Loan Modifications: Selling Loans Means Being Sold Down the River

This won’t take me very  long, I promise.

As a nation, we want to see loans modified, right?  Homeowners at risk of foreclosure certainly do, but they’re not alone, right?.  The president says he wants loans modified.  And the Treasury Secretary too, right?  And so do mortgage servicers and investors in mortgage backed securities, so I’ve been told.  Even Fannie Mae, who absolutely cannot stomach the idea of even one dollar in principal reduction, is pro-loan-modification, right?

Yeah, that’s what I thought I’d heard and read… just wanted to make sure I had it right.

We all know the process of getting a loan modified falls somewhere between, “stressful but fairly straightforward,” to something more along the lines of, “so indescribably infuriating that my husband shot himself in the head.”  It’s quite the range, I understand.

For the record, I’m going to go out on a limb and say that I probably hear from or talk with as many homeowners in the loan modification process as anyone in the country, how’s that?  In don’t really know if that’s true, but I’d be willing to bet it is because I’ve noticed that no one else who writes on the subject was dimwitted enough to put his or her email and cell phone online.

Yeah, just try to reach Yves Smith over at Naked Capitalism by phone or email, for example… and good luck with that.  Or how about Matt Tiabbi at RS… let me know how that works out.  Me, on the other hand… if you’re in foreclosure, I’m you’re contact-Huckleberry… my phone can ring at 2:00 AM when a homeowner who couldn’t sleep, started reading me online.

But, we don’t seem to be able to do anything about our hinkey little consistency issue we keep having with the loan modification process, for whatever reason.  I’ve come to accept that it’s completely un-friggin’-solvable… like we’ll probably see peace in the Middle East long before any two loan modifications go the same way.

There’s truly nothing in our society today, and I’d have to think nothing in post-Civil War American history, that compares with today’s loan modification process.  (If you missed that last one, go back and read it slower this time.)

If I had to peg the average, I’d say it’s something north of, “I can’t even believe I lived through that,” and a few clicks south of, “I’d rather go through chemotherapy than that again,” which is actually one I’ve heard homeowners say a few times now.

And no, I’m not kidding… if I were kidding, you’d be laughing.

Okay, so as they say, there’s no point ‘beating a Fed bank’ over this… it obviously cannot be fixed.  It’s been almost six years, so with the full faith and credit of the United States government’s brain trust on the problem, combined with the top minds in the financial services sector, and Lord only knows who else has weighed in… and still, if you wanted to measure the aggregate progress at most servicers, you’d need a micrometer.

So, screw it… clearly, it is what it is… and be thankful that it isn’t even worse.  Fine.  I’m over it.

It’s just as obvious that it hasn’t been any fun for mortgage servicers either, because over this past year, they’ve been bailing out of servicing rights even faster than Tim Geithner bailed out counter-party collateral calls.  (And if that didn’t make you LOL, please see me after class.)

Which leads me to the point of my writing this… leave the actual loan mod approval process out of it… not everything that’s terribly wrong related to loan modifications and servicers is unsolvable.  There are a few torturous practices that could easily be addressed for the good of all involved.

Sold down the river… 

Last night I got a call from a 60 year-old woman who spent the last two and a half years trying to get Chase to modify her loan.  Along the way, she got ripped off by scammers and do-nothing-pseudo-law-firms the requisite 2.5 times, which I believe is the median these days… or maybe it’s just mean.

Anyway, after throwing away a few grand and spending 100 hours chasing her tail, which I explained was just part of the process as designed by state and federal officials, she finally succeeded and was granted a loan modification… a trial modification, of course, but still… nowadays trials do become permanent in almost all cases, assuming the homeowners make the trial payments.  So… Yay!

No, not Yay… because right after she made her first trial payment… her very first one… and you can just  imagine how happy and a little bit proud she was over her accomplishment in light of having endured 2.5 years on the extremely expensive Modification-Go-Round… she barely had time to bask in the relief of her modification when she received a letter from the  new owner of her loan.

Penny Mac, a company brought to you by many of the same nice folks that brought you Countrywide, was the proud new owner of her mortgage.

Yes, it’s true… it seems that the venerable JPMorgan Chase… the same giant of the financial services world that only days ago was fined just shy of $1 billion related to its top notch systems, stunning operational controls, and brilliant decision making that las year wiped out roughly $6 billion faster than you can say “beached whale,” in a British accent…. had apparently used the same type of systems, controls and decision making to sell her loan to PennyMac.

And here’s the best part… the letter from PennyMac said that her payment was not the lower amount promised as part of her trial modification, rather it was back to the old higher amount… not that it mattered all that much, because the letter also informed her that her loan was in default so they’d be starting foreclosure proceedings soon.

How cool is that?  Show me another business that can do that with impunity and a straight face, and I’ll make you breakfast every morning for a millennia.

PennyMac, the company whose Website says: “Ask Twice.  If you’ve been turned down by a lender or bank, don’t give up.  Often PennyMac can say yes, when other lenders can’t.  Find out if PennyMac can help you lower your monthly payment.”  They’re talking about refinancing when they say that stuff, but still.

PennyMac’s Website also says this related to “Preventing Foreclosure,” specifically…

“Many people have the misconception that the lender wants to take back your home through foreclosure. Untrue – the lender is most interested in ensuring that mortgage payments are made each month. Lenders only begin foreclosure when every other option has failed.”

Yeah, I can’t imagine why so many people are under such a crazy misconception.  What’s wrong with you people anyway?

Okay, so we know what’s happened here… it’s a no-brainer, as they say. 

Chase sold the woman’s loan to PennyMac.  Simple as that.  Had her modification already been made permanent, PennyMac would have had to honor the modified payment amount, but because she was only in a trial modification, Chase is going to say something to the effect of…

“Sorry, old gal… chin up… cheerio, Bob’s your uncle, and all that rot,” in a British accent, of course… because it’s JPMorgan Chase.  (From now on, every time anyone talks about JPMorgan, we should do it in a British accent, just to drive Jamie Dimon insane.)

At this point in the story, I’d like to refer you back to my opening paragraph:

As a nation, we want to see loans modified, right?  Homeowners at risk of foreclosure certainly do, but they’re not alone, right?.  The president says he wants loans modified.  And the Treasury Secretary too, right?  And so do mortgage servicers and investors in mortgage backed securities, so I’ve been told.  Even Fannie Mae, who absolutely cannot stomach the idea of even one dollar in principal reduction, is pro-loan-modification, right?

 

Uh huh.  Got it.

Well, call me crazy, but I think it’s possible that I might be onto something here that could just help all those mentioned above inch a little closer to fulfilling their desire to see more loans modified.  Forget about fixing the loan mod approval process, as I’ve already conceded, that’s impossible… like cold fusion type impossible.

But here’s what we could do… might be able to do… possibly could consider doing…  perhaps we concentrate on at least modifying the loans that… HAVE ALREADY BEEN MODIFIED.

How does that idea sound to you financial wizards and public relations gurus over at JPMorgan Chase?

You know, since it obviously takes longer to modify a mortgage than it does to clean up 4.9 million barrels of oil pumped directly into 68,000 square miles of the Gulf of Mexico, what say we just leave that alone and just try focusing on NOT NEEDING TO ATTEMPT IT TWICE.

Look, this cannot be that hard, and it’s not something that we should even have to question or debate.  The new servicing standards required by the National Mortgage Settlement prohibit dual tracking… and this makes dual tracking look like a streamlined, stated income refi.

Looking to the Courts for Guidance… 

In several fairly recent instances, we’ve seen the courts rule that once someone fulfills the requirements of a trial modification, because it says that the servicer WILL provide a permanent modification… servicers can be held to that promise.  In Wigod v. Wells Fargo, a case heard by the Seventh Circuit Court of Appeals, the court ruled that Wells Fargo was required to provide the plaintiff who had successfully completed a trial payment plan with a permanent modification.

And more recently, the Ninth Circuit Court of Appeals, in Corvello (and Lucia) v. wells Fargo, following the thinking in Wigod, ruled that Wells Fargo, by virtue of what they stated in the Trial Payment Plan agreement, was obligated to provide a permanent modification if the borrowers fulfilled their obligations under the agreement.

In Corvello v. Wells Fargo, Circuit Judge Noonan really nailed it down in no uncertain terms by saying…

“Read as a whole the TPP between Corvello and Wells Fargo makes no sense. It is self-contradictory. Page one promised Corvello in two places that if his representations were accurate and if he were in compliance with the Trial Period Plan, the Lender “would provide” him “with a Loan Modification Agreement.” 

Paragraph 2G stated: “the Loan Documents will not be modified unless and until (i) I meet all of the conditions required for modification; (ii) I receive a fully executed copy of a Modification Agreement and (iii) the Modification Effective Date has passed.”

Wells Fargo drafted this document, and Wells Fargo must be held responsible for it. The document promises a substantial benefit to Corvello if he meets its terms. The document then makes these benefits illusory because they depend entirely on the will of Wells Fargo.

To say, “I give $100 for your watch but I will decide whether I pay you $100” is not to make a contract but to engage in a flim-flam or, in plain words, to work a fraud. You promise so that the other will perform. You reserve your promise so that the promise is empty while you have gotten what you wanted from the promisee.

No purpose was served by the document Wells Fargo prepared except the fraudulent purpose of inducing Corvello to make the payments while the bank retained the option of modifying the loan or stiffing him. “Heads I win, tails you lose” is a fraudulent coin toss. Wells Fargo did no better.

That’s two courts of appeal ruling with abundant lucidity that granting a trial modification, once the borrower fulfills its requirements, pretty much obligates the lender/servicer to permanently modify the borrower’s loan.  But, selling someone’s loan right in the middle of a trial modification obviously deprives the borrower of the opportunity to fulfill the requirements of the trial modification.  And I hate that.

How can that possibly be okay with anyone, if not in light of these recent decisions, then how about in the Court of Common Sense?

The way I see it, the courts in these cases have basically ruled that granting a trial modification is not some sort of loosey-goosey, renege-on-anything-at-any-time situation.  Why would it be just fine to grant a trial modification and then sell that loan the next day to another entity knowing that the trial payment plan offered would not be honored?

And why wouldn’t Chase be obligated to inform the buyer of the loan that they have contracted to modify it under certain conditions that if met by the borrower, would be binding on the loan’s new owner, just as would have been the case had Chase not sold its loan?

We’ve had so many disappointments… the underwhelming overall performance of the government’s loan modification programs, the almost countless improprieties that led to the $25 billion National Mortgage Settlement, the utter and complete failure of the OCC’s Independent Foreclosure Review, a loan modification process that no one understands, and an industry that profits by spreading misinformation and taking advantage of homeowners in distress…

I’m mean… is anything okay?

Allowing loans to be sold in mid-trial-modification without the new owner being bound by the promises made by the prior owner is just flat out wrong… I can’t imagine anyone disagreeing with that sentiment.  If not a matter of law, then certainly as a matter of fundamental fairness.

Nathan Fransen, who’s both a very good friend and a very good lawyer, had the following to say about contract law… “If you’re a party to a contract and you’ve undertaken certain obligations, those always survive the transfer… otherwise you’d just transfer anytime you didn’t want to perform.”

I’m sure that’s true.  It certainly makes total sense.  And really… how hard could this possibly be to solve?  But all that “making sense” probably just means that it won’t apply to this situation.

Mandelman out.

~~~

Wigod v. Wells Fargo Bank, 7th Circuit Court of Appeal by Martin Andelman

Corvello v Wells Fargo, Lucia v. Wells Fargo – 9th Circuit Court of Appeals by Martin Andelman