The only real failure in life is not to be true to the best one knows.
The 'good' reason why banks lobby so hard against the consumer authority to be founded and Bernanke thinks not needed since his FED is already protecting consumers (Shall we burst in tears or laughter - hard to say) is they will have a harder time stealing money from their 'customers'It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.
JP Morgan with all others is busy using the new rules to establish new ways to steal money from their customers accounts - which they dare to call fee's but that mobsters do as well.
Chase serves itself first in mortgage modifications; MBS bond holders up in ARMs
By Mike Gregory
Published: July 27 2009 22:33 | Last updated: July 27 2009 22:33
This article is provided to FT.com readers by Debtwire—the most informed news service available for financial professionals in fixed income markets across the world. www.debtwire.com
JPMorgan Chase, one of the first mega banks to champion the national home loan modification effort, has struck a sour chord with some investors over the risk of moral hazard posed by certain loan modifications.
Chase Mortgage, as servicer of several Washington Mutual option ARM securitizations it inherited last year in acquiring WAMU, has in several cases modified borrower loan payments to a rate that essentially equals its unusually high servicing fee, according to an analysis by Debtwire ABS. Simultaneously, Chase is cutting off the cash flow to the trust that owns the mortgage. In some cases, Chase is collecting more than half of a borrower’s monthly payment as its fee.
When asked about the loan modifications, a Chase spokesperson said, ”Given the volumes in the current modification environment, situations are arising that require servicers to review and address modification-related transactional issues. Chase is currently reviewing these transactions.”
Typically a loan servicer – the entity that collects monthly payments and interfaces with borrowers on behalf of mortgage owners and/or MBS lenders – charges between 0.25% and 0.50% annually. So if a borrower’s interest rate is 7.25% per year on a USD 100,000 loan, the servicer may be receiving USD 250 per year in fees (assuming a 25 basis point fee and no amortization), with the remaining USD 7,000 of annual interest going to the holder of the mortgage note.
But for the loans in question, servicing fees range as high as 2%-3%. In some cases, Chase, or Washington Mutual previously, modified interest rates on the loans down to 3%, while keeping the servicing fee flat. This essentially strips cash flow from the mortgage note holders and diverts it to the servicer, a tactic that doesn’t sit well with owners of the impacted bonds.
Investor complaints break down into two categories. First, note holders argue that the loans with unusually high servicing fees incentivize Chase to keep borrowers current as long as possible, even if that borrower has no real shot at avoiding foreclosure.
Second, some investors allege that Chase is violating its fiduciary duty as servicer to the trust by taking actions that seem to be in its own financial interest. Those actions may violate the pooling and servicing agreements (PSAs) of the impacted securitizations, they said.
A call to ARMs
Chase’s profit in servicing bonds backed by option adjustable rate mortgages (ARM) compared to other RMBS acquired from WAMU is striking. In June, Chase Mortgage collected nearly USD 30m in fees from servicing just 34 deals (45,777 loans) that had average servicing fees north of 1%, according to loan files reviewed by Debtwire. The other 168 WAMU deals (with approximately 142,175 loans) paid Chase about USD 23m.
In 11 WAMU 2007 option ARM deals sampled, about 412 loans of the roughly 21,000 existing loans are either marked as fixed-rate (suggesting they were modified) or reported as modified, the loan data shows. Of those 412 loans, 383 have servicing fees above 0.38%, with the average being 1.84%.
“These are the highest servicing fees I’ve ever seen in any mortgage securitizations,” said one portfolio manager, who requested anonymity because of relationships with JPMorgan.
For example, a loan in one option ARM deal, WMALT 2007-OA2, was apparently modified to a 3% fixed rate in August 2008, with the investors’ interest lowered to zero and the servicing fee maintained at 3%. The prior month’s interest rate was 7.5%, and the loan was 11 months delinquent.
After the modification, the borrower’s new monthly payment was USD 2365, with USD 1612 going to the servicer and no interest being passed into the trust. The borrower was delinquent again by December, made another payment in January, has been delinquent ever since and the property is currently in foreclosure.
In another instance, a loan in WMALT 2007-OA4 had its interest rate lowered to a fixed rate of 3% in January 2009 from a floating equivalent of 6.125% the previous month. Nevertheless, Chase maintained the 2.75% annual servicing fee, lowering the pass through component of the loan to 0.25%.
In other words, the servicer collected USD 1,175.75 of the borrower’s USD 1,867.44 monthly payment. Of the USD 1,282.64 in monthly interest, just USD 106.89 is passing through the interest waterfall.
When compared to the USD 1175.75 monthly collection on this loan, the one-time USD 1,000 incentive to modify via the government’s Home Affordable Modification Program (HAMP) seems insignificant.
“An investor would definitely have a moral hazard argument, with the incentive for the servicer to keep the borrower current so strong,” the portfolio manager said. “[Investors] should be able to ask the question, ‘Are you modifying this loan truly for the benefit of the borrower?’ If [the servicers] wanted to make it an affordable loan, they could start by bringing their servicing fee to industry standard.”
To be clear, as Washington Mutual deals, the servicing fee arrangement were put into place long before Chase took over the operation. At the time, interest rates were significantly higher, with the moving Treasury average above 5% when WMALT 2007-OA4 priced in 2007.
If the interest rate margin were an additional 3%, the borrower might have had an average rate of around 8%, which would have made the abnormally high servicing fee stand out less. Nevertheless, high fees would have been a flag at time of issue to anyone paying attention, as they are clearly disclosed in the PSAs and prospectuses, said three investors interviewed for this article.
Generally the PSAs for the Washington Mutual option ARM deals state that the servicing fee is determined as the greater of 37.5bps and the difference between the interest rate margin and a fixed rate that increases relative to the length of time a prepayment penalty is in place.
Theoretically when a loan is modified to a fixed rate, there would no longer be a rate margin, so the servicing fee should be reduced to 37.5bps upon any arm-to-fixed modification, two of the investors said. This hasn’t been the case in several of the modifications.
“You have Barney Frank and the government raising all this noise about hedge funds and investors, and you have Chase … taking half the borrowers’ interest payment each month,” one of the investors said.