Foreclosure Crisis Finally Hitting Banks Where it Hurts: Their Stock Prices

I’m surprised it has taken this long for Mr. Market to wake up and smell the coffee.

Major bank suspending foreclosures in a whole passel of states, overwhelming evidence of fraud on courts (commemorated in sworn testimony), and increasing evidence that these developments are mere symptoms of much deeper problems had been spun by the banks and its Team Obama enablers as mere “technical” or “paperwork” problems.

It’s taken analysts a bit of time to start taking a stab at what this might mean for banks. The Wall Street Journal, New York Times, and Financial Times all have prominent, alarmed articles tonight on the decline in bank stocks and residential mortgage bonds.

The funny bit is that the analysts whose reports stirred so much alarm really don’t have a good grip yet on the nature of the liability (as in you need to understand what units with the bank are vulnerable due to their involvement with this mess and what their exposure might be). A Washington Post piece gives a more candid comment on the lack of a decent understanding of the wider ramifications:

It is not yet clear what the consequences would be if large quantities of mortgage-backed securities turn out to be defective – or how the trouble could be solved.

“If the basic principles of property law have been violated here . . . it may be extremely difficult to fix,” said a source involved in government oversight of financial institutions, who spoke on condition of anonymity because of the uncertainties involved. “There is a chain of questions that no one seems to know the answer to.”

We’ve been poking at this story since early in the year, more intensively since May, and even with persistent effort and good contacts to people in a position to give good readings on the legal and procedural issues, there are still a lot of unknowns, simply because the real estate market is fragmented and practices varied. But what has been striking the deeper we have dug into this morass is that on almost every matter of fact (as in how exactly did the banks handle the notes, which is the borrower IOU), the answers are coming in consistent with worse case scenarios. I continue to be gobsmacked at the flagrant disregard by large numbers of securitization industry participants for adherence to their own contracts and legal procedures necessary to protect their clients and ultimately, their organizations.

Ah, but I forget, a banker’s primary loyalty is to his own paycheck.

With that as background, the analyst reports that caused a bit of frisson on Thursday are actually pretty tame, in that they are putting more realistic numbers on known issues but have not yet made a serious reading of the implications of the escalating foreclosure mess and the much bigger issues it raises of the failures to convey residential mortgage loans properly to the securitization trusts.

The sighting that caused the big alarm focused on a longer-standing but not widely recognized process, namely, that Freddie and Fannie have been putting back mortgage backed securities to due to purported problems with the loans as originated. The report by Manal Mehta Branch Hill which was released in August but got heightened attention today, includes some pretty dubious analysis. For instance, it seems remarkably unaware of the fact that the suits filed by some monolines are called “rep and warranty” suits, in that they allege that the defendant made inaccurate representations and that those in turn led to investor losses. Gee, the banks sold subprime crap, it blew up, surely the monolines have a case, right?

Um, not so easy. The banks did say these were not such great loans. So the legal question is two part: to what extent were the loans worse than specified, and to what extent did those shortcomings produce losses.

So guess what? The second part gets argued on a loan by loan basis. No joke. The plaintiff has to establish that loans failed because they were crappier than promised, as opposed to, say, bad luck (the economy went to hell and a lot of people lost their jobs). Proving why a borrower defaulted is not trivial. Therefore these cases do not generate large settlements.

And amusingly, the presentation lists Assured Guaranty as a potential beneficiary of litigation related to putbacks (see page 4). Guess what? Assured hasn’t even filed a lawsuit. Kinda hard to win the lottery if you haven’t bought a ticket.

Having said that, Chris Whalen for some time has flagged putbacks by Fannie and Freddie to the major banks as a continuing drain on bank earnings.

But the banking industry is still in denial about the severity of its new headache, the foreclosure mess, from a legal and therefore monetary perspective. The battle lines are pretty clearly drawn. On the one hand, you have the industry apologists, as represented by the Wall Street Journal and some websites that I normally respect, such as Housing Wire, but in this case are taking up industry talking points verbatim.

A good piece by Max Abelson of the New York Observer discussed the yawning cultural divide:

A former member of the Goldman Sachs management committee was not so sure. “Don’t you think, out of 10 million data points, there will be 500 unbelievably screwy examples? It’s a little bit so what,” he said on Tuesday. “I don’t get it. It doesn’t feel like this is fraud. Maybe there is sloppiness, but at the end of the day, people took out mortgages they can’t pay back. Now I worry that if anything, the government is making something that is just a clerical error into something that would be nefarious or whatever.”

Yves here. We keep coming back to the “my dog ate your mortgage” excuse. It’s “sloppiness” or “error” (better yet, “clerical error”, those Masters of the Universe never got close to the operational stuff to be accountable, right?). And now the defenders will ‘fess up that there were abuses, but really it was very few people, so what’s the fuss? After all, as Reuters argues in an article that reads like dictation from the banks’ communications department, the borrowers were all deadbeats anyhow.

It has hit the point that the increasingly disconnected financiers are getting told they are way off base as far as little niceties like the rule of law, not by the usual pro-borrower sorts, but the Financial Times, in its editorial yesterday “Wall Street’s bad behaviour redux” (hat tip Richard Smith):

The growing scandal over the improper, and perhaps fraudulent, foreclosures on homes by US banks is becoming both a financial and a political hot potato. Wall Street is being forced to admit to yet more unsavoury practices linked to mortgage bonds….

The banks and their defenders mutter that this is all a bureaucratic technicality and much ado about nothing. Almost all the borrowers had defaulted on their mortgages, they point out, and the problem is simply of the paperwork being improperly prepared, which can be corrected.

They are wrong, and the fact that they regard court proceedings to repossess homes so lightly is a worrying reflection on Wall Street’s ethical standards, or lack of them. At worst, the banks may have been lying to courts over a vital safeguard in property law – the sanctity of documents.

This scandal is a mirror image of the lax and often improper lending practices that grew up in the years before the 2008 financial crisis as Wall Street raced to extend mortgages in order to have fodder for asset-backed securities. They never took seriously the importance of lending soundly and thoughtfully to homeowners.

In a sad bit of synchronicity, the World Justice Project published its Rule of Law index this week, and the US showed dismal rankings:

The world-wide study examined how nations implement and enforce its laws for ordinary citizens. And more importantly, whether the poor have equal access to civil justice remedies that are available to the wealthy. How did the U.S. measure up? Not good. The exorbitant costs of lawyers and limited access to civil justice placed the greatest country on earth at number 20 out of all 35 countries surveyed. The countries of Mexico, Croatia and the Dominican Republic treat their poor and disenfranchised better than we do when it comes to civil justice.

And a more pointed take came in comments from reader ABSGuy:

This has the makings of a mess of monumental proportions.

Back in 2007 when the ABX (the subprime MBS index) had fallen a few points, the Street came out in force saying this was a gross over-reaction. Losses would never be more than a few percentage points. Buyers of protection (like myself) were pooh-poohed as hysterical nut-jobs. Within a few months the ABX had dropped by a third, on its way to 40, and a short time later the entire banking system was on life support.

The lack of a perfected security interest in the mortgage loans on the part of the securitization trust (if true) is a very, very big deal. The requirements for the conveyance of mortgages is well-established, “black-letter” law. Anyone who says this is a “technical” problem is uniformed or lying.

The press accounts of analyst efforts to dimension the potential costs to banks of this escalating crisis, as we indicated, so far look way too light, but are completely in keeping with the “nothing to see here” party line. For instance, consider this take via the New York Times:

“I don’t see how it can be cleared up in a short period of time,” said Richard X. Bove, an analyst with Rochdale Securities. “The moratorium won’t last that long but the problem will last at least four or five years, maybe a decade.” In the short term, he said, “it could easily cost $1.5 billion per quarter.”

Yves here. Um, what do we consider “the problem” to be? If the trusts don’t have the standing to foreclose, the RMBS are at best unsecured paper (this may seem awfully counterintuitive, and lawyers might find this recap a bit imprecise, but a party has to have its rights perfected to a fairly high degree to be in a position to foreclose; a lesser degree of perfection of rights, as in showing clear intent but not completing the stipulated steps in full, may be deemed to pass muster by a lot of courts as far as the ongoing monthly mortgage payments are concerned). That alone will kick off the mother of all litigation, with the bank trustees as the biggest targets.

Just consider one element of collateral damage: second mortgages. The most likely resolution of this thorny situation is cramdowns or mass mods (which is an outcome most investors would prefer; better to take a 40% to 50% loss on a mod than a 70% loss on a foreclosure). That means seconds, which the four biggest banks are carrying at 80% to 90% of face value, will be wiped out. These are roughly $400 billion in total.

And if you think that is bad, consider what happens when investors who bought RMBS as secured paper and learn it to be something else start taking aim at the banks.

But the estimates thus far are almost entirely well below quite conceivable outcomes. For instance, Bloomberg notes:

Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia, raised his estimate for the cost of litigation and delays to banks to $10 billion yesterday from $6 billion…..

The New York Times did mention that this estimate excluded costs due to abusive foreclosure proceedings, which Miller put at an additional $3 to $4 billion.

One Bloomberg source does come up with big numbers, but then discounts it as very unlikely:

Wide-scale principal reductions may lead to “huge losses” for banks, said James Ellman, a former Merrill Lynch & Co. bank- stock portfolio manager who is now president of San Francisco- based hedge fund Seacliff Capital.

“You could potentially be talking about hundreds of billions of dollars in losses,” Ellman said. “Though it is a low probability, banks would have to go back to the capital markets for more capital.”

The credit default swaps market is starting to take note. Widening spreads indicate worries about funding stress and ultimately viability. Bloomberg again:

Credit-default swaps on Bank of America widened to 193 basis points, on pace for the biggest weekly rise since June 2009, according to data provider CMA. Contracts on JPMorgan are headed for their biggest weekly increase since May, to 92 basis points, and those on San Francisco-based Wells Fargo increased the most in a weekly period since June 2009, to 131 basis points, CMA data show.

We have focused on possible civil action, but more and more people are calling for criminal prosecutions, and those demands are likely to get more traction as this crisis drags on. Alan Grayson has asked the FBI and the US attorney to investigate possible criminal activities by banks operating in Florida. And the attitude presented by the Financial Times is likely to win out:

The correct approach is for states to hold banks to account, and show them that their slapdash and contemptuous approach to their legal responsibilities is unacceptable.

We can only hope we have enough of an independent judiciary left in this country to bring these miscreants to heel.

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  1. AndyC

    “On the one hand, you have the industry apologists, as represented by the Wall Street Journal and some websites that I normally respect, such as Housing Wire, but in this case are taking up industry talking points verbatim.”

    With that in mind, check The Pragmatic Capitalists column from this am.

    : (

    We are doomed if they don’t get it together and reign these large financial institutions in.

  2. SidFinster

    Come on Yves, you know better than this:

    “Ah, but I forget, a banker’s primary loyalty is to his own paycheck.”

    A banker’s primary loyalty is not to his own paycheck. A banker’s primary loyalty is to his own BONUS check.

    I hope that this an oversight or a clerical error on your part.

      1. Francois T

        Technically, you are correct Yves. But a bonus is much more than a mere extension of the paycheck. It an anti-depressant, an euphoria-inducer without side effects for the personal health! It is a recognition by the entity, the tribe, (I was about to write, the Borg) that recipient did cojonudo an outstanding job. He/she earned, deserved, by sheer hard work, the best and most scrumptious cookie in the jar.

        That oughta flatter the ego, big time, no? Not only that, it stimulates the production of serotonin at the presynpatic level, obviating the need for mere palliatives to stress such as alcohol, exercise or performing variations of the Kama Sutra.

        So, looking down at the bonus as being a mere “part of a banker’s pay” just doesn’t cut it!

        He! He!

  3. Maju

    It looks to me that the issue is most serious. There are two key aspects:

    1. Of justice: homeowners with fraudulent mortgages are likely to be able to stop paying their loans as of now, effectively resist foreclosure attempts and even ask for devolution of what was paid to banks so far. Foreclosed people may be entitled to at least compensation if they were trampled by one of these fraudulent mortgages. As you say, the US justice system treats common people very bad but it also has something called class action that allows people to join efforts in cases of mass offenses like this one.

    2. Whatever happens in the judiciary front, there is a strong shadow of doubt on the mortgages having any value whatsoever, what makes them hyper-toxic and non-tradeable. This alone should cause many banks to face big losses and should also cause at least some “domino effect” to other financial institutions in the USA and elsewhere in the World.

    So it’s a total disaster, yes it is. But banks can only blame themselves, and considering who are the real victims of the fraud (common people, homeowners, including huge sectors of the citizenry) they are going to get no pity this time.

    1. Antifa

      It had puzzled me that America’s banks are so aggressive about pursuing foreclosures, when it makes better financial sense all around to work out some way to keep people in their houses.

      Then it dawned on me that these mortgage-backed security bundles are all insured — in fact multiply insured through credit default swaps and derivatives. Getting the house back is peanuts. Getting that mortgage into ‘default status’ by hook or crook means there are insurance payouts for MBS investors, for the lender, and for whomsoever did derivatives deals on said MBS.

      That’s why banks won’t negotiate. They want you to default so they can open those other cookie jars.

      The house can sit there, get stripped of anything useful, and rot away — the bank got paid several times over for it.

  4. Koshem Bos

    Some questions I cannot see answered so far.

    – If the mortgage IOU is nowhere to be found, does the borrower owe anything? The logical answer seems to be: nothing. In essence, not paying the monthly installments doesn’t violate anything.

    – If Joe has already paid back for 10 years but there is no IOU, can Joe sue the servicer demanding returning of the totality of the 10 money they grabbed fraudulently?

    – Should everyone with mortgage determine whether an IOU exists, and if not the property is his or her free and clear.

    In regular comments: the banks clearly hope that Obama with the help of the coming Republican house will get them out of trouble. They are probably right.
    We should not forget that in this scandal the behavior of the courts, so far, was largely shameful. But then, we know that the American justice system is the worst in the developed world.
    Altogether, we are jumping from the Empire State Building without a parachute and due to Obama, the Republicans will add small rockets to enhance our speed on the way down.

    1. anon48

      “Some questions I cannot see answered so far…If the mortgage IOU is nowhere to be found, does the borrower owe anything?”

      Good question. From a moral perspective the answer should be yes. They DID borrow the money.

      And, the borrower in many cases made a deal using questionable financing arrangements (e.g. initial period option arms, interest only payment schemes, etc.) that enabled them to purchase a property that they otherwise couldn’t afford. Understanding that if prices didn’t continue to skyrocket there situation blows up. People that did this knowingly should not be entitled to a windfall on a legal technicality. They gambled and lost. They should be held accountable for their actions.

      A loan mod to reflect the portion of the purchase price that was in excess of the actual sustainable long term value at time of purchase may be in order. However, this is not something to be considered that borrowers are owed. Rather, it’s should be a disincentive penalty to the lenders/investors who were greedy/dopey enough to promote and invest in the deal.

      1. F. Beard

        Good question. From a moral perspective the answer should be yes. They DID borrow the money. anon48

        Not so fast. Banks don’t lend existing money; they create it as they lend it. That outrageous but legal practice also causes the boom-bust cycle which is why many home owners cannot afford the overpriced debt on their homes.

    2. Nathanael

      Depends. Apparently Countrywide stated in legal filings in 2007 (defending MERS!) that it routinely destroyed the original notes after “entering” them in MERS.

      You should know what this means. The note is like a check. Destroying it deliberately is legally equivalent to forgiving the debt.

      So homeowners in the position where their servicer deliberately destroyed the note should not have to pay ANYYTHING, legally or morally.

      Homeowners in other situations should generally have to pay SOMEBODY, but the money should be put in escrow until it can be determined WHO.

      Furthermore, if the servicers engaged in other forms of fraud or legal violations (accounting fraud against the homeowner, which was very common; simple refusal to negotiate modifications, when federal and/or state law requres such negotiation), the courts are perfectly justified in choosing to cancel the debt based on bad faith.

      Furthermore, if the servicers didn’t handle the paperwork for the mortgage properly in a particular way (separating the note from the mortgage, which was very common with MERS), many state laws convert the note to an UNSECURED debt, so that the homeowner still owes money, but *cannot* be foreclosed upon.

      1. Mrdan242

        Would that make the 2nd mortgages and HELOC’s that Yves is fretting about become Senior and could the banks foreclose via them? If they are still on the Big 4’s books, they should have clear title, no?

        1. chophouse

          Another possible wrinkle – the owners of the 2nd institute actions to declare the 1st invalid BECAUSE there is no note, thereby moving themselves into first position. This would be a best-defense-is-a-strong-offense response.

      2. Koshem Bos

        Thanks for your replies. I don’t agree with the moral question. When I was a kid, we used to say, “robbing a robber is not a robbery.) I don’t think we owe anything to Citibank or Bank of American or the other criminal gambler. After all, the survived because of money we gave them.

        The question also pertained to the borrowers not behind on payments. And by the way people that fall behind haven’t, generally, acquired the mortgage with questionable financial statements; they may be unemployed or losing their business to the bad times. The people not behind shouldn’t not pay back money when there is no IOU.

        Such a wide nonpayment may be the only act of civil disobedience we can get

        1. Kevin de Bruxelles

          I agree.

          In my experience in negotiations, people only bring up morals when the contract is against them. Whenever one of the people on my team makes an appeal to morality, me and the others discreetly give each other a look as if to say, “well we lost this one”.

          The time to take morals into account is when designing the system. If your system architecture depends on the continued morality of the users, then you better be really Dutch or your system will fail.

        2. anon48

          “When I was a kid, we used to say, “robbing a robber is not a robbery.) I don’t think we owe anything to Citibank or Bank of American or the other criminal gambler. After all, the survived because of money we gave them.”

          It’s not Citibank, BOA or any other bank that is ultimately going to take the hit? It’s the US government. And guess who backstops the government? That’s right it’s us. What is really being proposed is a humongous wealth transfer from the general population (actually our children) to a group of people, many of which(certainly not all) who have no business to be deserving of such a windfall. Remember a significant number of the problem loans were most likely generated between the years 2004 through 2006, not a time remembered because of the noble conduct of either mortgage brokers or borrowers.

          Taking this “hit the lottery” perspective is no better than the attitude of the TBTF banks. Theirs is one of complete arrogance but this is utter foolishness.

          1. Maju

            No. The government is already taking the hit from the existence of such widespread and tolerated corruption. The government would do best taking strong action against banks, either letting them fall or nationalizing them but never giving them anything for free. If you are in business and you fail, it’s your problem. And if you are in business and you commit crimes is a public problem, and society (the state) should send you to jail.

            A solid democratic state is based in solid legal principles, of which first is that law is equal for all: the struggling homeowner as the fat bonus’ banker. If banks get away with this one, the US government would have lost all remaining credibility (and it’s already very very low after all the Bush era abuses, the deception of Obama, who did not stand out to repeal Bush era abuses and restore public confidence, and the Louisiana bail out of BP at the expense of public health and a whole region’s economy, not to mention the environment).

            The USA desperately needs a honest delivering government who can reign on the robber barons. Otherwise it’s as good as a banana republic. You’d never think in the past people would use the term ‘banana republic’ when speaking of the USA but it’s happening now and with good reason: because it’s not the principles of law and citizen’s rights which are being applied but those of a neo-feudal regime in which the giant corporations control all power resorts: from the media to the White House, from the courts to Congress.

            It’s so bad that you need to do something really strong about it, like tearing down corporations to pieces, nationalizing (some of) them, getting their most corrupt CEOs in jail for many years and allowing them to suffer some losses when they deserve them. After all any mindful business would have reserves to face some losses, right?

            A corrupt country cannot prosper, only a healthy, ethical one can.

      3. anon48

        “You should know what this means. The note is like a check. Destroying it deliberately is legally equivalent to forgiving the debt.

        Seems to me electronic versions of executed agreements are being respected generally in business (especially if so stipulated in the original agreement). If the comment about Countrywide is accurate- are you certain that the agreement didn’t allow for conversion to digital format? If the lender’s intention was not to forgive the debt, but rather to just to digitize records, it may delay or prevent a foreclosure, but there’s no valid case for declaring it forgiven. You’re analogy is better represented by the end of an old feel good movie where the black hat mustached bad guy, who finally sees the light, rips up the note smiling knowingly while atring directly at the poor widow.

        “So homeowners in the position where their servicer deliberately destroyed the note should not have to pay ANYYTHING, legally or morally.”

        Can’t see how one can address the legal side of your statement with absolute certainty without all the facts -but- can address the moral side. You borrow money from someone else- you should repay unless the other party intended to forgive the debt. What is being suggested would help destroy whatever level of trust that still remains in the financial system. There would never be any investors interested in purchasing mortgages as investment ever again if the culture evolved to where the borrower tries to walk, while still keeping the house, every time there is a sign of technical impropriety. I wouldn’t want the government backing mortgages in that type of environment either.

        What I would prefer to see if this fraudulent mess proves to be correct, is for the government to pursue the parties that caused it. That means pursuing the tens of thousands of minions who participated- including borrowers who lied just to get a house they couldn’t afford, the frontline representatives of the banks and mortgage companies who assisted in generating the bad deals, the frontline enablers at the ratings agencies who clearly knew their companies didn’t do squat to justify the ratings being handed out, the well-paid salespersons at the financial institutions who misrepresented the quality of the mortgage pools to investors and finally the audit firms that blessed the quality of drek that wound up actually sitting in the mortgage pools (and SIV’s). Were this to be done in large enough numbers, a side benefit would be that the information obtained during discovery of all these cases, would allow for a more deep, broad, and clearer picture to emerge about who higher up on the food chain knew and was in control. Clear evidence of the patterns of corruption would become obvious. When time came to actually move against the alpha dogs it would be more of a slam dunk win.

        1. Yves Smith Post author

          I’d like to see the information supporting the Countrywide claim. That’s contradicted by the direct experience of lawyers working on cases in this area (one tracked down a mortgage loan by Countrywide to Countrywide itself, which is not where it should have been, it should have been with the custodian of a particular trust) and the individual who fetched and presented the note claimed all Countrywide notes were still with the bank. This is admittedly anectodal, but is a LOT of notes.

          And perhaps as important, these attorneys are on top of damaging evidence that has been unearthed by litigation. I’m not saying it’s impossible they missed something this major, but there are a lot of eyes on these cases, and I’d be surprised something that significant was overlooked.

          The only instances attorneys working on these cases have found of deliberately destroyed notes is out of New Century, and even there it does not appear to have been its dominant practice. The lawyers who have been pursuing these cases on a consumer level (and their collective experience is in the thousands of cases, the network is pretty good about sharing information) is that the deliberate destruction of notes is a relatively uncommon phenomenon.

          The pooling and servicing agreements never contemplated electronic versions of the notes. Real estate related document were explicitly excluded from Federal legislation authorizing the use of electronic signatures. Mortgage notes MUST have so-called “wet ink” signatures.

          The first step in cases contesting standing is to demand the collateral file from the trustee. So “where is the note” is ALWAYS an issue in these cases.

          The only public sighting I have seen of the “we destroyed the note” claim is from the Florida Bankers’ Association. If you read the actual letter, it contains a general statement about how great using electronic documents is, and its assertions about mortgage notes are actually pretty vague. And as I’ve indicated, this seems likely to be cover for the use of lost note affidavits as one of the fixes for the notes being improperly endorsed.

          I’d be VERY surprised if the claim related to Countrywide referred to the notes, and was in sworn testimony.

          1. anon48

            “The pooling and servicing agreements never contemplated electronic versions of the notes. Real estate related document were explicitly excluded from Federal legislation authorizing the use of electronic signatures. Mortgage notes MUST have so-called “wet ink” signatures.”

            Thanks for clarifying that.

          2. madopal

            Yves, glad to see you check in on this issue. The original question is one I’m still curious about. Much of the FUD from the investment community follows the “these people shouldn’t be in their homes” variety. But what if an owner of a property that is current can prove that the bank they’re paying their mortgage to doesn’t hold the note? Is there any precedent for such a thing? Would the homeowner be allowed to sue? Abandon the property since no one really owns it? Renegotiate the loan? This idea could be a very interesting way of having the banks wind up paying for their greed, no?

          3. Maju

            Madopal: one thing is the property of the home, which is property of the one who has the scripture, the homeowner, in principle, and another thing is that property as guarantee for a loan (which is the mortgage). If there is no legal mortgage, the property is that of the one who has the scripture: the homeowner.

            Only if a bank or other has a legal mortgage contract, which may not be the case, it seems, they can claim the property via foreclosure, which requires at least a formal judicial intervention, which should be backed by a legal contract and not the junk that seems to exist in all those cases.

            Legally at least the banks have dug their own tomb.

          4. marblex

            In any legal proceeding where documentation is material, the original document is required unless it can be established that the original is NOT available and that there is a legally authenicable copy. However, there are cases where the exception does not apply. Real estate transactions are such cases.

            Real estate transactions are documented by a Deed of Trust (or, mortgage in states that have mortgages) and the borrower’s note. The note is the only evidence of the borrower’s debt and is the one document that CANNOT be copied, substituted, photocopied or “re-created,” any more than one could cash a photocopy of a check. The borrower’s original signature IS required. Thus, tearing up the note is in fact, the legal equivalent of debt forgiveness. A a copy of a note commemorating a forgiven debt is not only inadmissible but it is irrelevant.

            If this plays out according to the LAW, there will have to be a huge unwinding of all of these transactions. Should the federal government attempt to assume federal jurisdictions over real state transactions by intervening and invading sovereign state law (most real property transactions are governed by state law because the land is situated in rem (in the state itself) .. In fact, save for any federal land within state borders, the real estate that is comprising the state IS the state (physically). Any invasion of this traditional area of state law by the federal government would require the federal government to assume ownership of the property, since otherwise it couldn’t govern transactions purporting to transfer title thereto.

            If this happens, the USA will cease to exist as a democratically governed republic (some may argue that has already happeneed) and become a feudal monarchy, with the “king” the Fed the landowner of every square inch of land in the USA. Governors of states and rich cronies would become squires and Lords who obtain the Fed’s permission to rule and carry out the fed’s business of collecting taxes and food grown, items produced by the serfs (otherwise known as 97% of the American population).

            There is no magic federal fix for this. Even HR 3808 which Obama vetoed, which would have federalized the notarization process to allow for electronic rubber stamped notarizations nationwide, would not have cured the defects in title caused by the lack of original documentation.

            This makes big shitpile of 2008 look like raiding a child’s piggy bank. These defective and fraudulent transactions will have international implications. Despite what Obama and the congress do for their BFF’s the banksters, the international community will not be as forgiving.

            Let’s see how many judges the banksters can buy.


        Do not, in any instance having to do with this monumentally stupid mortgage fiasco put any money in escrow anywhere. It will be securitized and stolen again!

    3. Crazy Horse

      Are we missing something here?

      Everybody knows that Mr. O and Timmy serve at the banksters bidding, but why did Obama pocket veto HR 3208, hand delivered by Congress? Was it because its attempt to void a century of property law in the middle of the night offended his sense of propriety and his training as a lawyer? Does he plan to use it as a talking point in the coming elections? (no evidence of that so far) Or could it be that he and Geither are beholden primarily to Goldman Sacks, rather than the wider bankster cabal?

      What is Goldman’s current position with regard to bets placed against BOA, USB, MS & Wells F? Have they bought CDS swaps that insure themselves against liability for their part in the fraud? There will be losers as this train wreck unfolds, but who will end up owning the tracks?

      1. dingusansich

        Cynical thought: Obama et al. pocketed the legislation to leash political opposition before the midterm — opposition from bankers, not voters. It’s as if the administration is saying, Look at the nice present we have for you … if you behave. Santa’s keeping a list of who’s naughty and nice. Keep that in mind, o children of Citizens United.

        It calls to mind the deal struck with the health insurance legislation “stakeholders” (read: able to drive a stake through meaningful reform). The administration did all it could to stop an onslaught of cash opposing the legislation and the Dems pushing it. Could be something not dissimilar here. After the election the board clears, and it’s another game entirely.

      2. marblex

        It wasn’t a pocket veto. Although congress had “recessed” it held pro forma sessions to prevent Obama from making recess appointments. Consequently, Obama’s veto was in fact a veto, which could have been overridden by Congress.

        Don’t worry, HR 3808 will be back and signed by Obama after the election.

    4. BC

      Is the MERS legally allowed to foreclose the note, in lieu of original documentation? It has been asserted that MERS has the Legal Authority to act as a trustee for the owners and can initiate foreclosure.
      I don’t know but would like an answer.

  5. toxymoron

    Hi Yves,

    Could you please comment on the following. BofA acquired Countrywide, so in a certain way ‘obtained’ the notes that Countrywide never conveyed down the chain. Would this open a legal opportunity to straighten things out (at least for some cases)? And as the banks love to loot, can we expect BofA to go again after already foreclosed properties and present the original note?

  6. i on the ball patriot

    The rule of law is frozen,
    The game is on hold,
    The scum bag bankers,
    Are getting quite bold,

    Their theft is quite brazen,
    With a false paper trail,
    They arrogantly rob you,
    With no fear of jail,

    The womb of austerity,
    Now signals the pains,
    The bag of waters is leaking,
    The birth canal strains,

    Little baby mayhem,
    Will soon cry his first scream,
    It signals the end,
    Of the scamerican dream,

    The bugs flock to the lampposts,
    A feast is in the air,
    They’ll soon fatten on the blood,
    Of the bankers hanging there …

    Deception is the strongest political force on the planet.

    1. liberal

      “They’ll soon fatten on the blood,
      Of the bankers hanging there …”

      Would that it were so.

  7. ellen Anderson

    Pretty so someone is going to look at the appraiser’s role in this. An appraiser is supposed to take a look at the title of a property before proceeding. All owners and encumbrances must be on record at the local registry of deeds. I wonder whether registries were accepting questionable documents or the documents simply were never filed. That will be an important question to be answered in trying to resolve these situations. If there is a title question it should be raised. Most appraisers don’t do that. First, they try to get around their obligation by invoking an assumption that the title is good and marketable. Second, they may have been instructed by their client, the lender, to make that assumption which they should state as a client instruction. Real clients are now going to want their appraisers to look more closely into title matters, I imagine. These properties may have to be examined one-by-one.

    The government may have suspended the Federal Accounting Standards but it will not be so easy to suspend the Uniform Standards of Professional Appraisal Practice.

    1. Dan

      Please refrain from commenting about something you cleary have no knowledge of. Before you make uninformed inaccurate comments you should at least attempt to have a slight iota of knowledge of the facts. An appraiser does not research title on a property (unless there is some glaring problem that warrants further investigation). In fact there is a standard statement in 99% of all appraisals that state this fact. That is why there is a seperate professional group that does title work and insurance. Next it will be the appraiser fault that your car broke down because the appraiser saw the oil spot on the driveway and didn’t report it. And by the way, no where in USPAP does it state in any way shape or form that an appraiser research title work. Maybe you should try reading USPAP prior to quoting it, its a great read!!

      1. Bill

        As appraisers, we are bound to utilize the URAR (Uniform Residential Appraisal Report) form as provided by Fannie Mae for all reports which may end up at Fannie as a result of secondary market sale.

        On page one of the preprinted Limiting Conditions is this caveat:

        STATEMENT OF ASSUMPTIONS AND LIMITING CONDITIONS: The appraiser’s certification in this report is subject to the following assumptions and limiting conditions:
        1. The appraiser will not be responsible for matters of a legal nature that affect either the property being appraised or the title to it, except for information that he or she became aware of during the research involved in performing this appraisal. The
        appraiser assumes that the title is good and marketable and will not render any opinions about the title.

  8. tim

    Do kings ever admit infallibility?

    But Charles Hugh Smith adds to the problem that I’ve outlined – and QE-anything isn’t going to fix a damn thing because the problem is a rot in the middle of the banks’ balance sheets, which can only be fixed by forcing them to eat it – and that will bankrupt them:

    Either there is due process of law or you have a kleptocracy/”banana republic” oligarchy. At present, that is the decision we face as a nation. If the banking Elites and their partners in the Central State (Fed and Treasury) are allowed to “win” and gut the property laws of the states, then the U.S.A. will be revealed as a kleptocracy/”banana republic” oligarchy.

    If state laws are upheld, then the “too big to fail” banks are insolvent and they will fail. Then the question of kleptocracy arises once again: will the banks be allowed to fail as per Classic Capitalism, that is, their owners and managers will have to absorb the losses of that bankruptcy/failure, or will the Central State use its powers to collect taxes and cover the private losses of the Bank/Financial Power Elites? Privatizing profits and socializing losses has been the entire game plan since the global house of cards collapsed in 2008.

    It’s decision time, citizens. Either the banks/Central State “win” and we are a kleptocracy/ “banana republic,” or they lose and the U.S. mortgage/ banking sector implodes and is either formally socialized (i.e. owned lock, stock and barrel by the Central State) or rebuilt from scratch without big banks, Federal guarantees and the Fed’s incestuous interventions. (“We create the credit that enables the mortgage, you issue the mortgage, and then we buy the mortgage.”)

    There is no “fix” or half-measure that can patch this over now.

  9. Mendy

    Yves, I am not sure that I agree with you on the question of collateral damage to second mortgages. If there is a cram down or modification reducing the first mortgage, the second mortgage is left in better shape not worse shape. Is there something that I am missing?

  10. libhomo

    These current problems provide even more reasons for a national foreclosure moratorium. It would help in cleaning up this mess, and it would be a huge boost for the economy. It also would stablize housing markets which have gotten unreasonably low in price after having been excessively expensive during the bubble.

    1. Eric

      A foreclosure moratorium is quite close to being the same thing as a purchase moratorium. If the problems with title are this severe, the chances that they show up only on mortgages in or at the edge of foreclosure are about zero. Maybe this is what is required, but there needs to be a very, very rapid cure of the current title problems. Again, punish the frauds on the courts, etc., etc., but there is no conceivable way that it is good for our collective future to not get this put back together as fast as possible. If that means swallowing a mouthful of effluence to make good what the MBS players screwed up by tremendous negligence it has to get done.

  11. Bruce Krasting

    I agree that “seconds” are toast. But I don’t think the banks have them booked at 80-90 cents.

    HELOCs are seconds. You can buy all the PERFORMING HELOCs you want at 50%. A non performing HELOC in SoCal or Arizona or Nevada can be had for 2 cents on the dollar.

    Go ask the FDIC, they are the sellers.

  12. Manto

    While I think fraud is the wrong word, someone should ask the
    Goldman banker mentioned if GS has ever challenged a lien on secured debt in a bankruptcy case where they were unsecured. And if so how is that not considered a technicality.

  13. silentbutdeadly

    So, the bank are using foreclosure mills and robo-signers to save costs. Does anyone know how much the costs would increase as an approximate, ball park figure if they were to do it properly ie, all the paperwork being checked properly before an affidavits is signed, ascertaining who the correct owner of a note was to be named on the foreclosure, where possible. Is this an increase of double, ten times or a hundred times more.

    If a robo-signer was signing 5,000 documents a day, this is clearly too many to check properly, what is a more realistic figure for someone to sign, doing the job properly?

    Of course all of this is academic where the owner of the note is not known.

  14. ciaoant1


    My name is John Tsafogiannis, and i am from Greece.

    I am sorry for the off-topic message, but i am currently writing a book (in Greek of course) regarding the
    capitalistic crisis, and in my book, i would like to use a diagrams i
    found in an older article in your site:

    I am just sending you this email just in case you have any objections
    to me using your diagrams – i hope not. I couldn’t find an email address, so i decided to just write a -completely offtopic- comment in the most recent article of your site.


    1. Yves Smith Post author

      Thanks for asking for permission.That’s fine, as long as you make a proper citation in your book as to the source.

    2. i on the ball patriot

      Getting pretty nasty in Greece. Good luck with your struggle and your book!

      Excerpt …

      “Contract workers of the Ministry of Culture were staging a protest since yesterday inside the Acropolis demanding no less than their wages, a demand which is becoming increasingly utopian in the current economic reality of Greece. The state owes them 24 months of worked wages and seems in no hurry to having its debt settled. The workers also demand the cancellation of 350 lay offs planned for the end of the month.

      Instead, the Greek satrapy decided to pay back with force. Living up to the standards of the fastest growing tyranny in Europe, the Greek government sent its praetorian guard, the MAT forces to deal with the workers. The riot police entered the space of the Sacred Rock by a back door, effectively desecrating the asylum for the first time since the Nazi occupation.”

      Deception is the strongest political force on the planet.

  15. Moopheus

    One thing that I haven’t seen discussed much, and I am wondering about, is does this potentially affect people who are not in foreclosure? If there is a general problem of poor paperwork, and loans are not being conveyed properly, then are all securitized loans in doubt, not just the ones in default? I mean, I know that my loan went directly to Fannie Mae, but for others it may not be so clear.

      1. Praedor

        That was a thought that occurred to me when the whole shitstorm started and it became clear that mortgages were being sliced and diced into BULLSHIT CDS’ and other “synthetic” crap designed by failed mathematicians and physicists. I wondered about going to my bank and asking them to prove they hold the note on our mortgage (fully up-to-date and only 30% left to pay off).

        I was thinking that if they could not produce the note proving they actually have rights to the loan and its payments, then we could simply stop paying indefinitely until and unless someone with proper rights to the loan note actually proved this to be the case.

        This is what should be happening all across the country: a big push by ALL people owing on mortgages, current and in arrears, demanding proof that their mortgages are truly owned by whomever is getting the payments. No proof, no more payments. Everyone gets their home free and clear by default because they are the ONLY ones in the entire situation with a clear hold on the property. The banks and wall streeters eat the shit they deserve for creating “synthetic” bullshit to trade and the entire process/game stops from that point on. You originate the loan, you OWN it and cannot trade it, cannot chop it up, etc. There MUST be a simple, clear trail of rights and ownership of the note or the loan is rendered null and void.

  16. arby

    Yves, first, my wife and I enjoyed the book. You earned our share of your royalties. I have not passed the book along as per my custom and have instead recommended others to buy it on their own.
    Second, if $400 billion on the books equals zero for the big banks, what does that mean to their capital adequacy now and under more stringent rules?

  17. Siggy

    To say we have a ‘foreclosure crisis implies that we are about to experience some sort of change. From better to worse, non. From bad to worse, yes.

    Just what is the nature of the problem? Lack of executed, notarized and recorded assignments? Indeed, especially as to recordation. Real circumstance, a great many securitized notes and their attendent mortgage have not been properly assigned, notarized and recorded. Meaning: RMBS are very poor securities to be owning. Effect, market takes RMBS to liquidation value, say $0.10 on the dollar. Effect on RMBS owner’s balance sheet . . . INSOLVENCY!!!

    As the attorneys general conduct their investigations, and hopefully prosecutions, they recall their duty to exercise escheat and lay claim to all the clouded title properties they find. With the properties in hand, they can then sell them into the market and reap a marvelous windfall. It’s probably enought to pay for the legal work to exercise escheat along with a substantial profit to be applied such general fund requirements as exist.

    This is a major full employment opportunity for attorneys, judges, court reporters, bailiffs etal. You gotta love this land of opportunity.

  18. Ben there done that

    The root of the problem is twofold: 1. home loans were passed out like candy at halloween with little regard or care for who got a belly ache from eating too much crap and who got the candy bar that was half-eaten but passed off for a wholly vested and perfected transfer of property; and 2. no one (neither investors nor the originators/securitizers) ever wanted to pay for competent servicing of mortgages, so you definately got what you paid for.

    The servicing costs to assess the current damage, create a proper infrastructure, train staff and work out the legal mess should be borne solely by the investors, even if the current holders are the banks themselves. They are the ones that took for risk in exchange for paying an insufficient servicing fee. The Bankers should be forced to share in the cost in that they were more than happy to tell investors that for bargain basement fees, they would get proper servicing. Oh you say, the banks are not the servicers. Well, yes they are and the investment bankers forced the servicing arms of their own institutions to do lots for little. And for those that are not providing servicing through an affiliate, it is called share the fee cap. So again the banksters absolutely had a hand in fee structuring – always looking out for the investors’ ROR.

    The potential mortgage losses to the banks should be handled like similar losses have always been handled – taken out from the bottom line and reduced/ no bonuses for the responsible business units. Nothing like no bonus to change behavior!

    Every time I start to feel sorry for the banksters, I remember my own colleague telling me that he needed a new sales guy to sell RMBS because volume was so high. He hired his caddy. Apparently the guy was a scratch player and was fun to go drinking with.

    1. Nathanael

      Ah, but the investors wrote contracts (called “Pooling and Servicing Agreements”) which required that the paperwork to transfer the notes be done correctly and on time.

      Since it wasn’t, the cost falls entirely to the banks.

      1. ben there done that

        yes and no. The servicing agreement is the dump it all on the servicer agreement that is generally boiled down to a fight between an increase in fee (to benefit the servicer) for a reduction in negligence standard (to benefit the investor) or vise versa. The investors are generally assured by counsel and their bankers that the servicing is not their problem. The problem is, due diligence, reliance, reps and warranties are all concepts that are generally treated like meaningless afterthoughts as opposed to core concepts of fair trade. So maybe the banks/sponsors need to take the first losses and then try to recover from their investors. Or maybe just take their losses.

        1. Yves Smith Post author

          You may be confusing two agreements.

          The so called Pooling and Servicing Agreement is a typically 900 page document that governed the creation of the trust that holds the notes and also specifies the various economic and reporting arrangements. This is the overarching document governing the establishment and operation of the deal.

          Servicing agreements operate at a lower level, most often between the master servicer and sub servicers.

          But in addition, the banks are liable, but the liability for the failure to convey the notes correctly would sit with the trustee, since the trustee provided multiple certifications that everything was fine in note-land.

          The servicers may be liable if they were the ones that authorized fraud, like the fabrication of documents, to proceed with foreclosures.

          1. Ben there done that

            Rather than confusing the two concepts, which you are of course correct about, I hastily was making a larger argument (with little clarity!) that the trust/trustee, servicing and deal sponsors are often affiliates. That in and of itself is not a bad thing. What makes it bad is when the deal sponsor side keeps stuffing deals into the servicing/trustee/reporting side without knowing or caring how business is being conducted. The deal sponsor advocates for lower fees for its brethren. So my point is yes you can slice and dice away the documents and assign bad acts (and the fight over which entities’ have to sign or acknowledge the contracts can be entertaining), but when you have one institution that wears multiple hats, hard to say they had no hand in what transpires. BTW, that is why a good number of investors demand that third parties be involved in such transactions. And guess what, the sponsors got their deals back under one roof by dropping the fees. Marketplace? Sure. My point is the trustees blew it and the affiliated banks should be held accountable. Where the trustee is not affiliated with a sponsor, recover from the sponsor and let it go after the trustee to be made whole. Strict contract law, I don’t know. Sensible and gets at the root problem, I think so.

  19. killben

    “We can only hope we have enough of an independent judiciary left in this country to bring these miscreants to heel.”

    I hope so! Till now there is no sign of it ..

  20. Fannies May

    Did Fannie Mae hand out (underwrite) loans like Holloween candy? Why won’t they show the world their automatic underwriting software? Show the world how risk became irrelevant and properties were fraudulently appraised into the stratosphere? If you had brokers using their software in offices nationwide, they could use it to pad their take, sink the knife into their victims, knowing all along Fannie greased their lucrative expeditions. Live Public or Die – as Baker says.

  21. vlade

    How about looking at this mess as a lottery that banks instigated to repay taxpayers? What if people simply wrote to banks saying something like (no idea what would/wouldn’t work under US/state laws, so just a statement of intention rather than proper legalese :) ):

    Dear Bank,

    You purport to have a mortgage agreement on my property, or rights to service one.

    Based on the recent mess, I have reasonable grounds to doubt it. Please prove that you have the IOU or the right and proper chain to service it. Should my attorney not receive the proper documentation, and proofs it was lodged/verified/etc appropriately within 3 month, I shall take it as an admission that you do not have rights to the payments and cease the payments until such a time as the owner of the note shows up, making all future payments as per the schedule into an escrow with my attorney.(is there some period when you can declare that they owner is not showing up and thus get the money back?)

    Your truly,


    What would one have have to lose? If the bank comes back with a propert IOU, you just continue as before. If they don’t you stop, and may get to keep your house for free – hurrah, you just got back the bank subsidy!

    1. Nathanael

      One correction to your letter. Instead of saying “I shall take it as an admission that you do not have rights to the payment”, you say that you will file a quiet title action to extinguish their rights if you do not receive proof. Then do so!

      Attorneys are actually starting to try this.

    2. Sinaptics

      Here’s a modified version of form letter. Any comments?

      “To whom it may concern:

      This is a qualified written request under Section 6 of the Real Estate Settlement Procedures Act (RESPA). I own the property at the address listed above, and your bank services my mortgage.

      Over the last several weeks there have been many stories documenting the problem that banks are foreclosing on homes without proof that they own the loan. I have learned that in many cases, banks like yours do not even know who owns the loans you service. Employees at several leading banks have admitted to rubber stamping tens of thousands of foreclosures every month, without even checking to make sure that the bank had a legal right to proceed with foreclosure. In some cases, banks allegedly falsified mortgage documents to cover up their mistakes. There have been reports of two banks trying to foreclose on the same home, banks foreclosing on homeowners who were current on their payments, and even of a bank foreclosing on a home where the homeowner had never taken out a mortgage to begin with. This is not merely a “technical problem”–it is the difference between having a warm bed at night and being out on the street.

      To protect myself and my family, I need to know who owns my mortgage. Within sixty days, I would like to know the name, address, and phone number of the bank or investor that owns my mortgage. Furthermore, in light of the recent allegations of foreclosure fraud, I demand to see the original mortgage note proving ownership over my home loan. I would like to see copies of all endorsements and assignments of my mortgage note and where and when the assignment(s), if any, were recorded. I also ask that you provide me with evidence of your firm being contractually retained to service my loan. If you fail to provide the information I am legally entitled to, I will be forced to consider all options available to me to ensure that my family and my home are protected, which may include, but is not limited to, payment into an escrow account until the true owner of the note is established, or filing of a quiet title action for removal of lien.

      I ask that I receive my response in writing. I understand that under Section 6 of RESPA you are legally required to acknowledge my request within twenty business days and must try to resolve the issue within sixty days.

      Thank you for your attention to this matter.



      1. Pascal Blacque

        We should all be watching how the banks/servicers respond to this letter … if it holds water it could snowball much faster than the foreclosure mess simply because performing notes account for 85% to 90% of all mortgages…

        I’ve been asking the same question for over 2 weeks. On October 4, I asked “What about PERFORMING notes? Cant non-delinquent borrowers request proof that current lender is rightful owner of note thus having a legal claim over mortgage payment? If the lender or servicer cannot prove ownership or adequate / legal assignment, can not the borrower stop making all payments until title chain is free and clear?”

        Yves seems to believe that the Trust is held to “a lesser degree of perfection of rights, as in showing clear intent but not completing the stipulated steps in full, may be deemed to pass muster by a lot of courts as far as the ongoing monthly mortgage payments are concerned.” In other words this is not a big issue!

        I hope she’s right for if she isn’t … it’s going to get mighty ugly. That is why I think Wall Street is taking it in strides so far; they must think they can manage the foreclosure mess. But if performing borrowers join the party and stop paying until they’re showed proof, then all bets are off.

        1. Yves Smith Post author


          I’m not saying I buy the argument re lesser rights. The New York trust experts don’t buy it. But I can see judges doing everything they can avoid to set of this bomb. So you might see a range of opinions at the lower court level when the real fights start.

          The securitization industry is also starting a big PR campaign. They’ve announced they will be releasing a white paper in 2 weeks. It’s clear from the tone of the press release that the intent is to assert that the critics have this all wrong.

          However, even the language of the press release is artful. It looks pretty clear they are going to assert that there is nothing wrong the procedures set forth in the documents, that all the parties got opinions of counsel saying this all worked, etc.

          The problem is those opinions were qualified and said, basically, if you did what you said you’d do, you are fine. But the problem is that the parties to the agreement didn’t uphold the agreement. The facts are pretty clear here, but a lot of very high priced law firms are providing their names to this cover-up.

  22. Praedor

    I think it is fairly simple really. If there was lying and cheating, then people go on trial and go to jail (including CEOs if it comes to that). Also (and key to my mind) is if these mortgages were broken up into CDS’ and CDOs then someone has to provide PROOF that they have standing to foreclose. If they cannot provide the note proving they have standing to foreclose, and more importantly, if it is unclear because of the bullshit mathematician and physicist crap games that were played by banks and finance, who actually now owns the note, then the people currently in those houses get them free and clear. Possession is 9/10ths and all that. If the banks f*cked up by creating these bullshit “synthetic” toys for wall street trading and they have totally obscured who has right to the loan (and to foreclose) then they must suffer the consequences of their f*ckup and the people should win.

    This would have been my very first tack if I were in a foreclosure situation. I would have demanded proof that the foreclosing entity actually has the note. I would have demanded, in court, that they produce proof that they have standing. I would then have sought to have their attempt to foreclose thrown out and the house awarded to me, the only entity in the whole mess with any clear hold on the property. They made their synthetic bullshit mess, they should lie in it and nibble on it.

  23. surferdude

    “Just consider one element of collateral damage: second mortgages”

    alternatively, perhaps the 2nds increase in value as they are now a first lien position.

  24. Ron

    The recent situation in Southern Calif with a family moved back into their prior home that had been foreclosed and sold to new buyers is interesting as it shows how certain Americans expect to use the current crisis for profit. Here is some recent updates on what this family paid for the home and how much they took out via cash out refi since:

    “The Earl family bought the Simi Valley house in 2001 for $539,000. In 2005 they refinanced with an $880,000 loan. In February, the trustee’s deed upon sale indicated unpaid debt with costs on the property just over $1 million.”
    Why in the world would they refinance? By my calculation they increased the debt on this place by $341,000. The median U.S. home price is $179,000! Is this your typical family? Not even close. Oh but it gets even better:
    “That was what (they) claimed we owed at that time,” Danielle Earl said. “I don’t believe I owe anything at this point.”

  25. apachecadillac

    Not to be too technical, but somehow the whole idea of choice of law has gotten lost in these discussions. For one purpose governed by the law of one jurisdiction(a foreclosure proceedings, say), a bulk assignment in blank of MERS-eligible notes and mortgages is utterly worthless. That doesn’t mean that the notes and mortgages are no longer valid, just that the transfer was ineffective.

    But for another purpose, say the initial funding of the trust and determination of conduit status for tax purposes, the laws of a different jurisdiction (for a New York trust, New York law and the instrument creating the trust, and the rules and regs of the IRS) determine the outcome. If the trust instrument contemplates bulk assignments in blank, I don’t know why a New York court interpreting a NY trust instrument would look past that.

    Look, an organization has a problem if it has institutionalized its criminal tendencies to the point where it has hired employees to commit routine perjury and outsourced its forgery needs. You don’t solve that problem by giving the employee a title like ‘limited signing officer’ and buying your forgeries off a price list calling them ‘file recreation’. That appears to have been going on and that’s a huge problem. But it doesn’t bring into question the validity of title to every piece of real property financed or refinanced in the last ten years, and it doesn’t mean that all that MBS can somehow be put back to the deal sponsors.

    1. Justicia

      If the trust instrument contemplates bulk assignments in blank, I don’t know why a New York court interpreting a NY trust instrument would look past that.
      Because NY case law holds that the assignment of a mortgage cannot be in blank. Chauncey v. Arnold, 24 N.Y. 330, 335 (N.Y. 1862):

      “No mortgagee or obligee was named … and no right to maintain an action thereon, or to enforce the same, was given therein … It was, per se, of no more legal force than a simple piece of blank paper.”

      See Christopher Peterson’s article, p. 17

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

      1. Pascal Blacque

        Do you remember back in the fall ‘08, Bill Gross titled one of his monthly letters “Where’s Waldo?” … and we’re still searching today… although the Fed owns a lot of it, poor us!

        Anyway … I could imagine another such title “Where’s Notee”… for it seems to me like if we could find the original notes, a lot of the current issues could be resolved. Yes there will be a lot of wrist slapping, fines, disbarment, maybe jail time, etc. for all the illegal foreclosures and frauds on the court to date.

        But without the notes –and hopefully you can weigh in on this– the problem metastatizes to include all borrowers that are current on their payments and all real estate transactions that include a mortgage/financing.

        In other words, am I wrong in believing that:

        1) All performing borrowers have the right to demand evidence of note ownership before paying another penny to the lender – you can appreciate what that will do to MBS investors and to the mortgage financing market

        2) All past, current and future real estate transactions involving a mortgage are at risk if the title chain is/has been clouded – Why buy an property if you cannot be certain your Title will free and clear?

        If the above 2 issues are relevant, what do you envisage as a possible fix?

  26. EmilianoZ

    Somebody reading this blog could’ve shorted those stocks and made a killing.

    But since Obama will predictably bail them out, maybe we should now take a long position.

  27. Jim

    We all no how the foreclosure documents crisis will end, the banks water carriers in Washington will legislate it away and a solemn Obama will sign it into law siting the ‘threat to our economy’. The veto of the recent attempt at this simply came at an inconvenient time.

    Some, hopefully many, in the judiciary will resist and the issue will be fast tracked to the Supremes. Does anyone doubt that the current court will side with the banks?

    The bond scandal is a different matter, short of a bailout there isn’t a legislative way out, so count on the bailout.

  28. Francis


    There’s a draft of a law review article kicking around arguing that the conveyance of a mortgage to MERS could result in the noteholder losing the security. If this happens, the borrower remains liable for the debt. Now, what happens next is likely to get very tricky. First, the lender goes to court and gets a judgment for the amount of the unpaid debt. Second, the lender records the judgment against the assets of the debtor (like the house). Third the lender tries to foreclose on the judgment lien. Fourth the debtor declares bankruptcy. Here’s the kicker. In many jurisdictions, the priority of judgment liens are treated differently from mortgages. Specifically, they come after the debtor exemption. And debtor exemptions vary hugely from one state to the next.

    The state with the most generous exemption? Florida. People get to keep their primary residence.

    (note: this comment is based on my recollection of bankruptcy law class, which was 17 years ago. Please check this with someone who is a little more current on that law.)

  29. Eagle

    To the question of how did the US rank behind Mexico in civil justice? I think we can safely say it was by using an absurd methodology.

    When Mexico starts complaining about an American illegal immigration problem, I’ll start taking these results a little more seriously.

    As far as how widespread the problem is – there still isn’t hard evidence one way or the other. You are pointing to worst-case scenarios and the banks are pointing to bast-case scenarios. Let’s see what happens.

    One thing I agree with you unquestioningly on is the need to hold the banks to current property law standards, requiring them to produce all necessary documentation in foreclosures – and I’m encouraged that we do seem to be moving in that direction.

  30. Sinaptics


    But as Apachecadillac points out, does that just make the transfer to MERS invalid? Or does that split the baby? If the banks can just have everything given back to them as if the various deals never existed, then the homeowner is in exactly the same position.

  31. MinnItMan

    Whatever else is going on, the lenders’ agents have admitted that they have used affidavits which fail the basic test of admissibility of evidence, that the statements sworn to in the affidavit were not based upon personal knowledge.

    Nonetheless, these affidavits and the copies of documents supported by them were admitted, the cases moved forward, and judgement was enterred by various courts. While “personal knowledge” is a technical requirement of admissibility, “automated” or “assembly line” processes that systematically undercut that requirement are not “errors” or “technical errors” or “techincalities” under any oridinary meaning. I would expect to be disbarred if I made a sworn statement saying I had personal knowledge that the documents submitted as exhibits referred to in a complaint were true and correct copies of the originals, when I had no such knowledge, didn’t care about such knowledge and as a matter of systematic practice, would never have such knowledge.

    I just don’t see where the “error” is here, other than they thought it “wouldn’t be a problem.” Oops. It’s even plausible that the affiants (the affidavit makers) thought they had peronal knowledge because they were told to do things this way, that is, an “error” on the affiants’ part and maybe even an “error” on their employers’ part. But it still isn’t enough to substantiate what was actually said in those affidavits in light of statements specifically denying the personal knowledge component.

    Legislatures can and do frequently legislate rules of evidence relating to how substantive requirements of a law may be met. DWI laws are an example. The legislature defines a certain blood alcohol level as presumptively “intoxicated” or “impaired” regardless of whether the person charged was actually intoxicated or impaired. The charged person is prevented from rebutting that presumption, that is, he can’t say, “while most people may be intoxicated at.08 BAC, I am not.” This example is important because the prosecutor must still provide foundation for admissibility of those test results. The charging officer must state he has personal knowledge of the time, location, that the charged was in fact tested, the method of the test, the controls for accuracy of the test, that the test results were handled in such-and-such a way, etc. before the test results are admissible.

    It is the foundation part that the lenders’ agents fabricated. Ordinarily, after getting caught bearing false witness (biblical reference intentional), the party seeking damage control has to get through the “if you were lying then, how do we know your not lying now” moment. This is not a pain-free (at the very least, legal time is not cheap) experience.

    It’s unclear how legislators and attorneys’ general are going to come up with a global fix that allows lenders a pass here, one that isn’t subject to judicial challenge for encroachment on the various judiciaries’ turf. I will venture to say this: I am hard-pressed to think of a single more important “rule of law” than the requirement of personal knowledge in backing up sworn statements and/or testimony. To think that this matter is settled before state supreme courts and the US Supreme court rule on this is about as great a gamble as anyone could make. Needless to say, this is what underwriting counsel at title insurers are going to think, even if their companies do decide to eat this risk.

    As for the next cliche. So far, I don’t see “sloppiness.” In fact, when I look at these submissions, my opinion is they are rather “tidy.” I frequently submit affidavits to courts for the same reason – to provide foundation for the admissibility of documents upon which I am asking the court to use as evidence to make its decision. If there is no personal knowledge, there is no foundation, and the documents are inadmissible. As a solo practitioner with no legal secretary and no paralegal, this process uses up roughly half my time in working on court submissions (e.g. complaints, responses to production for documents, motions etc.).

    I once did run into a judge who commented on a “sloppy” submission” of mine. The paper had a coffee cup ring on it. While this was a little embarassing, it didn’t affect admissibility, and I didn’t have to worry about anything other than appearing a little “small-time.” And frankly, I don’t worry about that very often.

  32. npoet9

    The mistake of the Obama administration was NOT to bail out the taxpayers before taking this much needed action against the banks. Instead of throwing $1 billion at the investment banks, the money should have been in terms of 100% rebates on income taxes paid the previous year + an equal percentage of the money the banks were extorting the government for – and then letting the market play out that economic. Then, we put foreclosures on hold for renegotiation. The banks, would be pressed to make fair deals with homeowners and taxpayers with bargaining power. That’s not utopian, that’s very, very pragmatic.

  33. Bill

    Yves, thank you very much for all your efforts. It is with efforts like yours that maybe the whole rotten capitalist system (as it is now practiced – not as it was originally intended) will be shown for what it is. Thank you again Yves.

  34. John Ryskamp

    The other shoe to drop is when investors start to go after the homeowners as co-conspirators, converters and defrauders. Look at the factual representations homeowners signed off on as they bought or sold these properties.

    We’re past the point where homeowners are regarded simply as the good guys, who paid their mortgages, and didn’t realize what they were doing.

    Why? Because investors now want to go after titleholders, saying they are trustees for a constructive trust, and what is in the trust is title to the property. So the judge can order the titleholder (the homeowner) to convey title to the investors.

    You think investors are going to leave homeowners alone, when the only asset worth having now is the property itself and the right to sell it?

    1. Justicia

      If the mortgage originators gave out NINJA loans (no income, no job, no assets required), what can they sue the borrower for? Where’s the misrepresentation on the borrower’s part?

      The lender knew, or should have known, that this was a very high risk loan.

  35. F. Beard

    I am enjoying this spectacle though I do pity the innocent victims.

    I suspect the operative phrase has gone from “Doing God’s work” to “God is not mocked”.

    1. John Ryskamp

      What innocent victims? They were all participants in this Ponzi scheme. Think the moron just paying his mortgage is an innocent victim. Baloney. He’s participating in the Ponzi scheme, signing off on representations which allow the scheme to suck in more money.

      1. F. Beard

        What choice do people have in the face of a government backed counterfeiting cartel in the government enforced monopoly money supply? Were they supposed to accept negative real interest rates in housing on their savings and be priced out of the housing market forever?

        I suggest that rather than throw stones at the borrowers that you lobby for a general bailout of the population. Then savers too can be compensated at the expense of counterfeiting cartel. No new debt is needed, debt and interest free legal tender fiat (United States Notes) would do nicely.

  36. LizinSarasota

    The most ominous issue here in Sarasota County is not so much that fraudulent affidavits riddle our foreclosure cases in the 12th Judicial Circuit, what’s most disturbing is that the law library is jettisoning 2/3 of its current and complete collection of BOOKS and moving into a tiny cramped and temporary space in the general library. Current and complete collections of Atlantic Reporters, SE and SW Reporters, Pacific Reporters, and a whole bunch of perfectly fine, absolutely OK books are scheduled to be thrown in the dumpster.
    We are about to be left to the tender mercies of WestLaw. What happens when the internet goes down? What happens when the power goes out? What happens when I want to borrow a book over the weekend?
    Darn it, two computer terminals does not a library make.
    This is banana republic behavior, right here in Florida, USA!

  37. Walter W

    Here’s something interesting. Guess who is in charge of Mortgage Servicing at JPM? David Schneider, formerly President of Washington Mutual’s mortgage biz and who was called before Senate Committee last Spring to testify on WaMu’s mortgage biz.

    1. F. Beard

      Nice interview! And a nice club to obtain mortgage principle cram-downs.

      Hey savers. You may miss out unless you insist on a general bailout of the population, not just forgiveness for the debtors.

  38. GrayGhost

    Another thought, which I may have missed above. How about the impact on Strategic Defaulters. If the security interest is not perfected, then personal deficiencies may not apply. Therefore, the bar to taking the strategic default step is lowered.

    Assume homeowner has $600,000 mortgage, and other assets and income which prevent Chapter 7, and home is worth $300,000 today. If strategic default, then the difference could be assessed in some states as a deficiency as subject to collection.

    If, OTOH, there is NO perfected security interest, then Strategic Default becomes viable option. About like leaving your vehicle, in which you are upside down, unlocked in a bad part of town.

    Second thought is on the idea of “unclean hands.” Assume investor sues packaging bank who in turn “3rd party Defendants” in the homeowner. Would homeowner be able to raise either “unclean hands” or just plain “negligence” as a defense to the bank. If so, investor has recourse against bank, and presumably the bank only has recourse against it’s attorney, or perhaps an errors and ommissions insurance policy on its own officers.

    This is extremely state specific, so I have not researched. Just ideas.

  39. Demented Chimp

    What is anything worth if the rule of law has not been followed and you cannot be certain of title. Those fuckers have undermined the basis of the creation of capital.

    Hernando de Soto postulates that the creation and fungibility of such capital is the reason the “west” is wealthy and developed.

    “What the poor majority in the developing world do not have, is easy access to the legal system, which, in the advanced nations of the world and for the elite in their own countries, is the gateway to economic success. For it is in the legal system where property documents are created and standardized according to law. That documentation builds a public memory that permits society to engage in such crucial economic activities as identifying and gaining access to information about individuals, their assets, their titles, rights, charges and obligations; establishing the limits of liability for businesses; knowing an asset’s previous economic situation; assuring protection of third parties; and quantifying and valuing assets and rights. These public memory mechanisms in turn facilitate such opportunities as access to credit, the establishment of systems of identification, the creation of systems for credit and insurance information, the provision for housing and infrastructure, the issue of shares, the mortgage of property, and a host of other economic activities that drive a modern market economy.”[13]

    I cant see this ending well – US rapidly going banana republic.

    Certainly means a lot more scrutiny of valuations and valuers and probably a lot more work sorting though the mess for banks and receivers.
    Quality work is where the long term business going forward not the Roger model.

  40. r stephenson

    OK then, if no one is paying the mortgage I assume then that no one is paying the property tax either. So, I expect that the county will at some point seize or condemn the property and auction it off at a sheriff’s auction?

    1. Yves Smith Post author

      Banks have taken to delaying foreclosures because the owner of the property is liable for the taxes. Local governments can pursue homeowners for taxes owed.

  41. Matt

    How many of the trusts are actually big banks? I remember some parties in the mortgage securitization path were very small entities getting paid about 15 basis points to be there?

    1. Yves Smith Post author

      The trusts were the final stop in the chain. The intermediary entities could indeed by small, but the trustees of these securitization trusts are major banks.

  42. TC

    “We can only hope we have enough of an independent judiciary left in this country to bring these miscreants to heel.”

    This too, though, circles right back to Congress. I recall Senator Shelby (R-AL), the ranking member of the Banking Committee citing the need for thorough investigation — indeed, citing the Pecora Commission of the 1930s — when early in the Obama administration the push for FinReg was on. So, should Republicans win the Senate and Shelby gain the chair of the Banking Committee, there could be added impetus for a penetrating investigation.

    Indeed, a great struggle for power in Congress might be the order of the day. The status quo of the past two years might be turned upside down. Another TARP backstop for Bernanke’s insane QE2 might not be forthcoming. Time for bankruptcy reorganization might be right now.

    So, the Senate bears watching on this account.

    As for the House, there is so much up in the air — and this as the hatred for the President grows — it’s hard to say what the dynamic there will produce. One thing is fairly certain, though: the witch is dead. Buh-bye Madam Speaker.

    All things considered it seems that, with today’s obeisant Congressional leadership in place until January, a crisis prodding some trillions from the New Masters of the Universe — the protectors of the nation from another Great Depression — seems just what the doctor ordered. The final two months of 2010 could be a nightmare for investors.

    Concerns surrounding MBS might be producing a standard dose of denial, yet given what we already have been through these past few years, doubts in the voracity of those who downplay the risks are solidifying a lot faster (and with sound evidence bolstering fear) than they did a few years ago. This certainly cannot be a good thing when mortgages backing MBS are in doubt. That’s a game killer.

  43. MG

    And sadly the main media and the American public generally are apathetic to this issue. Don’t know what it will take to make Americans really care but my guess is that it will have to be fairly horrific and be dramatic instead of complicated, dragged out, and papered over.

  44. leslie

    In May 2005 we deposited and invested $200,000 in Real Property, where we recently found out that $118,800 was embezzled out of our property from Mortgage Lenders and Trust Brokerage Companies, namely Goldman Sachs through an escrow Transaction. The $118,800 in funds was paid to these embezzlers from the Investors unbeknownst that the securitization happened by encumbering our property and making up a fraudulent fake Promissory Note and Deed of Trust.

    See the link for further information:

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