Hi-Tech Industry: foreclosure sales

I’ve taken a particular interest in GMAC because in the one consumer foreclosure case I

‘ve attended, back in May, I had the dubious pleasure of seeing a GMAC employee and an attorney for the local foreclosure mill, who was also put on the stand, perjure themselves. And this isn’t my interpretation; documentary evidence was presented later in the trial that showed core elements of each of their testimony to be false. The GMAC staffer, who had made confident statements about the case and provided plenty of bromides about the integrity of GMAC’s processes, was suddenly reluctant to say anything more definitive than “I don’t know.”

A Birmingham, Alabama law firm, Bradley Arant Boult Cummings, has been GMAC’s national counsel on real estate servicing matters for some time (see here for examples of some of the matters it has handled).

Curiously, Bradley Arant is one of the firms that GMAC engaged to conduct an “independent review” after its use of robo signing became public:

GMAC Mortgage is initiating an independent review of foreclosures in all 50 states and examining foreclosure sales nationwide to ensure procedures and documentation are accurate….

The firms hired to conduct the review are Sullivan & Cromwell LLP, Bradley Arant Boult Cummings LLP, Morrison & Foerster LLP and PricewaterhouseCoopers LLP, said a person familiar with the matter.

Given Bradley Arant’s long-standing and extensive involvement in GMAC’s mortgage business, how can it legitimately be part of the team conducting the review? It’s incentives will be to minimize any problems, for a host of reasons, the most important being so as not to ruffle a big meal ticket and to avoid the exposure of any issues that might create liability for the firm.

But if that isn’t bad enough, get a load of this, courtesy Bloomberg:

Fannie Mae, the largest provider of mortgage financing in the U.S., said it halted referrals to a Florida foreclosure-processing law firm that’s being investigated by the state attorney general.

The Law Offices of David J. Stern PA have drawn scrutiny in Attorney General Bill McCollum’s investigation into the foreclosure of homes based on possibly fraudulent or improperly prepared documents….Fannie Mae, which has a $3.3 trillion book of business, has hired law firm Bradley Arant Boult Cummings LLP to review Stern’s processes and operations.

Why is this problematic? The profile of a typical foreclosure mill is a very high staff to partner ratio, as many as 90 to 100 paralegals for every partner. Their processes are routinized. Foreclosure mills are evaluated according to parameters set by Fannie and Freddie, in case of GSE securtizations. Most of this coordination and assessment does not take place directly, but via a firm called Lender Processing Services, which serves as a defacto outsourced manager on behalf of the GSEs and servicers.

It is hardly news that foreclosure mills in the LPS/Fannie/Freddie network were engaging in questionable conduct. Consider this June 2009 statement:

Attorney General Richard Blumenthal, as part of an investigation into the foreclosure business in Connecticut, has requested information from mortgage giants Lender Processing Services, Inc., Freddie Mac and Fannie Mae concerning their process for selecting law firms in foreclosure proceedings.

Blumenthal is investigating reports that a majority of Connecticut foreclosures are assigned to only a few select law firms, and complaints by consumers who said they did not receive proper foreclosure notices from marshals.

In letters to Lender Processing Services, Inc., the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae), Blumenthal said he understands that these organizations maintain a network of law firms that perform legal services relating to foreclosure actions…

“Dominance over foreclosure service by a few select law firms and marshals has spurred complaints about improper or illegal practices — wrongfully allocating work to non-marshals, forging papers, failing to serve papers, and making kickbacks,” Blumenthal said. “Concentrating this work in a few hands can be severely problematic — causing unconscionable costs and failed notice delivery. These companies — mortgage lending giants — have a public trust.’

Now how does this relate to GMAC and Bradley Arant? LPS and the mills they hire work in an integrated fashion. Moreover, Freddie, Fannie, and the servicers have chosen to work with firms that operate in a high-volume, highly standardized manner. Blumenthal clearly was of the view that Fannie and Freddie would bear some, perhaps a great deal, of responsibility for any improprieties, since the law firm was operating less independently than would normally be the case.

GMAC also used the David Stern law firm. Thus both due to its desire to deepen its relationship with Fannie and to keep itself and GMAC out of trouble, Bradley Arant is certain to frame its examination as narrowly as possible and not consider potentially troublesome but germane questions such as who at the contracting organizations (LPS, Fannie, other servicers) might also be culpable.

A broader look is key to understand who really bears responsibility. Foreclosures of securitized loans increasingly look to be what Bill Black would call a criminogenic environment, in which the major perps are deeply entwined and work together. And if caught, it is clearly in their best interest to cut loose the weakest, most dispensable actor in their tidy group, the foreclosure mill.

So in many ways, the selection of Bradley Arant makes perfect sense. It is familiar with the terrain, so it will be able to issue a plausible-sounding report. It is also so deeply part of this questionable backwater that it is highly unlikely to make a bottoms up investigation and potentially rock the boat.

As former central banker Willem Buiter remarked, “Regulation is to self regulation as regard is to self regard.” The only way for an investigation of this sordid business to succeed is for it to be truly independent, and that means requisitioned and executed by parties that have their hands clean. If any of these companies had a new CEO or a particularly tough compliance/internal audit function, they might fill that bill. However, the very choice of Bradley Arant strongly suggests that these examinations are exercises in form over substance.

Next week, the Federal Housing Finance Agency (FHFA), the regulator for Fannie Mae and Freddie Mac, hosts its Supervision Summit. Attendees comprise 300 "stakeholders," whom I'll address the morning of Wednesday, December 8, 2010 with a presentation titled: Repairing the Damage of "Fraud as a Business Model."

Among other things I'll remind them that widespread foreclosure problems have festered for years. In January 2008, I submitted the manuscript for my book, Structured Finance, to my publisher. I explained that the rating agencies should be stripped of their NRSRO designation for structured products. Among a host of other problems, the rating agencies were clueless as to how to account for failures in the way the assets were handled in the creation of the deals they rated:

Executives at Standard & Poor's, Moody's and Fitch said they were waiting until foreclosure sales before recognizing losses, but they did not comment on the rising number of vacant homes on which foreclosures had not occurred, the complaints of trustees who could not foreclose because they could not "find" the required documentation to prove they had the right to foreclose or on the possibility of non-economic mortgage restructuring which would simply delay foreclosure. They also did not comment on the rising delinquencies which most often led to inevitable foreclosure.

NRSRO stands for "Nationally Recognized Statistical Rating Organization." Moody's, Standard and Poor's, and Fitch were the key rating agencies participating in rating collateralized debt obligations, yet they failed to follow basic statistical principles. When the SEC solicited comments for its proposed rules for the Credit Rating Agencies, mine was the first letter it posted on its web site in February 2007. I recommended the SEC revoke the NRSRO designation for the rating agencies with respect to rating structured finance transactions.

By the end of 2007 and through 2008, rating agencies scrambled to keep up. Moody's kept changing its models and "correlation" assumptions. At one point it announced that "new correlation" would equal three times "old correlation." In December 2007, Standard and Poor's announced an increase in capital requirements in order for certain financial guarantors to maintain "triple-A" ratings only to materially increase its loss assumptions in January of 2008. Fitch announced it might issue one notch downgrades for Ambac and MBIA [the two largest municipal bond insurers] in December 2007, only to downgrade Ambac two notches in January 2008 when Ambac announced larger than expected losses in its credit derivatives portfolio. The rating agencies were inconsistent, ill-informed, and floundering.

Structured Finance & Collateralized Debt Obligations, (excerpt from Chapter 17) Wiley, 2008.

MBIA eventually slid from "AAA" to a junk rating. Ambac filed for Chapter 11 bankruptcy protection November 8, 2010.

Of course, I will also give my recommendations on how to fix the rating agencies. The least controversial part of my presentation will be on the rating agencies, but it is worth mentioning this small preview in advance. None of the issues I'll talk about next week is new, and "financial reform" is late to the party and dead on arrival.

eric seiger do

Wednesday, December 1, 2010

foreclosure sales

No comments:

Post a Comment

Followers

Blog Archive

About Me