The hidden and emerging battle between investors and servicersAndrew L. Liput Esq.foreclosures, defaults, repurchases, loss mitigation
With the impact of foreclosures and defaults reverberating
throughout the mortgage industry, a little-known, but important,
battle is brewing that has major implications for lenders facing
repurchases. Sub-prime loan servicing agents are being criticized
inside large investors for their inability to conduct impartial and
effective loss mitigation to stem the tide of losses flowing from
the glut of bad loans hitting the market. The failure of servicers
to do their job well when it comes to defaults is having a
significant impact on repurchase demands plaguing lenders
today.
Servicers, the initial and most direct link to borrowers, are
failing to take immediate, effective steps to control losses before
they spiral out of control. Lenders are then facing repurchase
demands where significant time has passed after a default, with
little or no steps taken to control losses. Investors are then
forced to look at their lender clients as an insurance policy
rather than a partner in loss mitigation, as the lender-investor
has traditionally been viewed and as anticipated in most purchase
and sale agreements. Furthermore, the failure of servicers to act
properly or in concert with their investor clients sometimes means
that foreclosures occur before a notice of defect or default is
even given to a lender.
It is not unusual, these days, for an investor to send a
repurchase demand over a year or more after a default has occurred
and months after a foreclosure sale, merely seeking a make-whole
amount. The consequences are enormous--as a lender then has no
opportunity to investigate the alleged defect that caused the
default, has no opportunity to conduct its own loss mitigation and
control its losses, and has no chance to examine and challenge the
investors actions to assure that they were completed within the
good faith and fair dealing covenants inherent in the purchase and
sale agreement.
As those who specialize in loss mitigation in our industry are
aware, timeliness is the key to loss control. Engaging in immediate
and constant communication with brokers, borrowers, insurers, title
underwriters and others involved in the loan process is important,
because it normally provides sufficient time to correct loan
defects, recover losses or control the property to the extent that
it can be sold or refinanced to satisfy the existing lien and
resolve a repurchase scenario. With servicers controlling access to
the borrowers, they are the first to learn of defaults and
servicing errors that occur when payments are misapplied, as well
as other important details about a property. They are speaking to
the borrower constantly; servicing notes are usually full of
nuggets of important clues about a property and a borrower that, if
interpreted properly and addressed quickly, could result in better
loss management for investors and, ultimately, lenders, as
well.
Lenders would be interested to know that typical servicing
agreements executed by investors contain extremely detailed
schedules of servicing tasks and timeframes within which they are
to be performed. These include timely reporting of consumer
servicing problems and disputes, defaults, escrow problems,
insurance issues (such as cancellation), property issues (such as
abandonment and damage), property valuation, foreclosure,
real-estate-owned (REO) acquisition, and the details of
post-foreclosure property listing and sales.
Left to their own devices, without proper reporting (or investor
inquiry), some servicers are ignoring early warnings of borrower
issues, failing to manage and control abandoned properties, failing
to properly conduct market valuations to determine post-REO sales
and, most important to lenders, failing to provide timely notice to
defaults so that loss mitigation can be conducted in a global
manner, involving not only the servicer, but the investor and the
lender, as well. Some investors have also claimed that servicers
are literally stealing from them, failing to forward insurance
proceeds, rents and even post-default payments, all of which works
to offset losses to the investor and, ultimately, to the lender, as
well.
I have previously written about the necessity for a new Wall
Street/Main Street partnership in loss mitigation. This involves
the tacit recognition by lenders and investors that only by working
together, utilizing resources from the street, where the loans were
originated, to the board rooms of the Wall Street giants, can the
industry really get its arms around effective loss mitigation
arising from the sub-prime meltdown. Now it is clear that another
important link in the mortgage loan chain must also be on
board--the servicers. Investors, servicers and lenders all have a
common interest in the defective mortgage loan. All have benefited
from loan origination, all have potential losses from loan
defaults, and all have a stake in a coordinated effort to resolve
loan problems to their mutual benefit.
For lenders, the immediate lesson is this. Beware of repurchases
that may be the result of the failure of your investor's servicing
agents to do their job effectively. You have the right, under your
purchase and sale agreements, to expect good faith and fair dealing
in the investor-lender relationship. When a servicer is negligent,
that negligence should not, in good faith, be the basis for a
lender's demand that you insure for their failed contractual
relationships.
Andrew L. Liput Esq. is president of Repurchase Resolution
Specialists Inc. He may be reached at (888) 424-3728 or e-mail
[email protected].
