Category Archives: Credit markets

Adam Levitin: Alabama Mortgage Ruling “doesn’t have precedential value anywhere“

Georgetown law professor and securitization expert Adam Levitin has weighed in on the ruling in an Alabama case, U.S. Bank v. Congress, in which a state court judge ruled against what we have called the New York trust theory. For readers new to this terrain, the short form is that the parties to mortgage securitizations are governed by a so-called pooling and servicing agreement. The PSA, among many other things, described how the notes (the borrower IOU) were to be conveyed to a trust that would hold them for the benefit of investors. The trust was almost without exception a New York trust. New York was chosen because its trust law is both very well settled and very rigid. New York trusts have no discretion in how they operate. Any measure undertaken that is inconsistent with explicit instructions is deemed to be a “void act”.

Now it appears that the notes were not conveyed to the trusts as stipulated in the PSAs on a widespread basis. (You can read the details here). Because the trusts are New York trusts, that means you have a really big mess. You can’t convey the notes in now, that’s not permitted because the trust had specific dates for accepting the assets that have long passed. The party that has the note (someone earlier in the securitization chain) can foreclose, but no one wants to do that. It isn’t just that this would be an admission that that parties to the agreement didn’t fulfill their contractual obligations; there is no way to get the money from the party that foreclosed to the trust and then to the investors.

Since the securitization industry has had so little good news of late, and this New York trust issue has the potential to make the chain of title problems that banks are facing in courtrooms all over the US even more acute, Paul Jackson of Housing Wire was quick to jump on this pro-bank decision as a major victory. We argued that it was probably not a significant precedent, and that some of the legal reasoning looked like a stretch, other parts were at odds with decisions in other states (meaning those states were unlikely to change course based on a lower-court decision in Alabama). But we acknowledged that parts of the decision were hard to parse and over our pay grade.

Levitin has taken an even more dismissive view of the decision

Many Foreclosures in Oregon Halted Due to Decisions Against MERS

We pointed last week to an analysis by Lynn Syzmoniak that showed that foreclosures across a number of different servicers were way down in January 2011 versus the same period in January 2010. This was admittedly a tally in only two Florida counties, but she indicated that a quick look at other counties in Florida showed a similar pattern.

We are seeing analogous developments, but the drivers appear to be state specific, as judges give adverse rulings on common practices in foreclosure land. Reader wc4d pointed to a report in the Portland Oregonian, that lenders are withdrawing cases because five court decisions have found that lenders that used MERS violated state recording laws.

Paul Jackson Declares “Mission Accomplished” on Securitization Woes Based on Alabama Foreclosure Decision

Paul Jackson has posted on a decision by an Alabama trial court involving the so-called New York trust theory that we have discussed at some length on this blog. Given how banks have been taking it on the chin ever since the robo-signing scandal broke, I suppose I’d be inclined to gloat a little, as Jackson does, in response to a verdict in favor of a bank; bank PR has been a particularly tough assignment these past few months.

But Jackson tries to treat this particular lower court decision as an important precedent, when this is anything but. In addition, Jackson evidently is not familiar the normal process of getting new legal arguments accepted in court, or of how decisions in one court are viewed in another. Finally, as I will touch on here and discuss at greater length next week, there are good reasons why it is unlikely courts in other states (or even Federal bankruptcy courts in Alabama) will look to this decision as a precedent.

Matt Stoller: Angelo Mozilo, Tea Partier?

By Matt Stoller, a fellow at the Roosevelt Institute. His Twitter feed is http://www.twitter.com/matthewstoller Mozilo’s emails expose a political philosophy borrowed from Ronald Reagan. I was combing through the Financial Crisis Inquiry Commission resource materials, and I found an interesting email from former Countrywide CEO Angelo Mozilo to his senior executives. It was written in […]

The Bizarre Mortgage “Settlement” Negotiations

We are getting only odd tidbits out of the so-called settlement negotiations among the fifty state attorneys general, various Federal banking regulators, and mortgage servicing miscreants (meaning all of them). As Matt Stoller pointed out last weekend, the lack of transparency is troubling. Nevertheless, certain things are apparent.

1. There has not been anything even remotely resembling an investigation. As we have said earlier, the eight week Federal exam was a joke. As Adam Levitin noted:

GSE 2.0 Scare Tactics: False Claim That No Government Guarantee = No Thirty-Year Mortgage

The propaganda strategy for selling the public on the creation of supposedly new improved GSEs is becoming more apparent. Recall that we had an initial skirmish a month ago, when the Center for American Progress published a plan to reform Fannie/Freddie and the housing finance system. It would create an FDIC-like insurance fund to stand behind private Fannie/Freddie like entities that will offer reinsurance with an explicit Federal guarantee on mortgage-backed securities. These new firms can also be controlled by banks.

This plan, which was very similar to ones presented by the Mortgage Bankers Association, the Federal Reserve and the New York Fed, t was clearly an Administration trial balloon; the CAP is the mainstream Democrat think-tank, with close ties to Team Obama. But after the CAP proposal got some resistance, the Treasury’s report, which came later in the month, went the route of presenting three alternatives rather than a specific plan. But we argued at the time that this seeming change was merely a tactical move, to present the Administration as fair brokers in a politically fraught process, and that it still favored what we called the GSE 2.0 plan.

We think the idea of reconstituting the GSEs in somewhat improved form a terrible idea because it preserves the bad incentives of a public/private system and launders housing market subsidies in an inefficient and unaccountable way through the banking industry.

Another County Seeking to Collect Unpaid Recording Fees From MERS

I must confess I get a perverse sense of satisfaction from watching MERS suffering pushback on a variety of fronts. The latest, as we mentioned a few weeks ago, is the prospect of litigation by various local governments asserting the right to the recording fees that the MERS system bypassed.

The press release below is from the Guifford County Register of Deeds in North Carolina. As you can see, he is exploring the county’s options for recouping recording fees he believes that MERS owe to Guifford County, to the tune of $1.3 million (hat tip Lisa Epstein via ForeclosureFraud).

The £1bn-plus HBOS Fraud Investigation That Lloyds Keeps Trying to Brush Under the Carpet

By Ian Fraser, a financial journalist who blogs at his web site and at qfinance. His Twitter is @ian_fraser Lloyds Banking Group, the financial behemoth formed from the September 2008 “merger” of Lloyds TSB and basket-case Scottish lender HBOS, is a bank that never ceases to surprise me. Take the bizarre contortions the bank has […]

Satyajit Das: Potemkin Villages – The Truth about Emerging Markets

By Satyajit Das, the author of “Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives”

Martin Gilman (2010) No Precedent, No Plan: Inside Russia’ 1998 Default; MIT Press, Cambridge, Massachusetts

Victor C. Shih (2008) Factions and Finance in China; Cambridge University Press, Cambridge, Massachusetts

Carl E Walter and Fraser J. T. Howie (2010) Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise; John Wiley, Singapore

According to myth, Russian minister Grigory Potyomkin ordered the erection of fake settlements, consisting of hollow facades of villages along the Dnieper River, to impress Empress Catherine II, about the value of her new conquests during her visit to Crimea in 1787. More than two centuries later, emerging market nations have borrowed the strategy. These three books provide insights into the Potemkin-village-like structure of emerging economies.

Megan McArdle Uses Straw Men to Argue Against Principal Mods

Megan McArdle has a post up discussing why she thinks the benefits of principal mods would be “at best small and mixed”.

The problem with her lengthy discussion is that it is rife with straw men.

Before we get to the nitty gritty, I want address two bits of framing at the top which I found troubling. The first was the title, “Principal Write-Downs Still Popular With Wonks”. The “still” suggests that wonks like it even though some, presumably most, yet to be named others don’t. And singling out “wonks” further implies that (aside from homeowners) they may be its only fans.

That is very misleading. Who is in favor of mods? The only people who under normal circumstances ought to have a vote on this matter, namely, the borrowers and the lenders. First mortgage lenders overwhelmingly favor mods to borrowers with who still have a viable income. Why? Do the math:

Dylan Ratigan: Will Washington wake up to Wall Street greed?

It’s good to see more MSM outlets taking up the “why the lack of cases against the big Wall Street firms” theme. Perhaps my cynicism is showing, but Phil Angelides seems to be talking a tougher line than he did when the Financial Crisis Inquiry Commission report was released. Is this simply his response to […]

Michael Lewis: Will Defamation Charges by His “Big Short” Villain Stick?

One of the dangers of framing stories as Manichean tales is the purported bad guys can take offense and try to get even. And if you do it in a book, the threshold for liability is low enough that they might indeed be able to inflict some real pain.

Michael Lewis, author of the bestseller The Big Short, along with his publisher, W.W. Norton and his source Steve Eisman, were sued today in Federal court for defamation by one Wing Chau. In case you are one of the five people in America who is interested in finance but has managed not to read The Big Short, there is a scene in the book in which FrontPoint’s Eisman, who is Lewis’ main subprime short hero, has asked to meet someone who is on the other side of his trade. That “someone” is a CDO which in practical terms means a CDO manager. Eisman and two of his employees have dinner with Wing Chau, who is the head of the CDO manager Harding. Needless to say, Lewis’ account makes it clear that he regards Chau as very much part of the problem.

Now we’ve written a LOT about CDOs; in fact, our book ECONNED broke the story of Magnetar and demonstrated how its CDO program, which it used to establish a risk-free short position, drove the demand for a large portion of the subprime market in the toxic phase. And we have taken issue with Lewis’ characterization of the shorts as heros.; Knowingly or not, the strategy that reaped them billions also distorted normal market pricing signals on a massive scale, not only allowing the subprime mania to continue well beyond its sell-by date but also by actively promoting the creation of the “spreadiest” or very worst mortgages.

Our reading of Lewis’ plight is that Chau’s claims seem to be a stretch, given that the facts are less on his side than a reading of his suit might suggest. But as we will discuss later on, litigation on books is so plaintiff friendly that even a weak claim can succeed in court.

Big Drop in New Foreclosures?

There has been evidence here and there of a marked fall in new foreclosure filings. Lender Processing Services, which handles more than half of the loans serviced in the US, said its revenues in its Default Services Group were down in the final quarter of the year. Why? Its revenues are tied to initial foreclosure filings, and its were off 33%, no doubt in large measure due to the robo signing scandal. Recall that it led many banks to halt foreclosures (some all over the US, others in judicial foreclosure states only) while they inspected the state of play and scrambled to revamp procedures. Banks piously claimed that they found no problems in the correctness of foreclosure actions and that ex making the changes needed to assure affidavits were proper, they were going to be back to business as usual post haste.

Now we already know that that isn’t the case. Since the robosigning scandal broke, foreclosure activity has been down. RealtyTrac reported that foreclosures in January were up only 1% over December levels, which was down 17% from the year prior.

But RealtyTrac captures every foreclosure filing in that particular report, so it is a mix of new foreclosure filings plus additional filings for foreclosures already underway….

Speculators Not Wagering Much Against Periphery Country Eurobonds

Given how many commentators believe that Greece is destined to default on its bonds (particularly since they are subordinate to any new money from the IMF and EU), you’d think they’d be putting their money where their mouth is.

But the old saw in the US is “don’t fight the Fed”. And the same logic appears to apply with the ECB. John Dizard of the Financial Times reports that perilous little in the way of CDS contracts is being written on everyone’s favorite sovereign default candidate (although the leader of Fine Gael, which will be leading the new coalition in Ireland, fired a shot of sorts across the bow of the eurozone officialdom).