While it is far too early to break out any champagne, the Powers That Be seem to be taking notice of the continuing train wreck in courtrooms all over the US as far as banks’ ability to foreclose is concerned. Apparently, the American Securitization Forum’s “Drive on by, nothing to see here” mantra is becoming less and less convincing with every passing day.
It’s worth nothing that only the Financial Times seems to be carrying this story (yours truly did check on key word variants in Google News and came up empty-handed). They also deem it to be worthy of front page placement. This is only an isolated sighting, but one of the features of the runup to the financial crisis was an ongoing news disparity between the Financial Times and US business press, particularly the Wall Street Journal. The FT would pick up on stories that seemed important and were too often either completely ignored or reported by the American financial outlets only in in a selective manner. So if we see more bypassing of inconvenient news by the usual suspects in the US, take heed.
What is particularly interesting is that the SEC seems to be targeting specifically the sort of abuses that we have chronicled at length on this blog: failure to convey mortgages to the securitization trusts in accordance with the pooling and servicing agreements (which were part of the offering documents); whether robosiging is inconsistent representations made to investors (this frankly is a novel angle, I’m impressed the SEC is considering it), as well as an issue that has gotten more attention in the media, that investors appear to have been mislead on a widespread basis about the quality of mortgages in late vintage subprime mortgage bonds.
Note that we’ve been surprised at the complacency of investors regarding the losses banks are taking on the issue of standing in courts all over the US. The securitization industry has desperately been trying to spin this as “deadbeat borrowers trying to get a free home” when the overwhelming majority of people in court are either convinced that they are the victim of servicing abuses, are fighting the dubious and pervasive practice of banks trying to break a bankruptcy stay (all creditors are supposed to take a time out while the borrower works out a bankruptcy plan with the court), or really just want a mod, but are having to cudgel the bank in court instead. Investors have been filing a few cases, but peculiarly on the (we think) not so attractive representations and warranties issue, in which the investors argue that the mortgages in the securitization pools were far worse than they were told, and the lousy quality of those mortgages (as opposed to the economy taking a big hit) is the reason they have suffered losses.
Even though the banks clearly put a lot of dubious loans into the deals, it is difficult and costly to win these rep and warranty cases, which means these case are typically settled early on, and for not very large amounts compared to the amount at issue). The issue of failure to convey mortgages properly to the trust seems more of a slam dunk, but we wonder whether investors are loath to advance a legal theory that strikes at the heart of the mortgage industrial complex. After all, if they win, they have just established that they were sold non-mortgage backed securities. Nevertheless, the news that the SEC is taking this matter to heart may embolden some of the fence-sitters.
From the Financial Times:
US securities regulators investigating the role of banks in the mortgage crisis are homing in on the question of whether investors were misled about the home loans used to back securities…
Kenneth Lench, chief of the SEC’s structured products unit, said at a conference in Washington on Friday that issues of interest to the commission include whether investors were properly informed about underwriting and foreclosure practices and the quality of mortgages used to back securities…
Mr Lench highlighted areas that could be of concern: “Were representations relating to the transfer or documentation of mortgages into the loan pools accurate? Did activities such as ‘robo-signing’ contradict those representations? Were disclosures to investors regarding the quality of the loans in the pools accurate?”…
Mr Lench said his unit was working with “legacy” cases from the financial crisis as well as new ones stemming from the “rippling effect of the unfolding crisis”.