Back in the 1980s, a colleague was getting a doctorate at Harvard Business School and had to take a seminar in statistical methods. Each participant was assigned a paper and was required to present to the class a critique of the statistical approaches employed.
The paper he was given was a dissertation that had caused a bit of chatter in financial economics circles. The author had used prices at which the Fed bought and sold Treasuries in its daily open market operations, and had used them to analyze the results the Treasury achieved in its periodic bond auctions. The paper concluded that the Treasury was doing a bad job, the prices it was getting at its auctions were far worse than those recorded by the Fed in its daily market operations.
When it came time for his session, my colleague stood before the class, gave a brief outline of the paper’s argument and approach, and said, “I have only one comment. Typical Fed daily market operation purchases and sales are in the millions of dollars. Treasury bond actions are in the billions. The data in this paper is irrelevant to the question it purports to analyze.” He then sat down.
He got an A for the course. And he went on to become a business school professor.
An analysis posted by the law firm, SNR Denton, “Commentary on Transfers of Mortgage Loans to RMBS Securitization Trusts,’ makes a conceptual error similar to that of the paper my colleague thrashed. It makes a very long and impressive sounding rebuttal of the line of argument made with increasing success by attorneys in court, and recapped on this blog: that the parties to the mortgage securitization failed to take the steps required to convey the borrower promissory notes and related liens (technically, the mortgage or in some states, the deed of trust) to the the securitzation entity, a trust. But as we will show, the arguments made in the article are simply irrelevant.
And unlike the graduate student who performed the misguided Fed/Treasury analysis, SNR Denton clearly knows better. SNR Denton is effectively the successor to Thatcher, Proffitt & Wood. Thatcher Proffitt was a leader, arguably the leader, in devising the legal structures and documents for mortgage securitizations.
Let’s start from the top of the article, since the efforts to misdirect start there:
There is a tremendous amount of public commentary these days about possible defects in foreclosure proceedings commenced by loan servicers.
Notice how the problem is framed as relating to “public commentary.” There is no acknowledgment of the fact that many judges have dismissed foreclosures because the party attempting to foreclose was unable to prove it had standing, or that the servicers themselves have admitted to problems (albeit of a type they are trying to pass off as merely procedural, that of the use of improper affidavits). In fact, there are problems with foreclosures that have been surfacing in courts all over the US, to the point where the media has taken notice and the servicers have had to take action to address a particular type of abuse. But according to SNR Denton, this problem is merely one of perception.
After a few words about affidavits, we get to this:
Within this overall dialogue, however, more fundamental issues have been raised challenging both the validity of the procedures used to convey mortgage loans into securitization trusts and the qualification of the securitization trusts as a real estate mortgage investment conduit (“REMIC”) at the time those trusts were formed. These statements are false and misguided.
The reasoning behind these statements appears to be as follows: (i) in order to satisfy procedural requirements in connection with foreclosure, certain steps may need to be taken in order to document the ownership of a mortgage loan by the securitization trust, and (ii) since not all of these steps were taken at the time of the securitization, the securitization trust must not own the mortgage loan. This reasoning is faulty, because some of the steps that may be required under applicable state law in order to bring a foreclosure action are not required to transfer ownership of the mortgage loan.
The purpose of this article is to refute these challenges to the efficacy of mortgage loan transfers to securitization trusts. Simply stated, the industry standard procedures used for decades in transferring mortgage loans to securitization vehicles comply with the well-settled principles of law governing the transfer of mortgage loans, and therefore are effective to transfer ownership of the mortgage loans.
Yves here. Accusations like “false” and “misguided” imply that what follows is gospel truth, or at least defensible. Yet instead what SNR Denton provides is a series of arguments that are at best narrowly accurate but irrelevant. One can only conclude the intent of the article is to mislead.
The article never directly recites the argument made here, which is that there is substantial evidence that in many cases, the notes were not conveyed to the trust as stipulated. As we have discussed, the pooling and servicing agreement, which governs who does what when in a mortgage securitization, requires the note (the borrower IOU) to be endorsed (just like a check, signed by one party over to the next), showing the full chain of title. The minimum conveyance chain in recent vintage transactions is A (originator) => B (sponsor) => C (depositor) => D (trust).
The proper conveyance of the note is crucial, since the mortgage, which is the lien, is a mere accessory to the note and can be enforced only by the proper note holder (the legalese is “real party of interest”). The investors in the mortgage securitization relied upon certifications by the trustee for the trust at and post closing that the trust did indeed have the assets that the investors were told it possessed.
Effectively, what the article endeavors to do is focus attention on aspects of the law that might be helpful to the securitization industry but are not germane. For instance, relies upon “general custom and practice in the sale of mortgage loans” and the UCC, which is the Uniform Commercial Code (which has been enacted in all 50 states, with relatively few state-level idiosyncrasies).
But rub comes not from the legal considerations surrounding note/mortgage conveyance, but the particular stipulations of the pooling and servicing agreement, which all the parties agreed to. And it is also clear that the provisions of the PSA trump the UCC.
Article 1 of the UCC allows the parties to an agreement to vary the terms (Ie deviate from the UCC) by agreement. The key points of the germane section:
1-302 Variation by Agreement
(a) The effect of provisions of this Chapter may be varied by agreement.
(b) Good faith, diligence and reasonableness are the only terms that may not be changed by agreement.
(c) The presence of the words “unless otherwise agreed” does not imply that other provisions of this Chapter may not be varied by an agreement of the parties.
That means the UCC governs only with respect to issues not varied by agreement in the PSA.
Section 2 of the PSA stipulates provisions that deviate from the UCC. Typical provisions:
Section 2.01. Conveyance of Mortgage Loans.Each seller hereby:
Sells, transfers, assigns, sets over and otherwise conveys to the depositor, without recourse, all the right, title and interest of such seller in and to the applicable mortgage loans.
The sales shall be as provided in this agreement.
Delivery shall be on or before the applicable cut-off date
The documents shall be delivered to the Master Servicer before the cut-off date
The Master Servicer confirms that all sellers have made such transfers and deposits before the cut-off date¡
Sellers by such deposits have conveyed to the Trustee for benefit of Certificate Holders all right, title and interest in and to the mortgage loans
The PSA also very clearly provided for an unbroken chain of assignments and transfers thought the parties (the A-B-C-D or more cited above). The use of intermediary parties between the originator and the trust, with a “true sale” occurring at each step, was intended to create FDIC and bankruptcy remoteness. The investors (who are called the certificate holders in the PSA) did not want a creditor of a bankrupt originator to be able to seize notes back out of the trust.
Some PSAs allowed for each party to endorse in blank, but the note still had to have endorsements by all the parties in the conveyance chain, while others stipulated that each endorsement had to be to the next party in the chain. However per NY trust law (and New York law was chosen in the vast majority of cases to govern the trust), the final endorsement had to be to the trust, not in blank.
The “unless otherwise agreed” language in Article 1 means you cannot rely on perfection solely by the UCC. It also means possession of the original note does not prove either ownership or perfection.
Now are any of these issues addressed in the SNR Denton article? Not really. The PSA is mentioned only in passing; the article weight heavily on the UCC. This part comes closest is under a section that discusses “general custom and practice in the sale of mortgage loans.” This is a backwards acknowledgment of what we and other have described: that in 2004, perhaps earlier, the securitization industry started ignoring the requirements of the PSA and would effect the transfers through the A-B-C-D parties via e-mailing lists of loan numbers (which were verified at each step) and wire transfers. SNR Denton is effectively arguing by invoking “general custom and practice” that we all should accept how then industry did things, you can make a legal case for it, as long as you ignore the sections of the PSA which govern what was supposed to happen.
Here are the sections of the SNR Denton piece that come closest to addressing the matters at hand:
In a private label RMBS transaction, the relevant contractual agreement is typically a pooling and servicing agreement, which conveys the mortgage loans from the depositor to the trustee on behalf of the securitization trust. Another relevant document could include a separate mortgage loan purchase agreement, under which the mortgage loans are sold by the sponsor to the depositor immediately prior to the sale from the depositor to the trust, with representations and warranties that are assigned to the trustee. These documents contain clear granting language that conveys ownership of all of the seller’s “right, title and interest in and to” the mortgage loans to the trustee on behalf of the securitization trust. There is a schedule or exhibit to these documents that specificly identifies each loan sold under the agreement.
Note that none of this acknowledges the requirement of the PSA that the note be endorsed to show the full chain of conveyance. Also observe the emphasis on ” These documents contain clear granting language that conveys ownership…”. The documents cannot alone convey ownership; the stipulated steps also have to be completed. The article does acknowledge the importance of delivery of the note in the following section, but again fails to address the PSA issues:
Physical delivery of the mortgage note to the purchaser or its agent, together with an endorsement of the note by the seller in blank, are also key components in the sale of mortgage loans for several reasons.
As we indicated, many PSAs required specific endorsement (to a particular party), not in blank, so this is inaccurate (except as far as describing “general custom”). The article repeats its assertion about endorsements in blank (note the section we boldfaced):
Notes may be delivered to the purchaser with an endorsement in blank. It is common for a mortgage note for a mortgage loan that has been sold to have stamped on it an endorsement to the effect of “Pay to the order of _____________, without recourse”, signed by the originator or a subsequent purchaser. Such an endorsement has the effect that any subsequent transfer of the note presumptively only requires physical delivery (i.e., with no additional endorsement). Therefore, where there are successive purchasers to a note, the endorsement in blank by any prior holder is a sufficient endorsement for purposes of the most recent purchaser.
As we indicated, that’s rubbish. The boldfaced language falsely claims that if the note was endorsed by A in the prototypical A-B-C-D chain we set forth earlier, then D could rely simply on the endorsement by A. In fact, the PSA required the full chain of endorsement and also required the depositor (the C party) endorse the note to the trustee (it is New York trust law requirements, not specified in the PSA, which would call for the final endorsement to be to the specific trust, not just the trustee).
Some other assertions are matter of fact, not law, and SNR Denton appears not to be on top of the facts:
In private label RMBS transactions, the prevailing and nearly universally-followed practice has been for the endorsed notes to be physically delivered to the trustee, or to a custodian as the trustee’s agent, at the closing of the securitization.
First, we’ve had industry executives of large “private label”, meaning non-Fannie/Freddie originators say the notes were never conveyed from the originator, and not simply for their bank, but across the industry. It appears they were conveyed only when someone needed to foreclose, which was well after the closing of the trust.
Second, there is ample evidence in court across the country of out of time assignments. of the note and the related lien being assigned to the trust shortly before a foreclosure action was commenced, in some cased, even afterwards, so again well after the closing of trust.
If you parse the piece carefully, its contentions hinge on these arguments, which in turn hinge on ignoring key provisions of the PSA and not integrating New York trust law considerations.
It ends on a indignant tone, and amusingly, resorts to the new preferred bankster line, “loose lips will tank the markets”:
We believe that the recent allegations of possible wholesale failures to convey ownership of mortgage loans to private label RMBS trusts are baseless and unfounded. All parties to these transactions, including issuers, underwriters, trustees and investors, clearly intended that the transactions convey ownership of the loans to the trusts, and appropriate steps were taken to effect such conveyance in accordance with well-settled legal principles governing transfers of mortgage loans. Any attempts to assert otherwise today are inaccurate and uninformed, and, if left to stand unchallenged, could cause substantial and unwarranted harm to the economy.
These arguments are “baseless and unfounded” only if you do readings of the law intended to favor your clients and ignore ample evidence in past and present court cases. If SNR Denton doesn’t like what it is reading on this blog, I suggest it take up the matter with the judges who are looking at the evidence and the terms of the PSA and are in a fair number of cases ruling against the servicers and trusts for having failed to prove their standing to foreclose.
To put it another way, if this is the best defense a leading law firm in the securitization industry can mount, it shows they have a weak case.
Barry Ritholtz Says:
October 15th, 2010 at 12:02 pm
And no, this is not about keeping deadbeats in their homes.
VennData Says:
October 15th, 2010 at 12:14 pm
“…Had we performed GM-like prepackaged bankruptcies…” while – slightly – speculative and can surely be argued …has one unarguably powerful benefit: future bond investors will not expect to be bailed out. And that, as the list of pluses and minuses are drawn, trumps them all.
chartist Says:
October 15th, 2010 at 12:20 pm
I just saw a lawyer on CNBC bringing up one situation where fraud occurred: People got mortgages on the pretense that it was for their primary residence, hence getting a lower mortgage rate. But, it was obvious they were for investing or othewise not for their primary residence and hence should have been given a higher rate….and the buyers of those loans were not told this and therefore overpaid for the mortgages….Now that’s fraud and a big problem for somebody.
hammerandtong2001 Says:
October 15th, 2010 at 12:22 pm
Hold your horses…
I thought this whole mess was just some book-keeping technicality mumbo jumbo…
(har, har…)
Said this the other day: I’m happy to pay my mortgage on the first of the month to somebody (anybody!) — that is — if you can PROVE that I owe you the money. Until then, it’s escrowed.
.
dead hobo Says:
October 15th, 2010 at 12:25 pm
Barry Ritholtz Says:
October 15th, 2010 at 12:02 pm
And no, this is not about keeping deadbeats in their homes.
reply:
————-
Not even just a few? Mean bastard. These people aren’t deadbeats. They’re payment impaired.
Otherwise, best story to data anywhere on the problem.
DL Says:
October 15th, 2010 at 12:28 pm
“Had we performed GM-like prepackaged bankruptcies, these issues would not exist”.
. . . . . . . . . . . . . . . . . . . . . .
So, throwing taxpayer money, and bondholder money at the UAW is a good thing?
DM RTA Says:
October 15th, 2010 at 12:28 pm
We do not know exactly how many structured products contain errors of Notes or Assignments, but a rough estimate is “More than a few.”
I feel like this is a dumb question but how are the securitized issues receiving the expected cash flow if there are mistakes that amount to more than a few? If the assignments are not in place properly then how do the various servicers know where to send the monthly principle and interest payments? And wouldn’t errors be showing up with the MBS holders?
Mr.Sparkle Says:
October 15th, 2010 at 12:31 pm
@chartist – Everyone likes to trot out their favorite anecdotes to make their case.
Maybe we’re just all too fixated on examining this issue through the “rule of law” lens. Perhaps we should be looking at this as an “unintended stimulus package.”
It seems that this is only going to be really resolved on a case-by-case basis that will take years to sort out. And considering the different set of legal standards in each state, this probably makes some sense. So in the meantime, there should be a bonanza for lawyers and “allied tradespeople” extracting fees from the banks and servicers. Call it a trickle-down stimulus even, since we all know where the TARP money went.
When uncovered in these cases, fraud should be punished severely. Let the DAs wanting to make names for themselves roll the little fish robosigners/filers on the bigger fish in the banks. Someone borrowed and falsified the intent? That’s probably not only fraud against the bank but it wouldn’t surprise me if there were some property tax fraud thrown in the mix. Bust them too. Punish them all. I suspect that the truly innocent parties in this whole fiasco are few and far between.
HEHEHE Says:
October 15th, 2010 at 12:34 pm
“These are problems of the banks own making, and we should make sure that the costs of these do not fall to the taxpayers.”
Good luck with that;)
deanscamaro Says:
October 15th, 2010 at 12:43 pm
I was wondering when you would put out a post such as this! Back long ago, in the clouds of time, I remember when you had a post or two about the problem of losing sight of ownership on mortgages as these securitization packages were sliced and diced and sold off to the highest bidder.
What comes around, goes around. Speed kills! Where were/are we to turn to stop things like this from happening…….the banksters???……our congressmen who were/are being paid off by the banksters???
Bend over, please, while you receive our latest delivery.
Mutant_Dog Says:
October 15th, 2010 at 12:48 pm
@DM RTA, good question. IF the legality of any assignment to the MBS is in question, the cash-flow stream paid as a result of that assignment should be under review as well. Off-the-cuff, I’d say that, now the foreclosed parties have much more stringent legal representation, and discovery, in their current predicament, than is routine to a mortgage-payer. IOW, the MBS world has just now become aware, itself, of the potential problems in this regard.
cwf Says:
October 15th, 2010 at 1:11 pm
To those few who have argued here, “the system is not perfect”, and that errors will happen when such a large number of loans/foreclosures are processed (the same argument several pro-bank analysts on CNBC have used), I ask this question:
Does US Law treat differently
a) A corp that does 1,000,000 transactions with 1,000 of them breaking the law (perjury, false docs, forgery, fraudulent representations, etc.)
vs
b) A corp that does 1,001 transactions with 1,000 of them breaking the law?
If so, banks should find out what the tolerable (by US Law) ratio of criminal transactions vs. proper transactions is, and try to maintain a level of criminal transactions just under that ratio. Easy money.
Arequipa01 Says:
October 15th, 2010 at 1:13 pm
Speaking of solutions:
Howzabout a lil thing we like ta cawl “adverse possession”
Hit it boys:
http://www.expertlaw.com/library/real_estate/adverse_possession.html
alnval Says:
October 15th, 2010 at 1:14 pm
“At the current stage, we really do not know how extensive the problems are.” (BR)
IMO regardless of the extent of the problems associated with errors in the foreclosure process and how resolving them will impact the resolution of the current crisis, if the Amherst report is to be believed, we’re still looking at the possibility of 20 percent of the 55 million existing mortgages going into default.
It seems to me that these two problems cannot be separated. Any resolution of the mortgage crisis is going to have to consider both issues. Having mechanisms in place to resolve both will be essential. Given the potential magnitude of the default problem some deference should probably be given to stopping the forest fire before it consumes the fire house and the local water supply. That may mean that the government will be forced to install a moratorium on any court action designed to resolve questions of ownership until the impact of a 20 percent foreclosure rate on the national economy can be brought under control.
I continue to fear, however, that our culture of self-serving denial will continue to prevent us is from accurately scoping this problem so we can get on with fixing it. What iceberg?
Arequipa01 Says:
October 15th, 2010 at 1:17 pm
This is for all the deadbeats and you know who you are (Kenny L- I’m lookin at chu!):
Blues Comin’ Home Baby (Melvin Taylor- Chicago based axe swinger)
http://www.youtube.com/watch?v=Qpv7uPJgeSQ
obsvr-1 Says:
October 15th, 2010 at 1:21 pm
@Speaking of solutions:
Howzabout a lil thing we like ta cawl “adverse possession”
Hit it boys:
http://www.expertlaw.com/library/real_estate/adverse_possession.html
— Reply
Nice try, the statue of limitations varies by state, but it takes anywhere from 10 – 30 years to make an adverse possession claim – this is a dog that won’t hunt.
pintelho Says:
October 15th, 2010 at 1:22 pm
Maybe some previous astute commenter has already raised this concern..
Does anyone know how much of this affects the three stooges…you know Fannie, Freddie, and Ginnie?
That makes this a tax payer issue as well…
Bastardos!
S Brennan Says:
October 15th, 2010 at 1:31 pm
Yes, the elites have decided, once again, as it always has been and will forevermore be…
Patricians: “It’s the Plebeians, it they would just fight and die in our imperial wars, pay for our tax cuts and shut up. I mean it’s not like we keep everything of theirs. We let them benefit a little from their labor don’t we…don’t we?”
Plebs: “We who are about to be crushed in your wars and brought to destitution in Patrician financial schemes salute you!”
Details here:
http://www.msnbc.msn.com/id/39674290/ns/business-real_estate/
Mark E Hoffer Says:
October 15th, 2010 at 1:34 pm
“… Under normal circumstances, the reckless illegality we have seen from banks would have caused the US Attorney to become involved in the investigations. Instead, the nation’s chief law enforcement officer has a conflict of interest…”
” Under normal circumstances ” ? Really ? Like, When?
Long Story Short, AG “Bag” Holder, like the Line of AGs before him, Is a walking ‘Conflict of Interest’.
Sorry, but that ain’t what that ‘Office’ does..
Friday links: bullet bonds Abnormal Returns Says:
October 15th, 2010 at 1:42 pm
Congress won’t let the too-big-to-fail banks to get torpedoed by foreclosure-gate. (NetNet also Big Picture)
Pocket QQ Says:
October 15th, 2010 at 2:03 pm
The Impact of Error From Securitization
What impacts (if any?) does this have on all RE transactions past and present? Are forged documents in refi and sales? Are people being economically impacted because nobody can figure out who owns what?
bman Says:
October 15th, 2010 at 2:06 pm
I am getting rather bored with homeowners referred to as deadbeats. How about we think up something creative, Pioneers for homeowners, Vultures or some similar carrion creatures for bankers.
The pontificating drolls who go on about “well if the homeowner had just respected his usurious mortgage agreement,” while the whole economy went to hell as a result of the same bankers running a gambling based con game on the rest of the world, are quite repulsive, and in the process shine a light on their level of ignorance, or their conflicts of interests.
mbelardes Says:
October 15th, 2010 at 2:18 pm
I’m tearing through analyst opinions and they are not paying any respect to the legal implications of this in their belief that this isn’t a big deal.
Due process of law in the deprivation of real property is a big deal. Fraudulent Affidavits to the court to begin the foreclosure of a property is a big deal.
IF this was as widespread as I bet it is, the banks are going to get ripped from the bully pulpit to the balance sheet.
obsvr-1 Says:
October 15th, 2010 at 2:22 pm
Why should the SEC settle a civil case and not go for jail time for one of the most corrupt CEO’s behind this mess ? !!!
Public May Be Deprived of Seeing Angelo Mozilo Tried in the ‘Flesh’
http://nymag.com/daily/intel/2010/10/public_will_probably_be_depriv.html
Freestate Says:
October 15th, 2010 at 2:31 pm
Does anyone know what the potential impact on title insurance companies is? Do they get stuck holding the bag here?
Jonke Says:
October 15th, 2010 at 2:32 pm
Even the Swedes figured out 18 years ago that you shall not bail out banks or keep the toxic assetts in the mis-managed banks. Let the fundamental law be valid even in banking: too little equity = company gone from your ownership. Governements shall not own banks in a long term perspective, they shall create strong regulators that have the authority to ask tough questions and enforce regulation indpendent of how much money a bank or a banking organisation has donated or if a politician has worked their earlier. The bailed out bank shall be placed under public ownership in a special banking vehicle that seperates the good parts from the bad and does IPO’s on the good parts, place the bad parts in a toxic fund that is given minimum 5 years to dispose the assetts in an optimal way, both from a return perspective and market disruption perspective. The banking vehicle should be run by professionals and not politicains or left over managers from the failed banks.
It is many times better to let the property then evict on of the few who wants to live their and a bank is not suited for that but a toxic assett fund would be able to do that.
The American bank solution is a typical example that validates Barry’s statement that politics in the US today is not left-right it is individual vs corporation.
sahillyard Says:
October 15th, 2010 at 2:32 pm
The Fed owns a good portion of the mortgage backed securities. Will they force the underwriters to take them back? This could get more interesting. Anybody know how well Maiden Lane is doing?
AGORACOM Says:
October 15th, 2010 at 2:39 pm
I’ll second the motion that this is one of the best, clear articles on the subject.
Further, I repeat from my post yesterday that the Feds do not have a “waive to wand”. This bank cluster f*$k is beyond their reach. As Barry stated:
“This is going to be challenging to resolve, as the parties involved are sophisticated investors who will seek to enforce their warranties and contracts via the courts.”
Barry forgot to add in the fact that these parties are “highly motivated” (i.e. very pissed off) at being taken by the Wall Street machine and are salivating to take them for everything they have. On the one hand, you have investors like that little town in Norway that are all but broke thanks to buying these non-performing assets.
On the other hand, you have ARM homeowners that lost everything thanks to mortgage brokers selling Wall Street crack. To be clear, I have little sympathy for the NINJA homeowners – but that is not the point. They are a pissed off group and now they have some leverage.
The banks dodged the first bullet, they won’t dodge this one.
What is still up for debate is whether the costs will be fall to taxpayers. In my opinion, US taxpayers ultimately gave TARP a pass the first time (though they did put up a strong fight) based on fears of economic catastrophe. They won’t do it again.
Regards,
George … The Greek …. From Canada
Michael Says:
October 15th, 2010 at 2:40 pm
Barry,
I like the tone of this piece…. more a focus on the facts, less on emotion. Plus as I stated before in a comment, I tend to believe INCOMPETENCE is at the root of most, but not all, problems; rather than outright devious/fraudulent behavior.
On a high level, I think one can argue that our society has become too complex for the skill level of the average employee to handle, e.g. the skill level of the people putting together mortgages and now foreclosing on them. It may surprise you to learn that half the people are below average! :)
Regards,
Michael
Effective Demand Says:
October 15th, 2010 at 2:53 pm
“Banks are sitting on millions of foreclosed properties. ”
I’d love to see you prove that assertion.. you can’t because it isn’t true!
There are many homes in the foreclosure process, the number of homes foreclosed on is a much smaller number. If the float is a million at any one point in time i’d be absolutely shocked, it certainly isn’t 2 million (millionS).
As for title insurance, the banks will either become self insuring or indemnify the title insurers for that specific flaw in title like BofA just did with a title insurer. It’s a minor issue that can be easily addressed.
I think you are at the point of extreme, zero hedge level exaggeration on point #6 which makes me suspicious of all your other points.
Mannwich Says:
October 15th, 2010 at 2:54 pm
@Effective Demand: It’s not true? You can’t prove that either. Go to places like FL, Cali, NV and AZ and there’s likely more than a million there alone.
chartist Says:
October 15th, 2010 at 2:55 pm
Somewhere there’s a sniper with a dwindling 401K who just read Matt Taibibi in Rolling stone, practicing his nail a banker from North Jersey shot…… We’re headed for revolution…..Who will be the victim of the shot hear round Wall Street?
DeDude Says:
October 15th, 2010 at 2:59 pm
“These people aren’t deadbeats. They’re payment impaired”
- or sick, or unemployed, or making a (nothing personal) business decision, or…..
until you actually talk with the individual parties involved it is not going to be possible to judge them – not that lack of specific knowledge would hold back most people. Nothing creates such a good warm feeling as condemning others as being bad immoral deadbeat people.
Effective Demand Says:
October 15th, 2010 at 3:15 pm
Mannwich,
I’ve been through this in California with many misinformed people. You look at the number of foreclosures taken in (its public record) vs the absorption rate and you can get the basic float.
There are a large number of homes in THE FORECLOSURE PROCESS but the number of homes FORECLOSED ON and held in inventory is relatively small.
Here is the data I have put together from public reports from Dataquick (the gold standard for RE data in CA):
http://effectivedemand.blogspot.com/2010/08/california-shadow-inventory-report-q2.html
I’d estimate the inventory “float” for California to be about 1 to 1.5 quarters worth of REO’s (60k -ish).
Ask yourself why would the bank take all the risk to have a home foreclosed on and not put it for sale. It makes no sense for them to do so.. and in fact they don’t do it.
I’ve never looked at it at a national level, I’ve got access to all the NAR data but I dont think they started reporting foreclosures as a % of sales until recently. California is a large enough sample size where I think you can get extrapolate and not be far off. Estimate 1 to 1.5 quarters worth of REO’s in inventory, round up and call it 2 quarters and you’re still only in the 500k home ballpark.
The data doesn’t support BR’s assertion :
http://www.realtytrac.com/content/foreclosure-market-report/q3-2010-and-september-2010-foreclosure-reports-6108
Last quarter was 288k REO’s for the US, BR’s assertion would mean they have approximately 7 quarters worth of REO inventory. NOBODY ANYWHERE is seeing that, it’s data pulled from the backside, a complete fabrication.
Effective Demand Says:
October 15th, 2010 at 3:22 pm
This shows the second half of point #6 is a non-issue just as the previous post shows the first half of point #6 is over-exaggerated:
http://www.americanbanker.com/news/bank-of-america-fidelity-national-1027074-1.html
Title insurance won’t be an issue going forward.
Andy T Says:
October 15th, 2010 at 3:23 pm
“We could make wild and unsubstantiated conclusions, but we prefer reason and logic.”
Funny stuff, that comment, given some of the histrionic proclamations made earlier this week.
kayem Says:
October 15th, 2010 at 3:32 pm
Earlier BR wanted to know actual stories, and others have argued that the the number of actual homeowners harmed is small. I think the magnitude of the problem should not be measured by the number of actual harmed homeowners, because really, so few of the foreclosures have actual homeowners living in them. How many stories have we all seen about vacant or half-finished developments or ghost towns (most recent: Einhorn/St Joe). So, regardless of how many individuals were harmed (or were deadbeats), the number of properties potentially without clear title (and subsequent problems with resale value and property values) is staggering.
Local anecdote: I’ve been watching the mess from my home in south Florida since 2002. Valuations in my historic neighborhood have made a complete round trip from 200K to 425K and now, as the foreclosures occur, below 200K. The adjacent new development sold out (preconstruction in 2004 and 2005), and completed construction in 2006. That fall, I counted lockboxes on 29 of 41, and only 1 real-live homeowner living there. Most of the places sat vacant for years, and now about half have renters and asking prices have plummeted. I can tell from the county’s property search records that most “owners” mailing addresses are different than the property address and many were out of state. Harmed homeowners? None. Properties without clear title if the whole development was in some trust without assignments? 41. Impact on property values in my neighborhood? Ah, that’s the question.
Housing recovery? Bueller? Bueller? Anyone?
Effective Demand Says:
October 15th, 2010 at 4:18 pm
Mannwich:
http://online.wsj.com/article/SB10001424052748703832204575210423113145954.html
You were saying? Turns out my estimates match up almost exactly with Barclays and I am sure their data is much better. Check out the spiffy chart, green line.
BR, I’d just remove #6 completely..
nofoulsontheplayground Says:
October 15th, 2010 at 4:25 pm
The best solution I’ve heard is the “California Solution.”
I believe in California if you challenge the ownership of the deed you need to put up the equivalent of the value of the note.
This keeps the deadbeats from dragging out the process. There have been hardly any instances of challenges like we’re seeing in Florida in California because of this law.
It should be adopted nationally, and that would solve the problem.
ReadingFundamental Says:
October 15th, 2010 at 4:27 pm
To whoever asked how anyone is collecting payments if the assignments were not done. Any time a loan is made it is set up day one on a loan servicing system. The originators made loans, and every now and then when they had a big enough “inventory” of them sold off pools of them for securitization. Some Wall Street firm would buy up a bunch of pools, pay lawyers to set up a REMIC and get it registered, and then sell bonds secured by those mortgages in the REMIC.
Now as soon as the originator sold the pool of loans it sent a “tape’ of the data – amount outstanding, interest rate, payment history, etc. to the new loan servicing company that would be handling the billing and collecting of payments for the REMIC.
When thousands of home loans are sold, the originators don’t want to pay people to sit and sign all those assignment documents and record mortgage assignments for them all at the courthouses, then the investment bankers putting together the REMIC don’t want to have to pay a bunch of people on behalf of the holding company (the mortgages go there until the REMIC has been created) to execute assignments of that stuff from the holding company into the REMIC, and pay to have all those mortgage assignments recorded.
In theory, a lawsuit against a borrower should not begin until someone has looked at ALL the loan documents – either originals or reliable copies, and the payment history, and signed an affidavit. All these entities were trading around data “tapes” instead of actual documents, so it appears that the folks hired at $12/hour (just a wild guess) didn’t ever look at any of this, they just signed.
I’ve signed a few affidavits in my time (for commercial transactions) and always went over them carefully. However, I ‘m an experienced financial services person with a B.A., and M.B.A., and a pretty long history of working with transaction and litigation attorneys.
dss Says:
October 15th, 2010 at 5:48 pm
Record number of foreclosures in 2009
This morning RealtyTrac® released its year-end U.S. Foreclosure Market Reporttm for the year 2009.
The report shows a total of 3,957,643 foreclosure filings (default notices, RealtyTrac Foreclosure Rate for third quarter 2009scheduled foreclosure auctions and bank repossessions) on 2,824,674 U.S. properties in 2009, a 21 percent increase in total properties affected from 2008 and a whopping 120 percent increase in total properties affected from 2007. The report also shows that 2.21 percent of all U.S. housing units (one in 45) received at least one foreclosure filing during the year, up from 1.84 percent in 2008, 1.03 percent in 2007 and 0.58 percent in 2006.
——————–
Almost 4 million filings on 2.8 properties, in 2009. How many properties are in default and have not been served?
Darmah Says:
October 15th, 2010 at 7:12 pm
Maybe not millions but you can search for an REO home among the 930,000 in the US according to RealtyTrac — http://www.realtytrac.com/states/bank-owned-props/index.html
Kris Dannon Says:
October 15th, 2010 at 7:19 pm
The humble settings where the robo-signer challenge began…
http://www.nytimes.com/2010/10/15/business/15maine.html
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Back in the 1980s, a colleague was getting a doctorate at Harvard Business School and had to take a seminar in statistical methods. Each participant was assigned a paper and was required to present to the class a critique of the statistical approaches employed.
The paper he was given was a dissertation that had caused a bit of chatter in financial economics circles. The author had used prices at which the Fed bought and sold Treasuries in its daily open market operations, and had used them to analyze the results the Treasury achieved in its periodic bond auctions. The paper concluded that the Treasury was doing a bad job, the prices it was getting at its auctions were far worse than those recorded by the Fed in its daily market operations.
When it came time for his session, my colleague stood before the class, gave a brief outline of the paper’s argument and approach, and said, “I have only one comment. Typical Fed daily market operation purchases and sales are in the millions of dollars. Treasury bond actions are in the billions. The data in this paper is irrelevant to the question it purports to analyze.” He then sat down.
He got an A for the course. And he went on to become a business school professor.
An analysis posted by the law firm, SNR Denton, “Commentary on Transfers of Mortgage Loans to RMBS Securitization Trusts,’ makes a conceptual error similar to that of the paper my colleague thrashed. It makes a very long and impressive sounding rebuttal of the line of argument made with increasing success by attorneys in court, and recapped on this blog: that the parties to the mortgage securitization failed to take the steps required to convey the borrower promissory notes and related liens (technically, the mortgage or in some states, the deed of trust) to the the securitzation entity, a trust. But as we will show, the arguments made in the article are simply irrelevant.
And unlike the graduate student who performed the misguided Fed/Treasury analysis, SNR Denton clearly knows better. SNR Denton is effectively the successor to Thatcher, Proffitt & Wood. Thatcher Proffitt was a leader, arguably the leader, in devising the legal structures and documents for mortgage securitizations.
Let’s start from the top of the article, since the efforts to misdirect start there:
Notice how the problem is framed as relating to “public commentary.” There is no acknowledgment of the fact that many judges have dismissed foreclosures because the party attempting to foreclose was unable to prove it had standing, or that the servicers themselves have admitted to problems (albeit of a type they are trying to pass off as merely procedural, that of the use of improper affidavits). In fact, there are problems with foreclosures that have been surfacing in courts all over the US, to the point where the media has taken notice and the servicers have had to take action to address a particular type of abuse. But according to SNR Denton, this problem is merely one of perception.
After a few words about affidavits, we get to this:
Yves here. Accusations like “false” and “misguided” imply that what follows is gospel truth, or at least defensible. Yet instead what SNR Denton provides is a series of arguments that are at best narrowly accurate but irrelevant. One can only conclude the intent of the article is to mislead.
The article never directly recites the argument made here, which is that there is substantial evidence that in many cases, the notes were not conveyed to the trust as stipulated. As we have discussed, the pooling and servicing agreement, which governs who does what when in a mortgage securitization, requires the note (the borrower IOU) to be endorsed (just like a check, signed by one party over to the next), showing the full chain of title. The minimum conveyance chain in recent vintage transactions is A (originator) => B (sponsor) => C (depositor) => D (trust).
The proper conveyance of the note is crucial, since the mortgage, which is the lien, is a mere accessory to the note and can be enforced only by the proper note holder (the legalese is “real party of interest”). The investors in the mortgage securitization relied upon certifications by the trustee for the trust at and post closing that the trust did indeed have the assets that the investors were told it possessed.
Effectively, what the article endeavors to do is focus attention on aspects of the law that might be helpful to the securitization industry but are not germane. For instance, relies upon “general custom and practice in the sale of mortgage loans” and the UCC, which is the Uniform Commercial Code (which has been enacted in all 50 states, with relatively few state-level idiosyncrasies).
But rub comes not from the legal considerations surrounding note/mortgage conveyance, but the particular stipulations of the pooling and servicing agreement, which all the parties agreed to. And it is also clear that the provisions of the PSA trump the UCC.
Article 1 of the UCC allows the parties to an agreement to vary the terms (Ie deviate from the UCC) by agreement. The key points of the germane section:
That means the UCC governs only with respect to issues not varied by agreement in the PSA.
Section 2 of the PSA stipulates provisions that deviate from the UCC. Typical provisions:
The PSA also very clearly provided for an unbroken chain of assignments and transfers thought the parties (the A-B-C-D or more cited above). The use of intermediary parties between the originator and the trust, with a “true sale” occurring at each step, was intended to create FDIC and bankruptcy remoteness. The investors (who are called the certificate holders in the PSA) did not want a creditor of a bankrupt originator to be able to seize notes back out of the trust.
Some PSAs allowed for each party to endorse in blank, but the note still had to have endorsements by all the parties in the conveyance chain, while others stipulated that each endorsement had to be to the next party in the chain. However per NY trust law (and New York law was chosen in the vast majority of cases to govern the trust), the final endorsement had to be to the trust, not in blank.
The “unless otherwise agreed” language in Article 1 means you cannot rely on perfection solely by the UCC. It also means possession of the original note does not prove either ownership or perfection.
Now are any of these issues addressed in the SNR Denton article? Not really. The PSA is mentioned only in passing; the article weight heavily on the UCC. This part comes closest is under a section that discusses “general custom and practice in the sale of mortgage loans.” This is a backwards acknowledgment of what we and other have described: that in 2004, perhaps earlier, the securitization industry started ignoring the requirements of the PSA and would effect the transfers through the A-B-C-D parties via e-mailing lists of loan numbers (which were verified at each step) and wire transfers. SNR Denton is effectively arguing by invoking “general custom and practice” that we all should accept how then industry did things, you can make a legal case for it, as long as you ignore the sections of the PSA which govern what was supposed to happen.
Here are the sections of the SNR Denton piece that come closest to addressing the matters at hand:
Note that none of this acknowledges the requirement of the PSA that the note be endorsed to show the full chain of conveyance. Also observe the emphasis on ” These documents contain clear granting language that conveys ownership…”. The documents cannot alone convey ownership; the stipulated steps also have to be completed. The article does acknowledge the importance of delivery of the note in the following section, but again fails to address the PSA issues:
As we indicated, many PSAs required specific endorsement (to a particular party), not in blank, so this is inaccurate (except as far as describing “general custom”). The article repeats its assertion about endorsements in blank (note the section we boldfaced):
As we indicated, that’s rubbish. The boldfaced language falsely claims that if the note was endorsed by A in the prototypical A-B-C-D chain we set forth earlier, then D could rely simply on the endorsement by A. In fact, the PSA required the full chain of endorsement and also required the depositor (the C party) endorse the note to the trustee (it is New York trust law requirements, not specified in the PSA, which would call for the final endorsement to be to the specific trust, not just the trustee).
Some other assertions are matter of fact, not law, and SNR Denton appears not to be on top of the facts:
First, we’ve had industry executives of large “private label”, meaning non-Fannie/Freddie originators say the notes were never conveyed from the originator, and not simply for their bank, but across the industry. It appears they were conveyed only when someone needed to foreclose, which was well after the closing of the trust.
Second, there is ample evidence in court across the country of out of time assignments. of the note and the related lien being assigned to the trust shortly before a foreclosure action was commenced, in some cased, even afterwards, so again well after the closing of trust.
If you parse the piece carefully, its contentions hinge on these arguments, which in turn hinge on ignoring key provisions of the PSA and not integrating New York trust law considerations.
It ends on a indignant tone, and amusingly, resorts to the new preferred bankster line, “loose lips will tank the markets”:
These arguments are “baseless and unfounded” only if you do readings of the law intended to favor your clients and ignore ample evidence in past and present court cases. If SNR Denton doesn’t like what it is reading on this blog, I suggest it take up the matter with the judges who are looking at the evidence and the terms of the PSA and are in a fair number of cases ruling against the servicers and trusts for having failed to prove their standing to foreclose.
To put it another way, if this is the best defense a leading law firm in the securitization industry can mount, it shows they have a weak case.
61 Responses to “The Impact of Error From Securitization to Foreclosure”
Barry Ritholtz Says:
October 15th, 2010 at 12:02 pm
And no, this is not about keeping deadbeats in their homes.
VennData Says:
October 15th, 2010 at 12:14 pm
“…Had we performed GM-like prepackaged bankruptcies…” while – slightly – speculative and can surely be argued …has one unarguably powerful benefit: future bond investors will not expect to be bailed out. And that, as the list of pluses and minuses are drawn, trumps them all.
chartist Says:
October 15th, 2010 at 12:20 pm
I just saw a lawyer on CNBC bringing up one situation where fraud occurred: People got mortgages on the pretense that it was for their primary residence, hence getting a lower mortgage rate. But, it was obvious they were for investing or othewise not for their primary residence and hence should have been given a higher rate….and the buyers of those loans were not told this and therefore overpaid for the mortgages….Now that’s fraud and a big problem for somebody.
hammerandtong2001 Says:
October 15th, 2010 at 12:22 pm
Hold your horses…
I thought this whole mess was just some book-keeping technicality mumbo jumbo…
(har, har…)
Said this the other day: I’m happy to pay my mortgage on the first of the month to somebody (anybody!) — that is — if you can PROVE that I owe you the money. Until then, it’s escrowed.
.
dead hobo Says:
October 15th, 2010 at 12:25 pm
Barry Ritholtz Says:
October 15th, 2010 at 12:02 pm
And no, this is not about keeping deadbeats in their homes.
reply:
————-
Not even just a few? Mean bastard. These people aren’t deadbeats. They’re payment impaired.
Otherwise, best story to data anywhere on the problem.
DL Says:
October 15th, 2010 at 12:28 pm
“Had we performed GM-like prepackaged bankruptcies, these issues would not exist”.
. . . . . . . . . . . . . . . . . . . . . .
So, throwing taxpayer money, and bondholder money at the UAW is a good thing?
DM RTA Says:
October 15th, 2010 at 12:28 pm
We do not know exactly how many structured products contain errors of Notes or Assignments, but a rough estimate is “More than a few.”
I feel like this is a dumb question but how are the securitized issues receiving the expected cash flow if there are mistakes that amount to more than a few? If the assignments are not in place properly then how do the various servicers know where to send the monthly principle and interest payments? And wouldn’t errors be showing up with the MBS holders?
Mr.Sparkle Says:
October 15th, 2010 at 12:31 pm
@chartist – Everyone likes to trot out their favorite anecdotes to make their case.
Maybe we’re just all too fixated on examining this issue through the “rule of law” lens. Perhaps we should be looking at this as an “unintended stimulus package.”
It seems that this is only going to be really resolved on a case-by-case basis that will take years to sort out. And considering the different set of legal standards in each state, this probably makes some sense. So in the meantime, there should be a bonanza for lawyers and “allied tradespeople” extracting fees from the banks and servicers. Call it a trickle-down stimulus even, since we all know where the TARP money went.
When uncovered in these cases, fraud should be punished severely. Let the DAs wanting to make names for themselves roll the little fish robosigners/filers on the bigger fish in the banks. Someone borrowed and falsified the intent? That’s probably not only fraud against the bank but it wouldn’t surprise me if there were some property tax fraud thrown in the mix. Bust them too. Punish them all. I suspect that the truly innocent parties in this whole fiasco are few and far between.
HEHEHE Says:
October 15th, 2010 at 12:34 pm
“These are problems of the banks own making, and we should make sure that the costs of these do not fall to the taxpayers.”
Good luck with that;)
deanscamaro Says:
October 15th, 2010 at 12:43 pm
I was wondering when you would put out a post such as this! Back long ago, in the clouds of time, I remember when you had a post or two about the problem of losing sight of ownership on mortgages as these securitization packages were sliced and diced and sold off to the highest bidder.
What comes around, goes around. Speed kills! Where were/are we to turn to stop things like this from happening…….the banksters???……our congressmen who were/are being paid off by the banksters???
Bend over, please, while you receive our latest delivery.
Mutant_Dog Says:
October 15th, 2010 at 12:48 pm
@DM RTA, good question. IF the legality of any assignment to the MBS is in question, the cash-flow stream paid as a result of that assignment should be under review as well. Off-the-cuff, I’d say that, now the foreclosed parties have much more stringent legal representation, and discovery, in their current predicament, than is routine to a mortgage-payer. IOW, the MBS world has just now become aware, itself, of the potential problems in this regard.
cwf Says:
October 15th, 2010 at 1:11 pm
To those few who have argued here, “the system is not perfect”, and that errors will happen when such a large number of loans/foreclosures are processed (the same argument several pro-bank analysts on CNBC have used), I ask this question:
Does US Law treat differently
a) A corp that does 1,000,000 transactions with 1,000 of them breaking the law (perjury, false docs, forgery, fraudulent representations, etc.)
vs
b) A corp that does 1,001 transactions with 1,000 of them breaking the law?
If so, banks should find out what the tolerable (by US Law) ratio of criminal transactions vs. proper transactions is, and try to maintain a level of criminal transactions just under that ratio. Easy money.
Arequipa01 Says:
October 15th, 2010 at 1:13 pm
Speaking of solutions:
Howzabout a lil thing we like ta cawl “adverse possession”
Hit it boys:
http://www.expertlaw.com/library/real_estate/adverse_possession.html
alnval Says:
October 15th, 2010 at 1:14 pm
“At the current stage, we really do not know how extensive the problems are.” (BR)
IMO regardless of the extent of the problems associated with errors in the foreclosure process and how resolving them will impact the resolution of the current crisis, if the Amherst report is to be believed, we’re still looking at the possibility of 20 percent of the 55 million existing mortgages going into default.
It seems to me that these two problems cannot be separated. Any resolution of the mortgage crisis is going to have to consider both issues. Having mechanisms in place to resolve both will be essential. Given the potential magnitude of the default problem some deference should probably be given to stopping the forest fire before it consumes the fire house and the local water supply. That may mean that the government will be forced to install a moratorium on any court action designed to resolve questions of ownership until the impact of a 20 percent foreclosure rate on the national economy can be brought under control.
I continue to fear, however, that our culture of self-serving denial will continue to prevent us is from accurately scoping this problem so we can get on with fixing it. What iceberg?
Arequipa01 Says:
October 15th, 2010 at 1:17 pm
This is for all the deadbeats and you know who you are (Kenny L- I’m lookin at chu!):
Blues Comin’ Home Baby (Melvin Taylor- Chicago based axe swinger)
http://www.youtube.com/watch?v=Qpv7uPJgeSQ
obsvr-1 Says:
October 15th, 2010 at 1:21 pm
@Speaking of solutions:
Howzabout a lil thing we like ta cawl “adverse possession”
Hit it boys:
http://www.expertlaw.com/library/real_estate/adverse_possession.html
— Reply
Nice try, the statue of limitations varies by state, but it takes anywhere from 10 – 30 years to make an adverse possession claim – this is a dog that won’t hunt.
pintelho Says:
October 15th, 2010 at 1:22 pm
Maybe some previous astute commenter has already raised this concern..
Does anyone know how much of this affects the three stooges…you know Fannie, Freddie, and Ginnie?
That makes this a tax payer issue as well…
Bastardos!
S Brennan Says:
October 15th, 2010 at 1:31 pm
Yes, the elites have decided, once again, as it always has been and will forevermore be…
Patricians: “It’s the Plebeians, it they would just fight and die in our imperial wars, pay for our tax cuts and shut up. I mean it’s not like we keep everything of theirs. We let them benefit a little from their labor don’t we…don’t we?”
Plebs: “We who are about to be crushed in your wars and brought to destitution in Patrician financial schemes salute you!”
Details here:
http://www.msnbc.msn.com/id/39674290/ns/business-real_estate/
Mark E Hoffer Says:
October 15th, 2010 at 1:34 pm
“… Under normal circumstances, the reckless illegality we have seen from banks would have caused the US Attorney to become involved in the investigations. Instead, the nation’s chief law enforcement officer has a conflict of interest…”
” Under normal circumstances ” ? Really ? Like, When?
Long Story Short, AG “Bag” Holder, like the Line of AGs before him, Is a walking ‘Conflict of Interest’.
Sorry, but that ain’t what that ‘Office’ does..
Friday links: bullet bonds Abnormal Returns Says:
October 15th, 2010 at 1:42 pm
Congress won’t let the too-big-to-fail banks to get torpedoed by foreclosure-gate. (NetNet also Big Picture)
Pocket QQ Says:
October 15th, 2010 at 2:03 pm
The Impact of Error From Securitization
What impacts (if any?) does this have on all RE transactions past and present? Are forged documents in refi and sales? Are people being economically impacted because nobody can figure out who owns what?
bman Says:
October 15th, 2010 at 2:06 pm
I am getting rather bored with homeowners referred to as deadbeats. How about we think up something creative, Pioneers for homeowners, Vultures or some similar carrion creatures for bankers.
The pontificating drolls who go on about “well if the homeowner had just respected his usurious mortgage agreement,” while the whole economy went to hell as a result of the same bankers running a gambling based con game on the rest of the world, are quite repulsive, and in the process shine a light on their level of ignorance, or their conflicts of interests.
mbelardes Says:
October 15th, 2010 at 2:18 pm
I’m tearing through analyst opinions and they are not paying any respect to the legal implications of this in their belief that this isn’t a big deal.
Due process of law in the deprivation of real property is a big deal. Fraudulent Affidavits to the court to begin the foreclosure of a property is a big deal.
IF this was as widespread as I bet it is, the banks are going to get ripped from the bully pulpit to the balance sheet.
obsvr-1 Says:
October 15th, 2010 at 2:22 pm
Why should the SEC settle a civil case and not go for jail time for one of the most corrupt CEO’s behind this mess ? !!!
Public May Be Deprived of Seeing Angelo Mozilo Tried in the ‘Flesh’
http://nymag.com/daily/intel/2010/10/public_will_probably_be_depriv.html
Freestate Says:
October 15th, 2010 at 2:31 pm
Does anyone know what the potential impact on title insurance companies is? Do they get stuck holding the bag here?
Jonke Says:
October 15th, 2010 at 2:32 pm
Even the Swedes figured out 18 years ago that you shall not bail out banks or keep the toxic assetts in the mis-managed banks. Let the fundamental law be valid even in banking: too little equity = company gone from your ownership. Governements shall not own banks in a long term perspective, they shall create strong regulators that have the authority to ask tough questions and enforce regulation indpendent of how much money a bank or a banking organisation has donated or if a politician has worked their earlier. The bailed out bank shall be placed under public ownership in a special banking vehicle that seperates the good parts from the bad and does IPO’s on the good parts, place the bad parts in a toxic fund that is given minimum 5 years to dispose the assetts in an optimal way, both from a return perspective and market disruption perspective. The banking vehicle should be run by professionals and not politicains or left over managers from the failed banks.
It is many times better to let the property then evict on of the few who wants to live their and a bank is not suited for that but a toxic assett fund would be able to do that.
The American bank solution is a typical example that validates Barry’s statement that politics in the US today is not left-right it is individual vs corporation.
sahillyard Says:
October 15th, 2010 at 2:32 pm
The Fed owns a good portion of the mortgage backed securities. Will they force the underwriters to take them back? This could get more interesting. Anybody know how well Maiden Lane is doing?
AGORACOM Says:
October 15th, 2010 at 2:39 pm
I’ll second the motion that this is one of the best, clear articles on the subject.
Further, I repeat from my post yesterday that the Feds do not have a “waive to wand”. This bank cluster f*$k is beyond their reach. As Barry stated:
“This is going to be challenging to resolve, as the parties involved are sophisticated investors who will seek to enforce their warranties and contracts via the courts.”
Barry forgot to add in the fact that these parties are “highly motivated” (i.e. very pissed off) at being taken by the Wall Street machine and are salivating to take them for everything they have. On the one hand, you have investors like that little town in Norway that are all but broke thanks to buying these non-performing assets.
On the other hand, you have ARM homeowners that lost everything thanks to mortgage brokers selling Wall Street crack. To be clear, I have little sympathy for the NINJA homeowners – but that is not the point. They are a pissed off group and now they have some leverage.
The banks dodged the first bullet, they won’t dodge this one.
What is still up for debate is whether the costs will be fall to taxpayers. In my opinion, US taxpayers ultimately gave TARP a pass the first time (though they did put up a strong fight) based on fears of economic catastrophe. They won’t do it again.
Regards,
George … The Greek …. From Canada
Michael Says:
October 15th, 2010 at 2:40 pm
Barry,
I like the tone of this piece…. more a focus on the facts, less on emotion. Plus as I stated before in a comment, I tend to believe INCOMPETENCE is at the root of most, but not all, problems; rather than outright devious/fraudulent behavior.
On a high level, I think one can argue that our society has become too complex for the skill level of the average employee to handle, e.g. the skill level of the people putting together mortgages and now foreclosing on them. It may surprise you to learn that half the people are below average! :)
Regards,
Michael
Effective Demand Says:
October 15th, 2010 at 2:53 pm
“Banks are sitting on millions of foreclosed properties. ”
I’d love to see you prove that assertion.. you can’t because it isn’t true!
There are many homes in the foreclosure process, the number of homes foreclosed on is a much smaller number. If the float is a million at any one point in time i’d be absolutely shocked, it certainly isn’t 2 million (millionS).
As for title insurance, the banks will either become self insuring or indemnify the title insurers for that specific flaw in title like BofA just did with a title insurer. It’s a minor issue that can be easily addressed.
I think you are at the point of extreme, zero hedge level exaggeration on point #6 which makes me suspicious of all your other points.
Mannwich Says:
October 15th, 2010 at 2:54 pm
@Effective Demand: It’s not true? You can’t prove that either. Go to places like FL, Cali, NV and AZ and there’s likely more than a million there alone.
chartist Says:
October 15th, 2010 at 2:55 pm
Somewhere there’s a sniper with a dwindling 401K who just read Matt Taibibi in Rolling stone, practicing his nail a banker from North Jersey shot…… We’re headed for revolution…..Who will be the victim of the shot hear round Wall Street?
DeDude Says:
October 15th, 2010 at 2:59 pm
“These people aren’t deadbeats. They’re payment impaired”
- or sick, or unemployed, or making a (nothing personal) business decision, or…..
until you actually talk with the individual parties involved it is not going to be possible to judge them – not that lack of specific knowledge would hold back most people. Nothing creates such a good warm feeling as condemning others as being bad immoral deadbeat people.
Effective Demand Says:
October 15th, 2010 at 3:15 pm
Mannwich,
I’ve been through this in California with many misinformed people. You look at the number of foreclosures taken in (its public record) vs the absorption rate and you can get the basic float.
There are a large number of homes in THE FORECLOSURE PROCESS but the number of homes FORECLOSED ON and held in inventory is relatively small.
Here is the data I have put together from public reports from Dataquick (the gold standard for RE data in CA):
http://effectivedemand.blogspot.com/2010/08/california-shadow-inventory-report-q2.html
I’d estimate the inventory “float” for California to be about 1 to 1.5 quarters worth of REO’s (60k -ish).
Ask yourself why would the bank take all the risk to have a home foreclosed on and not put it for sale. It makes no sense for them to do so.. and in fact they don’t do it.
I’ve never looked at it at a national level, I’ve got access to all the NAR data but I dont think they started reporting foreclosures as a % of sales until recently. California is a large enough sample size where I think you can get extrapolate and not be far off. Estimate 1 to 1.5 quarters worth of REO’s in inventory, round up and call it 2 quarters and you’re still only in the 500k home ballpark.
The data doesn’t support BR’s assertion :
http://www.realtytrac.com/content/foreclosure-market-report/q3-2010-and-september-2010-foreclosure-reports-6108
Last quarter was 288k REO’s for the US, BR’s assertion would mean they have approximately 7 quarters worth of REO inventory. NOBODY ANYWHERE is seeing that, it’s data pulled from the backside, a complete fabrication.
Effective Demand Says:
October 15th, 2010 at 3:22 pm
This shows the second half of point #6 is a non-issue just as the previous post shows the first half of point #6 is over-exaggerated:
http://www.americanbanker.com/news/bank-of-america-fidelity-national-1027074-1.html
Title insurance won’t be an issue going forward.
Andy T Says:
October 15th, 2010 at 3:23 pm
“We could make wild and unsubstantiated conclusions, but we prefer reason and logic.”
Funny stuff, that comment, given some of the histrionic proclamations made earlier this week.
kayem Says:
October 15th, 2010 at 3:32 pm
Earlier BR wanted to know actual stories, and others have argued that the the number of actual homeowners harmed is small. I think the magnitude of the problem should not be measured by the number of actual harmed homeowners, because really, so few of the foreclosures have actual homeowners living in them. How many stories have we all seen about vacant or half-finished developments or ghost towns (most recent: Einhorn/St Joe). So, regardless of how many individuals were harmed (or were deadbeats), the number of properties potentially without clear title (and subsequent problems with resale value and property values) is staggering.
Local anecdote: I’ve been watching the mess from my home in south Florida since 2002. Valuations in my historic neighborhood have made a complete round trip from 200K to 425K and now, as the foreclosures occur, below 200K. The adjacent new development sold out (preconstruction in 2004 and 2005), and completed construction in 2006. That fall, I counted lockboxes on 29 of 41, and only 1 real-live homeowner living there. Most of the places sat vacant for years, and now about half have renters and asking prices have plummeted. I can tell from the county’s property search records that most “owners” mailing addresses are different than the property address and many were out of state. Harmed homeowners? None. Properties without clear title if the whole development was in some trust without assignments? 41. Impact on property values in my neighborhood? Ah, that’s the question.
Housing recovery? Bueller? Bueller? Anyone?
Effective Demand Says:
October 15th, 2010 at 4:18 pm
Mannwich:
http://online.wsj.com/article/SB10001424052748703832204575210423113145954.html
You were saying? Turns out my estimates match up almost exactly with Barclays and I am sure their data is much better. Check out the spiffy chart, green line.
BR, I’d just remove #6 completely..
nofoulsontheplayground Says:
October 15th, 2010 at 4:25 pm
The best solution I’ve heard is the “California Solution.”
I believe in California if you challenge the ownership of the deed you need to put up the equivalent of the value of the note.
This keeps the deadbeats from dragging out the process. There have been hardly any instances of challenges like we’re seeing in Florida in California because of this law.
It should be adopted nationally, and that would solve the problem.
ReadingFundamental Says:
October 15th, 2010 at 4:27 pm
To whoever asked how anyone is collecting payments if the assignments were not done. Any time a loan is made it is set up day one on a loan servicing system. The originators made loans, and every now and then when they had a big enough “inventory” of them sold off pools of them for securitization. Some Wall Street firm would buy up a bunch of pools, pay lawyers to set up a REMIC and get it registered, and then sell bonds secured by those mortgages in the REMIC.
Now as soon as the originator sold the pool of loans it sent a “tape’ of the data – amount outstanding, interest rate, payment history, etc. to the new loan servicing company that would be handling the billing and collecting of payments for the REMIC.
When thousands of home loans are sold, the originators don’t want to pay people to sit and sign all those assignment documents and record mortgage assignments for them all at the courthouses, then the investment bankers putting together the REMIC don’t want to have to pay a bunch of people on behalf of the holding company (the mortgages go there until the REMIC has been created) to execute assignments of that stuff from the holding company into the REMIC, and pay to have all those mortgage assignments recorded.
In theory, a lawsuit against a borrower should not begin until someone has looked at ALL the loan documents – either originals or reliable copies, and the payment history, and signed an affidavit. All these entities were trading around data “tapes” instead of actual documents, so it appears that the folks hired at $12/hour (just a wild guess) didn’t ever look at any of this, they just signed.
I’ve signed a few affidavits in my time (for commercial transactions) and always went over them carefully. However, I ‘m an experienced financial services person with a B.A., and M.B.A., and a pretty long history of working with transaction and litigation attorneys.
dss Says:
October 15th, 2010 at 5:48 pm
Record number of foreclosures in 2009
This morning RealtyTrac® released its year-end U.S. Foreclosure Market Reporttm for the year 2009.
The report shows a total of 3,957,643 foreclosure filings (default notices, RealtyTrac Foreclosure Rate for third quarter 2009scheduled foreclosure auctions and bank repossessions) on 2,824,674 U.S. properties in 2009, a 21 percent increase in total properties affected from 2008 and a whopping 120 percent increase in total properties affected from 2007. The report also shows that 2.21 percent of all U.S. housing units (one in 45) received at least one foreclosure filing during the year, up from 1.84 percent in 2008, 1.03 percent in 2007 and 0.58 percent in 2006.
——————–
Almost 4 million filings on 2.8 properties, in 2009. How many properties are in default and have not been served?
Darmah Says:
October 15th, 2010 at 7:12 pm
Maybe not millions but you can search for an REO home among the 930,000 in the US according to RealtyTrac — http://www.realtytrac.com/states/bank-owned-props/index.html
Kris Dannon Says:
October 15th, 2010 at 7:19 pm
The humble settings where the robo-signer challenge began…
http://www.nytimes.com/2010/10/15/business/15maine.html
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