Sloppy Bookkeeping In Securitizations Beginning To Bite Financial Institutions As Big Squeeze On Lenders, Servicers Looms In The Horizon

The New York Times reports:

• WE are all learning, to our deep distress, how the perpetual pursuit of profits drove so many of the bad decisions that financial institutions made during the mortgage mania. But while investors tally the losses that were generated by loose lending so far, the impact of another lax practice is only beginning to be seen. That is the big banks’ minimalist approach to meeting legal requirements — bookkeeping matters, really — when pooling thousands of loans into securitization trusts.

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• THE woes brought on by sloppy bookkeeping in securitizations will be on the agenda at the American Bankruptcy Institute’s annual spring meeting on April 3. An article titled “Where’s the Note, Who’s the Holder,” co-written by Judge [Samuel L.] Bufford and R. Glen Ayers, a former federal bankruptcy judge in Texas, will be the basis of a discussion at the meeting.

• Mr. Ayers, who is a lawyer at Langley & Banack in San Antonio, said he expects that these documentation problems will halt a lot of foreclosures. That will mean pain for investors who hold the securities. The problem for those who expect to receive the benefit of the note, Mr. Ayers said, is that they “may not be able to show to the judge they have a right to foreclose.” “It’s a huge problem,” he added. “It’s going to be expensive, I don’t know how expensive, ultimately to the bondholders.”(1)

For the story, see Fair Game: Guess What Got Lost in the Loan Pool?

Thanks to Mike Dillon at GetDShirtz.com for the heads-up on the story.

(1) More and more judges, attorneys, and homeowners are taking note of the fact that foreclosing lenders have no business foreclosing on defaulted mortgages unless the lenders (a) produce the promissory note, and more importantly, (b) produce evidence (ie. the chain of title to the note, etc.) that they have the legal right to enforce the note. First in line in feeling the financial squeeze are the loan servicers, according to a recent story in American Banker:

• [P]ooling and servicing agreements typically require that servicers advance all the principal and interest payments, as well as tax, insurance, maintenance, and foreclosure costs, to investors regardless of whether the borrower is paying. Servicers get reimbursed for expenses incurred while a loan is delinquent but only after the property goes into foreclosure, so getting repaid can take nine months to a year. Large banks with servicing operations may be able to handle the financial strain of paying advances to investors, but independent servicers and special servicers that deal with defaulted borrowers are already cash-strapped, said Matt Stadler, a principal and the chief financial officer at National Asset Direct Inc., a New York buyer and servicer of distressed loans. "Advance lines are ballooning, and servicers are paying interest on those advances," he said. Mr. Stadler likened the state of the servicing industry to the "I Love Lucy" episode in which Lucy is furiously grabbing chocolates off a fast-moving conveyor belt. "The borrowers are just piling up, and servicers are inundated and overwhelmed with calls they can't answer, short sales they can't complete, and not enough staff," he said.

The estimate of nine months to a year that it takes for a servicer to get reimbursed for its advances is obviously based on the foreclosing entity producing the note, and producing satisfactory evidence of its right to enforce it. However, as more and more lenders are unable to produce the proper paperwork in foreclosure actions, these cases are going into indefinite limbo, and will be causing (if they haven't already) a serious financial crush on those loan servicers caught in the middle as they are obligated to continue paying the holders of the securitized interests while the defaulting homeowners continue to properly stiff them. Any payments being made by the homeowners on account of their home mortgage will go directly into a court registry, or their attorney's trust account, pending resolution of the matter. ThetaMissingDocsMtg