Yet another Reporting Error – Bank of America’s Imaginary Second Lien REOs
The Alleged Error: The statement below and the graph showing the increasing number of REOs outstanding for three of the CWL second lien deals just makes no sense. For a sample set of loans, we can prove with official recorded documents, that loans being flagged as REO, are in reality, charged off second liens. The losses have not been passed through to the trust and the loans are incorrectly remaining in the trust with a positive UPB. When this alleged error gets corrected, large losses will hit these three trusts (see page 3).
“Generally, the Master Servicer will charge off the entire closed-end second lien mortgage loan when the related mortgaged property is liquidated, unless the Master Servicer has determined that liquidation proceeds in respect of such mortgaged property, which have not been received by that date, may be received by the Master Servicer subsequently.”
Source: Prospectus Supplement, CWL 2006-S2 page S-37, CWL 2006-S3 page S-32, CWL 2006-S5 page S-35
The Details on the Alleged Error
There are currently 848 second lien REOs ($28.8 million UPB) reported by BNY Mellon to be in CWL 2006-S2, S3 and S5, that we strongly believe should have been charged off. These are large losses that the trust has not yet taken. The three deals are serviced by Bank of America, were not transferred to Nationstar, and were not included in the BNY Countrywide RMBS Settlement. It is interesting to see from the graph that this alleged error started in late 2013/early 2014, just around the time that loans were being transferred from BAC to Nationstar. We can find no evidence that these three deals ever went to Nationstar or anyone else.
We have located the official recorded mortgage- and deed-related documents on a few dozen loans in these three deals, and not one has yet to be a REO. We know we have the documents to the correct loan because in most cases we located an Assignment that conveys the mortgage unto the Bank of New York Mellon as trustee for the Certificateholders of that deal. That document combined with a mortgage note with matching terms gives us great confidence.
The existence of the ‘Satisfaction of Mortgage’ and a ‘Warranty Deed’ to a Grantee other than the trustee are the smoking guns. This is solid proof that the loan is not a REO. The ‘Satisfaction of Mortgage’ is a document generated and signed by the current mortgagee that acknowledges “full payment and satisfaction of said mortgage, and surrenders the same as canceled, and hereby directs the Clerk of the Circuit Court to cancel the same record.” The ‘Warranty Deed’ acknowledges the conveyance of the property from the Grantor to the Grantee. BNY Mellon can only acquire a property (become REO) only when a Certificate of Title is issued to the Bank of New York as trustee stating that the property was sold to them or when a Trustees Deed is issued where the grantee is the Bank of New York as trustee. If the trustee has sold the property to a third party, which we have discovered, then the loan is not a REO.
For one loan (see page 8), we discovered that the city’s official records show no evidence that any foreclosure action had occurred and in fact, that the property is still owned by the borrower. There were no Lis Pendens, Deeds, Titles, Foreclosure Judgements or Satisfactions filed after the recorded mortgage. Given the property is located in a judicial state, this one makes no sense.
We have included 6 examples with excerpts from the recorded documents starting on page 4.
Although it is impossible for us to investigate every REO, our initial review makes us believe that this is a huge reporting error. Investors need to contact BNY Mellon and ask them to review these loans. The contact information is located on the top left corner of the monthly remittance reports.
Unfortunately, this is not the first problem we discovered with BAC serviced loans where BNY Mellon is the trustee. In our February 8th Commentary, we discovered that the FC to REO transition rate dropped to practically 0% on most of the deals included in the BNY Countrywide settlement right after the payout of the allocable share. In this case, BNY Mellon was incorrectly flagging loans moving from FC to REO as moving into 90+. The problem does not appear to be fixed yet.
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