Chicago Foreclosure Lawyer Blog

As I had long suspected, mortgage servicers have very strong financial incentives to push for foreclosure instead of modifying a loan. Diane E. Thompson, of counsel to the National Consumer Law Center, recently published an article in the Washington Law Review that analyzes various servicer incentives and how they prompt servicers to select loan modification or foreclosure.

In general, this decision is based on which approach will make the most money for the servicer. Although servicers will claim that an individual investor or group of investors has refused to entertain the idea of a loan modification, more often than not, investors have very little day-to-day involvement with individual loans. These investors are generally owners of mortgage-backed securities. They do not own individual loans, rather, they own an interest in receiving the proceeds from a large pool of loans.

Many investors are entities like pension funds, retirement funds, and other entities that are seeking a stable, long-term investment. In general, it is in an investor's best interest to keep the pool of loans filled with performing loans. Properties that are sold via foreclosure do not provide long-term income, and in many cases, investors see very little of the funds from the foreclosure. This is due to several factors.

First, given the fact that many properties are underwater, a foreclosure sale very rarely obtains an amount equal to the loan balance. Moreover, a foreclosure sale cuts off long-term gains from interest. A lump sum of $150,000 is worth much less than that same amount paid off over a term of 30 years at 5% interest.

Second, before investors see any return from a foreclosure sale, the servicer is paid. Servicing a loan that is in foreclosure allows servicers to obtain fees for late and missed payments, securing a property, hiring attorneys to process the foreclosure, and other costs. The longer a property spends in default and in foreclosure, the more money a servicer stands to make. Servicers make significantly less money servicing a performing loan over the long-term.

It is also worth noting that when servicers offer loan modifications, they often offer modifications that make economic sense for the servicer, not the investors. Many loan modifications provide for missed payments and the associated penalties by tacking the value onto the loan's principal balance. This means that many borrowers end up owing more after a modification than they did prior to modifying. Another popular strategy is to set aside the missed payments and fees in a separate line item. This amount can be paid down over time by making pre-payments, or it becomes a balloon amount due at the end of the modified loan's lifetime. These loans are more likely to default, sending more business back to the servicer.

Most interesting is why servicers don't generally offer principal reductions -- they are normally paid a servicing fee based on the principal balance of the loan. Reducing principal reduces that fee, which is clearly not in the servicer's interest. Servicers are also rated based upon their efficiency in resolving delinquent loans. Pushing to foreclose can help increase this rating and drive more business to the servicer.

Servicers will also keep borrowers in temporary loan modifications as long as they can. This increases the servicer's profit as it is entitled to keep the majority of its fees and penalties that relate to servicing the loan. Additionally, when a servicer denies a permanent loan modification, it can apply further fees related to the partial payments made under the trial modification. Keep in mind, trial modifications do not modify the loan, they are essentially a reduced payment period designed to test a borrower's ability to make reduced payments.

On the whole, the article is worth reading and is accessible to both academics and lay persons. Look for more updates and analysis in the future.

For those looking for a copy of the article on Westlaw or Lexis, the cite is:

Thompson, Diane E., "Foreclosing Modifications: How Servicer Incentives Discoruage Loan Modifications," 86 WashLRev 0755 (2011).

December 25, 2011 has come and gone, and the foreclosure fraud settlement has yet to materialize. Iowa Attorney General Tom Miller had stated that he wanted it wrapped up by Christmas, but it is clear that hasn't happened.

Several states including New York and California remain out of the negotiations, which means that banks are less willing to make deals when so much liability remains off the table. The major lenders are pushing for broad waivers of liability. Time is reporting that a deal may materialize in January and has published some details.

Here's the overview: the banks will commit $25 billion to three categories. They will make $5 billion in cash payments primarily to the states. $3 billion will be earmarked for refinances. The remaining $17 billion will be used for principal writedowns for underwater homeowners.

In reality, the banks will only be committing $5 billion out-of-pocket. The writedown funds will be paid by crediting banks for every dollar of principal that they forgive.

In exchange for these concessions, the banks will be released from claims brought by the states and the federal government for servicing, foreclosure, and loan origination abuses. Individual consumers will still be able to bring lawsuits, but those lawsuits will likely be less effective than ones brought by the government. With deep pockets and an army of attorneys, it isn't hard to fight individual lawsuits -- in some cases it is merely a matter of outspending the plaintiff.

The biggest problem with this latest version of the settlement is the same as it has always been -- it does not do enough. $17 billion towards principal writedowns is a good start, but with 25% of mortgages underwater nationwide (almost 50% in the City of Chicago), it is not enough to fix every underwater loan. The $5 billion to the states will end up in the pockets of some borrowers, but likely only $1500 to $2000 per person. Those aren't small sums of money, but likely aren't large enough to truly remedy the harm of foreclosure fraud and lending abuses.

If the banks are going to obtain a broad waiver of liability, the steps they must take to obtain that remedy should be equally broad. Given that the state of Nevada is suing Bank of America/Countrywide for violating a previous settlement agreement, even an optimist has little reason to expect that the banks will comply with the settlement this time around.

Reports are that the new settlement terms will be made public in January. Until then, I'd advise against holding your breath.

Apparently 60 Minutes has decided to roll out a series of "feel good" exposes this holiday season. Earlier this month, 60 Minutes ran two segments about whistleblowers at two major lenders whose claims have become criminal prosecutions. Delving further into the foreclosure crisis, 60 Minutes explored the effect that foreclosures have had on the neighborhoods that surround the foreclosed homes.

60 Minutes went to Cleveland, OH, where Cuyahoga County is demolishing abandoned homes in an attempt to shore up falling property values. On some blocks, there are more empty homes than homes with people. Chicago is in a similar situation, so Cuyahoga County's solution is especially topical. By turning stripped and vandalized houses into green space, the county hopes to prevent the further decline of home values and improve the value of remaining inhabited homes.

What's even more interesting about the segment is that one of the county officials interviewed just comes out and states the obvious: the only way to fix the problem is to write down the principal balance on underwater mortgages. I have stated this so many times in the past that I won't belabor the point.

Also pay attention to the homeowners who are continuing to pay on underwater mortgages. The moral obligation theory of contracts is put forth by at least one person. It breaks my heart to think that "my signature means something" could trump a bad investment/business decision. Certainly, her mortgage lender won't consider the moral hazard of her owing $100,000 on a house that is worth $50,000. Never mind that the real estate boom is what inflated home values, and that boom was driven by the same mortgage lenders foreclosing now.

As with the other 60 Minutes segments I have linked in the past, this one is worth watching.

In what is shaping up to be a series of cases, Nevada Attorney General Catherine Masto has filed a civil fraud lawsuit against Lender Processing Services. LPS is one of the largest providers of software and services to mortgage servicers and their network attorneys. Given that the state recently indicted some lower-level LPS officials, this seems to be the next step in the chain. I personally won't be surprised if Nevada follows Massachusetts's lead and goes after the servicers that use LPS next.

The complaint lays out everything that industry observers and consumer rights attorneys have been saying about LPS for years. At 39 pages, it's somewhat of a lengthy read, but the first five pages neatly summarize the facts behind the state's case.

Here's some background: LPS provides document preparation services and specialized software to servicers and their attorneys. LPS was largely unknown outside the mortgage servicing industry until last year when 60 Minutes ran a piece about the robosigning that was taking place at LPS's subsidiary, DocX. At the time, LPS stated that the activity at DocX was nothing more than a clerical notarization error. LPS further stated that it had processes and internal controls in place that ensured affidavits were properly signed.

According to the complaint, LPS has:

engaged in a pattern and practice of deceptive conduct that willfully misled consumers, courts, and the public, resulting in countless foreclosures that were predicated upon false, deceptive and deficient documents that LPS prepared and/or executed and included fees that were mischaracterized and deceptively passed on to consumers.

This single paragraph captures most of the complaint. It describes LPS's attempts to cover up and recharacterize its behavior as innocent clerical errors. The complaint also discusses LPS's involvement in the foreclosure process, which has less exposure to the public. For example, LPS is more than just an administrative middle-man. According to the complaint, LPS "improperly directs and/or controls the work of foreclosure attorneys in the LPS Network."

LPS advises its attorneys how and when to proceed with various steps of the foreclosure process. It also tends to obstruct communication between the attorney and the servicer. This is a problem since the servicer is the client, not LPS. LPS also charges its network attorneys a referral fee for each case that it routes to their offices. As the AG's complaint notes, this is essentially a kickback. It also sounds like fee-splitting, which becomes a major ethical hazard. According to the complaint, these kickbacks are masked as attorney and trustee fees. Those fees are then tacked onto the judgment against the homeowner, which means that ultimately homeowners who lose their homes are paying these fees.

The complaint also does a good job of encapsulating the nature of the foreclosure crisis:

The foreclosure crisis has been fueled by two main problems: chaos and speed. LPS' business model is designed to take advantage of the former by increasing the latter. The faster LPS is able to process foreclosures -- without regard to the accuracy of the documents or the integrity of the process -- the more money LPS makes.

This paragraph sums up the foreclosure crisis for most major players, not just LPS. Servicers tend to make more money foreclosing than modifying loans -- the long-term money is something that honest investors are seeking. The majority of the wrongdoers in the foreclosure crisis make money via volume and speed. For them short-term profit is more important than long-term stability.

Also interesting is the complaint's description of LPS' business model, including the use of LPS Desktop, which is essentially foreclosure management software. Desktop is used to organize and process foreclosure cases and includes prompts and alerts for various stages of foreclosure. Most importantly, it tracks the speed with which network attorneys close out cases. As always, speed is of the utmost importance.

The complaint also explains how LPS is the exclusive contact between the foreclosure attorney and its client, the servicer. Instead of servicers directly retaining attorneys, those who use LPS are connected with attorneys within the LPS Network. Effectively, if the attorneys want business, they will play by LPS' rules and pay the referral fees. For the servicers, it may seem like a value-added service.

The rest of the complaint outlines how LPS failed to prevent robosigning and how it continued to robosign after it said it wasn't. It explains how LPS executed documents on behalf of the servicer, how it executed documents on behalf of non-existent or defunct companies, and how it misled investors about its practices.

What I find most interesting are the parts that discuss how LPS directs and controls the legal process. It would appear that this is done on a software level and a systemic level. On the software level, LPS automates a lot of the decision-making involved in the foreclosure process. Its software also creates deadlines that exceed the industry standard, forcing some firms to compromise the quality of their work to maintain the volume needed to keep LPS happy. Attorneys who consistently miss targets get downgraded and receive fewer or no referrals from LPS.

In addition to the software, systemic issues cause LPS to exert an undue influence on Network attorneys. LPS is often the contact point for the attorneys, not the servicer-client. This means that LPS often directs the conduct of attorneys. This is a huge ethical no-no for attorneys -- non-lawyers should not be directing the legal work of attorneys. Non-attorneys cannot, for instance, hold any interest in a law firm. This is why you don't see the tall-building firms issuing stocks. According to the complaint, LPS non-attorney employees not only directed the activity of attorneys, but trained them and advised them as to how to prepare various pleadings, motions, and other documents. LPS often blocks communication between the attorney and the servicer -- odds are that the answer to an attorney question comes from LPS, not the client.

What it boils down to is that LPS may be engaged in the unlicensed practice of law. Given that its software is used in about 50% of all mortgage loans, you can imagine how many counts of unlicensed practice it may be liable for.

The case is ultimately based on Nevada's unfair and deceptive trade practices act. I hope that it succeeds. Almost every state has a similar statute. Success in Nevada could mean lawsuits from other states. The latest wave of lawsuits has shed some sunlight on the underbelly of the foreclosure crisis -- now we just need more sunlight.

The Federal Housing Finance Agency, the entity that oversees Fannie Mae and Freddie Mac, has filed a lawsuit challenging Chicago's vacant property ordinance. When I last blogged about the ordinance, it was to note that it had been amended and significantly toned down from previous versions.

Although that version had been drafted with the cooperation of several major lenders, the FHFA has stated that the $500 building registration fee is effectively a "tax" on Fannie and Freddie. Continuing violations of the ordinance can carry a fine of $1,000 per day. FHFA claims that the ordinance also represents an impermissible regulation upon Freddie and Fannie, which are currently regulated by the FHFA. The agency also maintains that the registration fee and daily fines prevent it from fulfilling its Congressional mandate, which is to preserve and conserve the assets of Fannie and Freddie.

While the FHFA may be correct that a local ordinance cannot trump its regulatory authority, I find it odd that requiring Fannie and Freddie to secure properties they intend to eventually repossess via foreclosure somehow puts the GSEs' assets at risk. Abandoned properties drive down the value of the properties that surround them. Given that Freddie and Fannie back more than 250,000 mortgages in Chicago, I would think that preserving property values would do more to preserve and conserve the GSEs' assets. Abandoned properties are frequently vandalized and gutted, leaving worthless shells in the place of once valuable housing. Again, I don't see how protecting these properties from further harm could ultimately hurt Fannie or Freddie.

This lawsuit seems a bit like a snake eating its own tail. Taxpayers effectively own Fannie and Freddie. Taxpayers in Chicago also supported the ordinance over which FHFA is suing. Given that FHFA is a taxpayer-funded entity, are taxpayers technically suing themselves to protect their own interests from their other interests? It's almost like a game of "stop hitting yourself." If we allow continued urban blight, Chicago will take that much longer to recover from the foreclosure crisis. If we hold lenders accountable for securing properties before they take legal title, we expose our investments in Freddie and Fannie to the risk of loss in the form of fees and fines.

As a spokesperson from Mayor Emanuel's office notes, this lawsuit demonstrates that the state needs to step in and take action to "hold lenders responsible for securing vacant properties."

More to come as the case develops.

I recently wrote about Nevada's lawsuit against Lender Processing Services when the first indictments were brought against two LPS officials for allegedly overseeing a scheme to file thousands of fraudulent foreclosures in Nevada.

The Nevada Attorney General's office has just announced that it has charged three notaires in the lawsuit. Each is accused of falsely attesting to legal signatures on foreclosure documents. Given that each notary is being charged with one count, my guess is that the state hopes they will become witnesses against the two LPS executives already named or that they will give up other people in the LPS corporate structure.

One other notary, who was also charged in the case, was found dead last week. While authorities are not investigating it as a homicide, some observers were a bit dubious. Nevada is an interesting state to watch given that it has been the hardest hit by the foreclosure crisis. Even though Nevada uses a non-judicial process for handling its foreclosures, it may still be a bellwether for future actions by other states. If Nevada is successful, I wouldn't be surprised to see other states bring criminal charges against corporate officials involved in foreclosure fraud.

Although Massachusetts has recently filed its landmark lawsuit against the five major lenders and MERS, it is a civil, not a criminal proceeding.

On Friday, GMAC Mortgage announced that it will cease purchasing third-party mortgages issued in the State of Massachusetts. The lender stated that, "[R]ecent developments have led mortgage lending in Massachusetts to no longer be viable." It seems pretty obvious that this move is related to the lawsuit filed last Thursday by Massachusetts Attorney General Martha Coakley.

The majority of GMAC's business is purchasing loans from correspondent lenders and wholesale brokers, but that doesn't mean that GMAC can't or won't directly lend money to the citizens of Massachusetts. Perhaps GMAC is hoping that other lenders will follow its lead and refuse to lend in Massachusetts as well. Here's the thing -- only five major lenders were sued by AG Coakley. There is no indication that credit unions and community/local banks are exposed to any additional risk for lending in Massachusetts.

AG Coakley's response to GMAC was, "With today's action, it appears GMAC has acknowledged it has a problem following those laws and being held accountable for doing so." I think her statement is more than apt. There is really no other way to explain the lender's sudden change in position. The implication is that if forced to follow the law, lenders cannot safely make loans. This is utterly absurd. Take, for example, credit unions and local banks, which have been safely lending for years.

The government owns 74% of GMAC. This means that we, as taxpayers, own 74% of GMAC. GMAC is fully aware of this, so it has justified its temper tantrum as fulfilling its "obligation to manage risks and deploy capital in an appropriate manner and in a way that protects the investment of the U.S. taxpayer." Hogwash. If GMAC has fixed its robosigning issues, then it has nothing to fear by continuing to do business in Massachusetts. Moreover, the issues weren't with loan origination, but with foreclosing upon mortgages.

Effectively, GMAC is indicating that if it is forced to comply with the law, it will take its ball and go home. Given the attitude of GMAC's executives, I think that may very well be the best solution for everyone involved.

Yesterday, December 1, Massachusetts Attorney General Martha Coakley filed a lawsuit against Bank of America, JPMorgan Chase, Wells Fargo, Citibank, Ally Financial and the Mortgage Electronic Registration System. A copy of the complaint is available here.

This complaint is really where the rubber meets the road. The State of Massachusetts is the first state to really lay the entire robosigning scandal out for all to see. The complaint reads like a list of "I told you so's" for any consumer defense practitioner.

AG Coakley accuses the lenders of foreclosing upon homes when they lacked the authority to do so and misrepresenting to borrowers their status as holders of the debts. She accuses them of engaging in false documentation practices to facilitate their foreclosure practices (robosigning). She also takes lenders to task for their unfair and deceptive practices in loss mitigation, including misrepresenting their desire to assist homeowners and the terms of internal and Federal loss mitigation programs. She also accuses MERS of violating the state recording statutes.

On the whole, it's a doozy of a complaint. What I like best about it are the illustrative examples of the lenders' bad acts. The examples begin on page 10 of the complaint and are worth the read. There are fourteen examples given and each is tied to a specific property and the foreclosure related to it. In no uncertain terms, the complaint lays bear the central issue in the foreclosure crisis -- in the rush to foreclose, lenders have willfully taken short cuts that include document fraud. Instead of staffing up call centers to handle the volume of borrowers seeking loan modifications and other assistance, the lenders created a Kafkaesque bureaucracy that did more to hurt homeowners than it did to help them.

This lawsuit is a major step forward. It also is an indicator that Massachusetts is not going to accept any settlement brokered by Iowa Attorney General Tom Miller. Although AG Miller's camp is apparently hopeful that AG Coakley will sign back onto their negotiations, this lawsuit is truly the elephant in the room.

I'm hoping that this goes to trial, or at least produces some substantive discovery. It would be nice to shed some light on the underbelly of the industry.

Two different headlines grabbed my eye today.

In one, a Georgia state judge issued a rather scathing order denying U.S. Bank's motion to dismiss a wrongful foreclosure complaint filed against it. The judge noted that one of the main complaints made by the Plaintiff was that he was not given a reason for being denied for a HAMP modification, even though the program's guidelines requires that a reason be given. He went on to state that U.S. Bank should have been able to produce a reason, with specific numbers, as to why the modification was denied.

The fact that no such document had been produced led the judge to believe that no such evaluation was ever performed. The opinion is a great read, and is an example of judges taking notice of the financial crisis and the various lenders' roles in the crisis. My favorite take-away (aside from the Arlo Guthrie reference) was, "This court cannot imagine why U.S. Bank will not make known to Mr. Philips, a taxpayer, how his numbers put him outside the federal guidelines to receive a loan modification. Taking $20 Billion of taxpayer money was no problem for U.S. Bank."

It's a question that I wish more judges would ask. Every time I see opinions like the one linked above, I have some hope.

In New York, a similar result recently played out, as described in this New York Times article. Justice Catherine M. Bartlett called out an attorney representing Bank of America stating, "Bank of America got a bailout, and this is an outrage, how this man has been treated. Hard-working, middle-class Americans are trying to make it, trying to refinance with your bank." Her statement reflects a growing frustration over the ineffective loss mitigation process that most banks require borrowers to endure.

These judges won't have much impact on Illinois courts. After all, they are from entirely different states. However, as the foreclosure crisis wears on, I have seen more judges in Illinois beginning to hold lender attorneys accountable for the documents that they file, even in undefended foreclosures. Although this blog is often loaded with cynicism, sometimes there are glimmers of hope on the horizon. Obviously, the biggest changes will be catalyzed by homeowners defending their foreclosures and taking the fight to lenders and servicers. However, they cannot win those fights without first winning over the judges that hear their cases. As these two articles demonstrate, some judges have already been convinced.

So it seems that there is a new leak from the foreclosure fraud settlement talks and 99% of industry observers find it to be absolutely awful. Adam Levitin, Yves Smith, Gretchen Morgenson, David Dayden, and others are rightfully angry. Instead of making lenders actually pay out $25 billion in cash (spread across all of them, not each), only a fraction of that figure will be paid in cash. The rest will be paid in "credits" that lenders receive for modifying mortgages.

That's right, the remainder of the settlement will be essentially paid by crediting banks for something they already do. To make matters worse, it is still a blanket settlement of all claims. Adam Levitin's blog post about the settlement has the best version of the numbers I've seen so far. Essentially, if you assume that the entire settlement would go towards principal reductions, and focus that settlement on 10% of the people in need of help, you end up reducing people's loan to value (LTV) from 148% to 128%. This means that those who would receive help would also remain underwater. If you expand the deal to include everyone who is underwater, you get, as Prof. Levitin points out, bupkis.

The fact that these remedies seem anemic should not go unnoticed. If this deal goes through, lenders get a pass for any wrongdoing. On the other hand, it does absolutely nothing to solve the problems that are the source of our current housing crisis. Morgan Stanley predicts a multi-billion dollar surge in rental revenues as a result of the current foreclosure situation. While this seems like a boon for landlords, these figures likely relate to basic supply and demand. As more homeowners are dispossessed of their homes, they are turning to rental properties (demand). Those properties are a finite value (supply). Even if we just let every foreclosure run its course, we're looking at years before the market clears -- assuming that there are investors available to own all of those properties.

In the meantime, we will see rental prices increase to reflect the increased demand for a limited supply of space. Moreover, being a landlord is only truly profitable when you have a high density of properties in a small space. This is why multi-unit dwellings are a better investment than several single-family homes dispersed over a large area -- it's an economy of scale. If you own a 6-unit building and the roof needs to be replaced, it's much cheaper than replacing 6 individual roofs. If your plumbing is bad, you only need to fix one building, or maybe even a portion of that building. The land baron of the new normal is about as real as unicorns or leprechauns.

At some point, we will have to notice the elephant in the room. Until then, we'll see myopic fixes to a long-term problem.

The above is a quote from the general counsel of the Illinois Mortgage Banker's Association. Here's the whole thing:

"While there was no case of robo-signing in Illinois, lenders and servicers slowed the [foreclosure] process down to examine the issue and establish guidelines in the execution of affidavits," said James Trausch, general counsel for the Illinois Mortgage Bankers Association, in an email.

Source

I find this difficult to believe. I also find it completely plausible, depending on how you define "robosigning." It is also completely plausible if you only look at banks that are based in Illinois. But then again, that is a much different sample set than the quote implies. "Guidelines in the execution of affidavits" sure sounds like "rules to make sure people aren't robosigning."

Really, it all hinges on how you define the term. Are we only talking about having fifteen people signing as the same person? It may very well be that there aren't any Linda Green documents in Illinois. But what about other actions?

I would define robosigning as including things like commemorative assignments, affidavits where the affiant does not have actual knowledge of the loan file, notes that are fraudulently indorsed, etc. I have seen all of these things happen in Illinois foreclosure cases.

If 1) a document was not created at the time of the transaction (e.g. assignment, indorsement, allonge) and 2) it was created after the fact 3) via a rubber-stamp or delegated signer, then it fits the description of robosigning. The entire point of robosigning was to make up for the shoddy record-keeping practices of the bubble years. Illinois foreclosure defense practitioners must continue to scrutinize signatures and documents.

In Illinois, a plaintiff must have standing to sue at the time the case is filed. Indorsed original notes, allonges, and commemorative assignments that suddenly appear after the case is filed tend to indicate that the plaintiff lacked standing at the time of filing. Affidavits also deserve close scrutiny -- if the affiant is claiming that a blank indorsed note has been a lender's possession since a specific date, how does the affiant possess that knowledge? If the affidavit does not lay the proper evidentiary foundation, then the affiant is merely making an assertion, not stating a fact.

I certainly hope that, going forward, lenders make an honest effort to comply with the law. As it stands right now, I have personally identified robosigned and otherwise insufficient documents in Illinois foreclosure filings. With the foreclosure process significantly slowed in Chicago, it may very well be that we are still seeing documents that predate "guidelines in the execution of affidavits" and other measures taken since the fall of 2010. Only time will tell.

The answer to the above question depends on several factors.

First, your loan must be owned by Freddie Mac or Fannie Mae, and have been purchased by Freddie or Fannie on or before May 31, 2009.

Second, you must be current on payments. You cannot have any missed payments in the past six months, and cannot have more than one missed payment in the last twelve months.

If you meet those criteria, things are looking good. The Obama Administration's changes to the Home Affordable Refinance Program (HARP) eliminate the cap on how deep underwater your mortgage can be. This is good for people who are more than 25% underwater. If you are not underwater, the loan to value ratio for your home must be greater than 80%.

The new guidelines will be released in November. I am interested to see whether the proposed changes provide the enhanced competition in the refinance market that the President promised the other day.

This program does not include any principal reduction measures. To that extent, it will not do much to solve the housing market's overall problems. However, the refinances should help some borrowers lower their monthly payments, which means more money back into the economy. If you consider this an economic stimulus plan as opposed to a plan to fix the housing market, it may be somewhat successful.

If you are current on your payments and underwater, your next step is to see if Freddie or Fannie owns your loan.

You can find the loan lookup tool for Fannie Mae here.

Freddie Mac's loan lookup tool is available here.

If either one owns your loan, you are most likely eligible for a refinance under HARP. Although I generally advise against hanging on to a property with negative equity, if you are very attached to your home, this may be a way to lower your payments. Granted, the trade-off is that you're also recovering equity at a slower rate because your payments are lower.

However, if your goal is to bide your time until the real estate market improves, a HARP refinance could offer some welcome relief.

According to Bloomberg, the Federal Housing Finance Administration has announced that has directed Freddie and Fannie to get rid of their attorney networks. A recent FHFA report indicates that Fannie did little, if anything, to monitor the behavior of its 191 network law firms.

What is a bit disturbing about this is that not only is it clear that Fannie turned a blind eye to robosigning and similar abuses of the foreclosure process, but the FHFA's solution is to require mortgage servicers to select their own attorneys. This seems to be on a par with the "lender-selected independent auditors" that were hired to vet foreclosure files after the robosigning scandal broke.

The big question on my mind is who will be responsible for overseeing the practices of the servicer-selected attorneys. Moreover, who's to say that the exact same firms won't continue to be utilized, although this time by mortgage servicers? Maryland Democrat Elijah Cummings, the top Democrat on the House Oversight and Government Reform Committee expressed similar concerns.

Cummings said in a statement today he would press FHFA for details on how law firms will be monitored under the new system "to ensure that specific measures are in place to require mortgage servicers to properly oversee the actions of law firms conducting foreclosure proceedings."

Fannie Mae will phase out its existing system "with minimal disruption," spokeswoman Amy Bonitatibus said.

I certainly hope Rep. Cummings holds the FHFA to task, because Fannie's "minimal disruption" plan sure sounds like "use the same firms, but have the servicers pay them."

Only time will tell, but my guess is that our office will continue to see the same players on these cases for quite some time.

Adam Levitin at Credit Slips posted two items about job listings for foreclosure auditors. As you may recall, most of the major lenders entered into a consent order with the Office of Comptroller of Currency and the Fed to avoid being sued for servicing fraud. One of the main elements of this fraud was the rampant robosigning that was taking place (and is still taking place) in the servicing industry.

As part of this settlement, lenders were required to hire independent auditors to review foreclosure files for evidence of wrongdoing. Prof. Levitin sums up the basics of the file review:

The ad is for a Mortgage Foreclosure File Reviewer Level 2 (whatever Level 2 means). It states that the: Key responsibility will be to determine if there was financial harm to the borrower.

It further states that the MFFR-L2 will:

Conduct a complete review of the foreclosure file to ensure all default timeframes were processed accurately.

Review to determine if ownership of the note and mortgage was properly documented when foreclosure was initiated, and document any exceptions.

Determine if the foreclosure was processed in accordance with applicable state and federal laws, to include SCRA and US Bankruptcy Codes, and document any exceptions.

Validate fees and penalties charged and assessed were reasonable, customary and within the applicable state and federal laws, and document any exceptions.

As you may have guessed from that quote's context, Prof. Levitin is quoting from a job listing for a Level 2 file reviewer. As he aptly points out, these are largely legal questions that must be answered by the file reviewer. With the vast number of law school graduates and licensed attorneys looking for work, surely the banks hope to tap that well-spring of talent for this task. Right?

Wrong. A Level 2 file reviewer only needs one year of mortgage servicing experience to qualify for the position. No J.D. or law license required.

But the problem is even deeper than that. Even if these job listings were for attorneys, the biggest question -- was there a financial harm to the borrower -- may be impossible to answer. I won't re-hash the good professors points here. Instead, I will provide some examples from my own experience.

1. A borrower in default on his mortgage files a Chapter 13 bankruptcy in an attempt to save his home. Nevertheless, the lender proceeds forward with a foreclosure action, in clear violation of the automatic stay. The foreclosure is eventually halted after spending time and money to bring an adversarial proceeding in the bankruptcy court. The borrower begins repaying the arrears on his mortgage and makes plan payments as scheduled. However, the bank is holding payments in a suspense account and tacking on massive fees as a result. This also violates the automatic stay, and will ultimately harm the borrower when he exits his Chapter 13 plan.

Will this be detected in a file review? Probably not. If the foreclosure is ultimately dismissed, and the borrower is current after the Chapter 13 plan is completed, the file didn't result in a foreclosure, so it likely won't be reviewed. Moreover, since most servicers don't seem to be set up to effectively handle bankruptcy filings, there's little chance that the individual reviewing the file would catch the discrepancy -- payments in a Chapter 13 plan work as if the borrower's loan was modified. There should be no suspense accounts or penalties.

2.) A borrower in default enters foreclosure, fails to defend himself, and is ultimately foreclosed upon. The entity foreclosing doesn't really own the loan, and all of the documents required by the court are robosigned. Will a random file reviewer catch the standing issue? How does one value the standing issue? In this scenario, assume that the bank has repurchased the home. Did the bank make a full credit bid, or did it bid a significantly lower sum? Was that sum lower than market value at the time? The file won't indicate these things. Moreover, in Illinois, it is generally presumed that the sale price at auction is the fair value of the property. So there's no reason to analyze the file that deeply, especially for a file reviewer with no legal background or real estate experience.

3.) A borrower in default enters foreclosure. A default judgment is entered, and the borrower hastily seeks a loan modification. After significant effort, a trial modification is offered. The borrower accepts the modification and makes timely payments for the duration of the trial period. The lender extends this trial period three times. After a year of trial payments, the borrower has found a better job with higher pay. The bank re-evaluates the borrower's financial situation, decides the borrower makes too much money, and denies a permanent modification.

As a result, the bank moves forward with the foreclosure action, but first tacks the difference between the unmodified payment and the trial payment plus fees and penalties onto the amount owed. This results in a significantly higher judgment amount and a significantly higher deficiency than had the bank simply foreclosed a year earlier. Since this tactic isn't technically illegal, there's no reason to identify a mistake and the file is marked as A-OK. Meanwhile, the borrower is on the hook for significantly more money. That sure seems like financial harm to me.

Both posts are a good read. I highly suggest checking them out.

According to ProPublica, recently obtained documents reveal that the Treasury's oversight of MHA, in particular HAMP, was almost non-existent. From the article:

Documents obtained by ProPublica -- government audit reports of GMAC, the country's fifth-largest mortgage servicer -- provide the first detailed look at the program's oversight. They show that the company operated with almost no oversight for the program's first eight months. When auditors did finally conduct a major review more than a year into the program, they found that GMAC had seriously mishandled many loan modifications -- miscalculating homeowner income in more than 80 percent of audited cases, for example. Yet, GMAC suffered no penalty. GMAC itself said it hasn't reversed a single foreclosure as a result of a government audit.

What is more disturbing is that ProPublica has only been able to obtain the documents related to GMAC because GMAC allowed the FOIA request to go through. Treasury is refusing to release audits of 9 other HAMP participants.

Neil Barofsky, the former Special Inspector General for TARP has gone on record stating that when rules and guidelines are treated more like suggestions, and when there are no consequences for violating those rules, you're not going to see any true compliance.

No wonder HAMP has been less-than-successful.

This is not the first time that I've written about the lack of regulation and oversight. Until we see positive changes, it probably won't be the last. I only hope that it isn't too little, too late. I urge everyone who reads this blog to take the time to read and digest ProPublica's lengthy expose and Mr. Barofsky's comments at the Huffington Post. When people ask why we choose to practice the law that we practice, I will now point them to these articles.