August 11, 2014
by Robert Schneider
Ronald R. Wolfe & Associates, P.L.
USFN Member (Florida)
On February 9, 2012, the five largest mortgage servicers in existence at the time reached an agreement (National Mortgage Settlement) with the federal government and 49 states to address an array of default servicing concerns that had been raised initially by consumers, and later lawmakers. Since that time, far-reaching federal regulations (see, e.g., 2013 Real Estate Settlement Procedures Act (Regulation X) and Truth in Lending Act (Regulation Z) Mortgage Servicing Final Rules) have been enacted and implemented, creating stringent default servicing policies regarding the handling of everything from lender-placed insurance to loss mitigation.
During this same period there has been a noticeable, parallel trend within the mortgage servicing industry to shift mortgage servicing rights (MSRs) of residential mortgages from these very same large bank servicers to nonbank servicers. While such moves may have initially gone relatively unnoticed, nonbank servicers and those traditional banks transferring servicing rights to them, have come under regulatory and political scrutiny due to the transfer of MSRs.
Most of the servicers subject to the National Mortgage Settlement continue to maintain large servicing portfolios. That being said, nonbank servicers’ portfolios no longer pale in comparison. In 2011, the ten largest mortgage servicers were traditional banks, whereas four of the top ten servicers by portfolio size are now nonbanks. Due to this recent and relatively rapid MSR acquisition, along with the retreat of some banks from residential mortgage servicing, nonbank servicers are experiencing growth. With this growth, however, come unavoidable growing pains.
Loss Mitigation Implications
The CFPB’s regulatory effects on loss mitigation, generally, have been explored at length in other USFN articles (see, e.g., CFPB: Mortgage Servicing Final Rules – Loss Mitigation by Andrew Saag in this edition of the USFN Report, as well as CFPB Amendments to the 2013 Mortgage Rules by Donna Case-Rossato and Wendy Walter, and CFPB: Mortgage Servicing Final Rules under RESPA (Reg X) by Wendy Walter). Still, the applicability of those loss mitigation rules may come into question, for example, when a loan service releases after a short sale has been approved, or a service transfer occurs after the borrower has submitted documents for modification review.
In the case of a modification, federal regulations dictate that the transferee servicer must have policies and procedures in place to identify whether a modification agreement exists, but the transferee servicer is still largely dependent on the transferor servicer to provide sufficient information such that it can determine whether or not a loan should still be placed on a loss mitigation hold. Even more commonplace are the issues that arise when a transferee servicer is generally aware of loss mitigation activity between the prior servicer and the borrower, subjecting the loan to a CFPB hold, but is not in possession of proof of loss mitigation from the transferor servicer such that a court would be willing to continue a final hearing and allow loss mitigation activity to occur without a final dismissal of a pending foreclosure. These issues are becoming more prevalent and may result in misunderstandings that become the subject of litigation.
What transferee servicers are even more likely to encounter are new defenses being raised in litigation, solely on the basis of the transfer of MSRs. In judicial states like Florida, many cases have been delayed through litigation for years, and courts are often setting aged cases for trial on the court’s own volition. This can present a problem when the servicing rights for a delinquent loan transfer to a new servicer anywhere from a few months to only a few days before trial.
At trial, whether the action was filed in the name of the servicer or the loan’s investor, it is often the servicer that will provide a representative to testify regarding the delinquent status of the loan. Given that the servicer will be called upon to testify regarding not only the total amount due but also the fulfillment of conditions precedent, and the ability of it or the investor to bring the action, this can become rather difficult when limited information is available to the acquiring servicer. (See. e.g., Hunter v. Aurora Loan Services, LLC, 2014 WL 1665739 (Fla. 1st DCA 2014)). From a practical perspective, such late transfers are also likely to put a strain on the travel schedules of the acquiring servicer’s representatives.
In a perfect world, litigation issues emanating solely from the transfer itself (i.e., a witness’s knowledge of the creation and maintenance of the loan records) would be resolved through cooperation between the releasing and acquiring servicer. By simply having the prior servicer present at a trial or an evidentiary hearing to testify regarding what that servicer’s records show with respect to the amounts due and owing could make up for the lack of knowledge of the new servicer. In reality, however, most MSR sales present a relatively clean break for the transferor servicer, requiring the transferee servicer to sometimes settle matters set for final hearing on the basis that it lacks the necessary information to prosecute a pre-existing foreclosure.
Political and Financial Implications
On a much larger scale, what nonbank servicers and traditional bank servicers will likely encounter for the remainder of 2014 and beyond is increased political scrutiny. New York, no stranger to the politics of foreclosure and mortgage servicing, wasted little time before publicly calling into question the trend of traditional banks transferring MSRs to nonbanks. On February 12, 2014, the Superintendent of Financial Services for the State of New York spoke at the New York Bankers Association Annual Meeting. The view elucidated by the superintendent about the trend of nonbank MSR acquisitions, when painted in the best light, can be described as apprehensive. In the most genuine light, it can better be described as distrustful. Superintendent Lawsky has called the trend “troubling” and took issue with what he viewed as “disproportionately distressed” servicing portfolios of nonbank servicers who “cut corners.”
While Lawsky’s stated belief of the cause of the trend is relatively undisputed (the creation of more demanding capital requirements for traditional banks already holding mortgage servicing rights), his provocative statements make clear that he and others like him will be scrutinizing the transfer of MSRs and will be vocal as they do so. He stated that he viewed the trend as an “extraordinarily challenging issue” that his office “must confront.” Lawsky made good on his statements when he effectively halted a $39 billion MSR transfer between a traditional bank and a nonbank two weeks later. That transfer remains in limbo at the time of this writing.
Every industry goes through changes and the mortgage servicing industry is clearly no exception. After the Great Recession, the United States financial industry, and the mortgage servicing industry in particular, were understandably subjected to increased regulation and scrutiny. It appears, however, that even as servicers exit the industry or scale back on their servicing involvement, they will still be very much under the microscope of the regulatory and political powers.
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Summer 2014 USFN Report