TheMReport — News and strategies for the evolving mortgage marketplace.
Issue link: http://digital.themreport.com/i/145103
Feature been able to provide a valid affidavit, despite numerous requests from the foreclosure attorney. Bankruptcy: The new servicer needs to understand the status of the bankruptcy proceedings to prevent inappropriate collection or foreclosure activities. Similarly, if filings have occurred, have the appropriate payments been passed to the trustee? Corporate and escrow advances: The new servicer needs balances and supporting documentation, as well as an understanding of what is recoverable from the borrower. It is not uncommon to find duplicate or missing invoices for advances and escrow payments. Recently, one of our reviews recovered more than $180,000 in excess fees. Losses: Clayton has observed instances of delayed losses associated with servicing transfers, which can have a negative effect on the monthly cash flows to investors. In one portfolio, we found 25 loans with loss-issues, reversing more than $417,000 in potential losses. Mortgage insurance: In servicing history of these legacy assets and the potential for problems in the transfer/boarding process? Certainly, not all of the new entrants are buying first and evaluating later. However, some groups are growing very rapidly, facing the understandable temptation to say, "Let's just push them through. We don't have time to go back and look at X, Y, and Z. Let's close the deal now at a strong yield and remediate and validate all the data later." But that's when problems can occur. Has there been a review of all the servicer advances to provide a fee and advance reconciliation? Or an adjustable-rate mortgage (ARM) audit to ensure that the proper interest rates and indices have been applied? What about modification payments? Finally, what is the overall data integrity of the tape? In our experience, we have seen that the error rates are high and the resulting issues complicated. Consider what can go wrong with ARMs. Suppose a loan has been transferred among a number of servicers before an MSR purchase. Along the way, an incorrect index was used to readjust the ARM, or an interest rate floor is overlooked, resulting in incorrect borrower payment application. In many cases, it can be confirmed that inaccurate payments were charged to borrowers for years in advance of a transfer. The buyer in this scenario has stepped into the liability of improper servicing initiated by the previous servicer. As the new owner of that MSR, what do you do? Try to collect a $500 per month underpayment that has grown to $12,000? A previous servicer's mistake might push the borrower into default. ARMs are just one of the "moving parts" that sometimes go askew in a servicing transfer. There are a number of other areas for potential problems: Foreclosures: Have all relevant documents, status updates, and milestones been provided? Do the current timelines make sense? Recently, we questioned a loan that had been in foreclosure for 35 months in a jurisdiction where the process should have taken a third of that time. What we found was that the servicer hadn't one security, we identified 389 defaulted loans with mortgage insurance coverage that a previous servicer had missed. To avoid these kinds of risks, some MSR purchasers are turning to outside experts to conduct pre-close due diligence on the assets behind MSRs and the servicers who are handling them. Other MSR investors seek help in the boarding and transfer process. Consider, for example, a large retail lender that's good at boarding and servicing its own production, but now is buying MSRs or adding a correspondent channel. As Warren Buffet said, "Risk comes from not knowing what you're doing." The best way to reduce risk is to have more information, to create new mechanisms to improve transparency, and to work with experts who know where to look for errors and potential pitfalls. The M Report | 21