State AGs Sell Short in LPS Settlement But Admissions May Be Helpful to Homeowners Facing Foreclosure

The Settlement announced today between State Attorneys General and Lender Processing Services (LPS) has some important implications for homeowners facing foreclosure and those who have been foreclosed upon over the past several years.

LPS is the company that is one of the most notorious players in the foreclosure crisis. Employees of their subsidiary, Docx were profiled in a 60 Minutes Segment admitting to signing other peoples names to documents and signing documents endorsing loans, assigning mortgages and swearing to facts under oath without authorization from the company on whose behalf they were signing.

Several LPS employees have also been indicted on criminal charges in Missouri and Nevada.

These forged documents were then used and continue to be used to foreclose on homeowners from Oregon to Ohio.

If LPS were taking homes away from citizens with guns instead of forged documents, the Chief Law Officers of 46 States would not have rested until the culprits were in jail. But apparently, since LPS was just taking those houses with admittedly forged documents under their contracts with the largest banks and mortgage servicers in the country a slap on the wrist was the outcome of their “investigation.

Ohio Attorney General Mike DeWine settled out on behalf of the entire state for an LPS contribution of $2,544,990 into the budget of the Ohio Attorney General’s Office. No money for homeowners. No damages for homes fraudulently taken. No Jail for anyone.

There is a bright side for homeowners facing foreclosure. LPS has admitted in the consent decree to be filed in 46 State that it did the following:

1. Admitted that LPS produced documents had defects.
2. That documents used in foreclosures had unauthorized signatures
3. That documents used to foreclose on homeowners were not signed by the person who the documents said sign them.
4. False assignments of mortgages were recorded with clerks and recorders throughout the United States.
5. Documents used in foreclosures had notarizations that were false.

These admissions can be used on behalf of homeowners facing foreclosure to form the basis of counterclaims against lenders or to challenge the right of lenders seeking foreclosure to use the courts to take people’s homes.

The AGs fortunately did not have the power to waive those claims on behalf of individual homeowners. This development makes it more important than ever for those facing foreclosure or who have been foreclosed on since 2008 to consult with legal counsel to determine whether there are claims that can be brought against LPS or the lenders they worked for or whether there are defenses that can be raised to the right of such lenders to foreclose.

For More Information See:

http://www.stopohioforeclosure.com

Failure of Banks and Fannie and Freddie to Write Down Principal is Against Their On Interest

A column in today’s LA Times  makes a compelling case for Fannie Mae and Freddie Mac to rethink their adamant opposition to principal forgiveness. Michael Hiltzak’s analysis also highlights the hypocrisy of the still mysterious Attorneys General settlement.

The dirty little secret is that $17-25 Billion of the AG’s Settlement that is reportedly going to be devoted to principal reduction will actually provide more that $17-25 billion in value to the banks and other lenders. This additional benefit to lenders results because reducing the principal of loans increases the likelihood that those loans will paid.  As a result, the Net Present Value of the loans will be increased.

So the bulk of the “heralded” settlement is actually not a cost but a net financial benefit to the scofflaws that the AGs were supposed to be punishing.

Principal forgiveness is actually a win-win proposition for lender and homeowner when a loan is significantly under water.

Hiltzak explains it:

“The reason should be obvious. The most important factor in a borrower’s likelihood of default is the loan’s negative equity. Put simply, if you think you’re so deeply underwater that you won’t have equity in your home by the time you’re ready to sell it, or ever, then default looks more rational the more your ability to pay comes under strain.

The closer you are to breaking even or going positive, the more you’ll fight to keep the house. Forbearance doesn’t get you any closer to that point (you still owe the original principal, one way or another), but forgiveness does.”

Principal forgiveness recaptures the self-interest of the borrower to the benefit of both borrower and lender.

Even the Federal Housing Finance Agency, the agency charged with overseeing Fannie Mae and Freddie Mac told Members of Congress, that principal forgiveness can increase the net present value of underperforming loans.

So, you ask, if its good for lenders and good for borrowers, why isn’t there an effort to rewrite all under water loans in America?

One answer to the question is accountants (no offense to my brother the CPA, well, ok, maybe a little offense intended)

Lenders including Fannie and Freddie are carrying these non-performing loans on their books as if every dime promised is going to be paid.  Principal reduction requires that the lenders immediately write down those loans that will effect share prices in the case of the banks and create political risk in the case of the now federally controlled Fannie and Freddie.

The second answer to the question is a little more nefarious, servicers, including all of the big banks that have entered the still undisclosed agreement with Attorneys General charge investors, including Fannie Mae and Freddie Mac significantly higher fees when loans are in default. The percentage of loan proceeds to be paid to servicers increases, plus mortgage loan servicers have become masterful at creating other ways to pay themselves by way of forced place insurance and inspection costs. In foreclosure, the servicers get paid first and if there is not enough from the foreclosure sale, the investor pays the bill.

My hope is that as congress, shareholders and the general public figure this out sooner rather than later.