How much money is flowing to mortgage bonds?

By Felix Salmon
October 15, 2010
not:

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If bankers are good at anything, surely it’s counting money. If there’s a cashflow, anywhere, bankers will surely be able to quantify it and report it. Or, not:

Mortgage-bond buyers are losing faith in the accuracy of remittance reports, and some say the apprehension could soon factor into their investment strategies.

Remittance reports, distributed monthly by securitization trustees, are supposed to provide routine snapshots of the cashflow-collection and distribution activities of servicers. However, investors say there has been a rash of recent instances in which the reported data differed considerably from what actually happened.

Loan servicers, it seems, are so spectacularly incompetent that they can’t even report to bondholders how much money they’re being paid. Especially when a loan has been modified, the servicers don’t seem to be able to report the new cashflows accurately.

Not that this is a bad time to reduce investors’ faith in the transparency and reliability of mortgage-backed securities, or anything.

7 comments

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Can we please stop assuming incompetence and start at least considering the possibility of fraud?

Posted by MattJ | Report as abusive

Its probably not intentional fraud at the lower levels where the data and foreclosure documents are produced. That is likely to be incompetence and ignorance by over-worked, under-prepared people. Unfortunately, a number of them may be fall people for perjury charges.

The real frauds are probably at the higher levels who will use the standard “hands off manager” defence where they profess ignorance and incompetence when questioned, but still expect 8-digit salaries, bonuses and golden parachutes.

Posted by ErnieD | Report as abusive

It’s not fraud, it’s ivory-tower hubris. High-level management slashes office budgets, demands more work with less staff. Overworked and undertrained staff rushes to keep up with the avalanche of paperwork coming their way. Mistakes happen, especially in complex situations, and some changes get forgotten.

High-level management gets big bonuses for cutting costs and saving money.

Posted by TFF | Report as abusive

The servicers profit from defaults. They profit from Hamp because they get to keep the money that was paid until they kick the homeowner out, get Hamp money for the renegotiation, they get late fees and get a percentage of the difference of the losses and perhaps other hidden fees?

Being there was probably a lot of book ‘enhanced book keeping’ there as well, and being there is a culture of corruption, perhaps they can’t reveal the (cooked) books to the banks until they are also ready for regulators to see the final product, being they are already falsifying documents?

I like what this guy has to say… this isn’t Jummy Stewart’s banking anymore. But isn’t it time, it was closer to that model?

http://rortybomb.wordpress.com/2010/10/1 1/foreclosure-fraud-for-dummies-3-why-ar e-servicers-so-bad-at-their-job/

Posted by hsvkitty | Report as abusive

hsvkitty, sorry but Mr RortyBomb is talking out his backside. Servicers have zero incentive to get people to foreclosure. This should be obvious from the clear and complete lack of investment in that side of the business. To get these fees apparently that are incentivising them they need to get the guy kicked out of his home, need to get the property sold and skim their take off the top. When it was a booming market this is not an issue, because you sell quickly and get loan + fees + some more. When the loan is underwater, then you suddenly have to justify those fees. The servicers are highly highly motivated to keep the guy paying and paying on time.

There are a series of articles written by Tanta over at calculated risk which remain the golden standard for the topic. Read someone who has a clue.

I am with TFF, the servicers were incentivised to cut corners BECAUSE they don’t make money off defaults. It is no more fraud than it was went tens of thousands of stimulus cheques were sent to dead people. The guy who kicked this off at GMAC was apparently try to do a foreclosure every 1.5 mins.

Posted by Danny_Black | Report as abusive

This is why the RMBS market needs to imitate the CMBS market, and have special servicers for properties in distress. They get paid more as a percentage of assets, and they do the workouts. That’s their job.

Posted by DavidMerkel | Report as abusive

“This is why the RMBS market needs to imitate the CMBS market, and have special servicers for properties in distress”

One of the things that surprised me most about the US subprime market back in 2007 was learning that special servicers weren’t commonly used. In the UK, it was standard practice at all but a handful of sponsors.

Posted by GingerYellow | Report as abusive