Related topics: stocks, financial services, foreclosure, mortgage, Jim Jubak
Add another word to English as spoken on Wall Street: robo-signers.
These are the folks at banks and mortgage service companies who signed hundreds of foreclosure documents a day. Frequently, they didn't read them at all. Even more frequently, they didn't bother to check that the financial information in the foreclosure documents was accurate or that the financial company bringing the foreclosure could even prove that it actually owned the mortgage in question and had the legal right to foreclose.
But the robo-signers signed away, putting their signatures on lines that said they had reviewed the documents for accuracy.
The result is a virtual national moratorium on mortgage foreclosures and an investigation by every state attorney general -- yep, all 50 of them -- into the mortgage servicing industry.
According to FBR Capital Markets, losses for banks and other mortgage servicing companies from the moratorium could run from $6 billion to $10 billion and stretch out for at least four years.
Jim Jubak
Ah, if only that were the biggest bill hanging over the U.S. banking industry. But there's also this problem called put-backs, which could cost the industry a lot more than that $6 billion to $10 billion. No one knows how much more or who would get stuck with the costs. And that's a huge issue for investors, because we all know how much Wall Street likes uncertainty.
We do know that, as of the end of the third quarter, JPMorgan Chase (JPM, news) had put $3 billion aside against potential losses from put-backs. (In the third quarter, the bank bought back $1.5 billion in loans from investors.) And that's just one bank.
So, just what is a put-back?
OK, I know you're on the edge of your seats and can't wait to get into the arcane details of mortgages and mortgage-backed securities. So who am I to deny you?
Put-backs have a certain similarity to the foreclosure problems that you've read so much about.
In a foreclosure, the bank or other mortgage service company is supposed to do what I'd call after-the-fact due diligence. Workers at the company and the officer who signs the paper are supposed to check to make sure that the homeowner is really behind in his or her payments (mistakes do happen), that all the required legal notices have been sent out at the required deadlines, that any required attempts to work out the debt have been completed and that, most importantly, the company bringing the foreclosure actually owns the property in question.
The robo-signers at the heart of the mortgage moratorium and investigation signed without doing this critical due diligence. In some cases, they signed documents that didn't demonstrate a clear claim on the property in question.
(A mortgage service company, in case you're asking, is exactly what it sounds like: a company that services the mortgage by collecting payments, sending out notices of delinquency and foreclosure, and keeps the books on who's up to date and who's not. These mortgage services can be performed by the bank that issued the mortgage, but frequently they're farmed out to companies that specialize in these back-office functions but that do not lend money themselves.)
