The documentation problems forcing mortgage servicers to freeze foreclosures might have been avoided had the companies invested more in technology and hiring — before and after the housing bubble burst.
Consider the robo-signers, those employees of Ally Financial Inc., JPMorgan Chase & Co. and Bank of America Corp. who admitted in depositions to personally signing thousands of affidavits a month without verifying the information in them or signing the documents in the presence of a notary. It stands to reason that this kind of rubber-stamping would not have been necessary if a company had more than one person to vet as many documents.
"They needed 10 people to sign documents and they only had one," said David C. Stephens, chief financial officer and chief operating officer at United Capital Markets, a Greenwood Village, Colo., firm that provides hedging services on mortgage servicing rights.
Scott Siefers, director of research at Sandler O'Neill & Partners LP, agreed. "You have to have a human go through the documents, read and understand them and sign off on them," he said. "The sheer volume [of foreclosures] is so massive that the personnel infrastructure could be at fault."
Another problem plaguing servicers — missing documents needed to prove a company has the standing to foreclose — reflects the antiquated nature of their systems.
"If they had done the right thing and invested in technology, they could have had a virtual loan file with access to every document and data element in minutes," said Terry Wakefield, the chief executive of Wakefield Co., a Grafton, Wis., consulting firm. "Instead, they're sending clerks into files trying to put their hands on paper and delivering them to someone to sign and notarize them. It's a process from the 1950s."
Yet banks and mortgage companies refused to sink money into what they considered a cost center, even as foreclosures climbed.
"It's the old 80-20 rule, where you have all the people in middle management with a certain budget and they just didn't kick it up the line and say they need 20,000 more people, as they had in 2007," Stephens said. "It's not because the costs of 20 more people would have changed the value" of a company's mortgage servicing portfolio. "A senior manager should have been astute enough to consider the consequences of what happens if they didn't do the foreclosures right and they get caught on some technicality."
What has happened is that in recent weeks at least three servicers — Ally, JPMorgan Chase and B of A — have halted foreclosure actions across the country while they review their processes. The disclosures have set off a flurry of investigations by attorneys general. Lawmakers in Washington are calling for a federal probe.
In addition to vilification by politicians, servicers now face millions in short-term costs from litigation, the reviews of loan files and internal processes, and the reprocessing of foreclosures, analysts say. To cover the higher costs, servicing fees may have to rise.
"The servicing contracts go back many years when they did not contemplate the enormous volume of foreclosures," said Joseph Lynyak, a partner at the law firm Venable LLP. "Usually they are limited in compensation, and in order to meet the legal standard in a jurisdiction, they aren't getting paid for it."
Servicers' annual fees typically range from 25 to 44 basis points of the loan balance. Since these fees are paid from the interest on a mortgage, raising them would entail raising costs for future borrowers. But in the short term, homeowners who are in foreclosure will get a break as servicers assess their back offices.
"This is a huge benefit to the borrower because the foreclosure gets delayed and they get to live in the house another few months for free," said Michael Pfeifer, a managing partner at the law firm Pfeifer & DeLaMora LLP in Orange, Calif., which represents mortgage lenders and banks.