What will the legacy of the robo-signing scandal be? Will it be more careful servicers who don’t cut corners under pressure from huge pipelines of foreclosures? Will it be large settlement payouts by the largest servicers involved in the mess?
At the SourceMedia Best Practices in Short Sales and REO Conference in San Diego that I chaired, myself, along with NMN staff reporter Amilda Dymi talked with Joe Filoseta, president and CEO of DepotPoint Inc.; Greg Hebner, president of the MOS Group; Ed Gerding, senior fraud consultant with CoreLogic; and Jay Loeb, founder and CEO of National Creditors Connection Inc. to discuss issues concerning the mortgage industry.
The biggest topic was the robo-signing scandal, as hearings in both the House and the Senate have given high-profile attention to that subject. In addition, all 50 state attorneys general, in a rare show of unanimity, are investigating the scandal. Close attention by state AGs on the mortgage business in the past has produced multimillion-dollar settlements, and the question is if this will be so in this case.
Filoseta saw the robo-signing as a technicality but also something that could lead to lawsuits and settlements.
Loeb saw the issue as one of operational efficiency that might have suffered by some cutting of corners, but said good might come out of it in terms of more efficient operations in the future.
Other topics that were discussed included short sales, one of the hottest topics currently in the servicing area. Short sales have some advantages for servicers in that losses are generally less and they don’t have to be adjudicated, as is the case for foreclosure/REO in many states. The government has weighed in here with its HAFA program, and the question is how effective will it be? The federal HAMP program has been beset with difficulties in getting borrowers into permanent modifications, and as many as 50% to 60% of all mods are redefaulting, a pace similar to the private efforts that preceded HAMP.
NMN: The biggest thing that’s going on in the servicing business is the robo-signing scandal. We’ve had hearings on that in the Senate and the House. We have 50 state attorneys general investigating. A lot of the banks would like to declare that the crisis is over and business as usual. But what do you think is going to be the outcome here?
FILOSETA: I would probably side with the banks, with regard to it being over. They will pay a price for what has happened. This is an issue of rule of law, and a technicality of sorts. There’s no doubt that we have a nonperforming, nonpaying borrower. We know that there’s an obligation, so it’s a technicality; but it’s also an issue of rule of law. So there will be lawsuits that will follow. There’ll be costs, and there’ll be a price that will be extracted from any number of regulatory and oversight authorities, including the federal government perhaps, and certainly as you indicated, Mark, at the state attorneys general level.
LOEB: I talked to some high-level clients for their insight. And there is the deal for operational efficiency in this regard, and people understand the process that they were going through. There was some pressure to get more foreclosures done, and get them completed on a more timely basis. This is not different. It’s been in the industry for a long time, and the pressure that comes with operational efficiency. When you call it cutting corners, really what happened, it’s not something that hasn’t been done before, is the point I’m trying to make. This is not an integrity issue upfront committed by banks whatsoever—more so an operational efficiency process. A technicality, as Joe put it, is more correct in line of what this is about. That he was absolutely correct, there will be some lasting effects, could slow the process down in the future where it won’t be as operationally efficient. It might be better. I don’t think there was any intention of foreclosing on folks who weren’t in fact delinquent on their loan and were facing the inevitable conclusion.
NMN: One question comes to mind is if the banks and services are so bad or careless at this, is there an opportunity for vendors to give them technology that will steer them in a better direction?
FILOSETA: With regard to the robo-signing incident in particular...what we do is all workflow based and all time driven. So in the case example of an individual who’s assigned the task of reading a set of foreclosure documents and signing off on them, the system would know when the task was open and when the task was theoretically closed. You can’t read these documents in eight seconds. They can be read within an agreed standard. So if a document set were opened and closed within that standard, it’s probably reasonable to assume that the person read them. At least it’s a practical matter; that’s better than where we are today, where there’s no control over that particular event.
NMN: Foreclosures obviously have been delayed already because of this, and may continue to be. What are the implications on that for short sales and REO? Does REO become less valuable, less prominent and short sales become even more prominent than they are because it’s better to get rid of the property before the foreclosure process? Is there any way you think that’s going to affect business in this particular area?
FILOSETA: I am pleased that robo-signing has come to light because in my mind, as a taxpayer, it’s a very difficult situation given the receivership, a conservatorship that Fannie Mae and Freddie Mac are in that we would not push, as a country, to deal with the debacle on our hands at the least cost. We all know, and it’s documented, whether you’re talking about prime paper or subprime paper, you can use a number between 15% and 25% less to do a short sale than to do a foreclosure and an REO. There are implications with regard to existing neighborhoods, if you can hold prices higher as a result of short sales, as opposed to REOs, because we all know sales prices of foreclosed homes and REOs run lower. The psychology of neighborhoods, of not having boarded-up properties, which just simply feeds on a downward cycle, and in the most heavily hit states, the “sand” states, California, in particular, we’re seeing entire neighborhoods dying, and new neighborhoods being built. Las Vegas being a perfect example where people don’t even want to buy into these neighborhoods anymore because of their fear of strategic defaults; that the rest of the people who are living there are going to walk away. Whereas new communities are being built and obviously funded under much more stringent underwriting guidelines, we’re seeing those communities thrive.
NMN: It’s almost as if you’ve got an assumable mortgage and somebody will take it on before you get to the foreclosure process. There’s no adjudication on a short sale, as well. That’s certainly a positive thing, I’m sure.
FILOSETA: There’s issues with regard to the consumers themselves. We all know the credit file is less impaired in a short-sale situation than it is in a full-blown foreclosure. For all of those reasons and more, it just amazes me that the administration treasury combined, and the leadership inside the GSEs who are holding most of these properties, as we know, have not pushed harder down this path of alternatives to foreclosure.
NMN: The HAFA program, you don’t think has gotten much traction?
FILOSETA: It hasn’t, and I speculate myself as to why that did not occur. I think part of it has to do with the initial HAMP rollout and how the HAMP program was in effect pushed down upon the top 21 servicers. You all remember when the Obama administration called the top 21 servicers to Washington and basically crammed down the program. Now they crammed it down for the right reasons, meaning we needed to do something. We had to stop spiraling defaults; that makes all the sense in the world. What’s ironic about all of this is we gave it to servicers who were ill prepared to even contemplate that kind of volumes without the technology to control it. So we had all these trial modifications to the tune. You probably know the numbers: 1.3 million, 1.4 million? And 20% permanent mods?
NMN: A lot of fallout.
FILOSETA: That’s an abysmal success percentage, and frankly, on a cost basis per successful mod given the program, the number I have is $56,000 per successful mod. Clearly not a success. There’s probably some resentment on behalf of the servicer community. There’s some tentativeness on behalf of the administration. There’s clearly a midterm election issue that came into play, which slowed things down in general. It was easier for Treasury to write the $3.5 billion check a month to fund Fannie and Freddie at the moment; but I think we’re past all of that. Robo-signing is going to bring the whole discussion about alternatives to foreclosures back into the central spotlight. The New York Times did a piece three weeks ago, which I applauded them for writing a piece in this manner; which is an individual who wanted to contemplate a short sale, and could not get the attention of their lending institution to get it done.
NMN: Because they’re so busy doing the REOs?
FILOSETA: Busy doing the wrong thing, my opinion.
LOEB: To Joe’s point, when you look at the history that had with HAMP into some people’s eyes as to the inefficiency, how many got put through the pipeline, some have the same short sale. If you step back and do a historical look back in the servicing side, of course you talk about catastrophe on one side, but you also have to talk about what they were efficient at. They were quite efficient at taking things to REO, and foreclosing, and that whole process was somewhat finely tuned.
Then you go to a behemoth servicer and say, operationalize HAMP and operationalize short-sale solicitation, it’s more difficult to do that operationally, than it is to say, just do a large scale REO; get these through the pipeline. When you talk about path of least resistance, when it comes to operational processes, it’s not easy doing this level of HAMP and HAFA. I don’t, to answer your question, Mark, about what’s going to happen with robo-signing and the effect on it, I think inevitably, you’re going to have more potential REO pipeline; this is going to delay the inevitable as far as where those files need to go.
Joe’s point, sure, they should go backwards, and take a look and make sure that they were offered a foreclosure alternative, and you’d want that to happen. But you have to understand the operational inefficiencies of doing large-scale short sales and large scale on the HAMP.
GERDING: Despite the bottom-line benefit, isn’t that the rub, Jay?
LOEB: Right, because if you go back 10 years, five years, let’s say and talk about subprime servicing shop, which is where loss mitigation hadn’t gotten through. Where do you talk about people that work for associates that used to work here? They tell these old war stories of “we had to mitigate losses on those; we were a subprime shop. We took a hit every time we foreclosed.
It was painful. But we had to do everything we could to save the loan.” They were familiar with short sales, and deed-in-lieu and all the processes that now are taking on a better light. Up until now, it’s been collect payments, people that don’t pay, put them through the foreclosure of timeline and process. Now we have to build in this whole process for foreclosure alternatives like loan modifications and short sales.
GERDING: We know particularly in a bottoms-up short-sale environment, the risk of fraud is very, very high. I don’t know about the total numbers, about 350 million. I don’t know if that’s a number worth talking about given the size of what the asset changes that are going on here. The fact is that there is a lot of fraud in the short-sale side, while there is far less potential for fraud on the REO side.
That’s interesting. I certainly agree, operationally short sales are much more difficult, and much more challenging; one, from a skill set perspective in the traditional servicer, and two, from a pure technology platform perspective. They are simply ill prepared.
