Cost of Fighting
Daniel Mudd, the former chief executive of Fannie Mae, once said that fighting the company's regulators and critics was "like having an argument with your spouse. There's no use in being right. You have to find the way forward."
That kind of thinking — both at the government-sponsored enterprises Fannie and Freddie Mac and at lenders — may lead to more settlements of mortgage put-back claims this year.
"It makes no sense to have everybody fighting about the issues of the past," said Justin Vedder, the senior vice president of risk management services at the insurance brokerage Arthur J. Gallagher & Co.
"There's an operational cost for both the GSEs and the lenders because they all have to hire account executives, repurchase analysts, REO experts and foreclosure people," Vedder said. "The focus now is going to be on disposing and moving forward."
Bank of America Corp.'s separate settlements with Fannie and Freddie, both announced Monday, show the industry's "movement in the right direction," Vedder said.
In his observation, lenders are unable to rebut about one-third of the GSEs' claims. Another third are ultimately fixable if the lender provides documentation, and the rest the parties can never agree on.
In its agreement with Fannie, he noted, B of A settled only "the problem loans where they were wrong" and had no defense. Future lender-GSE settlements, Vedder said, could encompass the other categories (as B of A's agreement with Freddie did).
Vedder said he would not be surprised to see more lender settlements with private-label mortgage bond investors as well.
Lenders will still have a tough time proving that their underwriting did not lead to a default. In many cases, lenders never checked the borrower's income or undisclosed debt or whether the borrower was really living in the home.
"At some point these things have to go to court, and it's difficult to predict the outcome from a legal perspective because there is so little case law," Vedder said.
Buyback claims also should plummet because of the GSEs' loan-quality initiatives, in which problem loans are weeded out on the front end, he said.
"The repurchase remedy is going to proven out this year," Vedder said. "We're seeing the first stages of it in these settlements."
The California Association of Realtors, whose members are frustrated by the dearth of short sales, has created a task force to examine the shortcomings of the government's Home Affordable Foreclosure Alternatives program.
The task force will investigate why there are three different versions of HAFA and why fewer than 400 successful HAFA transactions had been completed nationwide through the end of September.
But the trade group has already identified one culprit: servicers.
"Servicers are ignoring HAFA guidelines altogether," Beth Peerce, president of the California Realtors, wrote in a letter last month to Treasury Secretary Tim Geithner.
The biggest complaint is that servicers take so long to review and approve short sales that potential buyers give up or walk away from deals — even after the agent has spent hundreds of hours collecting paperwork and sending it to the servicer for approval.
Servicers also are flouting the program's requirements with no repercussions or sanctions from the government or Fannie and Freddie, Peerce said.
Though HAFA requires that servicers respond to a request for approval of a short-sale offer within 10 business days, many servicers take months to get back to the borrower, she said.
Short sales also are supposed to close within 45 days, but that rarely happens, Peerce said. Even a 60-day or 90-day close is unheard-of, she said.
"In practice, servicers are just not complying and we believe that the regulators have to find a way to make them do so!" Peerce wrote.
Not surprisingly, second liens are a major holdup and many lienholders refuse to accept a HAFA-approved payoff of $6,000 and typically demand more from the borrower.
"We have frequently seen them [lenders] demand additional funds to be paid, secretly, outside of escrow, which may constitute loan fraud against the senior lienholder," Peerce wrote.
The trade group wants regulators to mandate that the HAFA process, which is now voluntary, be used for all short-sale transactions.
"The government's unwillingness to mandate action by lenders to stem the current housing crisis relegates HAFA to yet another well-intentioned voluntary program which servicers, lenders and investors are all too happy to ignore," Peerce wrote.
"The way I describe the real estate market right now is that homes are on sale, not for sale."
Scott Stern, CEO of the cooperative Lenders One, in a roundtable discussion published in the Jan. 3 issue of National Mortgage News.
"Is anybody going to refinance next year?"
Dan Thoms, chief strategy officer of AllRegs, a provider of information on mortgage regulations, during the roundtable, which was held in October.