Denial in the Mortgage Industrial Complex

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I just came back from the AmeriCatalyst conference in Austin, which was a packed two days focused on the state of the housing and securitization market. The panels were very informative, and it was also good to see some of the people I’ve read or heard about, in particular the leading analyst, Laurie Goodman of Amherst Securities. She gave a talk that where she went through a very persuasive (and conservative) analysis that there are 8.3 to 10.3 million more foreclosures baked in given how underwater borrowers are. And she had some striking bits of information. One is if you take out the homes where no one has made a mortgage payment in a year or more, homeownership in the US is 61%. In addition, Judge Annette Rizzo discussed a successful program she had developed in Philadelphia to do remediation. The success rate on modifications that come out of her court is 85% after 18 months.

I had quite a few people come and commend me on my comments. I think the main reason was that the viewpoint presented on this blog, that there are deep seated problems resulting from chain of title issues, and that servicers have engaged in a lot of abuses, was sorely underrepresented. I don’t blame the organizer, Toni Moss, who has an exceptionally well thought out and prepped effort; I think this reflects the nature of who has expertise in this industry. The overwhelming majority of knowledgeable people will be insiders, and whether they can admit it to themselves or not, their first loyalty will be to their meal ticket. Put it another way: why would you have to go outside the industry to find someone (and a blogger to boot) to raise issues that come directly out of recent court decisions and the gridlock in foreclosure courts if you could find people with institutional credentials? (In fairness, there were other skeptics, such as Adam Levitin and Josh Rosner, but that was a minority viewpoint).

But I don’t mean to accuse the panelists or industry defenders of mendacity. Instead, it has much more to do with both loyalty to their industry, and a distressing lack of understanding of the legal issues involved. By happenstance, I’m reading a book by an award-winning academic psychologist, David Tuckett, Minding the Markets, and it includes a good summary on the state of the art on group processes. As W.R. Bion wrote,

I know of no experience that demonstrates more clearly that a basic assumption group experience is active [colloquially known as groupthink] that ‘the dread with which a questioning attitude is regarded’ and particularly towards the group itself.

I’ve been in conference in the past where denial was a palpable subtext, in particular, the 2008 Milken conference, which took place the month after Bear Stearns collapsed. There was a whistling in the dark quality to it, but there was also aggressive enforcement of a “ne’er a bad word will be said” policy (see here and here for details).

By contrast, here the hope was to mix it up a bit, yet there was a lot of unanimity. For instance, the six members of one panel were asked where housing prices would be a year from now. One said they’d bottomed, one said they’d bottomed but would bump sideways for a very long time. The others projected very modest declines (with the usual caveat that real estate is local), typically 2%, with the maximum 5%. Given how far housing prices have fallen, it would not seem crazy to expect things not to deteriorate much further. But given the severity of the chain of title mess and the high odds of a European banking crisis, which would wind up impacting the US economy, I found it telling that no one was willing to hedge their views with a consideration of a downside scenario.

But the biggest undertone was the “borrowers are deadbeats” meme. In the first panel I was one, one of the other speakers went on about borrower fraud in the widely criticized HAMP program. I had trouble containing myself in my response. Each table in the audience had a keyboard that allowed comments and questions to be displayed (both to people at the table and the speakers (a clever way to direct the texting temptation into the conversation). In a later panel I was on, on litigation, there were a lot of “shoot the messenger” remarks (among other things, I was accused of being an anarchist, and it was also interesting to see how some of my remarks were either distorted or misunderstood. For instance, I made a general remark about the use of allonges (a preferred form of fabrication to solve the little problem of failure to conveyu the mortgage notes as required on time), and a written comment charged me with being wrong about Kemp v. Countrywide, when I had just mentioned that case for a different reason). It was pretty clear that the American Securitization Forum party line, that these were mere errors or sloppiness, is widely shared. Too few are willing to accept the point made by Levitin:

To raise the “it’s just paperwork” argument in the context of securitization, however, is unreal. Securitization is all about legal fictions and paperwork. Why on earth would anyone every bother with the complex legal structures of securitization (typically involving two shell entities) other than to take advantage of legal fictions?

As I’ve noted in other venues, securitization is the legal apotheosis of form over substance, and the basis on which this is legally tolerated is the punctilious observance of formalities. Failure to do so can result in a securitization failing to be bankruptcy remote or to lose its off-balance sheet accounting status or lose its pass-thru tax status, any of which are disasterous. Securitization deals were so heavily lawyered precisely because the paperwork matters. They aren’t like a sale of a used sofa over Craigslist.

The “it’s just paperwork” argument quickly proves too much. Is the borrower’s signature on the loan “just paperwork”? How about a co-signor’s? If it’s just paperwork, why bother to have the borrower or co-signor sign, especially as it can create federal Equal Credit Opportunity Act issues when a spouse is involved.

So it isn’t surprising that a lawyer who represents investors made an impassioned plea for servicers to wake up and smell the coffee, that he’d rather work with them and negotiate a deal, but he was too often left with no other option than to sue. And that means that this battle will continue to play out in the courtroom.

The good news at least some of the media gets it. The New York Times was early to support attorney general Eric Scheiderman’s efforts. The Grey Lady provided another editorial covering his back, this one on his and other AGs like Delaware Beau Biden’s opposition to the direction the multi-state settlement talks have taken. Key points:

The administration says a settlement today would quickly deliver relief to needy borrowers. That’s true as far as it goes, but it doesn’t go far enough. Early word of the proposed settlement indicates that banks would reduce the balances on a million or so underwater loans by $17 billion to $20 billion. They would put up $5 billion to $8 billion to help pay for refinancings, counseling, legal services and other aid to homeowners. And they would have to adhere to tougher standards for loan servicing and foreclosures. That would be better than now but paltry compared with the potential extent of bank misconduct and with the scale of the mortgage debacle. At present, 14.5 million borrowers — and the broader economy — are drowning in some $700 billion of negative equity.

The administration also believes federal and state officials could effectively pursue investigations of unexamined issues after a settlement. We doubt that. The government’s history on challenging banks and holding them accountable does not inspire confidence. And for banks — threatened by crushing legal challenges for their conduct — the whole point of settling is to restrict legal claims.

The proposed settlement reportedly would prevent the states from pursuing claims against banks relating to fraud or abuse in the origination of loans during the bubble. (In some states, the statute of limitations has expired for bringing challenges for faulty originations but not on all loans in all states.) It would also prevent states from pursuing claims for foreclosure abuses, like improper denial of loan modifications. And it would prevent them from pursuing banks’ misconduct in their dealings with the Mortgage Electronic Registration Systems database, or MERS, a land registry system implicated in bubble-era violations of tax, trust and property law…

In effect, the legal waivers being contemplated would let the banks pay up to sweep wrongdoing under the rug…

The best outcome would be for government officials to do what they should have done all along: develop the strongest possible legal case by fully investigating the banks’ conduct during the bubble and since the crash and then — and only then — talk settlement. In the meantime, the public is being well served by attorneys general who are willing to say that the deal currently on the table is not nearly good enough.

The industry seems not to understand that it does need a global resolution, but not a fake one that will be undermined as the gridlock in the courts gets worse, but a real one that seeks to come to some equitable solution and put the industry on a sounder footing. Until then, they are holding the housing market and the economy hostage.

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  1. montysep

    One of the best posts ever at NC. Feel a fly on the wall. Thx. Will head to paypal link later today.

  2. ex-PFC Chuck

    As Upton Sinclair put it about a century ago,

    “It’s very difficult to convince someone of something when his salary depends on his not being convinced of it.”

  3. ambrit

    Do the people at this conference have influence with the political class? Thus, how long is the lag time between consensus change in the industry and change in the workings of the political apparatus? (A wordy way of asking, “Is it already too late?”)

  4. jake chase

    One problem with the foreclosure mess: you have large constituencies who are unrepresented but matter nevertheless. Securitization and origination fraud and borrower fraud drove prices sky high and priced out of the market anyone honest and sensible about his ability to service debt. Now we have twelve million mortgages under water by 125%. Why are the borrowers who signed these notes the only ones deserving of relief? Because the banks played footsie with state law recording acts and securitization bankruptcy and tax rules? What about those who are still sensible and still cannot buy a house because foreclosure failure keeps house prices still higher than they ought to be? What about those who continue paying their own plumped up mortgages? What about a construction industry made comatose by overinflated land prices? The fact is that the mortgage mess has created a political problem, not just a series of mind numbing legal problems. What we need most is a political solution. What we get instead is a surge in television advertising by foreclosure lawyers. Since you, Yves, are not a lawyer, why not try writing about the political problem and stop rehashing the legal problems overemphasis of which goes a long way to preventing even a start on a sensible political solution.

      1. Nathanael

        Arrest the criminals running the banks, shut down the major insolvent banks and establish new honest ones, and give free money to everyone in the country on a per capita basis (helping borrower and saver alike, and reinvigorating the economy).

        Now, how to get people with such an agenda into government?

        Given that such an agenda hurts the kleptomaniacs who are currently controlling the government, the major banks, and many large corporations, it seems difficult, unless we have a non-violent revolution.

    1. Ray Phenicie

      Good point about the political process being the only real arena for solution – the courts are a real part of that arean and they are very busy on all fronts there. I could say that will be like watching glaciers melt but these days that’s pretty rapid.

      However, a lasting and meaningful solution politically does have to rely on Congress. As long as those bought creatures are sitting and spinning on their pretty pillows and sipping champagne in between times, we can’t really expect much there.

      Keeping up on the current situation is about all we can do until the revolution arrives and then, those who are on top of what is going on will be the wisest person in the room.

  5. Susan the other

    Even if Biden and Schneiderman do investigate MERS/sue MERS, and even if Texas, Florida, etc. county recorders do class action lawsuits against MERS and all the robosigning stops because AGs like Masto in Nevada have put their foot down finally, even if the Banks admitted the paperwork was unretrievable and they are sorry – we still have a mess on our hands that nobody knows how to begin to resolve. How will all those titles be cleared and quieted? The catch 22 is that since the banks/trusts don’t have the paperwork they can’t reconvey a title they do not have a provable interest in! So in most states this means a formal quiet title process which usually costs $30,000.00 per homeowner and takes at least 6 years. And the current estimate is that 60 million titles need to be quieted. This mess is going to stop the real estate/housing market dead in its tracks.

    1. LucyLulu

      Yep. It also means there are a whole lot of mortgages out there that are unenforceable. I don’t what the solution is but instead of hiding their heads in the sand, industry, legislators, jurists and homeowners need to start negotiating how this will be fixed. Does refinancing fix the problem? If so, what is acceptable compensation? Offering refinancing at a reduced interest rate to clear title issues, IMO, not only inadequate but yet more fraud being perpetrated on unsuspecting borrowers.

  6. rainbow

    What’s wrong with being an anarchist?

    Seriously: maybe you are–and what would be wrong with that?

  7. Economic Maverick

    We need you and others in the NC community out there fighting in all of these forums. It doesn’t matter if you’re outgunned 3-1 or 5-1 or even 10-1 because you and the broader NC community have the facts on your side AND much smarter and better informed than the talking point robots from “mainstream industry”.

    It would be great if you could do this full time 100%. I know the fund-raising goal is perhaps a step in the direction of expanding NC, but I think we need something much bigger. No doubt it would take sacrifice, perhaps major sacrifice, but the world REALLY needs you right now. Take a leap! Go full time 80 hours a week. Develop a cadre of NC folk, a “hit team” that can go on these forums, TV shows, grass roots teach-ins ins at #Occupy movements, civic organizations, townhall meetings around the country. The world is THIRSTING for something new. NC has something amazing here. Let’s take a leap and do it.

    1. aletheia33

      along these lines, here’s an idea, something we at nc could do right from our armchairs:

      starting with the question: can the mass foreclosure/securitization abuses/fraud be explained simply (inspired in part by the people’s mic form of presentation)?

      how about we put together a one-page crib sheet/pr (talking points) flyer that occupiers (and others) can use to fight the deadbeat borrower meme, starting perhaps at their foreclosure occupations at people’s homes? occupiers and others could hand out this flyer to members of the media, supportive neighbors, and other supporters who show up at these events.

      a paper flyer may sound primitive, but it could have the virtue of simplicity. could hand-to-hand distribution at foreclosure points in neighborhoods be an effective way to reach people who are spending all their evenings, exhausted from their vampire jobs, isolated in front of fox tv? and wouldn’t such a flyer come in handy for many other audiences/venues? (like the u.s. congress, apparently they don’t have this information either.)

      the flyer could include a link to an online webpage that people could use for mass printing and forwarding of the flyer via the internet.

      this could be especially effective if done in a humorous way, or at least with some humorous effects–maybe even using graphics or some dramatic elements. (that might be too far afield from straight talking points–maybe would have to be a second project)

      yves and perhaps other members of her band of experts could preview, participate, and give final approval, to the extent they are able and needed, to make sure everything in the flyer is accurate and to the point.

      pieces have been written by experts refuting the deadbeat borrower meme; they could serve as a starting point. the challenge is to boil the material down to 1 page of simple points.

      a good way to proceed might be for an expert to volunteer take a stab at framing a first draft in the form of a people’s mic presentation. if someone has already done this as part of an occupation activity, then we have a first draft right there, if we can track it down.

      i cannot volunteer to put this together from scratch, but i am a professional editor (which may surprise readers of my comments), and i would be willing to dig in to the editing of such a document for clarity and correctness of language. (and would be happy to turn this task over to anyone else who’d like to have it–not seeking any kind of control.)

      i’m ready to collaborate on this with any interested nc persons.

  8. M Jane Ross

    The author of “Minding the Markets” is actually David Tuckett, not Tucker.

    Yves, I truly appreciate the work you’re doing. You’re right to seek financial support from readers (and when I’m back from overseas I intend to chip in). I’d like to see some of the support go towards copy editing/proofreading. You’re doing a great job on your own but an editor’s eye certainly wouldn’t go amiss. Thanks again for all you do.

  9. JTFaraday

    “I was accused of being an anarchist”

    Now isn’t this interesting. Someone whose work can only be described as an attempt to recuperate the rule of law make it effective has been accused of being an anarchist.

    “The “it’s just paperwork” argument quickly proves too much. Is the borrower’s signature on the loan “just paperwork”? How about a co-signor’s?”

    These people must be mighty afraid of the criminal law that they’re shrugging their shoulders at the property laws that secure their own money making activities.

    If it’s “just paperwork,” I’m going to go out tomorrow, find myself an empty house, and move in.

    1. JTFaraday

      Oh, what the heck. If it’s “just paperwork,” send me their addresses. (I bet they have some nice digs).

    2. Foppe

      Amusing, and sort of related to the ‘rule of law’ thing: De Waal, Primates and Philosophers, p.171: “A recent study of policing in macaques has shown that the
      entire group benefits. In the temporary absence of the usual
      performers of policing, the remaining group members see
      their affiliative networks deteriorate and the opportunities
      for reciprocal exchange dwindle.”
      (Of course, monkey social groups are not at all comparable to human ones, which are much more intricate…)

    3. securecare

      “…These people must be mighty afraid of the criminal law…”

      BINGO !

      “They ” are scared crapless that justice will be done and their “doing time” won’t be in some country club minimum security prison but in a real hard time lockup. We all know that is how illegal this all is.

  10. b.

    A dollar bill is “just paperwork”.

    The utter lack of common sense among the robo-thinkers and robo-liars is nothing short of stunning. Inbred privilege and aspiring greed must have become completely untethered – in the past, if it was not a sense of duty, then it was a gut-level understanding of their own mortality that held back the “e-lites”. Maybe the medical advances of the last two generations – reduction of child mortality and extension of life expectancy in particular – has had a profoundly detrimental effect on the cognitive abilities of our Privileged Few?

    1. JTFaraday

      These people aren’t born elites. They’re moderately educated administrators who found themselves a market niche and exploited it until they destroyed it.

      By playing the born elite card, you just give them an excuse to protest about how “hard they work,” how they pull “80 hour weeks,” etc–as if *that* were the point.

      No, the more factual version is much more interesting, and destroying property interests is a very substantial crime to their social betters.

      That’s why they keep pointing at “those people” and insisting that “they did it.”

      Yeah right.

    2. Nathanael

      Exactly what JTFaraday said. These people were *not* “born elite”. (Those born elite usually are trained better by their parents, PM Cameron excepted.)

      They were mostly born upper-middle-class (which gave them the chance), and then discovered that they could become elite through a career of white-collar *THIEVERY*.

      This is why their behavior is so spectacularly anti-social. They got where they were by being thieves and liars, and they aren’t about to stop!

  11. greggp

    All the talk about what a big mess it will be to fix the clouded titles is just talk. It can be done, and it has been in the past. Courthouses have burned down, taking land records with them, and both have been rebuilt (take Contra Costa County, California, for example).

    I think you can draw an analogy to the fire-management policies of the 20th century, and the policy of protecting the “too big to fail banks.” We spent countless resources trying to prevent fires in places that were destined to burn as part of the natural cycle, and while we may be initially successful, or even successful for years, when the fire comes, it is more severe and more devastating than a series of small fires (I’ve endured two such events int the last 10 years in San Diego). Yet once the fire is gone, and nature revives the area, things better than they were.

    So we experienced a real estate bubble that burst, and now we need jobs. We also need to fix the mess, and that will create jobs – not the same jobs that were lost, but different jobs. Some big investments will fail and some once powerful interests will fail, to be replaced by other investments and investors, free of the old baggage.

    (Disclosure: I am a lawyer working on foreclosure cases and MERS/securitization failures, and business is good. It’s been a struggle for the last several years, and I have often felt that things were hopeless, especially in “fraud theory” states like California, but lately, I have become much more optimistic about how some things may turn out.)

    1. aletheia33

      thanks for your comment. hope you can report more here from inside your business, and explain the basis for your recent increase in optimism. how do you now think these “some things” are going to turn out? would be much appreciated.

  12. MyLessThanPrimeBeef

    It’s scary to think that if our ancestors didn’t die, we would have an even bigger population/resource problem.

    What is holding the housing market/economy hostage is we (as in, us) are throwing too many obstacles for it to find a true bottom so those on the sidelines now and those about to form families in the near future can safely wade in without becoming new victims again.

    Perhaps this is too sentimental, but one generation (of people, investors or homeowners) always makes way for the next generation to emerge.

  13. LillithMc

    So glad that Yves was at the conference as a self-employed person. No doubt many were wondering where she worked and how to make sure she was fired. Sadly ethics and concern for the users of the mortgage system is long gone. From personal experience I know this is no longer an acceptable topic of conversation. I hope those individual attorneys can continue to sue because they are the only hope I have for some adjustment to the system. Maybe the very few AG’s in the very few states can create some legality in a system run wild. In underwater areas like mine few have any desire to buy a home. Let the banks eat the expense of massive vacancies. Someday they may realize they would have been better off making a deal than forcing foreclosures.

  14. steelhead23

    Very interesting Yves. I know you are in the biz beyond this blog, but do you believe you were invited to the panels because the organizers truly wanted people to hear what you had to say, or, were you the guest pig at the BBQ? You see Yves, you are a heretic, not an anarchist. During the Reformation, it was not uncommon for heretics to be invited to speak, and speak freely – they were then burned on a pyre of their own words. I would find it interesting to review the questions you were asked. Were they all germane to your talk, or were some perhaps contrived from the positions you have staked out on NC? Elsewhere on the blog, Matt Stoller extols the virtues of NC in educating congressional staffers. Prior to your and other blogs, such “education” was monopolized by K Street and the financial services industry. This leads me to believe that it is very likely that some of these players, particularly the big dogs, hate you and NC. Of course, they’re good at this game and will smile and shake your hand, but in truth, they’d rather spit on your corpse.

    You yourself have stated that “they (financial services industry) are holding the housing market and the economy hostage.” Isn’t it likely that in effect they are extorting the political/justice system? “Give us what we want (immunity from prosecution and lawsuits) and we will use our power over appraisals, control of capital, and marketing power to reignite housing, bring hope back to America, get people spending, and end this horrible depression the government has created by attacking us, the titans of capitalism.” Or, have I become too darned cynical?

    1. Mark P.

      Fact is, if the industry can merely run the clock a couple more years the statute of limitations will kick in regarding a mass of the earlier fraudulent cases that happened up to 2005-6.

        1. Mark P.

          Oh, you’re absolutely right. That’s why I’m fairly sanguine about the long run.

          Still, for the good of the larger American polity in the nearer term it would be better to see some guilty individuals doing perp walks. Truth to tell, the Chinese government’s solution to these crimes — execution — seems to me not without its appeals.

  15. Brian

    Was the issue of the possession and ownership of the note ever brought up? Since you don’t mention it, was that something they chose to avoid? The idea of having a settlement when someone claiming to own a lien can’t produce any evidence for such a claim would not be appropriate under the existing law.

  16. Eric

    “…there are 8.3 to 10.3 million more foreclosures baked give how underwater borrowers are.”

    “But I don’t mean to attribute to the panelists or industry defenders of mendacity.”

    “By happenstance, I’m reader a book…”

    I’m having trouble following this terse economics jargon.

    1. Yves Smith Post author

      Will fix, I had only 4 hours of sleep each of the last two nights, and was too tired to reread the post before putting it up.

  17. Bravo

    To Susan the Other:

    Your post poses the right question. Those who read this and other blogs for insight on ways to resolve the problem, are thirsting for constructive ideas as to how to resolve it other than the bogus AG settlement. The large banks seem to be paying for their own investigation of prospective foreclosure misdeeds against the delinquent class of borrowers.

    But what about the damage done to homeowners who have continued to pay, despite being hopelessly underwater, and could face issues obtaining title insurance if they were to need or choose to sell their house, since the servicer has been knowingly forwarding payments to a trust that cannot establish its legal claim to the note?

    Rather than watch as more and more underwater borrowers strategically default, it seems like enterprising attorneys in hard hit, large counties need to organize a class of homeowners who have made their payments to date and share a common servicer. Upon request, if the servicer can’t or won’t supply chain of title documentation to its members, then sue for quiet title on behalf of those borrowers in Chauncery Court, making it an affordable process via economies of scale. That would get servicer/trustee attention.

    A proactive large group of current borrowers in a given county, motivated by a common severely underwater condition and compromised chain of title, could affect a far better outcome than those of the delinquent borrower class in the OCC sponsored investigation, or the faux AG settlement discussions.

  18. Joy

    I was at the conference and was very happy to see you there. I heard people in the audience hissing at a number of your comments. I was quietly cheering you on and was thrilled to hear a voice of reason. You held your own in the lion’s den and won the respect of many for it – even folks who disagreed with you. thank you!

  19. GTF

    If I bought the book is that enough to support the cause, or am I being a cheapskate to one of my daily reads? Serious question, not trying to be an ass.

  20. Tyzao

    I was wondering if you have come across any news on the class action lawsuit against MERS coming out of Duval County, FL — wonder if that will be significant

  21. 21st Mortgage

    The banks also play evil. I have seen people getting rejected from their retail banks because the banks now are too skeptical towards everybody even their dogs and cats and fish.

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