November’s elections are just 37 days away. So crank up the inanity meter, especially when it comes to foreclosures. I’ve ranted since roughly 2007 that whenever an election is in the offing, and votes are to be had, you can bet on elected officials pandering to troubled homeowners.
And if the Democrats manage to hold onto a few highly contentious seats in the most-heated election races, they may have a completely mismanaged and backwards mortgage servicing industry to thank for it.
This particular election season is now shaping up to be an especially interesting one, ever since Ally Bank (otherwise still known by most as GMAC, majority-owned by none other than the U.S. Treasury) proved last week that despite earlier messes involving assignment and transfers of loans, it’s still more than willing to cut corners and expose itself to headline risk over its mortgage servicing practices.
Something tells me that the bank's executives are now rethinking that strategy.
Robo-signers: paragons of cost cutting
Anyone with experience in the loan servicing trenches probably wasn’t particularly surprised by the revelation that the geniuses running default operations at
GMAC Ally had tasked some employees with an impossible job: signing off on tens of thousands of affidavits of debt amounts owed by delinquent borrowers each month, without giving said employees the time they really needed to actually verify the information in the affidavit before signing their names on the dotted line.
This sort of one-sided approach to cost cutting has long been championed and rewarded within the servicing industry. And I’m pretty sure that when consumer attorneys gleefully run in front of the press and accuse other servicers of doing the exact same thing, they’re correct.
What’s amazing to me is that despite a foreclosure mess of historic proportions, banks and their associated servicers still haven’t figured out that headline risk is, in fact, a real risk — or, at least, enough of one to justify senior management meaningfully taking a strong look at how those in default are actually doing their jobs.
Which leads me to some important questions: At what point does it behoove senior management at the board level of a bank to sit “Chainsaw Al” down and explain to him that “streamlining” operations at all costs is actually counterproductive? At what point does a bank’s board decide that default operations are important enough to merit a more substantial investment in people and process, rather than continuing to push default management under the proverbial rug and being content to play whack-a-mole when problems inevitably pop up from below?
And as far as whack-a-moles go, this one is pretty big. California Attorney General Jerry Brown – himself in a close and heated election battle – seized upon the Ally opportunity last week and quickly said he was demanding that the lender demonstrate compliance with state laws or cease and desist from all foreclosures in the state.
"I'm taking this action to protect California homeowners facing the tragedy of foreclosure," Brown said in a statement. "They are clearly in jeopardy since an Ally Financial official admitted his review of thousands of critical foreclosure documents was really a sham."
At what point do managers at a bank begin to realize that the negative press around such stupidity as “robo-signers” in loan servicing will directly affect that bank’s ability to generate revenue on the front end of the mortgage business? Or does Ally prefer to see a shiny, new brand it has invested millions into dragged through the mud in the pages of The Washington Post?
Ally originated $26 billion in home loans during the first half of 2010, and 56% of the company is owned by the U.S. government.
I hope other banks are getting the message, and getting their acts in gear. Because JPMorgan Chase is already seeing itself dragged into this same mess, too – and does Chase Bank really think consumers will ignore this when choosing where to go for a loan?
Still just a legal speed bump
But before we all get carried away here, it’s worth reminding everyone that even the current "robo signer" episode is just the latest speed bump in a much longer road. In 2007, consumer attorneys gained traction with a "produce the note" strategy – an issue that, at the time, had consumer advocates telling the press that thousands of mortgages weren’t valid and the bank couldn’t foreclose because it didn’t "own the note."
None of which was really true, as I wrote back then. Since then, consumer attorneys have gone on to challenge the legality of MERS assignments as well, a battle that, I believe, is still largely ongoing.
The issue here isn’t with notes or assignments or recording instruments, but with signed affidavits from a bank. And consumer attorneys are again, somewhat predictably, telling the press that this issue will somehow void the bank’s interest in secured collateral.
From Bloomberg’s latest coverage:
If the documents are shown to be false after a home has already been resold by a bank, that casts doubt on who is the rightful owner, said O. Max Gardner III, an attorney at law firm Gardner & Gardner PLLC in Shelby, North Carolina, who has represented homeowners in fighting foreclosures and has cases pending against JPMorgan.
“I’m sure a lot of title insurance companies are concerned about the potential liability right now,” as borrowers challenge how banks made statements, he said. “The judges could absolutely hold the bank and attorneys in contempt.”
Those are some big claims, but notice the sleight of hand here: Bloomberg moves from an issue involving who is signing affidavits, and how, to an outright assumption that the same affidavits attesting to indebtedness of a borrower are now “false.” Or, at least, that’s the jump that Gardner leads the reporter to make.
Failing to properly verify an affidavit is one thing; having the amount attested to on the affidavit be false is another; and having a false amount on an affidavit render a loan wholly unsecured, as Gardner claims, is entirely another. Ally has gone on record stating that the affidavits in question contained no factual misstatements, a claim that I'm sure will be tested in the courts.
All of which means that procedural sloppiness on the part of bank, while an example of inexcusably bad business practice, isn’t by itself a valid defense against foreclosure. It just means the bank will have to spend more time on the back end crossing proverbial t’s and dotting proverbial i’s. You know, investing more money into that back office.
The management-talent gap
The Ally Financial snafu really underscores a longstanding management and talent gap that exists at “integrated” lender/servicing shops within most depository lenders. I’ve been in this business a long time, and I’ve seen it at every shop I’ve had the opportunity to be a part of or observe.
The loan servicing shop is its own world, with its own management – and none of this management typically has anything to do with the upper management within the banking institution itself. At best, the VPs that manage default only report to whatever management is ultimately responsible for the mortgage business (and this level of management is typically focused on originations and margins therein).
Show me one bank that has a default management executive on its board of directors. You won’t find one.
The reason here isn’t hard to fathom: default management isn’t a moneymaker for any bank, at least in a consolidated sense. (It can actually generate revenue under certain circumstances – a discussion for a different day – but even in the best servicing environment, mortgage loan servicing revenues will be dwarfed by the most modest of origination platforms.)
Given this, the talent gap between the front office and the back end of a mortgage operation can be substantial – the most talented financial minds, and the best trained and most experienced managers, don’t typically find themselves falling into default management as a career. The pay scale simply isn’t there. Banks don’t require future managers to spend time working a turn in default management, either. The Harvard MBAs go elsewhere, and don’t bother themselves with getting their hands dirty on the default side of the business.
In the past, this was acceptable business: defaults were low, staffing needs in default were minimal. And those managers that did decided to make a living in default servicing were largely free to operate as they saw fit, so long as costs were within tight ranges. The management-talent gap didn’t matter.
But the world has changed in a big way from those days. Millions of borrowers are defaulting on their mortgages, and millions more are likely to do so in the next two to three years.
Now, it’s the same management-talent gap that is wreaking havoc for the biggest of banks and their servicers. Some banks – Bank of America comes immediately to mind – have recently been trying to address this problem by shifting their best executives off of the origination business and into default management. That’s a start, but it’s tough to change old ways overnight.
Just ask Ally Financial.
Paul Jackson is the publisher of HousingWire.com and HousingWire Magazine. Follow him on Twitter: @pjackson