On JP Morgan’s "Mass Mods" for Residential Mortgages

In a move the stock market greeted with considerable cheer, JP Morgan announced that it was widening its program to modify mortgages. From the New York Times:

JPMorgan Chase became the latest big bank to pledge to cut monthly payments, by lowering interest rates and temporarily reducing loan balances for as many as 400,000 homeowners. Early in October, Bank of America, which acquired the large lender Countrywide, announced a similar effort aimed at 400,000 borrowers as part of a settlement with state officials….

“The banks are doing the cost-benefit analysis,” said Gerard S. Cassidy, a banking analyst with RBC Capital Markets. “The banks don’t want these customers going into foreclosure because it is a costly and punitive way of trying to collect your money.”

Roughly 1.5 million homes were in foreclosure at the end of June, and economists expect several million more borrowers may default in the coming year as housing prices erode and job losses rise. Nearly one in 10 mortgages is either delinquent or in foreclosure.

Chase officials said their effort was not an act of charity or a response to government pressure. By renegotiating loans with borrowers, the bank is hoping to reduce the losses that it incurs in the foreclosure process and when it sells repossessed homes. Chase said it has already modified 250,000 loans since the start of 2007….

The bank, which will open 24 counseling centers and hire 300 employees to work with borrowers, will suspend foreclosures on loans it owns for at least 90 days while it puts its new policies into place at Chase and the two banks it acquired this year, Washington Mutual and Bear Stearns.

Like other banks, Chase is largely aiming at loans that the bank owns and not the mortgages that it services on behalf of bond investors who own mortgage-backed securities. Banks have less leeway in changing the terms of loans packaged into securities, because contracts that govern them can be very restrictive….

Those contracts could limit the impact of loan modification programs at Chase and other banks. For instance, Chase owns $350 billion of the $1.5 trillion in the home mortgages it services; the rest are owned by investors.

We have stressed in this blog for some time that modifying mortgages is NOT charity; banks in the past have preferred to go that route when the owned the mortgage and had a borrower with some ability to make mortgage payments. And that was before trashing the house prior to eviction became popular.

The NY Times piece makes clear the mods will be limited to JP Morgan’s owned mortgages, not the one it only services. So that begs the question: if this is such a great idea, why the ramp-up now? Morgan had a program underway already, as again the article notes.

This all smacks of a hasty effort to pre-empt regulatory intervention, particularly with the FDIC’s Sheila Bair on the warpath to Do Something, JP Morgan having been forced to take an equity infusion from the Treasury, and a presumably-interventionist Obama administration likely to be on its way in.

But that still gets to the basic question: why would JP Morgan not do this voluntarily? While some readers think that too many borrowers are in debt too deeply for this to make sense, the flip side is there are some markets where the prospective losses on sale are so large that a meaningful reduction in the mortgage balance would still leave the bank ahead of the game for at least some borrowers.

I think the reas issue is different. Some further details from the Wall Street Journal:

The move by the New York bank will cover as many as 400,000 borrowers. They’ll be moved into loans carrying lower interest rates, smaller principal amounts or other more-affordable terms.

The changes will particularly focus on a type of loan structured in such a way that the borrower’s outstanding balance sometimes grows month after month. J.P. Morgan inherited $54 billion of such loans with its takeover of the beleaguered thrift Washington Mutual Inc. in September….

The move also suggests that banks are realizing they can improve the value of their loan portfolios through mass modifications rather than foreclosures, which tend to produce larger losses. Until now, mortgage holders have been reluctant to renegotiate loans or have been doing so one-by-one, a time-consuming process.

So despite the use of mortgage counsellors, borrowers are NOT being assessed on an individual basis. I hate to sound like a perennial skeptic, but I doubt that these programs will be terribly successful (although pushing foreclosures off even two or three quarters will probably make the bank’s financials look better, and they presumably extract some more cash from the hapless borrower in the interim even if the mod fails).

Why is this program likely to score little in the way of success? Consider what created this mess in the first place: reliance on highly automated, credit score driven credit approval processes with little to no data gathering about borrowers’ ability to pay.

So how, pray tell, are these mass mods going to be made? We all know credit scores are not very useful guides. The mass approach suggests the bank will do no investigation into the borrower’s income, and perhaps will take a statement of income, length of time in job, type of job. But this is where the loss of local knowledge has put banks at a huge disadvantage. A lender in a community knows in the vast majority of cases how stable local employers are. And commitment to keeping the house is an important intangible that will not factor into these decisions.

The reasons mods historically have been done one on one is that the bank needed to assess both the likely loss on foreclosure and how much the borrower could afford to pay to decide whether a mod was likely to be viable and how to structure it. Here, it seems the banks have only very rough area parameters as to how much of a loss they might take on foreclosure, and a grossly inadequate reading on borrowers’ financial condition. Any successes will be random.

But perhaps I am not being cynical enough. The point may not be to make the mods work, but to claim that mass mods are the only option and then prove that they don’t work to forestall government intervention.

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  1. CrocodileChuck

    One of the ‘Big 4’ here in Australia has a special unit to provide relief to customers with loan repayment problems (typically deferring interest-not writing off). It is done over the phone-but uses a fifteen minute interview to establish eligibility.

    To Yves’ point, it deals with each case on an individual basis. The number and service are marketed in its branches.


  2. SilverDollar

    This all seems a bit vague, doesn’t it? What are the new terms being offered? Does this move people out of non-recourse into recourse loans? Yves, I don’t think you’re being too skeptical here. Is it coincidence that they made this announcement a few days before we elect Obama, and a day after Bair came out with the outline of her own plan (which if I remember correctly, moved people into recourse loans. Why anyone would want to do this, I don’t know.). Lastly, does anyone think the housing market will bottom anytime soon?

  3. Richard Kline

    This ‘program’ by Jippy Morg is a lying crock, and should be laughed off the front pages. Just got done reading a summary in my own Seattle Times:

    JPM “will delay foreclosures for 90 days while it rolls out a wide-ranging effort to lower interest rates or postpone principal payments for eligible borrowers . . . The new program will allow some borrowers to reduce their interest rates, in some cases permanently, and to defer principal payments until people refinance or sell their homes . . . For borrowers who have option ARM mortgages — which allow customers to pay so little that their balance could rise instead of fall — JPMorgan will offer modifications to eliminate so-called negative amortization.” Full article at http://seattletimes.nwsource.com/htm/businesstechnology/2008337312_wamu01.html

    In short, JPM is NOT doing mods. That is, there is no discussion of _reductions of principal outstanding_ in this article, or in anything cited by Yves in the sources for this post. Instead, JPM will give a moratorium on payments during the three months over which Morgan will be siphoning off tens of billions from Paulson’s Private Purse on the story that ‘this will help JPM modify mortgates.’ JPM will, in their benevolent generosity temporarily take interest only on WaMus’s loans (which involved no JPM principal, and were bought for pennies in the WaMu takedown) over a duration at JPM’s discrection and convenience. “Until the housing market comes back;” read that properly and it says, ‘Until we can make a profit foreclosing your hopeplessly stupid prole asses, which we will do in hurry-up mode when it won’t BK us to cut your measly throats.’ If you go to the Seattle Times and read the whole story, the language JPM is putting out to the press is that homeowners should move now to get these careful and fair terms or Morgan may not deal with them later.

    JPM is thereby avoiding foreclosures which would hurt JPM by stringing along homeowners hopelessly out of the money to keep paying interest until JPM is in sufficiently good financial conclusion to take them out and shoot them, profitably, one at a time three years hence. Oh BTW, “Incoming 111th Congress, no need to act, _we_ have a ‘private’ solution to this terrible, terrible problem.”

    The only question _I_ have, is, When do we start the revolution. Take the top 100 names at JPM and book some tumbrils, ’cause these blokes are bad for the health of our country’s economy. The lying, greedy, stench from the maws of these macro pigs at JPM practically asphyxiates me.

  4. burnside

    To all Richard Kline writes, may I add there’s no line too discredited for a fresh airing – isn’t this the same approach mooted by Sheila Bair only a few months ago in an attempt to bully the existing servicer platform into mass workouts?

    Now that FDIC is on the IndyMac threshing floor, SB is getting schooled in what moves produce what outcomes for all concerned and the rhetoric has cooled considerably.

  5. Anonymous

    Yves write: But this is where the loss of local knowledge has put banks at a huge disadvantage. A lender in a community knows in the vast majority of cases how stable local employers are. And commitment to keeping the house is an important intangible that will not factor into these decisions.

    The key word is LOCAL. The move to stop mortgage lenders from redlining through entire neighborhoods was a local phenomenon. Freddie and Fannie buying up mortgages from the local banks would have left the decisions about foreclosure in the hands of the local bankers.

    The New York buffoons came up with the phony investment vehicles. The only political catch: it’s amazing no one in New York listened to George W Bush and dimwit US Labor Secretary Elaine Chao who for 8 years never met their monthly jobs creation target.

  6. Anonymous

    It’s been about 150 years since Lord Acton declared that “the issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks.”

    It’s been about 200 years since Jefferson’s admonitions about people being homeless in the land their fathers conquered.

    So, pray tell, anyone, what’s different this time?

  7. Anonymous

    …What Richard Kline has excellently stated!!

    But I have a question. Who are the “mortgage holders”? Who are these folks who “have been reluctant to renegotiate loans or have been doing so one-by-one”??

  8. MB

    you would have to be a damn fool to refinance into a recourse loan from a non-recourse. Which is what they want, lock people in so they cant walk away.

    this wont work, at all.

  9. Matt Dubuque

    This sentence, excerpted from the WSJ article, explains quite a bit:

    “The changes will particularly focus on a type of loan structured in such a way that the borrower’s outstanding balance sometimes grows month after month.”

    Negative amortization loans, described above, are leading the way in defaults and will likely be made illegal in the next Congress if the Democrats prevail.

    As the article implies, they were a key factor in bringing down Wamu.

    Matt Dubuque

  10. Anonymous

    I agree with Matt above. Certain mortgages that are legal now should become illegal to make a more stable system. I actually would love to see ARMs illegal for residential mortgages, and something like a minimum 10% down, but these two changes would probably be politically impossible. Barney Frank and his ilk would howl to high heaven.

  11. David

    “But perhaps I am not being cynical enough.”

    Brilliant! This is why I keep coming back, Yves. Fascinating content AND deadpan sarcasm.

    Where’s that tip jar, anyway?

  12. fresno dan

    Yves said “I hate to sound like a perennial skeptic,…”
    I like it when your skeptical, and I love it when your cynical.

    I think these things get complicated to obfuscate some basic points:
    1. the bank gets less interest, and is either less profitable or maybe even can’t meet its obligations, or government money is used to bail them out.
    2. The principal is reduced, and the bank gets less money…government bail out possible.
    3. The hit is taken when the home sells for less than the original value of the loan. rinse and repeat.
    People keep talking about the negative affect of quickly collapsing prices…but what about prices going down…2 years, 5 years, 10 years???
    People say people will not neccesarily stop paying if they are underwater.
    And houses didn’t use to be considered investment vehicals either. If this goes for years, people will begin to realize that they will lose 40k, 60k, 100k, or 200k (and for most, this is big time money) at the time of sale. And they will be rationale and say, why should I make house payments and lose money when I sell, when I can default??? They won’t default because they want to, but because they have to.

  13. Matt Dubuque


    It would be inadvisable for me to name names in this forum, but there is now more than one bankruptcy judge in California refusing to uphold negative amortization loans because they contain terms that “shock the conscience”.

    This rebellion among bankruptcy judges will shock those who insist that the US abandon its tradition, culture and history of common law and adopt the European civil law model where judges have very little discretion.

    But our legal traditions come from England, NOT Germany and France and this tradition of enforcing laws in a manner consistent with LOCAL customs and traditions stems directly from when judges traversed the countryside on horseback in England (i.e. they “rode the circuit”) to do precisely this. This is where we get the name “circuit court” judges in the USA.

    Morgan sees the writing on the wall.
    These will soon be illegal and Morgan is trying to bargain for better terms.

    Matt Dubuque

  14. Don

    You make excellent points, but I’d feel more certain of your concerns if I knew what the government intervention might be. From the taxpayer’s point of view,and after seeing how TARP has been going, I’m still not convinced that government intervention is going to be some onerous load on them. They’re doing a fairly effective job of lobbying, leaving lawmakers to do a lot of what the WSJ yesterday called “jawboning”. So, we’ll see.

    Don the libertarian Democrat

  15. Anonymous

    These debt slave homeowners would all be better off just sending JP the keys and telling this den of thieves to stick it.

  16. Anonymous

    JP Morgan is doing something very smart here, both politically and financially. Outside of SoCal and other similarly warm areas the selling season for the year is over. Winter weather and holiday time is here and people won’t be moving for the next few months. That physical reality and the overhang of potential legislation make taking initiative to keep people in homes now logical.

    JPM gets interest. JPM gets a few months of valuable maintenance on a large chunk of assets during cold months for free. JPM creates breathing room for processors who are overwhelmed, avoiding mistakes and fraud. JPM retains the assets and all current options on what to do with those assets remain intact. The only thing JPM loses is a whole lot of vacant homes they have to pay someone to manage.

    I’d imagine that someone at JPM ran the model against seasonal home sales and when they factored in current market supply/demand it showed them the best $ outcome was to be a landlord for now rather than a seller of an empty house declining in value. Lesser of two evils.


  17. Anonymous

    “MB said…
    you would have to be a damn fool to refinance into a recourse loan from a non-recourse. Which is what they want, lock people in so they cant walk away.”

    I am glad someone is making this point. That was my first thought, since when has a business, ESPECIALLY A BANK, ever done anything to hurt itself and help its customer?

    As KARL has pointed out, get a lawyer when doing any workouts to examine the terms. Will these suckers be duped again and take aa ‘deal’ to become debt slaves and have their wages garnisheed forever?

    They STILL can’t afford the house, so why spend bilions and prop them up?

    This isn’t any type of permanent program anyway it appears, but something of a temporary move ala Wells FArgo allwing delinquent loans to go 180 days instead of 90. What has changed? Its smoke and mirrors to give an illusion of helping and temporary making the banks look better on paper.

    This temporary loss keeps the buyer in the hopuse and avoids JPM having to buy and maintain these properties is an entirely selfish move. JPM could care less.

    They will take the FED billions to make them whole by swapping their worthless toxic waste for Treasuries.

    Sorry for the scrambled rant, but this continued nonsense makes me sick. Whatever happened to taking lumps and letting nature take its course?

    Values must find their own level, on their own.

  18. Anonymous

    There is no overall solution only default for both the banks and mortgage holders. This realizations is beginning to creep into the political and media reality which bubbles up as anger at those terrible banks.
    The SFR downturn has basically just begun with years of foreclosures, slow sales velocity and the BK of most public and private builders.
    The gov’t via the several FHA programs has become the new subprime vendor offering 3% to zero down loans in a declining market no less and generating a new wave of underwater homeowner wantabe’s.

  19. River

    Yves, you are not cynical enough about this proposal from JPM. You have an excellent blog, but do not be taken in by the pigmen.

    Home prices have to adjust to wages or wages have to adjust to home prices. There is no third way.

  20. Mara

    Cheers Yves, keep it coming girl! I can only hope for decency from bk judges and sheriffs who refuse to evict people (Chicago did this recently). About 4-5 months ago there was a bigger, tho under-reported, story about BK judges who threw out the fcl on the basis that the mortgage trustee didn’t have the actual deed, therefore their claims were invalid. The entire mortgage was nullified. Happened in Ohio, and in Calif. My kind of judicial activism– and I never wanted to be a populist, but here we are.

    Indeed, as you pointed out earlier, settling for a full-recourse loan would be the equivalent of debtor’s prison for these people. Of course, the same ones who were, shall we say, less sophisticated enough to accept a neg-am loan would be the same ones duped into agreeing to pay it forever.

  21. donna

    Hell, it took JPM four years to settle my mom’s estate, which was a pretty simple one. I think it will probably take them 2-3 years to do an average foreclosure anyway, as incompetent as they are.

  22. Mara

    One more thought…As River said: “Home prices have to adjust to wages or wages have to adjust to home prices.”

    An excellent point that is rarely brought up. Those many years of “outsourcing” jobs set the stage for needing lower qualifying standards on loans, since many folks ended up with lower hours or lower pay replacement jobs. Only brain-dead MBAs could convince themselves that if we could increase the consumption while taking out the wage expense could corporations show larger and larger profits and “make America strong”. This is like selling your blood for money. A good idea for a while, until the anemia and sickness overtake you.

  23. Anonymous

    You have very adroitly exposed the real reason for JPM’s mods – Recourse Loans. Very few homeowners have a clue as to what a recourse loan is, therefore they will sign up in droves. JPM looks like they only want to help, which will buy them goodwill in the upcoming administration. Next year, after they have suckered enough home owners into these even more toxic loans, and when housing prices have fallen even lower, they will start foreclosing. Then can then go to Congress with the excuse “We did everything we could to help homeowners, but it just didn’t work. We’re the good guys, you don’t want to punish us.”

  24. Anonymous

    I wish someone would address the unintended consequences. Take a look at the over 500 comments on the major newspaper article. I find it interesting that we are so carelessly promoting loan modifications. For every headline on a loan modification I imagine 5 prudent and responsible Americans are now considering paying their bills. I know I am.. In fact I can’t believe I am trying to figure out how to game this so I don’t have to lose sleep at night being so angry. If I just go and max out the cash on all my cards and then send letters and plead the lost of my job in May from Lehman brothers then I bet I will get a bailout..

    My sibling has a non-recourse interest only home in CA due to reset in 5 years. Inland empire.. We are both watching closely and waiting when it will be the most conducive time to have him walk away.. There really is no reason for anyone now in America feel compelled to pay off their debts.. I find many of our famous intellects seem to forget about this “common sense” human nature consequence when demanding we do loan modifications. This will be death of our financial system..

    We all know now or we all are figuring out that a fico score will mean nothing in the future if the banks want to do business. This and the “moral” argument is losing pace really fast..

    I suggest taking some time out and find out what 80 percent of the responsible and prudent are planning to do once this “loan modification” promotions becomes mainstream…

  25. Anonymous

    oops.. regarding my above post.. I forgot the all important “NOT” word..

    “Americans are now considering NOT paying their bills.”

  26. thebigkill

    Modifications, if successful, also provide a backstop to home prices. If the modification n a home purchase of $400,000 is successful, it’s one less foreclosure that could drive down the median price to below $200,000, which would result in another cascade of foreclosures. You want to keep those who have a stake in homeownership keep a stake in homeownership.

    American homeownership has transformed itself from a source of pride to a source of investment. That needs to change. Homeownership is a privilege, and the bullish cycle of homeownership created this foolish sense of American entitlement.

    Just like any investment, investors want to cut their losses if they don’t see a return on the horizon. With the loan modifications, it will reduce the foreclosure growth, and bolster home price appreciation.

    The modifications keep the borrowers from a default and the homeowners surrounding the potential default from also defaulting. One could see the modification as an insurance deductible from further damage to the whole system of a mass default. And that’s what we MUST avoid. In other words, JPM is doing the right thing long-run.

  27. DD

    Yves writes: “So how, pray tell, are these mass mods going to be made? We all know credit scores are not very useful guides. The mass approach suggests the bank will do no investigation into the borrower’s income, and perhaps will take a statement of income, length of time in job, type of job.”

    Do you really think that borrowers who lied on their initial application as to income, etc. are going to rush over to a JPM office and allow a valid investigation into their financial affairs? It’s not going to happen.

    Very few Mods will get done unless the charade continues.

  28. Anonymous

    ‘Sign on the dotted line’ pay only on reduced interest and give us a percentage of the selling price when you sell. Plus fess. Works for the GSEs.

    Either you’re gonna have wage inflation or eventually have RE values at current wage ratios. A long way to go yet for the latter.

    The only thing complicated about RE (either you can afford to pay or not) is the derivatives connected to mortgages.

    Have a friend in Texas wanting to buy in a new planned community, was told 100% financing, roll the closing costs into the mortgage was given a number to call…..you guessed it, Countrywide agent. Some things never change.

  29. Anonymous

    Excellent post. I could comment on a lot but I’ll restrict it to a thought on principal reductions.

    The bigkill wrote that mods will backstop the housing price decline. They might or might not but here is my concern. If the mods involve principal reduction and that is not divulged via recordation how can anyone determine the fair market value of a home.

  30. S

    Agree with above comment. Mods miss the point. Lots of people bought stuf only to flip and don;t want to be there anyway. Furthermore, perhaps the banks are warming to the idea that they sold massivily undepriced put options. The rational thing to do is walk away. JPM sees the writing on the wall and must realize that the unintended consequence of trickle down paulson bailouts is that the masses may indeed be forming up to declare checkmate. Watch deposit rates and net interest margins. Just as people are incented to walk away given the massive overpricing and virtual impossibility of capital gain over the term (given wages etc.). Anyway willing to play there game is an utter moron. Send the keys and rent a place for half the cost. Worst case sell it to the Fed.

  31. Matt Dubuque

    Sorry S, Fed won’t buy it.

    Maybe the idiots at Treasury will however. Far more likely.


  32. Anonymous

    thebigkill said…

    “The modifications keep the borrowers from a default and the homeowners surrounding the potential default from also defaulting.”

    What am I missing here? The surrounding homeowners will want the same modification or will walk.

  33. FairEconomist

    I’m considerably less cynical about this proposal. Bair is obviously serious about doing mass workouts; she’s almost humorously optimistic, but she is implementing the policy avidly. So workout seem to be government policy. JPM has practically been an arm of the Fed since the Bear bailout so if there’s a government policy I expect them to implement it. I think JPM means business.

    In addition, the California Option ARM portfolio is an ideal one for mods. For the most part, the owners can make the *current* payments and the prices are likely to fall enough to make the current payments “fair” in the sense that if JPM foreclosed and resold they’d get no more. JPM can also dangle huge principal reductions that will draw in many of the more gullible who won’t realize JPM is giving up money it’s never going to get anyway. It’s a better portfolio for mods than the teaser-driven subprime or fraud-ridden Alt-A.

  34. Anonymous

    a suggestion:

    everyone that is reading this post should make a comment to a hometown online newspaper that has reported this story.

    maybe include the link to this page, but at least warn others about the danger of entering into a recourse loan.

    the people are listening and are desperate for intelligent information.

    if you believe there is a need for a revolution in the banking system, the only way to stop them in their tracks is turn the tables on them and force their hand.

    history has made clear that calling for the heads of a couple bankers only perpetuates the problem (read the house of morgan).

  35. NOT_a_REAL_AmErIcAn

    Random thoughts on the article and comments:

    1) We can never go back. Local banks are as quant as the local candy store; with the owner that knew all the innocent little kids. Modern life means: huge populations manipulated and screwed with the sycophant media and computer programs.

    2) The peasants CAN’T make the right choices and “send back the keys”, or do anything to help themselves. They wouldn’t BE peasants if they could. Modern corporations – which are managed and run BY these SAME peasantry – couldn’t exist otherwise. And if they didn’t exist, where would these peasants work? Nope, peasants – gleefully working for the nobility – screwing other peasants, is what history boils down too. Corporations are just the modern instruments of warfare with the peasants gleefully screwing each other wishing they were the nobility instead (not sure who Napoleon is here – but, the same dumbass troops are marching off to Russia AND enjoying every minute of it).

    As a non-peasant, all you can do is watch the carnage and try to keep yourself and your relatives out of it. After all, not ALL the peasants marched off to the Russia with Napoleon.

    Btw, I’m a computer “knowledge worker” – for a large bank (now suddenly larger) – working to manipulate more cash out of our beloved customers. I think our management calls this “leveraging our organic synergistic assets in a going forward space…” Uh, no wait: that’s what they said was so great about the merger, it’s so easy to get the buzz-words confused – maybe it was something to do with level-setting the table-steaks… And people wonder why the financial bus drove of the cliff? Look who’s driving?! It’s the same happy-talkin’ self-delusional ignorant peasants that have been voting fascist for the last 30 years. EEE-HHHHAAAA!!

  36. Anonymous

    There’s been disclosure of the 2007 tax return for Hank Paulson’s Bobolink Foundation. link to bobolink’s 2007 tax return.

    In the foundation’s tax year ended March 2007, the foundation sold its GS stock for $95.7 million, and since the foundation is tax exempt, it didn’t have to pay tax on its $40.4 million of gain from the sale. Unlike if Paulson had sold the stock himself. The foundation invested the proceeds from the sale in $6 million of US government debt, $53 million of investment vehicles managed by Goldman (including a distressed debt fund), and $40 million of corporate debt a lot of which was issued by financial companies, like Wachovia, Wells Fargo, WaMu, MS, JPM, HSBC, and BAC.

    Based on this 2007 Bobolink tax return, Paulson didn’t have a financial conflict by helping Goldman Sachs avoid going bust in Fall of 2008 due to his relationship with Bobolink, although through the Foundation Paulson would benefit by helping issuers of its financial paper, like Fannie and Freddie.

  37. Robert Oak

    How can you say that this is just a preemptive strike against an Obama adminsitration move?

    JP Morgan Chase is the Obama administration!

    JP Morgan Chase CEO Jamie Dimon rumored to be Obama’s Treasury Secretary.

    So considering the revolving door, at least JP Morgan Chase is taking some right moves, but from the various appointments being prereleased of the Obama administration, including neo-liberal Rahm Emmanuel as chief of staff….

    A revolving door, neo-liberals, DLC corporate Democrats actually enacting a Progressive or Populist policies?

    Well, I’ll place bets that doesn’t happen here.

  38. Michael

    Yves and everyone else – I don’t think you are cynical enough. Karl Denninger explained it best:

    “See, a refinance, which this is, converts your mortgage into a recourse loan. That means if you take their “great deal” and then default later on (e.g. you lose your job in the upcoming Depression) your wages can be garnished forever and, if you earn more than the median income, you can’t even get rid of the debt in bankruptcy.”

    Which is exactly what these banks want to drive these hapless buyers into – a situation where they are forced to pay off these loans no matter what, even if it takes them the rest of their lives.

  39. Anonymous

    Most attorneys are passing up an unparalleled opportunity to earn high fees and high satisfaction from their clients by failing to research and understand the current environment of mortgages, notes, securitization, foreclosure and eviction.

    I have seen emails regarding the case against appraisal companies and it is understandable that someone would issue the comment that it was negligence and not a pattern of conduct falling under TILA, RICO and other statutes and laws, but nonetheless it is wrong. My research clearly shows that the three main rating companies — Fitch, Moody’s, and Standard and Poors — got into a turf war over market share and profitability. The investment banking community stoked the fires as much as possible and ended up negotiating ratings instead of issuing ratings based upon due diligence and industry standard analysis. My blog site will demonstrate that it was a pattern of conduct that existed, evolved and grew over many years, ending up with fishing trips and other perks given to the ‘analyst’ who was issuing the rating. The threat was that they would take their business elsewhere to get a rating if the issuer did not get what they wanted. This is all documented in writing in articles (Wall Street Journal, NY Times) and testimony. This was not negligence — it was an effort at plausible deniability.

    On the other end of the spectrum there was the same fraudulent activity. The appraisals were of real property. And the appraisers who came in with the high appraisers got the business and were paid bonuses, whereas the honest appraisers were left in the dust with no business because they would not lie. In 2005 8,000 appraisers petitioned congress warning of the impending crisis and the fact that they were being financially damaged because they wouldn’t ‘play the game.’ Just last month, a class action of appraisers against the mortgage originators was filed for exactly that reason. 10,000 convicted felons in Florida were recruited and licensed as mortgage brokers, most of whom had been convicted of economic crimes. I’m sure the same figures hold true in most states that were hard hit by this scheme.

    On the one hand, no investor would have purchased a AAA-rated MBS (cash equivalent) if they had known that the rating was based only on the top tier of a pile of junk, which is exactly what happened and is no longer disputed. On the other hand, no borrower would have signed a deal that used his personal identity, credit rating and personal information in an elaborate scheme for selling unregulated securities to defraud investors, based upon a fraudulent appraisal of his property — an appraisal that he relied upon along with his reasonable reliance (according to black letter law) on the lender’s underwriting, due diligence and appraisal review procedures.

    All of these people, committees and procedures were condensed into one desk with one person and rubber stamp that approved any loan application including the now infamous NINJA loan -no income, no job, no assets, no problem. A Dog with a note in his mouth could get a $300,000 loan, because they were all table-funded loans for which the chartered financial institution was not at any risk, where the ‘lender’ on the note and mortgage had been paid in full in most case BEFORE the loan closing or contemporaneously with the loan closing, AND they had received a 2.5% fee for lending the use of their charter to an unregulated, unregistered entity that was in the home loan business by virtue of an illegal undisclosed pooling and services agreement and an assignment and assumption agreement, most of which violated the express terms of the note, the express terms of the Truth in Lending Act, and banking regulations.

    The economics were flipped in the mortgage meltdown period of 2001-2008. The worse the loan, the higher the stated rate of interest on the note, even if the borrower was actually paying a tiny fraction of the interest, was not amortizing the note, and was not paying into escrow for taxes and insurance. Thus some loans had a stated interest rate of 16.5% which was thrown into a pool to lift the overall apparent yield, even though the borrower was paying 1% interest only on an option ARM.

    Since the MBS certificates were being sold at 8% or lower return the total “value” of the mortgage doubled or tripled when thrown into the pool and that is what it was ultimately sold for — a $300,000 NINJA loan could be sold for $600,000 whereas a $300,000 conventional fixed rate mortgage to a borrower with an 800 FICO could only be sold for par value ($300,000).

    The result was that Wall Street was bottle-necked with around $10 trillion from the sale of ‘mortgage backed securities’ for which they had no mortgages, no notes, no backing. So the pressure and rewards, bonuses, rebates, kickbacks and graft was intense as demands were made for loan documents of the highest dollar amounts possible. The sales effort was the most intense the world of financial services has ever seen with armies of mortgage originators (bird dogs) literally sent out to knock on doors, or cold call people from boiler rooms.

    FACT: More than half the loans in trouble were refi’s NOT requested or solicited by borrowers. This was not a case of shady borrowers pushing the market looking for money. This was a case of money pushing the market looking for anyone who would sign loan documents. As long as the money was pushing the market the appraisals grew for entire neighborhoods and cities by virtue of the sheer enormity of the scheme.

    The only way to satisfy Wall Street’s insatiable appetite for signatures was to either forge them, which they did, fake them, which they did, or lie about them, which they did. The best way to satisfy a demand for another $100 million in mortgage loans was to inflate a $50 million portfolio into $100 million. And that is what they did — on both ends of the spectrum, from the investor who put up the actual originating funds, to the borrower who thought he was simply financing his house.

    The clients you can receive in your office are a complete cross section of society from retired nuns, to police chiefs, to professionals and workers of every type who under pressure and clever scripts (some of which Attorney General Gerry Brown in California actually has) they fooled even some pretty sophisticated, educated and experienced people. The reverse red lined area of low income, low education and no sophistication were red meat and easy prey. People who had owned their houses free and clear were convinced to go into deals where they are now homeless.

    Despite clear Federal and State laws to the contrary none of these facts were disclosed to borrower or investor. Incredibly the standard answer we are getting now when we ask for the real holder in due course of the note and mortgage, is that this is ‘confidential’ information and cannot be revealed to the borrower or any of his representatives.

    I could go on of course. The point here is that nearly all the foreclosures are fraudulent, nearly all the sales of mortgage backed securities were fraudulent, nearly all the credit default swaps were leveraged out of any sphere of being honored, and the same holds true with insurance products from AIG, AMBAC etc. In addition, most of the players have errors and omissions policies that cover the losses. The reason the credit markets are in paralysis is not because home values went down, it is because TRUST was destroyed in the financial system. Only $13 trillion in MBS derivatives out of a total derivative nominal value in the credit markets of $600 trillion. Even a 40% drop in home values would not account for 1% of the total credit market. The problem is that they all know now that this was outright fraud — like writing NSF checks or checks on a closed account. It cast doubt on all $600 trillion in credit derivatives. Auctions stopped, exchanges ceased operations, and normal credit liquidity was gone. The only difference is that the numbers are larger than the normal paper hanger writing bad checks.

    Now add to this mix that 40% of the notes were intentionally destroyed, there is no chain of title recorded, and the proceeds of payments on each note were retained and not passed on to the appropriate holder in due course. Add also that contrary to the express terms of the note, parties with whom the borrower did not know he was in privity had secretly agreed to divert his payments to pay off a stranger’s loan.

    Now I write to you to invite you to consider the following premise: that a firm that litigates securities issues is the most likely to gain credibility in front of a Judge in state, Federal or bankruptcy court in explaining these factors. Nearly 4,000 pro se litigants have had the lender tossed out of the foreclosure process and there are some lawyers who have dropped everything else because representing homeowners has turned the graph of their law practice into a hockey stick, making them more money than they ever saw in their lives. And yet…. most lawyers won’t listen. I have over 300 cases in Arizona alone to refer without a referral fee expected. I have given seminars in California and Arizona without CLE credits and I got a pretty good turnout both times, but no Arizona-licensed lawyer showed up even to the seminar in Phoenix. So far, I have no Arizona lawyer to refer cases to even though in the surrounding states I have many.

    So here is my challenge or request or whatever you want to call it. I respectfully request an audience with the supreme leaders of your firm to present the business case for representing homeowners who have obtained mortgages from 2001-2008 whether they are in foreclosure or not.

  40. Yves Smith


    I have said before and I will say again, Denninger is off base.

    First, a very large proportion of mortgages are already refis. Over half the subprime were cash-out refis. Remember, as Tanta points out, many people became subprime as they became overextended and refinanced from prime into subprime as their finances deteriorated.

    In addition, pretty much anyone who had a mortgage prior to 2002-3 refinanced then to take advantage of low long term rates (and I don’t mean refinancing into ARMs, just fixed rate into lower fixed rate. I have a friend who refinanced four times chasing falling 30 year rates.

    Second, mortgages are de facto non-recourse. Even in states where all mortgages are recourse (California), lenders do not chase after people they have foreclosed upon for any shortfall in the foreclosure sale. Why? It costs a lot of money to sue someone, it would cost them money to try to defend it, and they know from experience that you cannot get blood from a turnip. It takes a fair expenditure of legal $ to pursue someone whose foreclosure sale reaped less than the mortgage balance (and non-standard, mind you, while foreclosing is a much more routine process) and a pretty much guaranteed negative return on investment.

    Another indicator: from what I can tell, no one, absolutely no one, has been pursued for trashing their house prior to eviction. Some people apparently ripped out all the copper. Now that is an activity banks would very much like to discourage, and I am sure they could construct a legal theory if they wanted to. And per above, with half the subprimes being refis, you’d think they’d pursue the shortfall in cases where house was vandalized, even if it wasn’t profitable in the narrow sense, to act as a deterrent. They aren’t even doing that.

  41. Anonymous

    Foreclosure Defense: How They Did it
    October 29, 2008 · 7 Comments

    One new answer we are getting when we ask for the identity of the real holder in due course of the note is “that information is confidential. You are not entitled to that.” Of course this is ridiculous — if you signed a note and it has been “assigned” to some third party, you have a right to know where to send your payments and to whom. There is no confidential status under any law or theory, legally, morally or ethically. And you have the right to know if the holder in due course is getting paid if there is a mortgage servicer involved. And if there is a mortgage servicer, you have a right to know whether they are indeed authorized to make collections — authorized by the real holder of the note, whoever that might be.

    Lawsuits in Texas and other states indicate that the distribution reports to investors are vague at best and outright fabrications in other cases.

    All of this brings us back to how they did it. How did they sell a $300,000 mortgage for $1 million and get away with it? And what happened to all that money? ANSWER: They sold the same mortgage over and over again. That is called fraud. They put the loan documents in pools that were described in tables that were impossible to decipher. See dsvrn.6m.d.htm .

    They were able to do this and make it “work” because they wanted and pressured the lenders to give them the worst loans possible carrying the highest interest rates possible with the most onerous terms for prepayment etc. that were possible to insert. That is because these loans were made with a note bearing an interest rate of 16% or more but they were put into pools of assets that contained a few real loans, thus bringing the average STATED return on investment to perhaps 6-8%. This was a fictitious return because none of the 16% loans were paying anything other than zero or teaser rates.

    Even though the pool contained numerous loans on homes that were appraised at 50% over market, and terms wherein the “borrower” was paying nothing to nearly nothing on the loan for the first few months or years, the loan went into the pool as a “performing loan” (because nothing was expected from the borrower) and sold as though the 16% income ($48,000 on a $300,000 note) was being paid. An unsuspecting investor would put up perhaps $750,000 to buy certificates for the $48,000 in income, especially if it was insured and carried a AAA rating. There is a $450,000 profit on a $300,000 loan — available to the investment banker only if the the loan was toxic waste (Z tranche) classified as such because there was no chance whatsoever that it could ever be repaid.

    But wait there is more. If you assign the $48,000 fictitious income into multiple parts (say $8 parts of $6,000), you could assign the same note to eight different pools. In other words they were selling the same note multiple times. If you and I did that we have free room and board courtesy of the state or federal government in a prison of their choosing. But on this scale, despite the clear presence of two sets of victims that were coerced, deceived, cheated and misled (borrowers and investors) the bailout went to the thieves instead of the victims.

    What this means to foreclosure defense is that your defense goes far beyond the “where’s the note” strategy. It goes to whether the note has been paid in full and whether there are multiple parties (investors) who are equity holders in the note and perhaps even the mortgage, all of whom have at least an arguable right to collection — totaling perhaps 300%-500% of your loan amount. It means that your payments probably went into the wrong pockets. It means that even if you made no payments, they probably paid the investor anyway out of reserves, overcollateralization, cross collateralization or one of several insurance products.

    The reason the note is gone in most cases (destroyed in 40% of all cases) and lost in most other cases is that the terms of the note do not match up with the description that went up line in the securitization process. That leads to only two possible conclusions:

    Either the note was separated from the mortgage making the secured obligation into an unsecured obligation thus voiding the power to foreclose OR the “assignments” were invalid because they were undated or otherwise defective leaving the mortgage and note intact — but PAID in full. Either there are assignees out there who have rights to the note obligation or there are not assignees with any rights.

    If there are assignees with rights, you need to know who they are, how they got the loan, and whether they are proper holders and if they are still holders in due course and if the seller of your mortgage sold the same deal to other assignees. And if so whether your payments or someone else’s payments were properly or improperly allocated to your account — not at the mortgage servicer level but much higher up at the level of the Trustee for asset backed securities series AAAA2007. You find that in the distribution reports. And if it isn’t there you find it through discovery asking for explanations of exactly where the payments went, who got them and why, along with proof of deposits and how they wer entered on the books of the receiving party.

    If there are not assignees with rights, then the case is simple it is defended by one word: PAYMENT. They were paid in full by a third party, plus an undisclosed fee (TILA violation) for “borrowing” the lender’s license in a “table funded loan” where the agent (mortgage aggregator) of the investment banker, directed by the CDO Manager (Collateralized debt obligation manager) reached around the apparent lender and placed the money on the table to fund your loan. The apparent lender’s name was put on the note and mortgage. Why? Because they wanted to qualify for all the exemptions that apply to banks and lending institutions even though those institutions were not making the loans.

    The apparent lender was paid a fee for 2.5% for pretending to underwrite the loan, perform due diligence, confirm the appraisal, confirm the viability of the transaction, confirm the affordability and benefits etc. The lender did no such thing. Brown’s lawsuit brought by the Attorney general of California, shows that the people doing the underwriting were under quotas that amounted to approving 70-80 loans PER DAY. 10,000 convicted felons were recruited in Florida to become LICENSED mortgage brokers. A virtual army of people were given scripts and amrching orders to get those loans signed no matter what they had to offer or what lie they had to tell.


    Bottom Line: Go Get Them. They don’t have the goods and can’t produce them because if they do produce them it may be an admission of criminal fraud.

    Check with local counsel before taking any action or deciding on any course of action in your particular case. This is general information only.

  42. Anonymous

    MODS are directed at owner occupied, what % qualify based on that single issue?

    Other then a blanket bailout based on some fixed % of principle and rate reduction combination will have any meaningful impact on the continuing foreclosure numbers. Even a blanket bailout must be its own standard have a fixed % reduction which will help some and not enough for others.

    The whole debate is a waste of time.

  43. Anonymous

    Why isn’t it in the interest of some holder of CDO’s to put the issuer into involuntary bankruptcy, and have that bankruptcy court put the issuers of RMBS or other securities held by the CDO issuer into bankruptcy, and so on down the line, until there is a bankruptcy court that can force mods with homeowners?

    You might even be able to put all the intermediaries into a consolidated bankruptcy case and have one court deal with all the security holders.

  44. River

    Anon of 816 pm…Excellent post and potential dynamite.

    If your post is correct there is little wonder why so little transparency is available.

    The courts and attorneys will have a field day with this one. The upshot may be that there is little reason for mortgage holders to ‘work out’ anything, since they are already own their home free and clear.

    What a hoot!

  45. Mr Mortgage

    This $110 billion the Chase is modifying is likely the WaMu portfolio it inherited.

    The reason JPM is doing this now is because they already took a large write down on the WM portfolio. Why wait for these Pay Option and Subprime borrowers to default when you can get ahead of the problem by offering them a settlement for less than the write down you have taken at acquisition? This was a smart move. Granted, they will screw it up by not re-underwriting every borrower at 28/36 DTI and lowering the new loan amount accordingly, this kicks the can down the road a number of years and solves their problem for a while at least.

  46. Tom Kanthe

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