Can We Please Finally Separate Securitization from Robosigning?

The steady, thumping headache that just won’t seem to go away for the structured finance markets is the seemingly never-ending connection between mortgage servicing abuse and the securitization industry.

This week’s installment features the negotiations between Bank of America (as the owner of the former Countrywide Mortgage), The Bank of New York Mellon (as the bond trustee for holders of Countrywide mortgage-backed securities) and 49 State Attorneys General (less New York’s AG who was booted from the team).  To add some spice, a side-show story once again tries to tie in the electronic mortgage registration system (“MERS“) into the plot.

Article after article for more than 3 years running has tried to connect the failures of the mortgage servicing industry into some twisted plot hatched by Wall Street bankers.  When this nonsense will ever end is what we would like to know.

What we would like to do is to separate these two very different topics, hopefully forever, although we have no reason to believe that we can.

First let’s think for a minute why and how the mortgage servicing industry could have gotten so screwed up with the paperwork (servicing) of  residential mortgages.  Let’s think about the explosion in home ownership and the resulting financing of those properties over the past 10-15 years.  At every turn, new volumes records were being hit quarter after quarter by private mortgage issuers including banks of all size and color across the US, independent mortgage companies (like Countrywide), mortgage brokers (who could easily find banks and non-bank lenders eager to get into the US real estate market) and of course, the “big kahunas”, the Government lenders (GNMA, FNMA and FHLMC). 

The competition for new borrowers became fierce, with every new entrant to the market trying to get in on the action.  This forced lenders to offer increasingly more competitive “pricing” which put pressure on their earnings in their mortgage businesses.  This in turn forced lenders to look for more ways to “streamline” their operations which of course meant their mortgage servicing operations.  What should be very apparent but somehow gets lost in the zeal to create a conspiracy theory is that the folks that actually run the servicing operations at these lending institutions have very little to do with what happens to the mortgages after they are underwritten.  Most were just told to either service them or package them up for a buyer (we’ll come back to the second scenario in a minute).  All these servicers were interested in doing was trying to keep up with an increasingly smaller spread (earnings) in their business.  No doubt the decision made at some point, after things got tight, to introduce a strategy such as robosigning to their procedures was a bonehead decision but how in the world someone decided a few years back to connect this “mistake” to some grand strategy germinated on Wall Street just doesn’t make any sense. 

What did the banker who put the mortgage-backed bonds together have to do with decisions about how the mortgages were serviced after the deal was in the market, including the decision to foreclose and how to do it?  The investors, on the other hand, had every incentive to push the servicer to speed up the foreclosure process, in order to retain as much value in their portfolio as possible.  While we acknowledge that some of these same banks wore both the hat of the investment banker and the investor, they were typically one of many investors and we would suggest that it was pressure from the investor side , which includes all types of institutional investors, from hedge funds to public pension plans, that “birthed robosigning”.  In fact, it is much more likely that it was the “distressed investor community” which applied most of the pressure on servicers to foreclose quickly because as a “late arriving investor” their bet was on their ability to recover any margin above the steep discount price that they paid for the securities.

We can tell you with a very high degree of certainty that many mortgage-backed investment bankers have never stepped onto the floor of a mortgage servicing operation and most of those that have, never left the conference room.  No one said one day, “Hey let’s just forge some signatures on this mortgage file so we can get this deal done.  No one will ever know.”  Sorry, while it makes for good Hollywood, that simply did not happen.  The deals were already done before robosigning came into vogue.

Servicers made bad decisions about policies, not to further the securitization of their mortgages but to better profits in their operations.  In the case of robosigning they did so under pressure from their investors.  The theory that the investment banks were somehow able to apply pressure so that they too weren’t sued for losses because they so poorly underwrote these deals, again while simply fascinating, doesn’t hold up.  This was not some huge “pump and dump” operation with some zen master pulling all the levers.  There were simply too many moving parts to try to tie what the servicers were doing into what the original intentions of the investment bankers were and what they may have become, once it all hit the fan. 

This week’s renewed attempts to drag MERS into this grand conspiracy just doesn’t wash either.  If today’s average mortgage industry neophyte with a blog were to actually study the development of the US mortgage industry over the past 20 years, they would have known that the origins of MERS lies in an attempt to create an industry standard for the “immobilization” of the paperwork behind US residential mortgages, similar to what DTCC has created for the securities markets (bonds, equities, etc).  By establishing an industry accepted “repository” for mortgages, the industry was hoping to create a more efficient method for banks to buy and sell mortgages.  Why do banks want to sell mortgages?  The easiest answer is that they want to be able to diversify their portfolio and to mange that process on an ongoing, if not daily, basis.  Buyers and sellers of residential mortgages may or may not decide to securitize their portfolios.  Many do, others do not and still others hold some and securitize others.  In our neck of the woods, we call that a market!  That’s why MERS was formed and once again, not under some grand scheme cooked up on Wall Street to create bogus MBS structures.

These “facts” do not absolve the issuer like Countrywide and the investment banks, law firms, accounting firms and rating agencies (nor the investors that bought the paper) from having constructed, reviewed, opined, sold or bought so many bad mortgage-backed bonds or, subsequently, so many bad CDO’s from bad underlying mortgages.  It is, without a doubt, very clear that often several participants in too many transactions either turned a blind eye or worse, knowingly tried to turn “hamburger into steak” by packaging loans with bad underwriting and poor due diligence.   However, we’re not going to try to blame the bankers for what the servicers were doing or did and we’re not going to blame the servicers for the parties that were involved in the creation, selling and buying of these poorly underwritten securities.

These are, quite simply, two unrelated stories and we wish that the folks would start to recognize that “fact”.

About markferraris
Managing Principal Orchard Street Partners LLC

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