Bank of America President and Chief Executive Officer Brian Moynihan today announced changes to Bank of America Home Loans and Insurance that will continue the company’s strong momentum in extending home mortgage credit while improving its leading mortgage modification programs for distressed homeowners and resolving legacy mortgage issues. (Emphasis mine)
This is, I think, a significant move by a significant player in the mortgage, servicing, and finance industries. It will be watched carefully by all of the other major banks and servicers, as well as the Federal government and legions of trial lawyers. I think what BofA is doing is very smart, and is indeed one of the few things that the industry could do to get a handle on the Foreclosuregate mess. It’s not over by any stretch of the imagination, but if what BofA did here is what I think they did, it’s very smart.
Details Unknown, But…
Obviously, a press release is not the place to go into huge detail. I assume those details will be coming in the weeks and months ahead, but it appears that what BofA has done is nothing short of setting up a “Special Servicer” to deal with loss mitigation efforts. As I’ve mentioned in my AOL column, and as so clearly laid out by Adam Levitin and Tara Twomey in this paper, residential mortgage servicers have done a very poor job of dealing with loss mitigation (e.g., loan modifications, short sales, and the like) while automating the crap out of foreclosures. They noted in the paper that commercial mortgage servicers often use “Special Servicers” who are responsible solely for dealing with troubled loans, but that they are rare in residential servicing:
Special servicers are responsible for directly handling defaulted loans. If there is a special servicer, loans are automatically transferred to the special servicer at some point of delinquency. While standard for commercial mortgage-backed securities (CMBS), special servicers are very much the exception for RMBS deals, where the primary servicer generally handles defaulted loans. (Levitin, Adam J. and Twomey, Tara, Mortgage Servicing, Yale Journal on Regulation, Vol. 28, No. 1, 2011, p.24-25. Available at SSRN.)
This new BofA unit sounds a whole lot like a residential Special Servicer that would act as a subservicer to all mortgages and RMBS handled by BofA’s servicing division. One assumes that going forward, all BofA mortgages and RMBS will have an arrangement where the main servicing unit would handle the normal, current accounts, while any sign of trouble would send the whole file to the new Legacy Asset Servicing unit rather than to the foreclosure mills.
One big reason for hope here is that a core problem in the handling of non-foreclosure methods for dealing with troubled homeowners is one of staffing and competence. As Levitin and Twomey point out, most modern servicing operations are highly automated, because when a loan is current, there really isn’t very much to do: send out invoices, process checks, do some bookkeeping, and some light customer service (handling inquiries, address changes and the like). But when a mortgage goes delinquent, the only path that can be automated is the foreclosure path: the computer system automatically sends the file, along with directions to file, to various law firms (so-called “foreclosure mills”) or other agents (in non-judicial states) to get the process of foreclosure going. The other path, of loss mitigation, whether that is through loan modification or through authorizing short sales, requires judgment by trained human beings, in-depth interaction with the borrower (you have to assess whether this is a borrower who has hit a temporary patch due to the economy, or just an irresponsible guy who would redefault).
Of course, as positive as this initial news is, we have to see how BofA actually implements and executes. Because of the time, expense, and effort required to hire, train, and setup a loss mitigation operation, one hopes that this has been in the works for years. As an industry, it’s time we wish BofA the best in their efforts here.
The other question is this seeming throwaway phrase: “resolving legacy mortgage issues”. The DS News reports that it means the new unit will also be responsible for dealing with investor claims:
[Terry Laughlin, the new head of the division] will oversee the bank’s mortgage modification and foreclosure programs, in addition to his existing duties of resolving residential mortgage representation and warranties repurchase claims.
The nature and scope of investor putback claims are not widely acknowledged, although there are academics and commenters (yours truly included) who believe that the chain-of-title problems in RMBS trusts are extremely serious systemic risks. The problem defied easy solutions.
Perhaps what BofA has come up with here is a privately negotiated way out of the mess.
First of all, in order to offer significant loss mitigation, the Special Servicer would need to have the right to do so. That right is conferred in the Pooling and Services Agreement that governs the RMBS trust. Since these are private agreements, perhaps BofA has found a way to amend the PSA’s, with approval of the investors, to allow for loss mitigation.
Second, at the same time that these negotiations are taking place, it may be that BofA is offering a bargain to the investors: don’t bring putback claims, and we’ll fix this, and give you an additional layer of protection in the form of the Special Servicer unit, Legacy Asset Servicing. Even if that means re-creating the whole trust, but properly this time, with no chain-of-title issues, as long as the investor agrees, there shouldn’t be a barrier to doing so. Those investors who opt out, obviously, can pursue putback claims — but these are sophisticated financial institutions dealing with other sophisticated financial institutions. Unless there is a benefit to bringing protracted lawsuits, one assumes that they’ll find a way to settle things.
Both of these are pure speculation on my part. Details may emerge as time goes on, but I sure would love to know how BofA plans to use the new Legacy Assets Servicing unit to head off potentially ruinous investor claims.
Impact on Real Estate Industry
First, I believe that BofA, long reviled by brokers and agents who did a significant amount of short sales and REO sales as one of the worst companies to deal with, will soon become the short sale broker’s new best friend. Assuming that BofA gets the implementation and execution right, the Legacy Assets Servicing unit should be able to do the labor-intensive work necessary to get a short sale approved or denied much faster than today. That’s sort of the whole point of a Special Servicer. Maybe the days of a short sale, with a ready, willing and able buyer waiting nine months for a decision, are behind us — at least at BofA.
Furthermore, if BofA is successful with this new venture, one assumes that the other major servicers will follow suit. As a whole, we should see significant improvement in clearing the shadow inventory of troubled mortgages via loss mitigation strategies.
Second, one hopes that with a large scale Special Servicer operation in place, foreclosures going forward will not be plagued with some of the problems we have seen: robo-signing, wholesale fraud, title problems, etc. So even if the Legacy Assets Servicing unit examines a borrower’s file and decides that foreclosure is the best way forward, there will be trained specialists on top of the whole case from start to finish to ensure that all of the i’s are dotted and the t’s are crossed.
Since the real estate market cannot recover until the huge volume of foreclosures and shadow inventory can be cleared, we can only hope that BofA is successful in the effort.
Third, and perhaps most importantly, if BofA is successful with some of the behind-the-scenes negotiations with other Wall Street banks, global financial institutions, and the like… we may head of systemic risk altogether and the flow of private capital back into the American residential mortgage market might resume. Cross yer fingers, boys and girls, and hope this is the case.
Wait and See
This is, so far, a very positive development. I actually can’t believe I’m so hopeful and happy about something that 99.9% of the population couldn’t care less about. But it’s an important development. None of us should be congratulating BofA or ourselves too early, of course, as only time — and proper execution — will tell if these hopes can be realized.
So let’s wait and see. But today is a little bit more hopeful than yesterday. And that’s a good thing. Kudos to Bank of America.