Servicer's Advance Payments When Borrower Stops

The following message and article brings up questions that I have been receiving with increasing frequency as homeowners, their forensic analysts and attorney dig further and further. They are following the money and coming up with the fact that servicers are advancing payments to investors when the borrower stops paying. In fact, they advance those payments to investors after the declaration of default and even after the foreclosure is complete. Where do they get the money from?

The answer is that they either get the money from their own pockets or funds they “borrow” from the investment banker that did the underwriting on the mortgage bonds or they are taking money paid on other performing loans and using it to make payments on loans that are not performing. Either way, the payment has been made and the account receivable of the real creditor is not in default. The only way to conclude that it doesn’t make any difference is if you look at all the players in the cloud of so-called “securitization of debt” as one single venture — a view that would raise all kinds of questions as to why and when you can ignore the corporate veil or the existence of a separate entity.

When this gets litigated, and I am sure it will, Judges will probably tend to the easier cloud view. But on appeal, it is likely that the appellate court will look at each transaction, the pleadings and the proof. They will likely conclude that with the account receivable of the alleged creditor being current, there should have been no declaration of default, acceleration, foreclosure or sale of the house. But they will say that the borrower is not off the hook. The Servicer has a separate claim for contribution or unjust enrichment. But such claims are obviously not secured by a pledge of the house as collateral because no such documentation exists.

Which brings me back to the falsification of securitization as cover for a PONZI scheme. If the bankers had played fair, they would have had the notes payable to the REMIC trusts and the mortgages naming the trusts as mortgagees or immediately record assignments of both. They could have disclosed the securitization at closing but they didn’t. If they did, the advances by servicers could have been covered by the documents producing the cloud effect that the banks want to see from the courts.
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From Dan Edstrom, senior mortgage analyst for Livinglies.—

I am not sure if you are aware of a recent article from Martin Andelman. His position on servicer advances of principal and interest is that it has nothing to do with the Borrower and these are just loans. Jim and I talked with him on the phone for a short period of time, but he wasn’t convinced that these payments should be applied to the Borrower (not that we can convince him or have to convince him). But I just read the following article and the light bulb went on again. Martin said the servicer advance is a loan and is to be repaid. Possible, although this isn’t contemplated (that I know of) in UCC 3-602. But now consider the following article that just came out. The advance pays senior tranches in full. By the time the servicer goes to pull the money out of the trust, a lower tranche loses that money (that was paid by other borrowers) and it gets diverted to the servicer for reimbursement. The losing tranche agreed to take these losses. The Borrower did not agree to make a payment to one creditor, give that creditor a discharge, and then take out a new loan with a different creditor and owe that creditor money (the creditor who agreed to lose money). When did I transfer the right to others to open and close credit accounts (or transactions) on my behalf (paying off debt to one party and acquiring debt from another party)?

Investors Warned on Nationstar, Ocwen RMBS Cash Remit Differences
Analysts are warning investors about the impact of different servicing strategies on the cash flow generated by mortgage servicing rights on securitized delinquent loans.

A Moody’s Investors Service analysis of the loss mitigation practices of Nationstar and Ocwen, two of the nation’s largest and fastest-growing servicers, revealed “particularly different advancing rates on delinquent loans,” enable Nationstar to pay more cash from its securitized subprime residential loans than Ocwen.

Findings matter to investors involved in current and future servicing transfers from portfolios acquired by Nationstar and Ocwen as well as to other residential mortgage-backed securities trusts eyeing MSR market deals.

“Ocwen’s recent acquisition of GMAC’s RMBS servicing portfolio is credit negative for that reason, although GMAC’s performing loans will continue to generate strong cash flow,” explained Jiwon Park, a Moody’s analyst who specializes in the MSR market.

Comparatively, Park wrote in a recent report, Nationstar’s scheduled acquisition of certain RMBS loan portfolios from Bank of America Corp. “is likely to have a minimal impact” on affected loans and their securities because “Nationstar has generally remitted” the same amount of cash on these assets as B of A.

The trend persists across the board with subprime RMBS vintages securitized between 2005 and 2010. Data show Nationstar implements higher advancing rates for delinquent loans and consistently pays more cash than Ocwen. Higher cash payments help keep the RMBS credit positive “because they pay down senior bonds with priority and more quickly,” the analyst wrote.

For example, during the first two months of the third quarter of this year, Nationstar’s monthly cash flow remittances from principal and interest collections, net proceeds from short sales and foreclosure liquidations, voluntary prepayments and delinquent loan advances was at 0.82% of the servicer’s outstanding RMBS balance, compared to 0.77% for Ocwen.

Park finds advancing rate differences between the two servicers are significant. During the same time period the amount of cash generated from distressed securities by source, Nationstar paid 0.07% of the balances from delinquent loan advances, compared to only 0.02% paid by Ocwen.

Loss mitigation strategies also influenced the amount of cash remittances leading to higher revenue from Nationstar’s REO property liquidations, while Ocwen is more successful in generating cash from loan modifications.

In the long term, however, even though Ocwen stops generating advances much faster than Nationstar, its much lower cash flow advances on delinquent loans is not expected to have a long-term effect on the relatively large GMAC portfolio, which includes a larger percentage of performing loans.
frequency. As homeowners, their forensic analysis, and lawyers dig further and further Follow the movement of money, they are finding that the so-called real creditor continues to get paid long after the borrower stops paying, and even long after the actual foreclosure. The motivation for this behavior in my opinion is to keep the investors happy, not suing the investment banker and still buying more mortgage bonds.

But the question is what is the effect of these payments? It has been postulated that it changes nothing. I don’t agree. Using generally accepted accounting principles, we find that the the creditor’s receivable account shows no default because they received payment from the Servicer. Since they never receive direct payment from the Borrower, they are satisfied — the amounts payable under the mortgage bond are fully satisfied. And the mortgage bond obligation is based on payments from borrowers plus payments from third party obligors but no where in the PSA or prospectus does it provide that the Servicer has an obligation to continue making payments when the borrower stops.

If the creditor’s account does not show a default then there should be no declaration of default, acceleration, foreclosure and/or eviction — which is why the Banks are doing a two step and moving the goal post around the field on who has the right to initiate a foreclosure. It is also covers up the fact that the Foreclosures are merely a way to conclude the fraudulent PONZI scheme that is mistakenly referred to as securitization.

So does that mean that the debt of the borrower has been extinguished? The answer is yes and no. Yes it satisfies the payment requirement to the creditor on the mortgage. But no, that doesn’t mean that the borrower is off the hook like magic. The Servicer has an action against the borrower for contribution or unjust enrichment. The difference is that the servicer’s claim is not secured with the house because THAT debt has been paid pursuant to the note (readers are reminded that I don’t believe either the note or mortgage are valid instruments in most cases).

When this matter is litigated as I am positive it will be, Judges will want to look at “securitization” of loans as a cloud, and that what goes on in the cloud, doesn’t matter. So my prediction is that at the trial level there will be mostly decisions against the borrower. On appeal, with the issues properly preserved and a good record for the appeals court to see, I think they will be required to look into the cloud and see that if they ignore the existence of separate entities without any pleading or proof as to why the corporate veils should be ignored, they will open the door to a boatload of trail and other moral hazards. Taking the transactions one payment at a time, the payments by the Servicer converts the obligation from payment on a secured note to a liability to the Servicer that is unsecured.

The other question is where do they get the money from if not the borrower making payments? The answer by pure logic is one of two ways — either from payments received from other borrowers or money they have or “borrow” from a very willing investment banker who doesn’t want another investor lawsuit and who wants to sell that investor more mortgage bonds.
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From Dan Edstrom, senior mortgage analyst for livinglies.—

I am not sure if you are aware of a recent article from Martin Andelman. His position on servicer advances of principal and interest is that it has nothing to do with the Borrower and these are just loans. Jim and I talked with him on the phone for a short period of time, but he wasn’t convinced that these payments should be applied to the Borrower (not that we can convince him or have to convince him). But I just read the following article and the light bulb went on again. Martin said the servicer advance is a loan and is to be repaid. Possible, although this isn’t contemplated (that I know of) in UCC 3-602. But now consider the following article that just came out. The advance pays senior tranches in full. By the time the servicer goes to pull the money out of the trust, a lower tranche loses that money (that was paid by other borrowers) and it gets diverted to the servicer for reimbursement. The losing tranche agreed to take these losses. The Borrower did not agree to make a payment to one creditor, give that creditor a discharge, and then take out a new loan with a different creditor and owe that creditor money (the creditor who agreed to lose money). When did I transfer the right to others to open and close credit accounts (or transactions) on my behalf (paying off debt to one party and acquiring debt from another party)?

Investors Warned on Nationstar, Ocwen RMBS Cash Remit Differences
Analysts are warning investors about the impact of different servicing strategies on the cash flow generated by mortgage servicing rights on securitized delinquent loans.

A Moody’s Investors Service analysis of the loss mitigation practices of Nationstar and Ocwen, two of the nation’s largest and fastest-growing servicers, revealed “particularly different advancing rates on delinquent loans,” enable Nationstar to pay more cash from its securitized subprime residential loans than Ocwen.

Findings matter to investors involved in current and future servicing transfers from portfolios acquired by Nationstar and Ocwen as well as to other residential mortgage-backed securities trusts eyeing MSR market deals.

“Ocwen’s recent acquisition of GMAC’s RMBS servicing portfolio is credit negative for that reason, although GMAC’s performing loans will continue to generate strong cash flow,” explained Jiwon Park, a Moody’s analyst who specializes in the MSR market.

Comparatively, Park wrote in a recent report, Nationstar’s scheduled acquisition of certain RMBS loan portfolios from Bank of America Corp. “is likely to have a minimal impact” on affected loans and their securities because “Nationstar has generally remitted” the same amount of cash on these assets as B of A.

The trend persists across the board with subprime RMBS vintages securitized between 2005 and 2010. Data show Nationstar implements higher advancing rates for delinquent loans and consistently pays more cash than Ocwen. Higher cash payments help keep the RMBS credit positive “because they pay down senior bonds with priority and more quickly,” the analyst wrote.

For example, during the first two months of the third quarter of this year, Nationstar’s monthly cash flow remittances from principal and interest collections, net proceeds from short sales and foreclosure liquidations, voluntary prepayments and delinquent loan advances was at 0.82% of the servicer’s outstanding RMBS balance, compared to 0.77% for Ocwen.

Park finds advancing rate differences between the two servicers are significant. During the same time period the amount of cash generated from distressed securities by source, Nationstar paid 0.07% of the balances from delinquent loan advances, compared to only 0.02% paid by Ocwen.

Loss mitigation strategies also influenced the amount of cash remittances leading to higher revenue from Nationstar’s REO property liquidations, while Ocwen is more successful in generating cash from loan modifications.

In the long term, however, even though Ocwen stops generating advances much faster than Nationstar, its much lower cash flow advances on delinquent loans is not expected to have a long-term effect on the relatively large GMAC portfolio, which includes a larger percentage of performing loans.

Tags: monthly payments, securitized loans, servicer, UCC
Posted in Corruption, evidence, expert witness, Modification, Pleading, securities fraud, Servicer |