To understand the title of this Post, one really needs to both understand Libor; not just what the acronym means, but the recent scandals involved. First, though, I want to talk a bit about the genesis of the Post, the series it will generate and the rationale thereof. As many are aware, there is somewhat of a feeding frenzy underway which pertains to the media. I think all parties involved have an inner gut feeling that something is afoul. That feeling, though, is where the sheer volume and scope of something begins to boggle the mind! Time and again, between several media outlets, I have fielded multiple follow up questions. Odd, you know, as really all I am is a Property Preservationist. Strange bedfellows which this Industry creates when one reflects back.
The most important item to understand when detangling this macabre nightmare called Real Estate Owned (REO) is to understand their are two distinct types: Bank REO (and really this may be Other REO or OREO) and United States Department of …Housing and Urban Development REO (HUD REO). The Bank REO is generally called Pre Conveyance Property (PRE CP) and the HUD REO is generally called Post Conveyance Property (POST CP). (Foreclosurepedia COO D. Paul Williams in his statement to NPPG Subcommittee, 2012)
REO stands for real estate owned property. When a homeowner defaults on mortgage payments, the mortgage lender tries to sell the property at foreclosure auction and then takes possession of the home if it does not sell at auction. Homes with FHA-backed loans are slightly different. An FHA-insured mortgage, such as an FHA 203(k) loan, has the federal government as a guarantor. If a homeowner with an FHA mortgage does not make mortgage payments, the FHA will pay off the mortgage. The mortgage lender will then transfer the property to another office of the federal government, the Department of Housing and Urban Development. After the home is transferred to HUD, the HUD website will advertise sale of the property as an REO. (Gilan Gertz, Realtor.com)
Getting from Bank REO to HUD REO is a magician’s trick, bar none! Herein lies the first and probably largest shell game in the Industry. First and foremost, there is a presumption by both Bank Regulators and Government Officials that everyone is going to play by the rules. One of the rules is that it is a Conflict of Interest for anyone to participate upon both pre and post conveyance. The reason for this is that the temptation to not enforce a Re Conveyance of Property (RECP).
Take for example the current incestuous relationship wherein National A provides work to National B by and through its PRECP Inventory. National B then, in turn provides work to National A by and through its POSTCP. National A has both a financial and vested interest in National B never Re Conveying Property! In an nutshell, what this means is that National A is the steady Bank REO stream of income which is far more lucrative than HUD REO. So, when (and it happens all the time) when National A sends a property to National B chock full of debris, tall grass, broken windows, etc. not only does National B have to eat the costs, but HUD, the US Government and ultimately the taxpayer does as well.
You ask why National B would not RCP the property to National A? Well, when you are staring down the barrel of a portfolio valued in the tens of millions of dollars, you are going to keep your mouth shut; National B will violate federal law and not even blink an eye! Ultimately, this disservice impacts the Contractor because many of the HUD REO Work Orders force them to absorb up to 5 Cubic Yards of Debris, when by definition there should be none. Additionally, the offset is rebilled anyway by and through disbursal and incremental fund layouts.
Libor. What is Libor and why does it have bearing upon the Industry? First, this is a proverbial analogy. The definition of Libor is best taken from Wikipedia:
Libor is defined as:
The rate at which an individual Contributor Panel bank could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable market size, just prior to 11.00 London time.
This definition is amplified as follows:
- The rate which each bank submits must be formed from that bank’s perception of its cost of funds in the interbank market.
- Contributions must represent rates formed in London and not elsewhere.
- Contributions must be for the currency concerned, not the cost of producing one currency by borrowing in another currency and accessing the required currency via the foreign exchange markets.
- The rates must be submitted by members of staff at a bank with primary responsibility for management of a bank’s cash, rather than a bank’s derivative book.
- The definition of “funds” is: unsecured interbank cash or cash raised through primary issuance of interbank Certificates of Deposit.
The British Bankers’ Association publishes a basic guide to the BBA Libor which contains a great deal of detail as to its history and its current calculation.
Now, the scandal: Early estimates are that the rate manipulation scandal cost U.S. states, counties, and local governments at least $6 billion in fraudulent interest payments, above $4 billion that state and local governments have already had to spend to unwind their positions exposed to rate manipulation. An increasingly smaller set of banks are participating in setting the LIBOR, calling into question its future as a benchmark standard, but without any viable alternative to replace it.
How does this apply to the Industry? Well, there are really only a handful of Whales calling the shots today. With absolutely no regulation nor oversight whatsoever on the Bank REO side, the Industry is wide open to price fixing with a monopolistic stranglehold upon Nationals whom perform HUD REO work. Make absolutely no mistake whatsoever, the HUD REO Vendor of today is, at all times, held captive by the National whom controls the Bank REO side. Additionally, as HUD categorically refuses to investigate the situation, or when HUD Office of the Inspector General (HUD OIG) does step in it is rendered impotent by the very Vendors it attempts to investigate! In a September, 2012 HUD OIG Report Innotion was called on the carpet for,
“…material deficienc[ies] … identified in a previous asset manager or field service manager inspection and not fixed as determined through a review of HUD’s P260 documentation.” In fact, HUD OIG went further and stated, “…Innotion’s subcontracted inspector appeared to have selectively uploaded pictures into HUD’s P260 system that did not show the landscape issues.” It additionally noted that, “…our review of 96 REO homes identified 38 (39.6 percent) with material deficiencies.”
How does this equate and remember we are simply on the HUD REO side in terms of projected losses by the US Government and ultimately the taxpayer? Innotion was paid “…$11,210 in monthly service costs for homes… .” Extrapolated, HUD OIG projected an overall loss of “…$1 Million dollars for inadequate services over the next year.”
Two things happened which substantiate my claim that HUD OIG, while serving a laudable cause, is quite ineffective if not outright commandeered. First, Al Espinoza of Innotion attached his response to the HUD OIG Report and did everything except even acknowledge that a single instance reported could possibly be the fault of Innotion other than his final paragraph stating that Innotion complied, “…most of the time… .” Second, Innotion was being $295 per month per property for the Routine Services (yeah Contractors take a real good look at that price and the NEXT ONE) prior to 31 May, 2012. After 31 May 2012, Innotion was paid $303.85! Now, I cannot comment as to the raise; however, the originating HUD OIG Report occurred from 01 July, 2011, through 31 December, 2011, and “…expanded when necessary… .”
So, in much the same way that the Libor was manipulated to bring profit on behalf of its benefactors and no penalties ensued upon the responsible parties, so it would appear, in my opinion, that there is a marked difference between law and justice prevalent on the HUD REO side. To be very clear here, I am not intimating, even tacitly, that Innotion was, is or has been involved in any Libor fixing. Nor am I implying that they are guilty of any crime. What I am giving my opinion upon, with respect to the HUD REO side of the Industry is this:
When a thorough and detailed investigation occurs; an honest excoriation, the links between HUD REO Providers and Bank REO Providers will be a blurred line. Do not think for a moment that I have not reached out and spoken to Sources whom will corroborate my hypothesis. As Rome was proverbially burning down around the holders of the HUD M&M III, Companies began to toss employees away like lint gathered in the Cloakroom. Lint has a funny way of appearing at the most inopportune moments. Sources very close to Rome intimate that 2012-LA-1010 is, at minimum, amateur hour. We will delve into that in upcoming Posts during this Series.
Finally, and simply to show that this is not simply isolated situations with specificity to quality of work, the aforementioned HUD OIG Report discussed the fact that, “[Innotion] performed at least one late inspection in 10 of 20 (50 percent) home files reviewed.” Additionally, when HUD OIG began to audit administrative mark up costs the results were anything if not startling. Administrative mark up costs are a common tool which I will get into on the Bank REO portion of this Series. While not in and of themselves violating the letter of the law, they certainly go against the grain of the spirit of the law. In fact, in HUD OIG Report 2013-LA-0801 we discover that,
We were able to identify 158 inspections in our sample of 183. Of these 158 inspections, 157 inspections included mark ups for administrative costs. (Emphasis added)
Generally known as Passthrough Costs, 2013-LA-0801 dealt primarily with termite inspections. The report stated that additional field service manager’s may as well be doing similar activities.
Therein lies my lynchpin: While I have profiled Innotion in this Article, make no mistake all providers on the HUD REO side are going to get their Andy Wharhol’s 15 minutes of fame; 15 minutes for some and days for others. The Geithner Doctrine appears to be alive and well; behind the scenes of the manicured lawns of Bank and HUD REO Providers there is an attitude of being Untouchable. This is a most pervasive and stench ridden attitude; an attitude wherein unnamed (as yet) Providers have executed a calculated assault upon the very foundations of the Industry.
The “Geithner doctrine” made the preservation of the largest banks, no matter the consequences, a top priority of the US government. Aside from moral hazard, it has also meant the perversion of the US criminal justice system. The US faces a two-tiered system of justice that, if left unchecked by the incoming Treasury and regulatory teams, all but assures more excessive risk-taking, more crime and more crises.
To close this first in a Series on the Industry, I want to point out that none of this is new or unknown. Dating all the way back to the HMBI accusations and the HUD M&M II (which we are going to delve VERY DEEPLY INTO in the future and this is a message to Our East Coast Assets), HUD knew what was going on. In fact HUD Secretary Alphonso Jackson, who resigned under a criminal probe, was quite possibly knee deep into the mess. As he served under President George W. Bush and today we are under President Barack H. Obama we see that this transcends party lines.
Editor’s Note: This Article is a shot across the bow to advise that we are capable of producing material which is markedly different from the both the drivel spouted from the Industry Mouthpieces and that which we have written prior. We have no issues with the Financial Institutions. While the morality of their Contracts might be questionable we realize that business is NOT personal. We encourage samesaid to begin to reach out directly to Contractors and their Affiliated Consortiums to help bring an end to what ALL Financial Institutions must realize as their loss of well over 65 cents on each and every dollar to administrative overhead. No actuary could ever justify the current Industry standard of Contractor realization of 32 – 35 percent of Financial Institution Price Point! Why not get dollar-for-dollar?!