Since the financial crash, banks have been accused of wrongfully foreclosing on U.S. homeowners because they failed to create and maintain proper mortgage paperwork. Now, there are signs that chaotic document management is harming investors in mortgage bonds, too.
A review of loan documents, property records and the monthly reports made available to investors show that mortgage servicers are reporting that individual houses are still in foreclosure long after they have been sold to new buyers or the underlying mortgages have been paid off.
These delays enable banks and other mortgage servicers to continue to charge monthly fees to investors in these mortgage-backed securities, the banks' investor reports show. It means that investors are buying mortgage bonds that may have billions of dollars of undisclosed losses that will become apparent only at a later stage. Mortgage experts said it could also lead to a new round of litigation for banks just when some appeared to have been putting their mortgage problems behind them.
The review, conducted by foreclosure investigator Lisa Epstein, found hundreds of instances across the United States in which information about the status of individual home loans was incorrect. The information is sent from the mortgage servicer, which handles tasks such as collecting monthly payments and handling foreclosures, to the trustee of the mortgage bonds, which administers monthly reports and makes sure investors get paid.
In 2009, Epstein helped uncover the robo signing scandal, in which she discovered that banks had hired low-level workers to pose as executives, signing hundreds of legal affidavits a day without verifying a single word, as is required by law. The reporting lag issues she identified in mortgage bonds involved many of the same mortgage servicers who engaged in robo signing.
"This is all part and parcel of having servicers who are unable to keep the documentation straight," said Linda Allen, a banking professor at Baruch College, who specializes in mortgage servicing. She said Epstein's methodology was sound.
Mortgage experts estimate these reporting delays could mean that billions of dollars in losses may still be hidden in these bonds. Mortgage servicers may have also been charging late fees, property inspection fees, legal fees and other penalties against these loans long after they have been paid off, inflating the losses, they said.
"The losses are building up inside these deals, and this is going to happen all over the place," said William Frey, founder of Greenwich Financial Services, which specializes in securitization.
Frey, who has worked on behalf of investors looking to sue over losses, said his team analyzed about 500 mortgage-backed securities originated by every major bank and that he has yet to find a single bond where the accounting adds up as it should.
In one case, Reuters found that Bank of America Corp had been collecting a monthly servicing fee of $50.73 from investors on a loan that had been paid off nearly two years ago, investor reports show.
Bank of America filed a document at a local county office on July 22, 2011 showing that the $162,400 loan on a cream-colored duplex in Greenacres, Florida, owned by a drywall hanger named Roman Pino, had been satisfied and "cancelled." But investors in Pino's loan and more than 6,700 other similar mortgages that are bundled together in a subprime mortgage bond still have not been informed that the loan no longer exists, according to the last investor report in May.
Bank of America spokesman Lawrence Grayson said reporting lags are not typical, and can occur because a sale or mortgage insurance proceeds may not be finalized. Loans can sometimes be subject to litigation, which could explain the ongoing charging of fees, he said.
Pino's foreclosure was the subject of litigation that concluded on February 7. The investor report in May includes the status of that loan through April 30. The bank declined to comment on the specifics of Pino's loan. According to Fitch Ratings, the loan did not have mortgage insurance.
Bank of New York Mellon Corp, the trustee, said that in keeping with industry practice, it relies on the information provided by the mortgage servicer.
Some of these latent losses are beginning to surface. Earlier this month, for example, investors learned of $1 billion in losses on dozens of subprime bonds, containing more than 75,000 home loans that were created during the housing boom. Many of the losses were not reported for a year or more.
"For whatever reason, these losses were basically pending out there for a while, and the reporting mechanism finally caught up and hit the bonds in the trust," said Roger Ashworth, an analyst with mortgage advisory firm Amherst Securities.
The bonds' trustee, Wells Fargo & Co, said that it relied upon the servicer, Ocwen Financial Corp, for the reclassification.
Ocwen said it stands by its monthly reporting. It added that it has helped tens of thousands of struggling families save their homes from foreclosure and significantly lowered investor losses, benefiting investors in mortgage bonds.
Latent losses could play a role in some of the settlements that investors have already reached with banks over other mortgage misrepresentations.
For example, many of the mortgage bonds with reporting lags that Epstein identified are the same securities that are at issue in ongoing litigation between Bank of America and investors in those securities.
Bank of America settled with 22 large investors, including two of the biggest - Pacific Investment Management Co and Blackrock Inc - agreeing to pay $8.5 billion to end legal liability for more than one million Countrywide Financial mortgages whose borrower histories and credit quality were allegedly misrepresented by the bank.
Some other investors in the bonds, including American International Group Inc and Grand Rapids Police and Fire Retirement System, have objected to the settlement. They project the losses to be more than $100 billion.
An AIG spokesman said no one had reviewed the individual loans to analyze the merits of the settlement, which was originally over what the bank had told investors about the quality of the loans.
If opponents to the settlement prevail, the reporting lag issues could crop up in new litigation.
BlackRock and Bank of America declined to comment on the settlement. PIMCO did not respond to a request for comment.
Estimates of latent losses in mortgage bonds vary. In a report on Monday, Fitch Ratings said that it had talked to major servicers and more such losses were possible, though it was unable to quantify the amount.
In June last year, independent credit rating agency R&R Consulting analyzed $1.4 trillion worth of residential mortgage-backed securities that were not guaranteed by a government-sponsored entity like Fannie Mae.
It found an estimated $300 billion in total expected future losses, meaning borrowers who were either in foreclosure, bankruptcy or 90 days delinquent. But of those, the firm says there are $175 billion that investors haven't learned about.
"There is such a thing as gravity, and sooner or later you have to do something with these numbers," said R&R founder Ann Rutledge.