Countrywide Sanctioned in Idaho Over BK Procedures

A federal judge in Idaho has sanctioned Countrywide for violating the bankruptcy code, the Wall Street Journal reported over the weekend.

From the Journal:

Earlier this month, U.S. bankruptcy judge Jim Pappas ordered two subsidiaries of Countrywide and a business partner to pay $2,250 for failing to properly respond to borrowers’ requests for documents and failing to appear at court-authorized depositions in a case where Countrywide was alleged to have tried to foreclose on the borrowers’ home in violation of bankruptcy rules.

The nation’s largest servicer has been the subject of similar scrutiny in Florida, where the US Trustee subpoenaed Countrywide in November.

I’ve noted in the past that mortgage servicing — particularly in the area of so-called special servicing — is facing scrutiny unlike any time previous in the industry’s history. Which isn’t so much of a bad thing, as one that likely changes the game regarding industry practices.

Note that the above references not just Countrywide, but “a business partner.” That partner, in all likelihood, is either the outsourcer or the attorney that was managing the file; Countrywide, like many of the nation’s large servicing operations, outsources much of the actual work that gets done. In this case, it appears that whomever had the file wasn’t paying attention to a BK, or failed to note it in whatever software platform was being used at the time.

I’d suspect a few things to take place on the default management side, after speaking with a few executives in the area. One, you’ll likely see a movement away from broad-based outsourcing among servicers as both perceived and managed risk continue to increase; during the boom, nearly everything was a candidate for outsourcing, and often to firms that cared little about compliance and more about maximizing churn as quickly as possible. That’s not to say outsourcing won’t still exist.

“We’re moving quickly to require much more from all our vendors — compliance audits, security audits, quality control — than we ever have before,” said one source, on the condition of anonymity.

Which speaks to the second change: because default management has long been the hidden underbelly of mortgage finance, usually just beneath the corporate radar, more than a few shady deals have been struck on the basis of personal relationships or a payola-style arrangement than you might see in other areas of mortgage finance.

That, too, will likely be changing, as more senior corporate executives outside of default administration as well as state and federal regulators begin to take a closer look at how a servicer is managing foreclosures, bankruptcies and even REO sales.