naked capitalism

Given the existence of a large and still for the most part very well remunerated mortgage industrial complex, it is not surprising that a investigation done by a mere county that found errors in virtually all the loans in a small sample of foreclosures created a hue and cry.

While state attorney general Kamala Harris remarked that, “The allegations are deeply troubling and, sadly, no surprise to homeowners and law enforcement officials in California,” and Nancy Pelosi wrote to ask Eric Holder to take a look, the securitization problem deniers went to assault mode. Paul Jackson came close to having a heart attack on Twitter, apparently hoping that rapid burst ad hominem attacks would mask his lack of a substantive argument, and also distract from the fact that he had yanked a straight up the center account on the audit by one of his best reporters, Jon Prior.

Since Jackson is particularly aggressive in defending the interest of his backers and advertisers, it is not surprising that he has gotten around to penning an article on the SF audit. The reason I dwell on Jackson’s stance is that he gets sanctimonious about his action:

I made the decision to pull our story covering the audit off the HW website in the interest of ensuring that our reporting wasn’t echoing false information.

Jackson is in no position to throw stones. We’ve debunked quite a few of past articles on securitization in which he has misrepresented the significance of court decisions and gone to some lengths to try to smear individuals who are on the front lines of exposing the chain of title and foreclosure fraud carnage.

Moreover, I have been told that Jackson will admit privately that he recognizes that these problems exists, yet contends he has to take the public positions he does to help his employees. Please. But this confirms that we were right when we depicted Jackson’s post, ” “Follow the Money” as a case study in projection. Those who have taken the path of downward mobility because they are no longer willing to be paid to lie have every reason to be offended by Jackson. He has strong ties to some of the very worst actors in the subprime and servicing arenas. It’s laughable for him to claim the moral high ground when he is simply doing attack dog style PR.

One of the things that Jackson tried to in his piece was (predictably) denigrate the firm that had executed the study, Aequitas, as being conflicted because its principals had previously performed loan assessment. Huh? There’s no conflict here; the problems at issue here were created in the securitization process, not the making of the loans (not that that was so hot either).

Jackson also tried to indict the firm as being wrong on one of the legal issues relating to defective assignments. He cites a Forbes columnist who has all of one year of legal training as well as unnamed “licensed attorneys that practice real estate laws in California.” For all we know, they could work at foreclosure mills.

Jackson’s predictable attack stirred a rise from Georgetown law professor Adam Levitin, arguably the top US legal expert on securitization. He has written several law journal articles on the topic, was special counsel to the Congressional Oversight Panel, and has testified before several Congressional hearings on securitization. His latest post is a takedown of the efforts to discredit the San Francisco audit, using Jackson’s piece to illustrate some of strategies used.

Levitin addresses disputes about the audit’s accuracy and methodology:

Whatever quibbles one might have with the audit’s methodology, it’s pretty hard to deny that there aren’t serious paper work problems.

If you want a “neutral” audit of the paperwork screw ups, take a look at MBS trustee exceptions reports (you can get them from servicer bankruptcies, when the trustee files a proof of claim). For the ones I’ve looked at, the number of exceptions (meaning paperwork problems found by the trustee) outpace the number of loans. This is on the front-end, before foreclosure, and while many of the problems are minor or don’t implicate foreclosures, the trustees also weren’t looking for a whole bunch of potential problems. (I would also not assume that most of the problems noted in exceptions reports were ever fixed–the expense would be prohibitive to the servicer. Query whether trustees then insisted on putbacks….)

He then turns to Jackson’s legal arguments:

Paul Jackson, who has been a steadfast denier of servicing and securitization problems, argues that the audit’s legal analysis is flawed because it claims that CA law requires recordaction of assignments. That’s only half right. The most recent CA case on the issue, Calvo v HSBC, says that CA requires records to of mortgage assignments, but not deed of trust assignments.

There are questions about whether the CA appellate court got this right, given that California law has long held that differences in form between a mortgage and deed of trust are irrelevant. Let’s assume, arguendo, that Calvo got it right. If so, Jackson’s criticism is still misplaced as there’s a whole separate question about whether those assignments actually happened and can be proven.

Recording has an evidentiary function; lack of recording means that banks will ahve to prove chain of title the hard way. That runs right into the PSA problem and the documentation required by UCC Article 9 (or Article 3 if the note is negotiable)–application of UCC Article 9 doesn’t mean “bank wins”. If anything, it just goes back to the question of whether an authenticated PSA can be produced that sufficiently identifies the loan in question. The banks couldn’t do that for either loan in Ibanez. There’s no reason to believe that was an exceptional case.(If it was, then why on earth the did the banks–or their lawyers–let it run up to the Massachusetts Supreme Judicial court?) The SF City Assessor-Record audit didn’t look into the UCC issue, but it did show that there were transfers that didn’t match the PSAs, which means that they cannot happen, so the foreclosure is being brought for a party that is not the deed of trust beneficiary. That’s a real problem that is far more serious than recordation of assignments.

As an aside, I’m not happy with the Article 9 view. It seems pretty clear that the parties to the securitization intended to contract out of the UCC as allowed for in Article 1 of the UCC. However, judges don’t like being told they need to look at pooling and servicing agreements (which is where an Article 1 argument takes you, directly) but weirdly seem more receptive if you invoke the UCC (which they did study in law school and have probably dealt with off and on since then) and then seem to tolerate looking at the PSA because making a finding under Article 9 requires it. I am hoping some budding young economist will study this phenomenon and put a name to what looks to me like a cognitive bias.

Back to Levitin:

Jackson also criticizes the audit’s findings about defects in the substitution of trustee process. He correctly points out that CA law treats a recorded substitution of trustee as conclusive evidence of the authority of the substitute trustee. I’m not sure that has any bearing when the recording was done by a party that lacked authority to do so, as the recording has to be done by the “beneficiaries under the trust deed, or their successors in interest”. If I record myself as substitute of trustee for Jackson’s mortgage, could that possibly be valid? It’s hard to imagine so.

And he finally takes aim at the “who cares, they are just deadbeats” argument. As we have said repeatedly, that just ain’t always so. A must read article from the Center for Public Integrity discusses how commons servicer foreclosures are. An extract:

The modification lowered their payment from $1,128 to $768 per month. But after three months, GMAC began returning their payments, the Grays claim in a complaint filed with the North Carolina Commissioner of Banks.

GMAC customer service representatives told them there was a “computer glitch” and that the problem would be resolved. Instead, GMAC twice started a foreclosure action.

GMAC claimed it had no record of any payment being received. The Grays have submitted bank statements that appear to show GMAC returning the $768 payment — several times. GMAC has since assessed more than $20,000 in interest and fees.

“I thought I was doing the correct thing” by obtaining a loan modification, Cassandra Gray said in a recent interview. “But I came home one day and there was a foreclosure notice on my door and a sign in my yard. I called constantly, but it was as if the dots were not connecting.”

A North Carolina clerk of court recently dismissed the foreclosure on grounds that GMAC had not properly demonstrated that it had standing to bring a foreclosure. But once GMAC gets its documentation in order, the loan servicer can foreclose again.

This anecdote illustrates a point we have made here before: most borrowers fight servicer errors that are compounded into foreclosures by challenging standing. It is far more costly to dispute the banks’ accounting (it is a pitched battle to get them to divulge their records, and then the borrower must engage a forensic accountant to testify on where the errors lie). So the fact that borrowers combat foreclosures using standing rather than the real reason they are in court, that they don’t think they are in arrears, unwittingly feeds the idea that people who contest foreclosures are just gaming the system.

More from the article:

“Almost all loans in default have something wrong with them,” said Tara Twomey, a lawyer at the National Consumer Law Center who recently completed a study of the servicing industry….

Jay Patterson, a forensic accountant who has examined hundreds of mortgage loans in bankruptcy or foreclosure, said that “95 percent of these loans contain some kind of mistake,” from an unnecessary $15 late fee to thousands of dollars in fees and charges stemming from a single mistake that snowballs into a wrongful foreclosure….

In an April 2008 ruling, Elizabeth Magner, a U.S. bankruptcy judge in New Orleans, rejected the two charges [for broker price opinions charged when the parish in which the home was located was evacuated thanks to Hurricane Katrina] as invalid. She also disallowed 43 home inspections, 39 late charges, and thousands of dollars in legal fees charged to the Stewarts’ account.

Almost every disallowed fee was imposed while the Stewarts were making regular monthly payments on their home…

Magner determined that Wells Fargo had been “duplicitous and misleading” and ordered the bank to pay $27,000 in damages and attorneys’ fees. She also took the unusual step of requiring the servicer to audit about 400 home loan files in cases in the Eastern District of Louisiana.

Wells fought successfully to keep the results of the audit under seal, and last summer a federal appeals court overturned the part of Magner’s ruling that required the audit. But two people familiar with the results told iWatch News that Wells Fargo’s audit had turned up accounting errors in nearly every loan file it reviewed.

I strongly encourage you to read this article in full. Back to Levitin:

…that brings us to attack number three–that this is just paperwork and the people who lost their homes were bums anyhow so who cares. Are we still barking up this no harm, no foul tree?

Yes, this is just paperwork. But so to is the mortgage loan itself. If signatures don’t matter, then what about the borrower’s signature? Finance is built on an edifice of paperwork. That paperwork creates and delineates legal rights, which in turn affect the pricing of transactions, both in mortgage originations and in mortgage sales…

In the end, then, the question is what sort of error rate are we willing to tolerate with foreclosures?Is it ok if 25% of foreclosures are improper? How about 10%? 5%? 1%? That would still be 50,000 improper foreclosures since 2007!

I would say that the optimal level of error is probably greater than zero, as the marginal cost of eliminating all errors is greater than the marginal harm prevented, but the contracts prof in me balks at this (and oh what a tension it has with the bankruptcy prof and claims estimation). The law has long treated the home as different, be it in property and contract (specific performance as a remedy) or in criminal law (right of defense). There is so much non-monetary value baked into the home that I’m not sure we can assume that the marginal cost of eliminating all errors will surpass the marginal harm.

Levitin is playing the good academic/philosopher king but even from that lofty perch, he questions whether we can have a system where we can tolerate any error in foreclosures. Unfortunately, conditions on the ground seem to say otherwise, since some people are losing their homes for bad reasons (think of people incorrectly told by their bank to default under HAMP, then also told to ignore foreclosure notices while the HAMP process was underway, resulting in the loss of their home. This isn’t theoretical; Nevada attorney general was pursuing this behavior in her second amended suit against Countrywide for violations of its 2008 consent decree).

When the robosigning scandal broke, I recall seeing Barry Ritholtz on a financial TV show, in which the other interviewees were arguing “Well, this really can’t be that bad, only a few people lost their homes due to a mistake.” Barry got close to apoplectic, cited an example of an erroneous foreclosure, and said, “This should never happen.” We had a system in place that was slow and deliberate because a roof over one’s head is a basic safety need, and if people have invested a lot to make sure they aren’t at the mercy of a landlord, they expect that if they meet their end of the deal, and make good faith efforts to perform if they suffer a major economic reversal, that the law will protect them. We’ve now learned that the idea of equal protection under the law is a joke, even for homes, which have long been, as Levitin stresses, treated as a special category.

I got a call from an attorney in Texas who has done both class action and title clearing for oil and gas rights deals (hence he’s seen MERS up close and ugly) having a Howard Beale moment over the mortgage settlement. He said he was convinced if the settlement went through, it would be seen as the day when property rights were shown to have no meaning and it would eventually lead to social upheaval. I’m not sure many people in the heartlands will react as viscerally as he did, but when you undermine the foundations of a society or to use the Biblical metaphor, sow the wind, you can expect to harvest a whirlwind.