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Banks “Nothing to See Here” Versus Grim Reality on Foreclosure Front

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It’s time to resurrect that 1960s expression, “credibility gap,” since it applies so well to the bank and Administration posture towards the foreclosure mess. The banks continue to insist, despite the unheard specter of foreclosure freezes, that they just need to check some things and tweak some processes and they will be back to normal programming soon.

Now, admittedly, there are some palpable signs of anxiety amongst the officialdom. David Axelrod, in his Sunday Face the Press chat, repeatedly stressed the need to resolve this crisis quickly, when there is simply no way that can take place. Similarly, Freddie and Fannie are cudgeling servicers to hurry up and make this go away. Per the Washington Post:

To protect themselves from those losses, Fannie and Freddie have threatened to penalize thousands of lenders if they fail to rapidly fix the way they seize the homes of borrowers who missed their payments, according to letters sent by the firms to lenders.

Yet this isn’t going to go away quickly. The rumored-since-last-week investigation by up to 40 attorneys general (wonder who is fence sitting) is getting close to going live; New York state AG Andrew Cuomo has expanded his own probe; Obama continues to alternate bank friendly actions (his Administration’s stance against a national foreclosure freeze) with playing to the consumer crowd (saying today that the Administration supported the AG investigations).

Astonishingly, despite mounting evidence that the lapses in industry conduct were egregious and widespread (the failure to adhere to their own contracts; the widespread use of fabricated documents), the industry is trying to keep the focus very narrow and pretend the only thing at issue is the, um, improper affidavits, and surely that will be fixed shortly, really there is nothing wrong with the underlying process. The abject failure to convey notes says otherwise, as does more and more evidence of people losing their homes due to servicing errors or other abuses.

Before readers start arguing that these problems are small and therefore inconsequential, consider Barry Rithotz’s remarks:

There are multiple failsafes and checkpoints along the way to insure that this system has zero errors. Indeed, one can argue that the entire system of property rights and contract law has been established over the past two centuries to ensure that this process is error free. There are multiple checks, fail-safes, rechecks, verifications, affirmations, reviews, and attestations that make sure the process does not fail.

It is a legal impossibility for someone without a mortgage to be foreclosed upon. It is a legal impossibility for the wrong house to be foreclosed upon, It is a legal impossibility for the wrong bank to sue for foreclosure.

And yet, all of those things have occurred. The only way these errors could have occurred is if several people involved in the process committed criminal fraud. This is not a case of “Well, something slipped through the cracks.” In order for the process to fail, many people along the chain must commit fraud.

That it is being done for expediency and to save a few dollars on the process is why the full criminal prosecution must occur..

In another widely-circulated sighting, Georgetown professor
Adam Levitin provided a prognosis that some sites touted as a surprisingly dour forecast. I was actually found his remarks to be pretty moderate; I’ve been told by litigants who have sought his input that his private views are more pointed (although it is possible they cherry picked his views). From the Citigroup report (hat tip Karl Denninger):

Levitin articulated three possible outcomes to the aforementioned issues and assigned an equal likelihood to each. In his best case scenario, these issues are deemed merely technical in nature and are successfully resolved but it takes at least year to do so and all foreclosures are delayed by at least a year. Levitin disputed the claim by banks that these issues can be resolved in a month or so and attributed the banks’ claims to “legal posturing.” In the medium case scenario, litigation ensues and it takes years to sort out these matters. In the worst case scenario, the aforementioned issues become a “systemic problem” which causes the mortgage market to grind to a halt as title insurers refuse to insure mortgages involving existing homes

I see the odds that the problems are “merely technical” as zero. Levitin hedged his bets on how widespread the problems are with the conveyance of the notes. The reports I am getting are providing more and more confirmation for the notion that the notes were seldom, if ever, conveyed correctly from 2005 onward. And if that is the case, the problems are not technical but fundamental.

It would be better if I were wrong, but brace yourself for a rocky ride.

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15 comments

  1. Foppe

    I’m not sure if it means something, but the 2nd item about Obama’s mortgage being robosigned concerned a mortgage dating at least from 2002 (or 1999, i’m not sure how to read these things).
    See here for the article.

  2. Tao Jonesing

    The ride is going to be way beyond rocky. We’re talking freefall unless the Obama administration and the Fed step in to put the now clearly insolvent TBTF banks into receivership to prevent them from selling off financial assets and tanking the markets in a desparate bid to stay alive. This is orders of magnitude worse than 2008, and the smoking hole is just too big to fill with a bailout. We shouldn’t compound the (t)error by letting the banks drag the markets down with them this time.

    The only question I have now is whether the banks will escalate the situation in advance of the Nov. 2 FOMC meeting to goose the amount of backdoor bailout they receive via QE2. If they extend and pretend for too much longer, there won’t be any political or monetary option left to help save the TBTF banks. They’re toast.

  3. AndyC

    The professor left out the “best best case” scenario in which the politicians change the rules and allow the banks to cover the whole thing up and continue on…..business as usual.

    This I suspect will happen after the elections

    1. Francois T

      The federal politicians are royally screwed and they damn well know it.

      Real estate law is a state matter and states will NOT let the federal government rewrite the rules just like that. It would mean the end of the actual order in the Republic. The states will be damned before sacrificing their power for the sake of the banks. Enough is enough!

      Banks should make plan for an orderly receivership. The stark reality is that there are no other option.

      1. Progressive Ed

        Federal law supersedes state law. In other words, the Emperor can do any damn thing he wants to.

        1. Yves Smith Post author

          I suggest you bone up on Constitutional law. The reading I got from DC is that this would be the mother of all constitutional battles, one Congress would be very loath to enter into.

          You’d need to intervene in the UCC in 50 states, well settled real estate law in 50 states, and New York trust law, just for starters. And there are clear ongoing SEC violations (representations made by the trustee in periodic SEC filings).

          1. Pascal Blacque

            So… what is to be done?

            Do you believe the States will commit economic/political suicide (a near certainty if all hell breaks loose) rather than agree/negotiate to put their constitutional power on hold until a national fix is found?

            For example, couldn’t the federal government offer (and States agree) a blanket title insurance scheme to back all securitized notes (against some preferred shares in MERS-member banks/servicers) until the title chain is cleared up?

            Any other fixes?

          2. AndyC

            Yves

            I don’t know, you saw that “voice vote” which would have done a whole lot to paper this over, sure Obama vetoed it but I suspect that was merely done to push the decision off until after the election.

            They do what they want and they work for the banks, public be damned.

            They will legislate this mess away after the election, that’s my prediction.

  4. Pascal Blacque

    Well OK … but for all his moderation, at least Professor Levitin clearly said PERFORMING notes were clouded as well, which –if true– could bring the whole housing financing market to its knees… and all of us in tow… tomorrow! Not many people have said this nor looked into the dire implications … was he wrong?

    Anyway, at this point rather than pointing fingers at who is at fault or who is covering up what… I think it would be more constructive to simultaneously think about what to do next. Imagine for a minute that you are Obama or Geithner or Lord Blankfein … and ask yourself “What can we do to fix this thing as soon as possible?”

    Any thoughts? As they say in real estate: time is of the essence!

    1. ZADOOFKA FLORIDA

      They kicked the can down the road by bailing out the TBTF banks 2 yrs ago. The can is now at the end of the cul de sac.

  5. Robert M. Armstrong

    I believe that in the past the mortgage holder held title to the property and could regain title in case of default. This is what allowed the resale of the property. Unfortunately the original mortgages have been sliced, diced, made into a puree, and sold to thousands of buyers. These buyers do not hold a mortgage. They hold very small pieces of millions of mortgages. So now there is no one to regain title in case of default. This makes resale of the property impossible. I see where the banks have a problem. Without the ability to seize and sell non performing real assets many of them will be insolvent. But Francois T is right. States are not going to change traditional understandings of real estate law just to keep banks solvent.

  6. Psychoanalystus

    It is amazing how bad this is getting as time passes. I am not referring only to the foreclosure mess, but to the entire unraveling of the American financial and economic system. It feels like the sinking of a very large ship — slow, but unstoppable.

    Psychoanalystus.

  7. readerOfTeaLeaves

    I see the odds that the problems are “merely technical” as zero.

    Yves, it’s just been breathtaking to follow this blog the past few months. But this week has been a jaw-dropper.

    I am deeply grateful for your efforts and your smarts, as well as your contributors and (most of the) commenters.

  8. KAH

    Yves,

    Freddie and Fannie owns/backs at least 50% of all mortgages in the U.S. How does that fact affect this situation?

  9. Dark Entropy 646

    So, IMO the question is?

    MERS, no MERS or a hyper-MERS.

    It is known that power corrupts, while absolute power corrupts absolutely. Now, irresponsible and rogue persons inside the big (or I should say bug) banks, realizing how “easy” is to fabricate property and loan data, decided to go on this path.

    You see, now our property isn’t in paperwork anymore. All are data. Our stock-market portfolio is a few records within a big database inside some hard-disk based storage device. Whenever this fails, whoops gone, we have no other proof, of what actually we do own. Ok, there are backups, there are double and triple redundant networks, this “oops-gone” would never happen in real life.

    But since loan and property data, were a few megabytes within the MERS database, the motivation of fabricating the foreclosures, to cut corners – due to the fact, that a house would have lost lots of it’s value, up to the date the bank would have the property back in it’s hands, if all have been done in a legal way, was tempting enough to get uncontrollable.

    So? Does US needs to drop MERS and finish this? Not so easy IMO. MERS – apart of it’s abuse – was the right tool to create MBS and sell them outside of the country. Now how a foreigner can trust anymore, that the tranche he just bought, is as actually as it sounds? Broken trust, would have such consequences of dishonor in the near future.

    This case reminds me the infamous “Greek Statistics”. As long as there’s no double or triple check based on independent authorities check, of everything related to loans and properties, it would be difficult to … regain the trust. This case can end to be highly corrosive for the ethics (if the fabrication was running for years in regards of home loans and foreclosures), what actually can prevent some persons to try the same thing for example, in auto loans or whatever (if it isn’t already happening).

    So, more or less, we end to the need of the hyper-MERS, which should be 2 or 3 independent “MERS” systems, belonging to contradictory in regards of interest “providers” and probably one of them established outside of the US itself.

    I understand that this sounds hard (to trust such data to a foreign data keeping corporation), but I wonder if there’s any other alternative for a foreigner to trust these excel spreadsheets indicating, what tranche he’s now having in his hands.

    Obviously, there should be an easy way for the MBSes to be traded around the world and excel worksheets were just an immature approach of such.

    Back to the case. Concentration of power means corruption. So, instead of the scenario, of creating a database system, which keeps every record of a property of something, there should be an alternative scenario, where various providers they do keep redundant “tranches” of data records of the same big picture.

    If it gets organized well, I think is more secure and way foolproof compared to the big all-in-one system

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