OMG - Statute of Limitations on Foreclosure Action
Joy Wiltermuth, a bond reporter at IRF-Thomson Reuters, wrote an article on January 16, 2015 titled “Growing threat hangs over legacy mortgage bonds”. If you have not read it yet, then find it and read it before you go any further.
Today’s commentary addresses many of the issues raised in the article, with an emphasis on the loan-level data. The size of the resulting losses to Non-Agency RMBS from defaulted loans that potentially can be voided by the courts is not easy to estimate. Each state has a different statute of limitations, some straightforward and some convoluted. Determining when the clock on the statute actually starts, what can stop and/or reset the clock, and whether the lender chose to accelerate the loan all add to the complexity of the analysis. It is also unclear whether this threat affects non-judicial foreclosures. In our estimates we simply focus on judicial states and assume that the clock starts from the last next due date. Ultimately, the courts will decide the merits of each case and therefore this issue has the potential to drag on for a long time.
There is ongoing debate whether each periodic payment constitutes a separate obligation and the failure to make a periodic payment constitutes a separate breach, thereby extending out the expiration date each month. In the absence of acceleration, this logic would drastically reduce the number of loans that could be voided. In addition, deceleration can return the lending arrangement back to an installment contract and possibly allow for additional foreclosure actions. Whether any of this can help servicers and RMBS investors is up to the courts to decide. We believe that the statute of limitations is an affirmative action, and the homeowner can chose to use it in their defense during a foreclosure action. If the homeowner fails to raise this issue then the defense is waived.
Servicers deliver inexact data to trustees regarding foreclosure status and foreclosure start/end date, and absolutely no data on acceleration or forbearance status. As a result, the CoreLogic LoanPerformance data is a helpful but not definitive source to use. Despite these challenges, we present with caution, our estimate of the potential losses that may result from this issue ($8.2 billion with $7 billion from FL & NY). The data we present is troublesome, as it reveals many loans that appear to be rotting in trusts without any effective servicer intervention. The data also reveals that servicers may not even be aware that state-level statute of limitations on foreclosure action even exist. In some instances, the servicer stopped the foreclosure action immediately prior to or after the expiration date of the statute of limitations, setting the RMBS investor up for potentially a complete loss. In addition, barring immediate servicer action, another $2.1 billion of loans will potentially fall into this situation within the next year.
With the help of the online tools provided by the New York City Department of Finance Office of the City Registrar, we were able to conduct a very intensive and quite eye opening review of the Brooklyn loan mentioned in the Reuters article. Our investigation of this one loan led to other loans, other properties, other borrowers, and raised questions regarding servicer behavior. Federal and state laws have been enacted to protect homeowners from unscrupulous lender and servicer practices. Unfortunately, in the case of the Brooklyn property, the law provided a means for a property investor with a history of RMBS losses, to walk away from his obligation and allow additional unnecessary and unjustified losses to be borne by RMBS investors.
Attached is today’s commentary, with supporting documents, and our estimates (deal-level and servicer-level).
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