Ginnie Mae has halted the transfer of mortgage servicing rights from Bank of America (BAC) to a nonbank servicer because the bank is missing documents such as recorded mortgages and title policies on the underlying home loans.
Ted Tozer, the president of Ginnie Mae, says he has held up the transfer of servicing rights by B of A "for an extended period" because the bank is not complying with agency's guidelines that require all mortgage documents be delivered to custodians in a timely manner.
"Issues are coming up now because documents are missing," Tozer said Tuesday. "It's a new phenomenon with the major banks getting out of the servicing business. We don't want to transfer the risk to a new servicer."
It is unclear how widespread the problem of missing documents is in the transfers of mortgage servicing, Tozer says, and he does not want to single out B of A.
"I don't mean to sound like we're picking on B of A," he says. "I can't say if it's just B of A or not."
Banks have been pulling back from the mortgage servicing business because they do not want to handle defaulted legacy loans from years past and because Basel III requirements make it expensive for them to hold servicing rights. Large banks have been selling portfolios to nonbank specialists like Ocwen (OCN) and Nationstar (NSM) – although those companies have recently had to slow down acquisitions due to regulatory scrutiny.
Bank of America said in a statement that some delinquent loans had complicated its ability to transfer mortgage servicing to other entities.
Approval for the sale of Ginnie servicing may contain "certain pre-sale document review requirements, which create incremental costs, extend sale timeframes and impact sale decisions," B of A said. "Most of the portfolios we sell include a number of delinquent loans where documents have been transmitted to attorneys, as legally required, which may complicate these pre-sale review requirements."
For now, the Government National Mortgage Association, known as Ginnie Mae, is trying to assess the magnitude of the problem of missing documents. Ginnie now plans to send letters this month to about 10 of the largest mortgage servicers – including B of A, JPMorgan Chase (JPM) and Wells Fargo (WFC) – that take part in a special program to expedite servicing transfers.
"As far as how big the issue is, we're not really sure," Tozer says. "We were under the assumption that everything was working well until B of A tried to sell blocks of servicing" and documents were found to be missing.
He would not say the size of the proposed transfer from B of A or identify the nonbank servicer that was supposed to take over the loans.
Shoddy document practices have plagued the largest mortgage servicers for years. The robo-signing of foreclosure documents ultimately forced the five largest mortgage servicers including B of A, Citigroup (NYSE:C), JPMorgan Chase, Wells and Ally Financial to sign a $25 billion national mortgage settlement in early 2012.
Problems with missing documents resurfaced recently in a program Ginnie created a dozen years ago, before the mortgage crisis, after some of the largest servicers asked for delegated authority to quickly transfer servicing rights.
"Back then, these banks never sold servicing – servicing was gold," Tozer says. "When B of A did this deal [to be part of the program] they never thought that it would become an issue because they never sold servicing."
Ginnie's "representations and warranties" program allows participating servicers to classify pools of loans as receiving "final certification" from Ginnie, even if there is no receipt of documents and no review by a trust's custodian that the essential documents have been delivered to the trust.
Instead, the servicers in the program agree to send all the essential records of the mortgage, deed of trust, title policy and intervening mortgage assignments to the document custodian in the normal course of business, usually within a year, though there is no set time frame.
Some servicers have asked the agency to extend leniency or grant waivers under the program; Ginnie has refused to do so. The agency now is asking the largest mortgage servicers for an inventory of loans that may have missing documents that cannot be verified by trust custodians.
"Banks have been asking for waivers and we are reluctant to do that because once they get sold, the servicing can get sold a second time or more," Tozer says. "We're taking this opportunity now to make sure we know who has what."
Though Ginnie Mae has flagged problems with servicing transfers by Bank of America before, Tozer says, they were resolved quickly and did not affect the transfer dates. This is the first time a transfer has been delayed for an extended period.
"All we're asking for them to do is to live up to the agreement from 10 years ago," Tozer says.
Ginnie does not originate or purchase mortgages. Rather, it guarantees timely payment of principal and interest on securities that are backed by loans insured by other government agencies, primarily the Federal Housing Administration and the Department of Veterans Affairs.
At issue is primarily what happens when a loan defaults or goes into foreclosure. Servicers in the program agree that they will bear the losses and legal costs for any problems with missing documents.
"If the loans defaulted, that's the major issue," said Tozer. "These attorneys are getting so creative in their foreclosure defense you have to make sure all loose ends are tied up" on the defaulted loans.