Legacy Robo-Signer

Of the top-five mortgage servicers, Citigroup Inc. is the only one to still deny using robo-signers and other faulty foreclosure processes.

But a deposition making the rounds on the Internet suggests that a subprime mortgage operation Citi acquired in the waning days of that market did engage in such practices.

The April 2008 deposition of Tamara Price, then a Citi Residential Lending Inc. employee, predates the deposition of robo-signing poster child Jeffrey Stephan of Ally Financial Inc.'s GMAC Mortgage.

In her deposition, conducted by Florida attorney James Kowalski, Price admits to signing court documents in foreclosure cases without having first-hand knowledge of or reviewing the information cited in the documents.

Price, however, was not an employee of Citigroup, the parent of Citi Residential, during the period she described. Price worked for AMC Mortgage Services, which Citi purchased in September 2007, said Mark Rodgers, a spokesman for the bank, in an e-mail.

"Contrary to amended counterclaims, AMC Mortgage Services, not Citi Residential, serviced the loan at the time of the foreclosure filing, mortgage assignment and affidavits," Rodgers said. "The plaintiff has never contended the assignment or affidavits in his foreclosure proceedings were substantively incorrect."

The deposition stems from a January 2007 foreclosure case against James Young, who fell behind on payments for his mobile home after he was forced into a more expensive insurance policy, Kowalski said.

"Mr. Young did have coverage but the bank said it was not enough," Kowalski said. "It's clear at some point he did lapse and then he went to an agent to ask 'What do I do to comply with this?' It's our contention that he was current at the time the foreclosure was filed."

Rodgers said, "homeowners are provided multiple opportunities to obtain insurance from the carrier of their choice. In circumstances where a homeowner does not provide a current insurance policy, we will secure insurance coverage as may be required by the owner of the loan."

Kowalski sees many cases in which homeowners end up in foreclosure after having expensive insurance policies foisted on them.

It's especially common in the South where mobile homes are prevalent, and in areas often plagued by floods, Kowalski said.

Mobile home owners are told they need to insure the value of the mobile home as well as the land it's on, even though regular, homeowners policies just cover the home, he said. Citi has since closed its Citi Residential Servicing sites and sold the bulk of the servicing rights in Feb. 2009.

Young is still living in his mobile home and the case is continuing.

Cutting Advances

Amherst Securities analyst Laurie Goodman said the latest round of foreclosure moratoriums caused by robo-signing, false notarizations and defective documents will cause servicers to cut back on advancing principal and interest payments (plus taxes and insurance) to investors.

Most pooling and servicing agreements require that servicers continue making advances as long as they believe the debt is "reasonably recoverable."

But servicers are significantly less willing to advance for underwater subprime loans, and as a borrower's equity declines, so do servicer advances, Goodman wrote in a research note Tuesday. The longer a mortgage is delinquent, the less likely servicers are to continue advancing payments to investors.

Goodman also cites a distinct pattern in which servicers "with deep-pocketed parents" typically make more advances across all loan categories. The highest advance rates are found on subprime loans made by Ameriquest (currently serviced by Citi, through the former AMC operation), Washington Mutual, (currently serviced by JPMorgan Chase & Co.) and Wells Fargo & Co., she wrote.

Follow the Note

Moody's Investors Service Inc. weighed in on the widespread foreclosure-document problems with a report Wednesday questioning whether custodians followed industry standards in tracking and holding original mortgage notes in their files. It also identified specific document defects that could prevent servicers from foreclosing.

While one major custodian told Moody's that the original note is present "in almost all of their files," at least one major securitization law firm did not routinely check the custodial receipts before a securitization closing.

Yehudah Forster, a Moody's vice president and senior analyst, wrote that the vast majority of notes and key documents exist. "But exactly how large that 'vast majority' is, precisely how disorganized the files of custodians and servicers are, and how practically findable the existing documents are, is uncertain," Forster wrote.

More problematic is that securitization agreements are "ambiguous" as to which party would be responsible for curing missing or defective documents, he said.

While sponsors typically would have to repurchase problem loans out of a pool, Forster wrote, they "may not have honored these requests, if anyone made them."

Though Moody's tried to buttress servicer claims that most defects are curable, it admits that there are cases in which document defects will prevent a servicer from being able to foreclose on a defaulted borrower.

"This may be especially true when the originator is out of business and cannot re-execute corrective documents," Forster wrote. "And in cases where the servicer cannot or repeatedly fails to produce the correct documents, courts may not be sympathetic."

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