Michael Olenick: How Servicers Lie to Mortgage Investors About Losses

By Michael Olenick, creator of FindtheFraud, a crowd sourced foreclosure document review system (still in alpha). You can follow him on Twitter at @michael_olenick or read his blog, Seeing Through Data

A post last week reviewed a botched foreclosure for a mortgage loan in Ace Securities Home Equity Loan Trust 2007-HE4 dismissed with prejudice, meaning that the foreclosure cannot be refilled; a total loss for investors. Next, we reviewed why the trust has not yet recorded the loss despite the six month old verdict.

As an experiment, I gave my six year-old daughter four quarters. She just learned how to add coins so this pleased her. Then I told her I would take some number of quarters back, and asked her how many I should take. Her first response was one – smart kid – then she changed her mind to two, because we’d each have two and that’s the most “fair.” Having mastered the notion of loss mitigation and fairness, and because it’s not nice to torture six year-old children with experiments in economics, I allowed her to keep all four.

When presented with a similar question – whether to take a partial loss via a short-sale or principal reduction, or whether to take a larger loss through foreclosure – the servicers of ACE2007-HE4 repeatedly opt for the larger losses. While the dismissal with prejudice for the Guerrero house is an unusual, the enormous write-off it comes with through failure to mitigate a breach – to keep overall damages as low as possible – is common. When we look more closely at the trust, we see the servicer again and again, either through self-dealing or laziness, taking actions that increase losses to investors. And this occurs even though the contract that created the securitization, a pooling and servicing agreement, requires the servicer to service the loans in the best interest of the investors.

Rest here…

~

4closureFraud.org