By Michelle Conlin
June 21 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
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
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
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 Feb. 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
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
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