regarding servicing fees, late fees, computation of interest, application of payments, regardless of what was stipulated in the mortgage and in the pooling and servicing agreement. Mortgage servicing is the poster child of what Lambert has called "code is law": where the perceived virtues of innovation result in badly-designed computer systems running roughshod over contracts and well-settled law.

Bentrim's case shows that "innovation" has simply been a vehicle for crapification. Banks are now worse at lending than they have ever been. They managed to take a performing loan turned it into a huge unnecessary cost for investors via legal expenses, due to poor systems and deficient paperwork. The Obama Administration was well aware of these issues and refused to address them. As a result, the crisis in housing hasn't really ended.

As reader MBS Guy said via e-mail:

Maybe the problem is that securitization has simply failed. The scale and efficiency of mortgage lending and servicing means that there will be regular, repeating errors in lending, servicing, paperwork etc. Automation doesn't eliminate the problems and sometimes makes the problems worse. So the reality is that the error rate for mortgages is much higher than securitization investors would tolerate, before you even get to credit risk. If loans are kept in portfolio, the problems can remain in house and opaque (Fannie, Freddie and Ginnie keep the issues opaque as well).

I think this would also mean that the entire mortgage market is mispriced – in order to compensate mortgage or MBS investors for the real risks, loan rates would have to be much higher, which no one has the stomach for.

In other words, the Administration was unwilling to address the morass of servicing problems because doing servicing correctly means pricing in the cost of mortgage modifications. Servicing never allowed for that, and doing so means more costly servicing, hence more costly mortgages. Team Obama was utterly unwilling to do anything that might reduce bank margins or increase mortgage costs, since reflating the housing market to rescue the banks was a top priority.

It didn't have to wind up this way. Servicing has become such a mess that it's often forgotten that for roughly the first 15 years of mortgage securitization, the mortgage notes and liens were conveyed properly to the trusts, so the underlying documentation for servicing was in order. And mortgage servicers once did do modifications. In fact, at the Milken conference in 2008, the Lew Ranieri, the father of mortgage securitization, was clearly shocked by reports that servicers weren't modifying loans; in the early days of securitizations, servicers did them as a matter of course.

But as the mortgage securitization market grew, originators looked for more ways to reduce costs so they could rip out more fees. Failing to transfer mortgages to securitization trusts as stipulated in the pooling and servicing agreements was one. Stopping doing modification that were good for investors and borrowers but produced losses for the servicer were another. And the result of cheapening the product means that it exists now only by virtue of government support. The servicing business, like the banks, turns out to be too big to fail.

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* This looks a lot like a retaliatory effort to make sure Bentrim fell into arrears so as to justify pursuing the foreclosure to recoup all the legal fees incurred so far.

** We have been told by whistleblowers that Wells applies late fees incorrectly, an abuse called "pyramiding fees". A borrower's payment is supposed to be applied under state law and the terms of the mortgage first to interest, then to principal, then to fees. But if, as Wells has been repeatedly alleged to have done, you charge late fees first (and remember, late fees here are disputed), the payment automatically comes up short, and many banks throw short payments in a "suspense account" which means they apply none of the received to the loan.

** The master-in-equity ruled against Bentrim on most of the standing issues last week, deeming that mere possession of the note was sufficient. Proper analysis of whether a party has standing to foreclose generally requires looking at the stipulations of the pooling and servicing agreement (the securitization trusts generally elected New York law as governing law for the trust, and New York law is well-settled and unforgiving). However, many judges recoil at that. But even if you rely on the UCC, which most judges have dealt with, the standard is not possession but that the party seeking to enforce a note be the "holder in due course," which requires entails more than mere possession.

10 COMMENTS

1. BangerJune 17, 2014 at 7:07 am
   The problem we are facing is relatively simple–Big Banks and servicing outfits have little incentive to be good citizens and every temptation to commit crimes because they are, largely, immune from prosecution. What I mean is that managers responsible for these abusive situations are not held personally responsible for their actions. At most, corporations pay (usually) modest fines for the virtual rape of citizens and that's the end of it.
   Again, if you have a legal system that is focused on protecting people who are assaulting citizens then citizens will be less likely to follow rules and regulations if they have an opportunity to do so. More and more people are realizing the game is rigged against them and that will tend to break down social order eventually.
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   1. craazymanJune 17, 2014 at 9:31 am
      what puzzles me even more is that catastrophic lack of integrity that seems to permeate every level of decision making in these organizations. It's a relatively complex topic for analysis, but in the interests of brevity it seems almost incredible to me that individuals in positions of leadership, almost to a man and woman, can't summon up the internal conscience to address and re-dress these wrongs. There is a sickness there, an emotional illness, a disease of consciousness, that is profoundly damaging both to self, to ones who perpetrate it, and society at large. I know we all see this illness in small ways in every day life, office life, anywhere "two or three are gathered together" as it were. But the degree to which this illness has overtaken an entire "industry" is both astonishing, fascinating and utterly revolting all at the same time. I don't think Jesus was kidding when he said what profits a man to have the whole world if he loses his soul. When that epiphany dawns, and it will at some point, the pain will be horrendous and no money in the world will alleviate it one iota.
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      1. NotTimothyGeithnerJune 17, 2014 at 11:06 am
         It's a yes man phenomenon too. We went through a period where companies became so big that understanding quality was difficult given the size of operations, and ultimately, only headline numbers and brown nosing are noticed. As we lost smaller companies who kept big companies on their toes, there was no way to challenge the yes men, and now most of the people are idiot yes men who have almost no understanding of how anything works. The smart were beaten down or left, and given a lack of corporate hiring, there aren't young people at these institutions who might provide an internal drive, just people attached to big wigs and there on favors, that is people who can't rock the boat.
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2. James ArnoldJune 17, 2014 at 7:46 am
   Uncertainty is a killer. The common citizen in America today is plagued by forces which don't make sense, and can strike at any time. This is terrorism without gunpowder. The banks can ruin your life with impunity. The EPA can shut down your farm with a phone call. Your health insurance can be sent into limbo for months upon months. So-called child protective services can take your child away from you based upon an anonymous tip from a neighbor who doesn't like the way you mow your lawn. Americans used to groan and chuckle at the arbitrary application of faux-law in last century's Soviet Russia. We are living that nightmare, with those as-yet-unaffected declaring we are free. Websites like Naked Capitalism offer the clues to our troubles. Please heed well, oh fellow citizen!
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   1. BangerJune 17, 2014 at 9:16 am
      Excellent comment James. We are subject to arbitrary laws and procedures that are the main cause of our epidemic of stress. We live, sadly, in a malevolent society and lack the ability to even face that fact because we are so used to being in denial we cannot comprehend nor want to comprehend the enormity of what we are facing.
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3. NathanaelJune 17, 2014 at 8:28 am
   Bentrim needs to bring Jones vs. Wells Fargo to the attention of the judge, as character evidence (or whatever the equivalent is for a corporation). WF did pretty much the same thing in that case — miscalculating deliberately and refusing to correct the miscalculations — and had to pay $3.1 million dollars in punitive damages for it. Bentrim should ask for $30 million in punitive damages, since apparently the $3.1 million wasn't enough to make Wells Fargo change its practice of miscalculation.
   http://livinglies.wordpress.com/2012/04/12/lawyers-take-note-wells-fargo-slammed-with-3-1-million-punitive-damages-on-one-wrongful-foreclosure/
   http://www.ncbrc.org/blog/2013/03/27/3-million-punitive-damage-award-upheld-against-wells-fargo/
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4. Paul TioxonJune 17, 2014 at 10:07 am
   The assignment of the note, and the original note are the only claims to a debt, that can exist. Private property can only be recognized through public records. Privacy and secrecy can never ensure enforcement of property rights, because anyone could make a claim on real estate, whether ownership or a lien. The failure of the modern financial innovation to duplicate the the labor intensive features of record keeping, spread out over counties and townships across states throughout the nation have more than likely resulted in the unwillingness to spend the enormous amount of money required as the initial investment on building a completely new system of record keeping to replace the army of people in banks and government courthouse that serve as the public repository of private property record keeping.
   The brave new world of 21st century free markets that have fought tooth and nail to relieve the government of any and all duties are replacing these critical functions inadequately with new free market structures. The social order was made possible by the structural feature of record keeping, accurately and faithfully recording in a unbroken chain over time who the owner of a piece of real estate is and the transfer from the previous owner. Together, property rights are publicly made available and no counter claims can be made in contradiction to the history of the property. Here, it is not science or belief but history recorded that provides certain evidence. It is too simple but too labor intensive and to duplicate will require an enormous expenditure to initiate a Universal Commercial Data Record, that will be institutionally sound to provide unbroken chains of ownership and transfer over extended periods of time.
   Private corporations are attenuated franchises of the power of the state. Corporations go in and out of business, merge, fail, are dissolved. That is not the place for the real estate records and property rights of society to be deposited. The free market has failed because it has taken on a task that is beyond its institutional function and capacity. The state is absolute and can not be dissolved like a contract. If we are living under such pretense as a contract that can be dissolved, then we are no longer living under the political aegis of a state, but rather under some sort of floating values of the market. It is then no wonder that any claim can be made against anyone from the market who sees a chance to make a buck and pursues it to exhaustion. Public records held by the state exclusively, are the only history of a property that can be counted upon over time. To change this structural feature of the state which is the only institution that is designed to last over extended periods of time, barring war and destruction, is take to property rights and scatter them to the wind and the appetites of the profit hungry.
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5. DolleyMadisonJune 17, 2014 at 10:26 am
   Thank you for not forgetting about those of us suffering through this. I won DWP (never defaulted) and they were found to not own or hold loan – yet they won't stop. They just appealed 3years later. Not a single lawyer in this bank town will represent me and in addition am now blacballed from employment. Its a scary lonely hoirrible ordeal…beginning to think nothing can stop this evil. Thank you.
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6. steelhead23June 17, 2014 at 11:10 am
   Yes, it is true. Mortgage servicers are bandits and the lack of justice, including the justice of risk-taking banks taking losses, is severely undermining both individual and social well-being, but the market is up, way up, and while a small percentage of Americans hold their wealth in stocks (the primary owners being the proverbial 1%), it would appear that the only metric GSO (Geithner, Summers, Obama) are concerned with is the market. Even the housing market plays second fiddle to the stock markets.
   It is high time Americans recognized her enemies, most of which are domestic, situated in Wall Street, a virtual flock of blood-sucking squid, controlling our elected officials like marionettes, while our true leaders (those made wealthy by the market and made powerful by their wealth) live like the titans they we have allowed them to become.
   A note to Elizabeth Warren. Sorry Liz, but offering legislation that nibbles on the edges of this massive corruption, is not going to change things for your vaunted "common man (or woman)". What is needed, desperately, is new leadership of our increasingly unitary system of government. Run for president dammit.
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7. PeonInChiefJune 17, 2014 at 11:25 am
   Lenders here in California seem to be intent on violating the provisions of the Homeowners Bill of Rights at every turn. With respect to the tenant protections they've gone to the State Legislature when the courts have refused to accept their "interpretation" of the law. Deutsche Bank has been arguing for years that foreclosure invalidates leases, even though both State and Federal law specifically provide that rental leases survive foreclosure. But when Deutsche Bank lost its appeal on the issue, in stepped the State Legislature with AB 1513, which allows lenders to claim that tenants are "squatters" and have them evicted by the local constabulary. In the court case Deutsche Bank was the foreclosing lender and Ocwen was the servicer (a marriage made in hell). Details on AB 1513 are here: http://tenantstogether.org/article.php?id=3166 and on the case here http://tenantstogether.org/article.php?id=3123

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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.