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» VISIT US ONLINE @ DSNEWS.COM COVER STORY INDUSTRY INSIGHT MARKET PULSE The days of winging it are long gone for our universe of distressed assets and loss recovery— the result of a chain reaction that inexorably changed the industry. T While Fannie Mae approved counsel in its earliest iteration of the program, it wasn't until 2008 that the use of its "retained attorney network" (RAN) was mandated. Freddie Mac, on the other hand, dictated from the beginning that only approved counsel could represent servicers on loans where Freddie was the investor. Despite this supervision, the actual practice of law by these firms was still largely a "black box" other than an increased level of reporting. How the firms processed that work and what internal controls or policies and training they had in place (if any) was seldom if ever earnestly questioned. All that changed in 2010 with the advent of what became known as the robo-signing crisis. As the Office of the Comptroller of the Currency and Department of Justice investigations progressed, the settlements from each included, among other things, a significantly higher degree of oversight not only for the internal workings of the affected servicers, but also for their vendors. Servicers initially struggled with developing audit protocols for their foreclosure law firms, in particular. Wells Fargo was one of the first major servicers to move oversight and management of its law firm relationships to its legal department—an unprecedented and unforeseen (remember the butterfly effect?) consequence of the regulators' and Justice Department's findings. Initially, many of the law firms were exposed to back-to-back client team audits that were, in many cases, repetitive. In one case, a servicer did three sequential audits of the same law firms where no one member of the audit teams was the same and they had not shared their findings with the others. As a consequence, the same questions and the same reviews were imposed on the law firms. Fortuitously, THE BIG PICTURE POINT— COUNTERPOINT The "butterfly" in question was the chronic and rampant overproduction of residential loans in the era ending in the mid-2000s. Without debating the propriety of that trend, in hindsight, many consumers found themselves in marginal mortgage loans— whether because they were steered toward unsuitable products for which they weren't qualified or because they chose to "game the system" and take 100 percent or more of the equity out of their homes is immaterial for this discussion. When the refi boom of the late 1990s and early 2000s imploded, the "beating of the wings" slowly but inexorably changed the life of mortgage servicers and their foreclosure counsels forever. In the decades preceding this meltdown, the management of attorneys who regularly represented lenders and servicers in processing routine mortgage foreclosures and consumer bankruptcies was relegated to low-level servicing personnel, often ignored entirely by the legal departments of that financial institution. These counsel worked for modest flat fees prescribed by HUD, the Department of Veterans Affairs, or one of the GSEs the risks associated with that type of work were generally limited to compliance with time frames and the relatively minor penalties associated with running over those time frames—which were generally passed back to the attorney so to little-or-no identifiable risk of loss remained with the servicer. Because the work was so routine in nature and the cost per loan was modest (by internal legal counsel standards), those firms that could deploy technology and process improvements to consistently hit agencies' defined time frames gained a large share of the business. The GSEs took an active role in managing these attorney relationships much earlier than anyone else. INDUSTRY INSIGHT he "butterfly effect"—a phenomenon we've all likely heard about but perhaps not entirely understood. The most often explanation given is that the beating wings of a butterfly on one side of our world can cause a tsunami on the other. And that is, to a certain extent, what brought the mortgage industry—and its outside counsel networks that handle residential mortgage foreclosures—to our current situation. 59

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