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Robo Signers No Matter How Thin You Slice It You Can still Slice it Thinner

Posted on Thursday, October 7, 2010

Foreclosure Halt May Shift Bondholder Pain - Foreclosure halt may shift pain
The recent suspension of foreclosures by three of the largest mortgage-servicing companies in the
U.S. is expected to result in more pain for some investors, and less pain for others, in the already
battered $2.8 trillion market for residential mortgage-backed securities.
The sector has seen massive losses and credit downgrades since mortgage defaults began to rise
in late 2007. Moody's Investors Services says losses on subprime RMBS issued between 2005
and 2007 will be in the hundreds of billions of dollars.
In the past two weeks, three major loan-servicing companies-Bank of America Corp., J.P.
Morgan Chase & Co. 's Chase Home Mortgage unit and Ally Financial Inc. 's GMAC Home
Mortgage Inc.,-put foreclosure sales and evictions on hold in the 23 U.S. states where
foreclosures are handled by the courts. The moves were in response to revelations about
widespread problems in the way these companies handled foreclosures, including the
mishandling of crucial court documents.
The companies say the problems are technical and they are reviewing their processes, which has
the effect of delaying and prolonging the foreclosure timeline and putting hundreds of thousands
foreclosures in limbo.
The latest revelations are yet another source of frustration for bond investors. "It's symptomatic
of sloppy servicing and a lack of adherence to contract and property law, which we've seen
examples of over and over again in the last two years," says Scott Simon, a managing director at
Pacific Investment Management Co. Other examples include the servicers' failure to put back
loans that violate representations and warranties made by the sellers of those loans, he says.
It's not clear how significant the costs will be for investors and who ultimately will bear the
burden. One big question is: How long will the foreclosure delays last? Another is: What further
costs will be incurred in the meantime, as mortgage-servicing companies pay lawyers to refile
foreclosures, maintain vacant houses and pay taxes and interest on the properties?
The first question is important because the structure of residential mortgage-backed securities
determines who gets paid first. When a house that has been packaged into a mortgage bond is 1424052748703843804575534 303696918076.html 10/7/2010
Foreclosure Halt May Shift Bondholder Pain - WSlcom#printMode Page 2 of2
liquidated at a foreclosure sale-the very end of the foreclosure process-the holders of the
junior, or riskiest parts of the bond, usually get wiped out. But if a foreclosure is delayed, the
servicer must keep making payments to all investors, including the junior debt holders, and even
though the home loan itself is producing no revenue stream
But the latest turn of events sets up a series of unusual circumstances where junior
bondholders-typically at the bottom of the credit structure- could actually end up better off
than they expected. Senior bondholders-typically at the top-could end up worse off than
"This is sort of an extraordinary situation," said Debashish Chatterjee, a vice president for
Moody's Investors Service who covers structured finance. By delaying foreclosures, "it means the
subordinate bondholders don't get written down for a much longer period of time, and they keep
getting payments."
"Ultimately, delays in the foreclosure process will shift cash flow that otherwise should have gone
to the senior bondholders and send it to the junior bondholders," said Tom Deutsch, deputy
executive director for the American Securitization Forum, an industry group.
But that means less money available to make final payments to the senior debt holders, who were
taking on less risk and received lower yields on their investment.
Not surprisingly, senior debt holders want banks to foreclose faster to reduce expenses.
"There are going to be significant costs in going through the process," of revalidating the
foreclosure documents, says Andrew Sandler, an attorney in Washington who represents
mortgage companies. He said it's not clear how the costs will be allocated.
Servicing companies hope the reviews will be quick At GMAC Financial Services, "the vast
majority of these affidavits will be resolved in the coming weeks and before the end of the year," a
spokeswoman for the company said. A spokesman for J.P. Morgan Chase said the company's
review process is expected to take "a few weeks."
But the problems could be magnified if the reviews uncover a lack of proper documentation or
other substantive problems rather than simple procedural errors. The furor over servicer
practices is also likely to trigger additional legal challenges from borrowers facing foreclosure and
more judicial scrutiny.

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