We figured it out! Why the FC to REO transition rates dropped to practically 0% on most of the deal
It was obvious that something changed right after the allocable share of the $8.5 billion in settlement cash was distributed to bondholders. The normal movement of loans from pre-foreclosure to foreclosure (FC to REO) practically dropped to 0% on most of the deals included in the settlement soon after the June 2016 distribution. We started to ask around and no one seemed to know why. We re-read the Settlement Agreement and that didn’t seem to have the answer. We asked people close to the settlement, someone at one of the sub-servicers, and folks that may be involved in what we thought could be causing it, and still no answer. Either these people knew and they wouldn’t tell us or they honestly didn’t know. We did hear indirectly from one of the sub-servicers who stated that nothing changed on their end and they continue to foreclose as usual. I was tempted to go on Twitter as that seems to be what everyone does these days to get issues resolved but instead Dan and I did what we do best. We stayed up late through the night and dug through the loan level and property level data to figure it out. After a few hours, we found the evidence that suggested what the problem seems to be.
We discovered we were asking the wrong question. The question was not “why did the servicers stop foreclosing on loans?” but rather, “why did the servicer (BAC) start reporting the wrong data to the trustee?”. We don’t know what changed after the payout of the settlement cash that made bad data get reported to BNY Mellon. Maybe someone quit or as some suggested. Is BAC moving the servicing? No clue.
Our Conclusion (or educated guess based on evidence)
The servicers and sub-servicers are foreclosing without any change in procedure. The public records data provided by the county recorder’s office clearly shows the trustee has been acquiring properties through the Trustee’s Deed upon Sale. However, it appears that the servicer, Bank of America, began to incorrectly report properties acquired by the trustee as moving back into 90+ day delinquent. Instead of the delinquent status changing from FC to REO it was reported as going from FC to 90+ days delinquent. We allege the high risk sub-servicers were indeed foreclosing but the servicer was reporting it incorrectly to the trustee. Thus, the remittance data provided by BNY Mellon is wrong, the remittance reports are wrong, and therefore the data provided by LoanPerformance is wrong. It is very tedious to locate each property and match it up to a loan, but since July 2016, there are 4,000+ loans that have moved from FC to 90+ in the 500+ deals involved. We suspect some small-to-medium subset of those are new REOs. We believe this is the issue but we cannot quantify how many loans are affected.
However it is not wrong across all 530 deals included in the BNY Countrywide RMBS settlement. The problem generally does NOT appear to exists when:
SPS is the servicer (i.e. CWALT 2005-45)
when BAC is the servicer but the deal is not subject to high risk loan subservicing (i.e. CWL 2004-2)
the individual loan is not being sub-serviced but others in the deal are
In the attached spreadsheet, we highlight in RED those deals that we believe are not affected. In most of these deals highlighted, it is evident from the transition rates post June 2016. Below is an excerpt from the spreadsheet for CWALT 2005-45, serviced by 100% by SPS versus CWALT 2005-51, serviced by BAC with SPS as the high risk sub-servicer. As the data shows, CWALT 2005-51 deal has all 0% transition rates post June 2016 while CWALT 2005-45 has no change pre June 2016 versus post June 2016.
As we always do, we will now show you the evidence. This is neither fake news nor alternative facts but real data provided by the many generous county recorders offices that are kind enough to make their records easily accessible online and free of charge. Some counties have systems with great search capabilities.
We are definitely on to something here. The actual problem may be explained differently by the trustee but the bottom line is that these deals are underreporting the amount of REOs. Facts are facts.
If you own bonds in any of these 500+ deals, call or email BNY Mellon Corporate. All the remittances and all the data since June 2016 need to be restated.
Contact us at 203-276-0672 to become a client and access all reports and attachments.
