Decoding Compliance

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The Latest SERVICING Or ig i nat ion s e r v ic i ng Below the Surface a na ly t ic s Researchers uncover misrepresentations in RMBS market. F ollowing the financial crisis, a prevalence of misrepresentations in the residential mortgage backed securities (RMBS) market has exposed investors to greater risk, according to a recent report from three researchers at two top business schools. The researchers studied private-label RMBS sold in 2007 in search of misrepresentations regarding occupancy status and second liens. Private-label RMBS totaled about $2 trillion in 2007. Overall, the researchers detected one of these two categories of misrepresentations in one out of every 10 loans. When misrepresentations involving HELOCs are included, the rate jumps to 12.2 percent. More than 27 percent of loans to non-owner occupants were categorized as for owneroccupants, and more than 15 percent of loans with second liens were miscategorized to hide the second lien, according to the findings. While some might attribute these misrepresentations to lowor no-doc loans, the researchers explain they "find significant extent of misrepresentation even when we focus on fully documented loans." Misrepresentations of owneroccupancy are slightly lower for fully documented loans, but the researchers found the opposite is true for second-lien misrepresentations, which are actually more prevalent among fully documented loans. The researchers clarify that these instances are not simply cases where "buyers know less than the seller," but instead are cases in which "buyers received false information on the characteristics of assets." In fact, lenders—seemingly aware of the discrepancies in loan facts and representations— often charged higher interest rates on loans with misrepresentations when compared with similar, accurately represented loans. However, the heightened interest rates were not effective in covering the added risk, according to the study. Important, the researchers state, "We find that these misrepresentations have significant economic consequences." Loans containing misrepresentations of occupancy status have a default likelihood 9.4 percent higher than accurately reported loans with otherwise-similar characteristics. Loans with non-disclosed second liens have a 10.1 percent greater likelihood of default, according to the researchers. "Because of their substantially worse performance, misrepresented loans account for more than 15 percent of mortgages that defaulted in our sample, a higher share than their proportion in the overall sample (about 10 percent)," the researchers stated in their study. The researchers concluded that industry regulation was not effective in preventing these detrimental behaviors in the industry. The M Report | 49 se c on da r y m a r k e t About $24.7 billion went to these efforts. Short sales made up another significant portion of servicers' efforts, totaling $19.5 billion. First-lien modifications totaled $6.04 billion, and active trials in progress currently stand at $3.49 billion. Refinance relief totaled $2.209 billion, and forgiveness of pre-March forbearance reached $1.37 billion. In the fourth quarter of 2012, servicers doled out $23.9 billion in consumer relief to 276,413 homeowners. A little more than 33,000 homeowners received first-lien modifications amounting to about $3.86 billion in principal forgiveness. Another nearly 120,000 homeowners received second-lien modifications or extinguishments, totaling $8.76 billion. Relief through short sales in the fourth quarter totaled $6.41 billion and went out to 55,580 homeowners. In addition to observing the consumer relief efforts of the five servicers (Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and Ally Financial) in the settlement, the monitor accepts consumer and professional complaints through his website. He has received 5,700 complaints from consumers across all states. For the first six months, the monitor received about 550 complaints per month. Since November, complaints have averaged about 830 per month. "This may be the result of greater awareness of my office, the result of persistent servicing issues, or both," the monitor stated in his report. Common consumer complaints include issues with loan modifications, changes in single points of contact (SPOCs) or lack of follow-up by an SPOC, requests for the same documentation to be submitted multiple times, and "questionable or undocumented fees." Complaints from professionals also often pertain to loan modifications and customer service issues, according to the monitor.

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