HousingStorm.com

February 22, 2010

Below is an Interview with Barbara Burke, Esq., Real Estate Law Series.com, provider of on-line continuing education courses for legal and real estate professionals. Check out her products!

Barbara, Question: Cindi, you have been in financial services quality control and underwriting for over 20 years, and have worked with the biggest names in the industry. How would you say the current wave of foreclosures changed the market?

Answer: My background includes developing and managing the fraud investigations team for one of the largest purchasers of mortgage backed securities, (MBS), on Wall Street, along with managing quality control and underwriting teams for the nation’s largest lenders. From the inside, many QC professionals saw the ‘bubble’ coming in the early part of the last decade. This was the time the mortgage backed securities market began to explode. The difference the MBS market made was mortgage loans were were no longer held on the books of the bank that funded them, but rather, were transferred into pools of thousands of units and sold to investment funds. This caused investors to look at defaults from an arms-length perspective, as a cost of doing business.

This resulting business perspective started the wave of foreclosures that will continue for the next several years as adjustable rate loans continue to reset. We are in the midst of this crisis, and the overwhelming opinion is that we have several years of workouts ahead. In plain English, the foreclosure rates will continue to rise or remain high for at least the next three years.

Question: What would you identify as the greatest obstacles in cleaning up the foreclosure crisis?

Answer: There are three parts to this resolution. First, the economy must stabilize. Second, the availability of capital needs to improve. Currently the market for institutional funding to purchase loan pools is sparse. This adversely impacts consumers’ accessibility to mortgage money. Lastly, loan quality needs to be a focal point modeling the days where your local community bank provided your mortgage. Tighter credit policy with the enforcement of common sense and documented underwriting need to be reintroduced in order to stabilize the lending markets.

Attorneys involved in assisting banks, investors and consumers with foreclosure claims and workouts, should consider these guidelines when investigating claims. Behind every foreclosure or default there are contract breaches that have occurred.

Question: How does the use of technology affect foreclosure workouts?

Answer: Technology and automated validation tools are vital to risk management in the legal and lending industries. From property valuation, income, and compliance verifications, technology makes it easy to confirm information provided in loan files. The downside of technology is the outright reliance on the information obtained and the lack of comprehensive knowledge of the guidelines and contracts underlying credit and legal decisions. To make absolute sense of data, an expert must be able to interpret the big picture relating to the case in hand. For example, the use of automated decisioning systems is being blamed for the lack of success in modifying mortgages. Servicers employ inexperienced personnel collecting data and running these systems. They are unable to interpret results, including valuation discrepancies, and are thereby declining viable loan modifications. Without the intrinsic knowledge of how to analyze the data and argue the case, everyone loses.

Question: Why is it so critical for attorneys to work with experienced lending experts when defending lenders, services and private parties in foreclosure cases?

Answer: For the reasons mentioned above. There are intrinsic originator, compliance and investor issues which are industry specific. These include mortgage backed securities, reps and warrants, and servicing contract breaches. The contracts to buy and sell mortgage pools, and even the lender guidelines applicable for the closing of one loan, contain hundreds, if not thousands of pages. Knowing where to efficiently begin evaluating breaches of these contracts takes an industry expert. As a valuable member of the legal team, a forensic financial auditor identifies document fraud, federal and state compliance errors, and breaches of the pooling and servicing agreements for mortgage-backed security certificates. This level of expertise coming from decades of experience adds value to the law firm and their client through legal knowledge, research efficiency and reduced billing rates.

Question: The term forensic audit is being heard more often these days when discussing mortgage foreclosure and loan buy-back defense. Can you explain what a forensic audit is and why it is important to the legal team?

Answer: This question is frequently asked. A forensic loan audit is a complex review and analysis of the mortgage loan contract, along with the underlying mortgage sales agreements which govern the sale of the pooling of said loan into a mortgage backed security.

Everyone is familiar with the complex process of obtaining a new mortgage loan. It is often referred to as one of the most stressful life events. It can take 45 – 60 days and require piles of paperwork. What most people are unaware of is the true lifecycle of a mortgage, which begins at the time the borrower signs on the dotted lines. Generally speaking, the loan is funded by a bank lender through a line of credit issued to the originator, otherwise known as a mortgage broker. The lender then sells the loan to a purchaser, usually in a “pool” of like mortgage loans. This is done through a process which constitutes a Wall Street-like auction. The bidder willing to pay the highest spreads on the loan wins. These investors are the Wall Street firms, Fannie Mae and Freddie Mac, who then bundle these pools into mortgage backed securities products and offer them as investments to institutional investors, such as insurance companies, retirement plans, and other investors. To complicate matters, subservicing and outsourcing of risk management and other pieces of this puzzle involve still more agreements that are very detailed and lengthy.

Each of these steps along the way is governed by a number of contracts detailing the specifics of what the loan should look like credit wise, how money collected on the loan or security is to be disbursed, and how the loan will be transferred and serviced. Throw into the mix the necessary compliance with federal, state and local regulation, and you have at a minimum of 600 pages of contracts detailing every aspect of that loan.

Defending a homeowner against foreclosure requires an advanced level expertise and knowledge of these underlying contracts whereby breaches can be identified and the parties involved can be held accountable.

Repurchase defense is a process used by an investor, lender or broker who has been ordered, under the terms of the aforementioned agreements, to repurchase, or buy back, a defaulted loan from an investor. The costs involved include the face value of the mortgage, plus reimbursement of all compensation, plus legal and other fees, which becomes very costly. Understanding the underwriting and securitization contracts allows the entity ordered to the repurchase a loan to defend itself through identification of errors and omissions throughout the loan sale process. For example, did the entity purchasing the loan comply with all of their representations and warranties involving the quality control review of the loan prior to the purchase?

When deciding on a forensic auditor it is very important to know who you are doing business with. Many auditing companies have surfaced recently that are simply technology products. They input data from loan documents and run automated reporting on compliance errors, relying on the standard verbiage found in these documents. Successful defense relies on a true understanding of the underlying contracts and entities involved, and the ability to work each case individually. Although these cases are very paper intensive, there are many layers of issues that must be taken into consideration, including mortgage and appraisal fraud. Attorneys should do their homework when hiring a forensic auditing firm, making sure they select an auditor with the expertise to handle and defend all aspects of their case.

Cindi Dixon has overseen the auditing of over $5 Billion dollars of mortgage loan products, has created and enforced underwriting policy for over two decades, and continues to provide expert witness testimony and consumer advocacy training nationwide. Mela Capital Group provides forensic financial audits and reporting for Attorneys and law enforcement throughout the U.S.

http://www.sacbee.com/2009/03/19/1698037/unemployment-in-california.html

Recession Porn of the Day: Unemployment Map Changes

”America’s obsession with its FICO scores is broadly symptomatic of an unhealthy attitude towards debt. We’d all be a lot better off if we stopped freaking out every time the sacred FICO score drops a few points.”

http://www.theatlantic.com/business/archive/2010/03/what-happens-if-you-close-a-credit-card/37414/