Only been a few Congressmen have weighed in on the mortgage documentation mess so far, since wrapping up the current Congressional session and campaigning consumes a lot of bandwidth. Nevertheless, I am getting reports from DC that people on the Hill are starting to take the issue of foreclosure document fabrication, errors, and improprieties seriously.
Some signs of motion today: Al Franken of Minnesota (ironically, the state that has implemented the most bank friendly foreclosure regime in the US) sent a letter to the supposed adults in the room (Geithner, Bernanke, Bair, US attorney general Eric Holder, HUD Secretary Shaun Donovan, and Acting Comptroller of the Currency John Walsh). He asked them to investigate servicers, identify individuals who have been harmed by illegal foreclosures, and in particular, hold GMAC and its employees accountable for any criminal misconduct. He also calls for more oversight of servicers. Full text here.
On a different front, Alan Grayson of Florida opened both barrels on what he called foreclosure fraud factories. This video is a tad more staid than his speeches on the floor of the House, but I strongly recommend you watch it. In particular, he gives some examples of people who have gotten caught in the maw of the mortgage doomsday machine (fans of the original Star Trek can pull up a fitting mental image). He presents case examples that are far from the borrower stereotypes that bank defenders like to talk about. He takes aim at document forgeries, and names LPS, Lender Processing Services, as a prime actor.
This video provides a very good overview (with only a few technical lapses, like the use of terms like “mortgage title”).
As we have recounted, people who can’t afford their house generally do not fight to keep it; Those who go to court generally fall into four categories:
1. They think they have suffered servicing errors (note they can compound rapidly because servciers, in contrast to Federal law and the provisions of the mortgage agreement, will take fees out of payments first, when they are supposed to credit monthly payments to principal and interest first, fees second).
2. They believe they are victims of origination fraud
3. They have filed for Chapter 13 bankruptcies (in a Ch. 13, the borrower is supposed to come up with a repayment plan for the benefit of all creditors; the servicers try to break the bankruptcy “stay” which is a legal time out while the borrower gets his plan approved and instead grab the house).
4. They are in government mod programs like HAMP and have been told they will get a mod but the servicer is still proceeding with foreclosure
Some accounts in the mainstream media that point out that the pushback against the abuse of contract and state law can have real upside. As the New York Times notes tonight:
Evictions are expected to slow sharply, housing analysts said, as state and national law enforcement officials shine a light on questionable foreclosure methods revealed by two of the country’s biggest home lenders in the last two weeks…..
Stricken neighborhoods across the country, for example, could benefit. One big factor undermining home sales is fear of a large number of foreclosed homes coming to the market. If the foreclosures are delayed or never happen, housing prices might find a floor.
“Maybe this is like shock therapy,” said the economist Karl E. Case. “Maybe this will actually get the lenders to the table and encourage them to work out deals that are to the benefit of everybody.”
Yves here. The hoped for outcome is that the breakdown in securitization procedures will force servicers and trustees to stop using the securitization as an excuse for not restructuring loans with viable borrowers. Before some readers howl about borrowers getting freebies, consider: it is normal creditor behavior to try to salvage a dud loan. It was also routine behavior not all that long ago when originating banks kept the mortgage loans they made. And note the big reason we have foreclosures grinding on whether or not they are the best course of action for the investors: the parties foreclosing have no incentives to produce the best outcome for the creditors. Servicers continue to advance principal and interest to the trust until the loan is deemed irrecoverable (which means the advances equal the original loan balance). This also creates powerful incentives to foreclose on homes where the borrowers might be viable with a restructured loan (although it can’t be proven from the outside, some industry insiders suspect that servicers are diverting principal repayments, including from refinancings, to pay themselves back for principal and interest advances on delinquencies). This is an even more potent incentive than the widely noted one that servicers also get fees when they foreclose, but do not get any payments to make loan modifications
Now admittedly there is a wee problem in that foreclosures hit mortgages securitizations from the bottom up (bottom tranches take first losses), while the losses on mods are allotted across all tranches (ie, even the AAA tranche will take a hit). But of all the Gordian knots one might consider cutting to resolve this mess, this is far less thorny that other potential angles into the problem.
But while we have at least some recognition that this document mess might force a lancing of the festering mortgage foreclosure infection, a predictable PR pushback is taking shape. From the very beginning, the servicers have taken the position that the document problems are mere “technicalities”. While that’s a stretch even with the affidavits (false affidativs are a fraud on the court), the problem of widespread failures to convey notes to the securitization trust isn’t a “technicality”; it means what were sold as MBS are potentially just unsecured consumer paper. And it goes further than that: if no notes were conveyed at closing, the trust under New York law (and all these trusts elected NY law for the trust operation) was “unfunded” meaning it does not exist (multiple top experts on NY trust law concur on this issue). I sincerely doubt anyone will try that line of argument in court but it gives you an idea of how fundamental these problems are.
But the preferred, and successful, howitzer of the bankster class is being readied. I’m told, but I can’t find the clip, that a segment on CNN Money on Thursday had a speaker who argued that efforts to fight improper foreclosures would “wreck the economy”. Funny, the banks seem to pull out that line whenever they feel really really threatened. It got them the TARP, it may have been used to cow the Obama adminsitration out of nationalizing insolvent big banks (but I suspect Team Obama was looking for any excuse not to inconvenience Wall Street).
But cleaning up the mortgage mess would fix the economy. The uncertainty over when the housing market will clear and how much of bank earnings and reported equity are a function of extend and pretend is impairing credit market activity. Why do you think new mortgage lending is now a subsidiary of the US government? This unhealthy state of affairs is a direct result to the failure to clean out the rot in the mortgage market.
So we have a simple choice, having the rule of law in this country or capitulating to the banks’ false claims that exposing their malfeasance will cause widespread economic harm. In reality, the biggest potential casualty is the financiers’ unwarranted privileged status. That is why they are so quick to resort to fearmongering, to obscure what is really at stake. But the odds are high that we will again accede to overhyped threats to security and sacrifice what should be bedrock principles of a democratic society.
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Minor issue, too technical, hardly something that would arouse people’s attention, except of course for those who may want to buy a foreclosure. Well yeah, banks messed up – like did not ask for a proof of income, we already know that. Anyway, most believe that it’s a good time to buy. I am with them: can’t wait for the old good times to come back.
“A whopping 70 percent of Americans believe it’s a good time to buy a home (September, 2010), according to the Fannie Mae National Housing Survey released today.
That’s up from 64 percent in a similar survey conducted in January”
Nothing is to technical on this blog, please expand.
The post ends with a rallying call (rule of law, etc), and I don’t see this issue as a rallying call. People want to own homes and will jump through whatever hoops are there to get there. Nor do I think that the populace at large – or even a majority of readers of this blog – view the “banks” and “financial industry” in general as an enemy.
Whom inserted the dream of home ownership as a way to better ones self…banks…for their bottom line (cough bonus)…eh, or do you arbitrary diminish the rule of law because it stands in the way of the masters bonus.
Confidence tricks http://en.wikipedia.org/wiki/Confidence_trick are based on convincing the mark of some pie-in-the-sky promise that cannot in reality be achieved.
It is important to remember that the American people were/are the mark, and while some may have been more culpable/gullible than others, this doesn’t alter the fact that the American people are the mark, and the banksters are the con men.
Corporate shills either 1) like nilys, perpetuate the pie-in-the-sky fiction, or 2) like Neil D, defend the con men by trying to keep the focus on the greed or dishonesty of the mark.
Trading in paper, land and real estate is as old as American pie.
And how appropriate it is that the Land of La Mancha, which gave us the iconic figure that served as a metaphor for the demise of the former economic paradigm—-feudalism—-now gives us a new metaphor for the demise of the current paradigm—-capitalism.
http://cnn.com/video/?/video/world/2010/09/29/goodman.spain.ghost.town.cnn
The dream and the reality now come face to face, and “To dream … the impossible dream …” isn’t always enough.
Replying to Down South who wrote above: “Corporate shills either 1) like nilys, perpetuate the pie-in-the-sky fiction, or 2) like Neil D, defend the con men by trying to keep the focus on the greed or dishonesty of the mark.”
I do not deny the predatory behavior of the banksters, but there are so many using that excuse for their own behavior, my BS detector keeps going off. I only seek to provide a little balance and focus on the other cause of the problem. Namely – too much debt and too much raiding of home equity that proved to be paper profit only. One can hardly ignore the fact that the bankers, or con-men, require a mark to succeed. Now that the con is exposed, we must educate the marks and explain to them how their behavior enabled the con.
As it is often said, “A fool and his money are soon parted.” Now, it seems, many of these same mortgage fools want me to part with my money so they can avoid foreclosure. Whose being conned now?
Welcome from Mars. The banks and the financial industry caused this long recession, it resulted in 10% unemployment and Obama’s support of Wall Street will sink the Democratic Party in the November election.
Al-Qaida didn’t cause even 1% of the damage the financial industry inflicted on us.
nilys says; “Nor do I think that the populace at large – or even a majority of readers of this blog – view the “banks” and “financial industry” in general as an enemy.”
ROFLMAO – you jest!
The ‘rule of law’ is a rich man’s scam that protects and serves the wealthy. The government in scamerica is a rogue gangster government that has been totally hijacked by the wealthy ruling elite through aggregate generational graft and corruption. It stands today as a cesspool of deception. Democracy is a farce and the electoral soap opera, promoted by fawning pussy sell out media shills (they all need a good bitch slapping!), is a shameful low brow production not worthy of the electrons it is puked across the country with.
Bankers are a key element in the hijacking of the government and enslaving the people. They are held in lower esteem than pimps, crack whores and used car salesmen — all comparatively much nicer people — and most people would like to see them get a Mussolini treatment.
You need to get out a little more …
http://images.google.com/images?gbv=2&hl=en&safe=off&rls=ig&newwindow=1&q=homeless+people&sa=N&start=20&ndsp=20&biw=1020&bih=616
Deception is the strongest political force on the planet.
Well said.
Well said, one thousand times well said!
I heard some complete douchebag on NPR (Beth Kobliner??) the other day claim that the economic meltdown was the result of the Baby Boomers taking on too much debt!
This neocon/Wall Street Talking Point, along with all the others could get her seriously damaged (in more ways than one).
People are fed up with all this propaganda BS.
To phrase it simply for all the other douchebags out there:
A bank or financial services institution generates financial instruments from securitized debt (1), then another bank or financial insitution buys that securitized financial instrument, marking it as an asset, then generates yet another securitized financial instrument on the liability side (2), then consider this continues on for another thousand or more times, and you’ll begin to understand what super-leveraging and ultra-leveraging mean, and that further condition that such leveraging allows for ultra-leveraged speculation, and you begin to get an inkling of the BIG PICTURE!
And that is how we get debt-financed billionaires, and all their debt placed into the public arena, which then becomes socialized debt.
Privatized profit === socialized debt.
As one of those who occassionally howls about the deadbeats getting undeserved breaks, let me say I also want to ensure the foreclosure process is fair.
As a renter, I would like to see several changes in exchange for my support of bailouts for mortgage deadbeats…
An end to the mortgage interest tax deduction.
An end to home equity lines of credit or any sort of equity raiding program like cash out refis.
Minimum 15% down payments for all mortgages and no piggyback loans.
An end to deadbeat whining.
I am tired of subsidizing housing for rich people.
Bank industry is making the big bucks off fees from fraudulent loans, selling crummy loans to pensions, servicing foreclousures, and the more than occasional bet the loans will fail as CDOs.
You lose, home buyers lose, hone owners lose, people buying securitized loans lose,
Only banks win. Banks are not interested in changing laws (or even following existing laws) to make good loans (which is why they fight for deregulation and against reform.)
Break up the TBTF banks.
One more condition – no mortgage mods for second homes or investment/rental properties either!
Personally, and I totally admit I am looking at this from a distance and I am missing some of the pain and loss of social status involved in losing your home, but foreclosure, far from being a bad thing, is one of the most powerful tools the people have against the banks, with two main caveats.
Think about it, if I’m sitting in a 1,800 sf house that I put little to nothing down on and I am struggling to make payments on a $400,000 mortgage and this house is now only worth $150,000, then I have a serious problem. Why wouldn’t I bail on the house, rent for a couple years, and then buy an even bigger house in a better neighbourhood for say $200,000? Even better, if I can swing it, is to pull a buy-and-bail move and skip the renting all together. Before this crisis hit if I had claimed someone could leave their current house and buy a better one for half the price, I would have been called insane. But now people can do this but for some reason it is called shameful. So sure there is real pain in losing your house. But that will be more than made up for by both being liberated from high mortgage payments and the prospect of much cheaper housing prices in the near future.
Many (but not all obviously) people will benefit from falling house prices, especially considering the last 30 years of falling wages and the very good likelihood of rising energy prices in the future.
Now sure the ideal situation would be for the banks to just cut everyone’s mortgage proportionally to match current values. And I do mean everyone since there is no way to seperate the prudent wheat from the potential defaulting chaff. The only realistic way I can see the banks being brought into that position is if they were forced to try to stem a massive wave of voluntary foreclosures that surely would hurt their balance sheets. And yes, I know, the government would just bail them out again but at least that would but more pressure on the system.
Now one caveat is the fact that some loans may be recourse. In a normal situation I actually prefer this system, along with high down payments, and even high transaction taxes like you often see in Europe; because these all serve to dampen the housing market. But obviously recourse loans are a very powerful hindrance to voluntary foreclosure. Having your wages attached for the rest of your life is not a very pleasant prospect. But this is where the title mess comes in. Just as poor immigrants in Europe are punished for not having the correct papers, the suddenly sans-papiers banksters at the very, very least should feel a little corporal discipline in not being able to enforce collection of the balance due on a mortgage after the sale of a foreclosed property.
The other caveat is that local government tax collections will be hurt by a large fall in real estate values triggered by a massive wave of voluntary foreclosures. They will just have to find other ways to fund their services. In any case most people would still be better off if their mortgage was cut in half but their taxes went up a bit. Sure people who own their homes outright would be hurt but at the very least their children would benefit from the lower entry level housing prices.
Kevin writes: “The only realistic way I can see the banks being brought into that position is if they were forced to try to stem a massive wave of voluntary foreclosures that surely would hurt their balance sheets. And yes, I know, the government would just bail them out again but at least that would but more pressure on the system.”
This would, correct me if I’m wrong, essentially be a bailout of the homeowners too. By taking the bad debts off the hands of the banks, you allow the mortgage deadbeat to default. What price, then, do we extract from the defaulting mortgage deadbeat? Nothing. Instead we pass their debts along to responsible borrowers and renters. I’m OK with that if we destroy the tax incentives and bad practices that created the mess.
And really – let’s dispense with the notion than anything but a small portion of the defaulters are blameless.
In terms of fairness, no solution will be totally fair but the in the part just before I said: “Now sure the ideal situation would be for the banks to just cut everyone’s mortgage proportionally to match current values. And I do mean everyone since there is no way to separate the prudent wheat from the potential defaulting chaff.” So the ideal would be that everyone in an underwater area gets a reduction in their principal because these are the people who have a realistic threat to voluntarily foreclose and help flood the market with their properties. This process is going to happen one way or the other in any case. If the banks don’t reduce principals the prices of homes will still drop and people will still either walk away or be foreclosed on. The big losers in this case would be those who manage to hang on and keep paying their overpriced mortgages.
By the way, I agree with your ideas. Part of any solution has to be a dampening of the property markets. While by definition this would have a tendency to reduce the number of people who are able to buy a home; the accompanying reduction in price should offset this to some degree. The same thing should happen with consumer credit as well.
As for blame, I am less interested in it. Obviously moral hazard has to be reduced but at the end of the day many, many people benefited from the bubble. On a closely related issue, I am sickened by what is happening in Ireland with their banks. But on the other hand I know that during the boom their foolishness provided me with years of work because these same banks were financing some of the most aggressive Irish developers who were building projects all over Europe. I certainly don’t remember my pleading with the Irish banks to stop lending when the latest Irish-financed city block-sized project would hit my desk back in the day.
But the preferred, and successful, howitzer of the bankster class is being readied. I’m told, but I can’t find the clip, that a segment on CNN Money on Thursday had a speaker who argued that efforts to fight improper foreclosures would “wreck the economy”. Funny, the banks seem to pull out that line whenever they feel really really threatened.
No need to scramble to find any particular clip. We can expect to be hearing this everywhere shortly.
I suppose by their rigged law this doesn’t qualify as the crime of extortion or terrorism, even though it certainly fits almost all definitions of terrorism. (Seeking to instill terror in the general population to achieve a political goal, in this case preserving the lawless finance tyranny.)
(I’d love to hear the detractors of a term like “finance terrorists” explain how this isn’t a terroristic threat. But then they were never able to explain away all the previous threats and actions like intentionally downing the stock market multiple times.)
Here, as in every previous case from the start of the Bailout, the truth is the exact opposite of the propaganda.
Smashing the criminals and taking back the country would heal the economy. Meanwhile bailing them out and allowing them to continue their crimes only dooms the economy to permanent wreckage and ourselves to permanent Depression and serfdom.
Will we finally refuse to be stampeded?
Good question. This is bizarre, too far gone to possibly end in anything but disaster. And the longer it continues unchallenged—rampant fraud, larceny, backdoor bailouts, extend and pretend—the harder the final breakdown.
Apart from Franken and Grayson, voices crying in the wilderness, the complete absence of Department of “Justice” investigations or charges—still, after years—is now simply too conspicuous. As electoral disaster looms for Democrats, and a glaringly-obvious, bipartisan populist issue like this falls like manna from heaven, the DOJ remains comatose? That’s so baffling, it is rankly fishy. I suppose Eric Holder is busy tasking special purpose judges and reinterpreting law in order to dispense with due process entirely.
Even worse, is how this financial train wreck coincides ominously with escalating war, rumors of war, and potentially, global climate disaster. Then, the purpose of FEMA’s rumored concentration camps, the new gulag archipelago, may become painfully clear.
Ominous indeed. It’s no coincidence, though. It’s all one interwoven whole.
Nothing short of an asteroid impact would be an accident by now, and we’d see who scrambled to exploit that.
the foreclosure fraud investigation would not be from the DOJ but from the states AGs
Yves, per your commentary,
“And it goes further than that: if no notes were conveyed at closing, the trust under New York law (and all these trusts elected NY law for the trust operation) was “unfunded” meaning it does not exist (multiple top experts on NY trust law concur on this issue). I sincerely doubt anyone will try that line of argument in court but it gives you an idea of how fundamental these problems are.”
The reason that I am more optimistic about persons “trying this line of argument in court” is the following.
The wise guy that your colleague interviewed–the one who said something to the effect of “then we’re fucked. No one transferred any paper…” may have been some stooge–or may have been a clever scam artist. Although the guy was clearly playing the, “Oops! We were supposed to do THAT???” card–it is more credible to me that the paper was not transferred INTENTIONALLY. This allowed the lenders to slip these mortgages into and out of as many pools as they wanted to–whenever they wanted to. The properties were vaguely described in the prospectuses–not specifically described. This fact, along with the fact that the original notes were never transferred leaves open a fairly wide opportunity for fraud via the simultaneous pledging of notes into multiple pools. (a la ponzie.)
I dug into some of those maidenlane securities that you reported on earlier this year. In the contract language, I noticed that the issue of “oh, and if an original note is lost–a lost note affidavit is good enough” was addressed. How strange that the issue of a lost note–an extreme rarity prior to securitization and “electronic registration”–was mentioned in the contract language as though losing notes was about to become more common. As if someone had already figured in advance that these notes would necessarily be “lost,” because they weren’t going to be transferred, because blank, endorsed, untransferred notes just left these originating lenders with sooooo many more options!
We’re talking Angelo Mozilo here. Is this a shock to anyone?
I’m just not buying that these guys didn’t know what they were doing…
Malicous intent masquerading as negligence?
I’m expecting that the purchasers of these so-called mortgage-backed “securities” are going to bring out the big gun lawsuits. Why? Because those purchasers have *money* and can afford to take a case right to the top.
The fact is that almost every purchaser of a “mortgage-backed security” was defrauded. Unless the trust underlying the security was properly formed, and specific mortgages and notes legally transferred to it (and recorded on local county clerks’ books), the “investors” were simply defrauded. And deserve a full refund of their money.
The banks which generated the frauds are all insolvent the moment this happens. They can’t legally foreclose, if they illegally foreclose they get houses they can’t resell because the title insurers won’t touch them; and they owe more than their total capital to the defrauded investors.
The administration has not used the law against financial crimes. The initial shenanigans of the big banks and investment companies have caused the recession and involved probably quite a slew of crimes. No one went to jail or was even indicted.
We now see what probably is a wall-to-wall fraud machine operated by many lenders and servicers. The best solution is not only to stop foreclosures altogether, but also start to hunt the individuals who were part of the fraud machine and make them pay for breaking the law.
We are either a country governed by laws or we declare that laws don’t applies to the rich.
Yves – I am a non finance person who realy enjoys your blog, because you explain things in a manner that I can understand and your commenters are intelligent and non snarky.
That said, it is becomming comic in terms of how the Den of Thieves being exposed. Congressman Grayson is a wealthy gadfly lawyer who is smart and very often puts people in uncomforable positions. I hope he survives the election.
All this is going to take is a honest judge who stands for the law of the land and it will even get to the main stream media
A couple of things:
1. Last week, NPR’s Marketplace’s pet toxic asset “Toxie” died: http://www.npr.org/blogs/money/2010/09/23/130079590/toxie-s-dead
How many of these toxic assets were purchased by the Fed over the past two years?
2. I assume that what the servicers do will play a major role in what total assets are finally recouped from the various tranches of the mortgage assets. It seems to me like the private sector has failed to operate efficiently and effectively in setting up appropriate and cost-effective systems to handle the roles that they were paid fees for. I winder when the security owners will start to realize that their servicers are jeopardizing them maximizing the return of their assets? Once the bond-holders begin to sue the srvicers because they are not able to realize an apropriate value from the assets, then it will get really interesting.
actually the private sector did do this process the most efficient and cost effective way. they just took the money and didn’t do it at all!
The security owners appear to have, in general, been outright defrauded; they never had any actual mortgage deeds in their trust, and often never had any notes — contrary to the claims of the security promoters.
They have already started suing, but they haven’t gotten that sophisticated yet; I don’t think there’s been a suit based on failure to actually fund the trust yet.
Yves,
Thank you for your service.
Looking in from the outside, You people gave up your access to the Rule of Law the day you accepted the Patriot Act. You signed away all pretense to Justice, and now you are reaping the consequences in forms you never imagined. Your all enemy combatants now baby.
Well, at least potential insurgents.
Boy, isn’t it , in a way, fortunate that this “problem” cropped up at this particular time now that the FED has stopped their buying in the MBS market.
The “unintended consequence”, or so they will claim, the slowing of foreclosures, is the intention.
The servicers will get a do-over because of whatever and everything will be fine in {place moving time-frame here}.
Slick!
One has to wonder, if actually doing the paperwork according to long-standing law to properly transfer the liens and notes was just too burdensome in this modern fast-paced age, um, don’t the banks and real estate business pretty well own the state governments? Especially in the really hot real estate states? Wouldn’t it have been a whole lot more prudent just to have your pet legislature rewrite the rules to allow a more streamlined all-digital sort of procedure than to ‘informally’ keep track of who owns what without actually transferring it legally? And it seems they couldn’t be bothered to actually keep track informally either.
Crazily, there’s a Land Registry in many European countries, and it’s being digitized. So yeah it would probably have been straightforward to get states to create digital land registries — a good idea, even, as it would save a lot of trouble.
But you miss the point. A state-run electronic system would have collected real estate transfer taxes of one sort or another. MERS was designed to *evade taxes*.
…and I am still surprised that local governments haven’t prosecuted MERS as a conspiracy to evade taxes.
Thanks Yves, well put.
So what happens to my newly bought house when a guy with dark glasses pounds on my door and says I have a week to vacate because another “owner” who also has a claim via one of these highly questionable tactics is going to foreclose? Does my title insurance cover this? And if it does why aren’t the Title Insurance companies all over this? A clear chain of Title seems to me a bedrock issue.
The fact that we can just wave our hands and trot out pablum like, nilys – “Nor do I think that the populace at large – or even a majority of readers of this blog – view the “banks” and “financial industry” in general as an enemy.”
Obviously this guy’s a plant. Apple pie, motherhood and having a home – all standard props in the copywriter’s toolkit. The sad fact is that banks and real estate interests are mounting a well-funded counteroffensive to change the tone of blog comment sections. Nilys is a perfect example.
The objective is to steer the conversation away from anything substantive – such as how much faith you can have that you didn’t just buy the Brooklyn Bridge – to flummery like, Mom and Apple Pie and everything’s gonna be all right. I hope Yves recognizes the clear threat here.
The chain of ownership is an issue that all the big boys are going to hope can be dealt with all “hush hush and on the QT” one poor sucker at a time. Let’s face it, if that dude with the dark glasses pounds on your door you’d better have damn good title insurance or a lawyer and a chunk of change. Do you want to defend a claim against the BoA? I don’t think so.
If this issue gains any traction at all the banks are liable to find they can’t find any buyers for their trashed out repos. The investor class who buy up these properties won’t touch them if they can’t buy protection against counterclaims.
I certainly hope your assessment about these threats is true, because it shows that Yves is worrying powerful interests. That’s a good thing.
hate to break to you but what you mention has already happen. and i think it was BOFA. foreclosed on house they didn’t own. had in fact sold it already too. took some money etc to get it all straightened out. and bofa explanation? oops?
Title insurers are already backing off, starting to refuse to insure foreclosures.
BOA’s lost two multimillion dollar lawsuits for breaking into, trashing, and “selling” the wrong house (in one case, it was owned outright, no mortgage)… they don’t seem to care, though.
Remember, this was Jeb Bush’s Florida, the fraud has been ongoing, localized and pervasive.
“There is something rotten in Dade…”
forbes.com/…/florida-bush-lehman-biz-beltway-cx_mb_1130florida.html
“A government money market debacle unfolding in Florida is raising questions about former governor and presidential brother Jeb Bush’s possible involvement in the mess. Florida froze withdrawals from a state investment fund earlier this week when local governments withdrew billions of dollars out of concern for the fund’s financial stability. In the past few days, municipalities have withdrawn roughly $9 billion, nearly a third of the $28 billion fund (which is similar to a money market fund) controlled by the Florida’s State Board of Administration (SBA). The run on the fund was triggered by worries that a percentage of the portfolio contained debt that had defaulted.”
Yves, when you say this
“the problem of widespread failures to convey notes to the securitization trust isn’t a “technicality”; it means what were sold as MBS are potentially just unsecured consumer paper. And it goes further than that: if no notes were conveyed at closing, the trust under New York law (and all these trusts elected NY law for the trust operation) was “unfunded” meaning it does not exist (multiple top experts on NY trust law concur on this issue). I sincerely doubt anyone will try that line of argument in court but it gives you an idea of how fundamental these problems are.”
This was what I was getting to on the FUBAR post you made several days ago.
If the trust doesn’t exist that creates a different type of vehicle than the one ostensibly created under the REMIC tax exemption under the IRS. If I understand it correctly it exposes the “trust” to taxes which would likely result in the unwinding of it with losses likely. But the critical thing is that if the IRS were to determine that “true sales” did not take place then the IRS penalty for that is confiscation i.e. 100% of the gains not simply the existing tax rates and it is retroactive to the creation of the entity or up to the limitations the IRS has in going back through taxable years.
I can see investors filing suit. The reality is with MBS there is a virtual certainty that every note in the trust – not just the ones being foreclosed – is not owned by the trust.
This is truly an issue beyond foreclosure. Look at a simple re-finance. If that note was extinguished by the refinance and a new note created there is still an improper document chain and clear title doesn’t exist. Between the refinancings and foreclosure sales or even short sales for that matter there must be literally millions of bad titles out there. Those homeowners now have a legal problem and almost all of them don’t know it. In many jurisdictions it will take a legal proceeding to fix these situations and expose the current homeowner to claimants.
Not to mention the current note holder is sitting on an unsecured loan. This means the current note holder has a vested interest in pursuing clear ownership of the note.
Further, on the other side of the equation, investors don’t always hold the cash flow as a passive investment (simply collecting cash) but they use that asset as collateral for other borrowings. Among the banks holding the Super Senior positions this is most certainly the case. It would be in the best interests of the lenders (especially money market) to make sure that the collateral they have is good. If it is coming from MBS paper that literally isn’t backed by anything due to this debacle they need to demand other collateral which likely isn’t available.
Oh, and one more thing. If anyone thought MBS was illiquid before it might as well be a block of granite until this mess is straightened out.
I was onto the IRS angle months ago. It’s very clear the IRS will not touch this with a ten foot pole. And the IRS also can fall back on the notion that the tax characterization does not have to conform with the legal characterization.
The notes in many if not all cases appear to be stuck earlier in the securitization chain. Some securitization lawyers will try arguing that the trust does have some sort of rights (the notion would be that they didn’t take the steps necessary to perfect all their rights) but the New York trust experts beg to differ. But since many of the originators and/or the intermediary entities through which the notes were to have been conveyed (per the pooling and servicing agreement) are bankrupt and may not longer exist, it is not at all clear how they could be conveyed now, independent of other impediments.
I found this court document to be a good illustration of the fiasco. It also illustrates another fiasco that is out there – assignments to the trusts that are after the closing date.
http://www.hppinc.org/_uls/resources/Gewecke_Memo.pdf
I would expect the holders of MBS to be suing the banks left and right, as they were defrauded by being sold unfunded trusts. It seems to have started, but I haven’t heard much about it in the last couple of years — has anyone been tracking such cases? Any big ones?
Yves, I found the statement that servicers are foreclosing, not to benefit the trust/MBS investors, but to benefit themselves, a tad alarming. What it suggests is that those with real interest (even if the paper is tainted) in MBSs should take the servicers to the woodshed, and we (citizens, interested in protecting our MBS interests (remember, we own a lot of this stuff thanks to Tim and Ben)) should encourage such internecine warfare. I know I’m tilting at windmills, but I want the U.S. to recover every dime possible from its idiotic investment in MBS since 2008. And the fact that servicers have created “funny paper” is a great opportunity to put this junk back on the originators and let them kill the servicers. And oh, BTW, if indeed this did lead to lots of junk MBS being thrown back onto the originators, damn right, some of them would go down and the domino theory might just get tested. So that “wreck the economy” meme is not wholly invalid – given the scale of the fraud underlying the MBS market, this issue sure could kill some big banks. Gee, however would we all survive without our parasitic vampire squids?
It’s worth noting that a bunch of the servicers have proved unable to give proper accountings of the mortgage debts, from either the investor or homeowner side. Some, like Countrywide and IndyMac, appear to have simply demanded money from the homeowner whenever they felt like it, while sending different amounts of money to the investors….
Definitely running the scheme to maximize the servicer’s income (probably the servicer’s CEO’s income if they’re typical corporations).
“while the losses on mods are allotted across all tranches (ie, even the AAA tranche will take a hit). But of all the Gordian knots one might consider cutting to resolve this mess, this is far less thorny that other potential angles into the problem.”
Huh? Isn’t the precise reason that an AAA tranche exists is to avoid this outcome? I suppose if the lower tranches throw some incremental yield towards the higher tranches this could work, but it does seem pretty “Gordian” to me. Or maybe we could reinstate the forebearance tax and use the proceeds specifically to grease the higher tranches to let this stuff go through. If you are going to get an $80K forebearance it might not be such a bad deal to pay the tax if that allows it to proceed.
Where is Atticus Finch when we so desperately need him?
“Now admittedly there is a wee problem in that foreclosures hit mortgages securitizations from the bottom up (bottom tranches take first losses), while the losses on mods are allotted across all tranches (ie, even the AAA tranche will take a hit).”
Oooooooohhhhh. So, winding up the foreclosure machine and pointing it at the borrower hits the (more) stupid bondholders first, but negotiating something hits all of the bondholders. This is a bad set of incentives.
Wow, this party is starting to rock!
Did you get the note saying that you are in charge of popcorn for all?
Rock on!
The popcorn economy is on the table, enjoy!
I am always amazed at how some people blame the homeowners. There has been absolutely blatant predatory lending and the banks designed the loans to fail, especially in the case of Option Arm loans. The homeowners was depending on all the professionals involved to steer them properly, but instead they got ripped off. The banks were bailed out to the tune of trillions of $$ but we can’t possibly help the true victims, the homeowners? WHY IS IT OK TO RESCUE A BUNCH OF CROOKS WHO GIVE THEMSELVES 100 MILLION DOLLAR BONUSES AS THEIR COMPANIES LOSE BILLIONS, BUT NOT OK TO HELP HOMEOWNERS WHOSE LIVES ARE ABOUT TO BE DEVASTATED BY LOSING THEIR HOMES?
The way people think really boggles my mind sometimes….