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Title Insurance Woes Illustrate Liabilities of Foreclosure Mess Concentrated in TBTF Banks

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There are so many fronts to the foreclosure crisis that it’s now becoming difficult to stay on top of all of them.

One development Monday that didn’t get the attention it deserved is the fact that Bank of America is now eating title insurance liability on foreclosed properties sold by its servicer. Per Bloomberg:

Bank of America’s agreement with Jacksonville, Florida- based Fidelity National calls for the lender to cover the title insurer’s costs in the event of an error in the company’s processing of foreclosure documents, Sadowski said. The bank will notify the insurer in each case that the foreclosure complies with state laws and regulations.

Bank of America is in talks with other title insurers for similar agreements, said Richard Bramhall, the bank’s chief title officer. He declined to name the other companies.

This is a big deal for several reasons:

1. The liability in case of a wrongful foreclosure is large. There is no way for the wronged borrower to get his house back, so title insurance is the only recourse. As Bob Lawless explained in Credit Slips:

…most every (or maybe even every–I’ll let someone else do the 50-state survey) state provides the strongest possible finality protections for deeds obtained through foreclosure sales. We also see similar rules for other judicially supervised sales in other contexts such as sales of personal property subject to a security interest or bankruptcy sales….

Suppose Henry and Helen Homeowner lost their home in foreclosure proceeding, and it has since been purchased by Bill and Betty Buyer. Now, Henry and Helen discover the affidavits in their foreclosure proceeding had some of the very same apparently fraudulent signatures reported in the media. When Henry and Helen complain to the court, the answer should be: “Your complaint is against Deutsche Bank (or whoever foreclosed) and not against Bill and Betty. You can recover damages from Deutsche Bank but not eject Henry and Helen from possession.” In turn, this will mean that that Bill and Betty (or their lender) will not have to look to the title insurer for recovery.

2. This means the large banks now effectively have direct exposure to borrowers for screw ups in foreclosures (note that they did earlier, in theory, but this move shortens the process of the money coming from the bank).

3. The liability is via the bank servicer. Note the Bank of American is now the largest servicer in the US (Wells is a close second) by virtue of having bought Countrywide.

4. Some contend that the risk of clouded title means that title insurers may come to require warranties from banks for all properties sold that has securitized mortgages. As Adam Levitin indicated in a Citigroup report, documentation lapses could “cloud title on not just foreclosed mortgages but on performing mortgages.”

It isn’t hard to see that other banks are likely to be required to take the same step as Bank of America, at least if they want to unload foreclosed property.

It isn’t hard to see where this is going. The biggest servicers are part of TBTF banks. The biggest trustees (the folks who were supposed to make sure that the loans all got to the securitization trust properly) are part of TBTF banks. The major structurer/packagers are now all part of TBTF banks.

Isn’t a concentrated financial services industry grand? Any time they screw up, they are too large to be made to pay for their crimes. The die was cast at the beginning of the Obama administration. It was a critical window of opportunity to take over and put new management in the weakest of the big banks (and probably force them to shed operations too) and they instead were coddled and sent back on their merry way.

I guarantee that the losses, between extend and pretend that will no longer be viable (in particular, the unrealistic marks on second mortgages) and the liabilities resulting from this colossal mess, at least one major bank will be insolvent. But the odds of the new special resolution authority being used? I put the odds at pretty much zero.

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26 comments

  1. prostratedragon

    About out of here and too tired to track it down now, but I seem to recall that when many expressed wonderment at BofA rushing to buy Countrywide, the best anyone could come up with was the value of the servicing business …

  2. Darby Shaw

    Doesn’t this violate federal antitrust laws? Are they not a de facto monopoly? The banks have been colluding every single step of the way.

    So now in a residential mortgage situation they control the retail market (They essentially wrote the legislation that killed any independant mortgage brokers anymore), the title companys (who the hell pays THEMSELVES on a claim with their OWN money??), the appraisal racket (Who lobbied for the new appraisal laws mandating appraisal “management” companies), they controlled the MBS market (Which they have subsequently broken almost every law imaginable)and created all these toxic bombs, and apparently they control our government too.

  3. mp

    From the Bloomberg link:

    “Everyone sort of sees the same risks, and that’s the good part,” Pfotenhauer, chief executive officer of the American Land Title Association, said today in a telephone interview. “You just have to craft a solution that’s acceptable to all the parties, and we’re making progress.”

    Christ. Talk about corporate incest, Pfotenhauer is a member of the MERS board of directors. So, yeah, I guess he sees the risks.

    BWAHAHAHAHA!

  4. Neil D

    Ms. Smith writes: “The die was cast at the beginning of the Obama administration. It was a critical window of opportunity to take over and put new management in the weakest of the big banks (and probably force them to shed operations too) and they instead were coddled and sent back on their merry way.”

    I don’t know if I buy that. It seems to me the “die was cast” long before then. The idea that the Obama administration could have made this entire situation better if only they had been tougher on the big banks, while satisfying, seems a bit of a reach to me.

    Sometimes things really are beyond repair.

    Being tougher on the banks seems to mean making them write off all their 2nds and modify all existing mortgages to some mythical “current market value”. We can still do that if we want to. I’m sure Speaker Boehner and the House Tea Party Caucus are preparing a bill to do just that even as I write.

    1. DownSouth

      Extend and pretend is not a solution. It only postpones the day of reckoning for the banksters, allowing them to steal just a little bit more in the meantime.

      1. Moneta

        Can we really have all houses foreclose at the same time?

        So you want things to unravel even faster when many of the problems we are encountring now are due to going too fast and cutting corners.

        Our system was built to go up, and badly built at that. Now that things are going down, there’s a bottleneck. Extend and pretend, although annoying, slows down the flow.

        1. Justicia

          Extend and pretend just puts a band-aid on this cancer. And it goes beyond the foreclosure mess.

          The banksters have f*ed up the real property recording system in this country. Millions of properties will have a cloud on the title — i.e., a glitch in what is supposed to be an unbroken chain of transfer from one owner to the next. And this is true not only for houses in foreclosure. Even if mortgages have been fully paid off, if they were processed through MERS (and of them in the last decade were) they may be screwed up.

          See my posting below and read this article:

          http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1684729

          Two Faces: Demystifying the Mortgage Electronic Registration System’s Land Title Theory

          Christopher Lewis Peterson
          University of Utah – S.J. Quinney College of Law

          1. Stemp

            Justicia, I paid off my 2002 Countrywide mortgage in 2009, and I currently live in the house. MERS was definitely involved. I have been looking into trying to figure out if my title is clouded but the focus in the blogs is (probably quite rightly) on the foreclosures.

            I have a copy of the “substitution of trustee and full reconveyance” signed by MERS and ReconTrust. (ReconTrust is a company previously unknown to me, I sent my checks to Countrywide, as well as the payoff. My loan was never delinquent). This document was filed locally. I of course did not receive my note back, and expect it was destroyed, although I plan to ask for it back just for grins.

            I am happy to consult with a real estate attorney if that is the right move, but I’m also wondering if this end of the problem space is simple enough that a few facts will give the likely diagnosis for my title being clouded or not.

            What I’m really hoping for is the RortyBomb take on “so you think you paid off your mortgage?”

  5. Glen

    “But the odds of the new special resolution authority being used? I put the odds at pretty much zero.”

    Ouch! I hope you are wrong, but you’ve been very accurate as to how this plays out.

    So much for Financial Regulation law. One of the two political parties will have to “support” bailouts which pretty much means they will be DOA in 2012. I suspect it will be the Democrats since Obama seems to be willing to throw the whole country under the bus rather have to than reform Wall St.

  6. Ina Deaver

    It is definitely a problem of title insurance, not title from the point of view of the purchaser. This is sort of the problem that has been troubling me throughout this discussion. I’m starting to get clear on what you mean in the discussion.

    As someone said earlier, when the potential liability is such that monster corporations with truly black and evil records decide to take a loss rather than continue foreclosures, that’s some liability. And of course, I’m afraid that you are right about where all that liability is going to wind up. . . .

    Why, oh why can’t we have heads on a platter instead? These corporations need to be disbanded and what they contain that passes for “assets” scattered to the wind. The flesh and blood that ran them need to be sent to jail.

    1. Kevin de Bruxelles

      Why, oh why can’t we have heads on a platter instead?

      It all comes down to power, or lack there of in this case.

      The history of man can be summed up as a battle between the thesis of idealism: for example “all men are created equal”, “the rule of law”, or even more basically, fairness vs. its antithesis, realism which was succinctly expressed in Thucydides’ Melian Dialogue as: “right [fairness], as the world goes, is only in question between equals in power, while the strong do what they can and the weak suffer what they must”. The synthesis, a just society, is only possible if all groups acquire and maintain a balance of power. As soon as one group gets weak, history tells us that they will most certainly “suffer what they must.”

      The history of powerful and wealthy nations, and America is no different, shows that they usually start out as small, rough, semi-barbarous, mean-and-lean martial cultures, who rape and pillage their way to glory and power. The individuals who make up these societies are often independent, yeomen types, with a large stake in their society and are willing to fight for it. At the point these societies reach great success, when they have conquered many of the neighbouring tribes civilizations, the population starts to undergo a cultural transition and the old ways are forgotten and instead the people become urban, sedate, comfortable and soft. With increasing wealth comes wider social stratification, the former yeoman either struggle their way up the ladder to be rich or they fall back into dependency or semi-slavery. The key for the continued wealth and power of these societies is to avoid these kind of dangerous internal imbalances of power.

      What is interesting is that all too often, just as this wealthy society reaches its peak of wealth making it a nice juicy target for raiding by its new, even rougher, semi-barbarous, semi-nomadic, mean-and-lean neighbours, its ability to defend itself has a tendency to decline due to the cultural decadence wealth brings. If these societies are not careful, the people can grow obese and turn inward to enjoy the comforts of all the sweet sensations their wealth gives them access to. Passivity-inducing bread and circuses are showered on the people by their rulers which only further helps to increase the velocity of the spiral of decline. The formerly proud yeoman who formerly demanded fairness with the edge of his sword is reduced to meekly thanking his betters for the crumbs of bread they deem to give him. Hard work or military service is often farmed out to the barbarous neighbours since the rich local population have long ago grown too soft for such work and the semi-slaves among them have no longer any martial (or work) spirit left in them.

      And often when the inevitable arrives, the new masters from the neighbouring tribes sometimes even attempt to keep the empire going by simply taking over the ruling class and continuing to rule the people as before. The barbarians from the Germanic tribes tried to keep the Western Roman Empire going for two hundred years after its official fall.

      Obviously in today’s world some of the old martial skills are now applied on the battlefield of global economics. But even given this, within this framework it is clear that unless the people of America quickly snap out of their comfortable numbness, their fate is sealed like so many other formerly great societies throughout history. American Exceptionalism will fall by the wayside and to future generations it will be just as laughable as the hubris of all other societies who dared believe they, and they alone, were blessed by God. So in this case the only people who will eventually be putting any Wall Street heads on a platter will be raiding, lean-and-mean, barbarians looking for booty to plunder from the junk heap that America is becoming.

      1. DownSouth

        Kevin de Bruxelles said: “The key for the continued wealth and power of these societies is to avoid these kind of dangerous internal imbalances of power.”

        Yep. An advanced society must comport itself like an advanced society if it expects to endure. Once a society, as Plato put it, divides itself into “two cities:…one the city of the poor, the other of the rich, the one at war with the other,” it has mortally wounded itself.

        “[T]he invading barbarians found Rome weak because the agricultural population which had formerly supplied the legions with hardy and patriotic warriors fighting for land had been replaced by slaves laboring listlessly on vast farms owned by one man or a few,” observed Will and Ariel Durant in The Lessons of History.

        Here’s how Bryan Ward-Perkins put it:

        Invasions were not the only problem faced by the western empire; it was also badly affected during parts of the fifth century by civil war and social unrest…. With the benefit of hindsight, we know that what the empire required during these years was a concerted and united effort against the Goths…and against the Vandals, Sueves, and the Alans… What it got instead were civil wars…

        “You fight and die to give wealth and luxury to others; you are called the masters of the world, but there is not a foot of ground that you can call your own,” Tiberius Gracchus appealed to the people.

        So unchecked greed destroyed the glue that held the Roman Empire together, and it fell victim to the same sort of infighting that had hamstrung the Barbarians for so long:

        Within reach of the Rhine and Danube frontiers lived tens of thousands of men who had been brought up to think of war as a glorious and manly pursuit, and who had the physique and basic training to put these ideals into practice. Fortunately for the Romans, their innate bellicosity was, however, to a large extent counterbalanced by another, closely related, feature of tribal societies—-disunity, caused by fierce feuds, both between tribes and within them. At the end of the first century, the historian and commentator Tacitus fully appreciated the importance for the Romans of Germanic disunity. He hoped ‘that it may last and persist amongst the barbarians, that if they cannot love us, at least they should hate themselves…for Fortune can give us no better gift than discord amongst our enemies’: Similarly, at a slightly earlier date, the philosopher Seneca remarked on the exceptional valour and love of warfare of the barbarians, and pointed to the great danger that there would be for Rome if these strengths were ever joined by reason (ratio) and discipline (disciplina).
        –Bryan Ward-Perkins, The Fall of Rome and the End of Civilization

  7. Random Blowhard

    The only financial institution that is ‘real world solvent’ in the United States is Goldman Sachs, ALL the rest are bankrupt. When the wheels finally fall off the Panem et Circences show the collapse will begin in earnest and the United States will join other economic superpowers such as Argentina, Venezuela and Mexico if we are lucky or Somalia if we are not. As for the major bank, my money is on the Bailout poster child Citigroup as they are the least competent and ethical of the TBTF zombies.

  8. Barricade with Concrete

    Citi tried to buy Chevy Chase Bank during the bailout shopping spree, instead, credit card hustler Capital One bought ‘em on the cheap. 4 Billion dollars, handed to a parasite. Why can’t we trust bust the bastards?

  9. Kujiranoai

    “…The biggest servicers are part of TBTF banks. The biggest trustees (the folks who were supposed to make sure that the loans all got to the securitization trust properly) are part of TBTF banks. The major structurer/packagers are now all part of TBTF banks….”

    The foreclosure crisis is a great example of what being too big to fail really means.

    Being “too big to fail” doesn’t just mean being TBTF when you might actually fail, it means playing the TBTF card right through the process from beginning to end…

    TBTF means that you can lend money to people who never had any hope of paying it back to begin with, mess up the paper work through your incompetence and corner cutting in the middle and then use fraud to cover it up at the end when you have to start to foreclose on the loans you made. Then, finally when it call comes out, well – you were always “too big to fail” in the first place…

  10. dd

    They are all insolvent as derivatives and securitization have effectively made them all one giant interconnected “counterparty” dependent on the same over-leveraged under-performing hollowed out assets. That was the AIG lesson.
    Then again, they were all insolvent after the demise of LTCM; but the genius of Greenspan, Summers, Rubin and Clinton was to make all the illegal activity legal and to simply render state laws null and void (see insurance and derivatives). That saved the day for awhile; but didn’t solve the underlying problem of hyper-leverage/insufficient collateral. Enron, et al again revealed the hollowed asset problem but the Bush team came to the rescue and embedded SIVs in the system (see SOX). Team Bush scored another victory obliterating IB net capital requirements.
    Now we have the champion team of Bernanke, Summers, Geithner and Obama. One awaits a Federal “MERS” title system and a Federal securitization law that by-passes all those pesky state laws.
    The real humor is the hyper-leverage/insufficient collateral is first revealed as a legal issue and the “problem” solved by making the “innovations” legal; but that doesn’t solve the underlying issue. But heck, once MERS is embedded everyone will have to pay “market value” to record, access or insure title and once Federal securitization occurs then homeowners can look forward to a continuing stream of perpetual fees linked to the mortgage payments.
    Those fees should help the TBTF.

  11. Justicia

    The banksters using MERS, have attempted to subvert ancient common law going back to the Magna Carter (13th C.) and the Statute of Frauds that requires all transactions affecting an in real estate to be in writing. What part of ALL don’t the banksters understand?

    I highly recommend this law review article (pre-publication copy). It’s very well written — even non-lawyers will be able to follow the analysis:

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1684729

    Two Faces: Demystifying the Mortgage Electronic Registration System’s Land Title Theory

    Christopher Lewis Peterson
    University of Utah – S.J. Quinney College of Law

    Real Property, Probate and Trust Law Journal, Forthcoming

    Abstract:
    Hundreds of thousands of home foreclosure lawsuits have focused judicial scrutiny on the Mortgage Electronic Registration System (“MERS”). This Article updates and expands upon an earlier piece by exploring the implications of state Supreme Court decisions holding that MERS is not a mortgagee in security agreements that list it as such. In particular this Article looks at: (1) the consequences on land title records of recording mortgages in the name of a purported mortgagee that is not actually mortgagee as a matter of law; (2) whether a security agreement that fails to name an actual mortgagee can successfully convey a property interest; and (3) whether county governments may be entitled to reimbursement of recording fees avoided through the use of false statements associated with the MERS system.

  12. Jackrabbit

    I don’t understand how the Insurance regulators can allow this.

    An interested party, with shaky finances (only solvent because of accounting gimmicks while repairing their balance sheet via Government largess), providing financial support so that an insurance company can assume huge systemic risk?

  13. TC

    “The new special resolution authority” is part of the same FinReg that, itself, is part of the “extend and pretend” doctrine driving the Washington-Wall Street axis of fraud. It is all talk through no teeth, and a grand fantasy at that!

    Yet, nevertheless, resolution still can be had in but two words barked repeatedly to congressional representatives desiring an extended political life: Glass-Steagall. The time has come (and anyone who isn’t a scammer knows it).

  14. MinnItMan

    Here’s one hint to decoding the title insurance/lender nexus: what is Warren doing? He very well be the biggest silent parter in the industry, and he has a very large interest in Home Services of America.

    “That’s why the financial strength and stability of HomeServices of America, a Berkshire Hathaway affiliate, is the prime choice nationwide. Our Title & Escrow division is built upon core values of unparalleled service and timely processing. It’s our goal to see that your investment is protected and that your needs are met.”

    The title insurers are vastly smaller counter-parties to the lenders, but vital to keeping real estate transactions a viable source of income (as it is a major source for HSA, much more, I’ve heard, than real estate commissions). Business is concentrated with the four major insurers and it’s hard to believe they’re not all in the same boat and underf the same pressure: keep moving ahead faster than the water is coming in through the hole in the back of the boat.

    I have to disagree with the Glass/Steagall reference here, at least in this sense: self-insuring (essentially) may ultimately be the only way lenders can off-load REO. I’ll have to think about that.

  15. Psychoanalystus

    This pathetic Geithner was on PBS’s Charlie Rose last night, justifying why the “too important to lose” (his spin on “TBTF”) are still around. In addition to that, he kept lying all the time.

    As a psychologist, I could not help noticing how Mr. Geithner has become more arrogant than he used to be before.

    Psychoanalystus

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