Garfield In & Garfield Out. Neilâ€™s Wrong on Servicer Advances.
When it comes to legal theories related to foreclosure, Neil Garfieldâ€™s Living Lies Blog would have to be considered nothing short of jam packed.Â An attorney, now practicing law in Florida, his ideas about foreclosure defense could be described as running the gamut from the somewhat commonplace to the absolutely arcane.
Sometimes, however, his ideas as to how things work are simply wrong, and Neilâ€™s post last week: Servicer Advances: More Smoke and Mirrors, was a shining example.
Here are Neilâ€™s opening paragraphsâ€¦
Several people are issuing statements about servicer advances, now that they are known. They fall into the category of payments made to the creditor-investors, which means that the creditor on the original loan, or its successor is getting paid regardless of whether the borrower has paid or not.
The Steinberger decision in Arizona and other decisions around the country clearly state that if the creditor has been paid, the amount of the payment must be deducted from the amount allegedly owed by the â€śborrower.â€ť
Okay, so first of allâ€¦ the Steinberger decision in Arizona said nothing of the kind.Â
Nowhere in that decision will you find anything stating that if the creditor is paid, the amount of the payment must be deducted from the amount allegedly owed by the â€śborrower,â€ť clearly or otherwise.
In fact, the Steinberger decision was just a â€śpleading decision,â€ť which means that the court simply accepted what was presented as being true, and then ruled that assuming it was true, the borrower would be able to return to the lower court to plead as such.Â (Very much like the Glaski decision in California, late last July.)
Hereâ€™s what the court said in the Steinberger decisionâ€¦
p 2. “In considering these issues, we emphasize that this opinion is limited to the legal sufficiency of Steinbergerâ€™s complaint. The strength of the evidence supporting Steinbergerâ€™s case is not before us in this special action.”
“However, Count Eleven also alleges that part of the loan has already been paid by the FDIC under a â€śShared-Loss Agreement,â€ť and Steinberger attached a copy of a Shared-Loss Agreement to the complaint. Â While it is not clear whether this agreement in fact applies to Steinbergerâ€™s loanâ€¦â€ť
Â¶96 While the alleged insurance payments are indeed speculative and unsupportedâ€¦
Â¶97 Given that Steinberger has adequately pled a claim for discharge based on the FDICâ€™s alleged payment of all or part of her loan, we vacate the trial courtâ€™s dismissal of this part of Steinbergerâ€™s discharge/payment claim. However, we affirm the dismissal of the rest of this claim based on the alleged destruction of the note and any insurance payments.
Under A.R.S. Â§ 47-3602, â€śan instrument is paid to the extent payment is made by or on behalf of a party obliged to pay the instrument and to a person entitled to enforce the instrument.â€ťÂ Even if there were a payment made by the FDICâ€¦ and there most definitely was notâ€¦ that payment would not have been made on behalf of the obligor.
And, Neil references servicer advances, saying: â€śNow that theyâ€™re known.â€ťÂ As if they were some sort of secret at some point?Â
Servicers are borrowing billions of dollars every month from banks all over the planet, but shhhhâ€¦ donâ€™t tell anyone?Â Neil, there are bulletins distributed on the topic of servicer advances, if not daily, then certainly weekly.Â Hereâ€™s one from June of 2011, titled: Servicers Reconsider Paying Advances on MBS.
Large institutions are starting to reconsider their obligation to make servicing advances to MBS investors as it takes longer and longer to foreclose and liquidate residential properties.
It currently takes over two years to foreclose and sell the REO and it is getting longer due to the backup in foreclose processing, according to Howard Kaplan, a partner atÂ Deloitte & Touche.
Meanwhile, servicers are advancing principal and interest payments to investors as well as paying for property taxes and insurance on the vacant properties. Â “Servicers are actually starting to think about whether they should be advancing P&I,” Kaplan said.
The Deloitte & Touche partner noted that a halt in P&I payment would cause an “uproar” in the markets.Â However, servicers are shelling out billions and billions of dollars of advances while the days to foreclose and liquidate continue to rise.
The accountant did not name any individual institutions but he noted that large institutions disclose servicing advances in their quarterly filings with theÂ Securities and Exchange Commission.
In its first quarter securities filing,Â Bank of AmericaÂ said its servicing advances on consumer mortgage loans totaled $24.9 billion.Â
In addition, hereâ€™s an excerpt from a DBRS Newsletter from November 5, 2007:
A servicer typically advances principal and interest (P&I) on behalf of a delinquent loan to the extent it is deemed recoverable from the loanâ€™s future cash flow. The operative documents of U.S. RMBS transactions permit reimbursements for advances to have priority over other cash flow waterfall claims.
Â Of the respondents to the ASF survey, the general consensus was to advance P&I on all contractually modified loans experiencing delinquencies at the modified rate (when deemed recoverable).
Now, hereâ€™s Mr. Garfield.Â He says servicer advances are making the homeownerâ€™s mortgage payments and therefore homeowners are never in default.
If the payment has been made and continues to be made, how can anyone declare a default on the part of the creditor?Â They canâ€™t.Â And if the payment has been made, then the notice of default, the end of month statements, the notice of acceleration and the amount demanded in foreclosure are all wrong by definition.
No, the payment has NOT been made.Â The trust borrowed money from the servicer to pay the trusts contractual obligation to the bondholders.Â Â Doing this does NOT pay off the borrowers loan, it just satisfies the obligation the trust has to its investors (bondholders).
Neil, your thinking on this is convoluted.Â Â If I owe you money every monthâ€¦ and one month I donâ€™t pay youâ€¦ so in order for you to pay your car payment you go and borrow money from your bankâ€¦ does this mean I donâ€™t have to pay you since your bank paid you?Â No, I still owe you the money and you owe your bank the money.Â Â The same principal is at work here.
Servicer advances are servicers loaning money to the trust to make up for the payments that are not being made by delinquent borrowers.Â The servicers advance payments to the trust until the servicer deems the amounts to be unrecoverable, and they get the amounts back one of two ways:
A. When the home is lost to foreclosure, repossessed and re-sold as an REO.
B. When the delinquent loans become performing again, usually as a result of modification.
The servicer isnâ€™t making â€śpayments.â€ť The servicer â€śadvancesâ€ť funds (or you could say, â€śloansâ€ť), to the trust to make up for the shortfall caused by delinquent payments, until the servicer deems the amounts advanced to be â€śunrecoverable,â€ť and gets reimbursed when the property is sold at auction or as an REOâ€¦ or once the loans are again performing, which would be the case if modified or, I suppose, if brought current by the borrowers.
I donâ€™t know how much simpler I can say that.Â
Why does the servicer make these advances to the trust?Â Â Itâ€™s to make the bonds easier to sell to investors, especially the investors in the bottom tranche, which is sometimes called the â€śequity tranche,â€ť and sometimes referred to as the NIM, which stands for â€śNet Interest Margin.â€ťÂ The bottom tranche, in case you donâ€™t remember your Securitization 101 class, takes the first loss, which means that when loans default
But, Neil doesnâ€™t even accept that the â€śservicers advancesâ€ť come from the servicers.Â He talks about a â€śreserve pool,â€ť a source of funds that is concealed, a â€śsecret report,â€ť issued by the servicer to investors â€śprobably through an investment bank,â€ť says Neil.
The actual payment of money comes from the reserve pool made out of investorâ€™s funds. The prospectus says that the investor can be paid out of his own funds. And that is exactly what they do.
The investors are paying themselves?Â Out of a fund thatâ€™s somehow â€śconcealed?â€ťÂ A report routed by the servicer â€śprobably through an investment bank?â€ťÂ (Oh, and see if you can pick out who heâ€™s talking about in the first sentence.)
One writer opined either innocently or at the behest of the banks that the servicers were incentivized to modify the loans to get out of the requirement of making servicer advances.Â He ignores the fact that the provision in the pooling and servicing agreement is voluntary. And he ignores the fact that even if there is a claim for having made the payment instead of the borrower, it is the servicerâ€™s claim not the lenderâ€™s claim.
No, servicer advances are mandatory, as long as the servicer deems the advances to be recoverable.Â Â That is to say, as long as the servicer estimates the value of the collateral at foreclosure is sufficient to re-pay the servicer, then they must advance.
That means the servicer must bring a claim for contribution or unjust enrichment or some other legal theory in its own name. But they canâ€™t because they didnâ€™t really advance the money.
Once again the propaganda is presumed to be true. What the author is missing is that there is no incentive for the Servicer to agree to make the payments in the first place. And they donâ€™t. You can call them Servicer advances but that does not mean the money came from the Servicer.
There is originally excess collateral in a mortgage-backed security (referred to as: Over Collateralization or O/C).Â However, O/C is the first piece hit by losses, and today the O/C is all wiped out and hence there is no excess cash flows to pay these advances.Â Â The servicers actually pay these amounts, and usually have credit lines for this purpose.
The investment banker or broker dealer has no control over funds once in a securitized trust.Â The only entities involved are the sub-servicer (if there is a Master Servicer), the Master Servicer, the Trustee and perhaps the â€śultimate certificate holderâ€ť who owns the owner certificate (this is the party who held the first loss piece and who, when all bond holders get paid off completely, gets whatever is left over.
Today with all the losses there is no way all bondholders will ever get paid in full so these owner-certificate pieces are generally not worth anything.Â The money only flows from Sub-servicer to Master servicer to trustee.
Like the loan closing the source of funds is concealed. The Servicer issues a distribution report with disclaimers as to authenticity, accuracy etc. That report gets to the investor probably through an investment bank.Â The actual payment of money comes from the reserve pool made out of investorâ€™s funds.
THATâ€™S JUST NOT TRUE.
The prospectus says that the investor can be paid out of his own funds. And that is exactly what they do. If the Servicer was actually taking its own money to make payments under the category of Servicer advances, the author would be correct.
AND THATâ€™S JUST RIDICULOUS.
The author IS CORRECT, and Financial institutions disclose servicing advances in their quarterly filings with theÂ Securities and Exchange Commission.
Hereâ€™s how it works: All advances are paid by the servicer to the MBS trust, for which the servicer books an account receivable.Â Most if not all of that AR is eventually paid back to the servicer, but without interest.
Servicers typically finance advance receivables in aada source.
The amount of financing received from banks or the capital markets (which the servicer pays interest on) is usually between 75% to 90% of the receivable.Â The servicer funds the remainder with raw equity, which is, of course, not free. Certain advances are not financeable in the current market such as P&I advances on Ginnie Mae and Fannie Mae loans.Â For these AR the servicer has to use its own capital for 100 percent of the advances.
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But, do I expect that based on reading what Iâ€™ve been writingâ€¦ Neil will change his view on the subject at hand?Â Noâ€¦. nothing could possibly accomplish that.Â Obama could show-up personally, and it wouldnâ€™t make any difference.
I mean, Bank of America has reported to the SEC in one of their many public filings, that the bank has just under $25 billion out in the form of servicer advances.Â But, watchâ€¦ Neil isnâ€™t likely to be moved by that admission either.
Last year, it seemed to me, was the year of the â€śinsurance company,â€ť on Living Lies, with Neil telling his followers that said insurance paid off their loans multiple times.
The problem with this idea is that itâ€™s not true either. I wrote about it in an effort to straighten out the misconceptions, and asked Impacâ€™s president Bill Ashmore, who has securitized $60 billion in mortgage-backed securities, to join me on a Mandelman Matters Podcast to explain the truth about the different types of mortgage insurance.
Did Neil stop saying that insurance paid off your loan three timesâ€¦ NO.Â He started saying it might be ten times paid.
And if youâ€™re thinking that this is a matter of opinionâ€¦ itâ€™s not.Â This issue is perhaps the most black and white, water-is-wet, the sky is blue, pedestrian point on the planet.Â Servicer advances have NOTHING to do with borrowers, and itâ€™s hard for me to believe that anyone thinks otherwise.
So, Itâ€™s time to take out the Garfield.Â
No, wait.Â Thatâ€™s not what I meant.Â The garbageâ€¦ I meant, take out the garbage.Â
Ooops, I think youâ€™d call that a Fraudian slip.
Do you have any idea how long Iâ€™ve been trying to ignore this sort of thingâ€¦ damn it, Neil.
Servicer advances having something to do with borrowers?Â Seriously?Â Do you really believe this theory of yours, because I have to say, I thought the â€śinsurance that paid off a loan threeâ€¦ or tenâ€¦ times,â€ť was as goofy as things could get, but apparently I was wrong.