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Mortgage Electronic Registration Systems, headquartered in a nondescript office building in Reston Town Center, has flourished quietly over the past decade, saving financial firms hundreds of millions of dollars by helping them avoid the time and expense of filing mortgage documents and paying fees each time a loan changes hands.
Its motto: "Process loans, not paperwork."
The MERS headquarters is tucked amid chain restaurants and retail stores near Dulles International Airport. But the firm's reach extends far beyond this slice of suburbia.
The company is an integral part of the system that emerged during the global housing boom, when mortgages were created and sold, sliced and diced, packaged and repackaged so quickly that financial firms had neither the time nor the patience to file paperwork in local courthouses as the loans were traded. By using MERS, lenders were able to reassign loans quickly and cheaply. But often the chain of ownership was not accompanied by an official paper trail.
The MERS registry tracks more than 65 million mortgages throughout the country and continues to facilitate rapid-fire transfers that keep the market for mortgage-backed securities humming.
But if courts increasingly begin to nullify the MERS model - different judges have issued differing rulings - this could call into question the legitimacy of millions of mortgages, wreak havoc on the real estate market, spur costly litigation against Wall Street banks and ultimately harm the broader financial system.
The land title system that went largely unchallenged in the United States for centuries became an obstacle in the 1990s. That's when financial firms began to ramp up a process called securitization, bundling and selling pools of home loans to sell to investors. Each time the loans were reassigned, the new owner had to record the transfers with local clerks.
Several executives in the mortgage industry came up with a faster, easier approach: MERS. The list of MERS shareholders includes an array of banks, lenders and title companies. Among them: Fannie Mae, Freddie Mac, Bank of America, GMAC, Washington Mutual, Wells Fargo and AIG's United Guaranty Corp.
Here's how MERS works: When a homeowner closes on a house, the paperwork signed at settlement often appoints MERS as a "nominee" for the lender and for whomever the lender might sell the mortgage to down the road. Each time the loan is sold and resold, MERS tracks the reassignment in its computer system, without generating paperwork.
But after the MERS computer system went live in 1997, some county recording offices complained that the company was bypassing the legal process and raking in money charging fees that were lower than those charged by municipalities. They were largely ignored.
"It wasn't like Congress or state legislators did anything," said Christopher L. Peterson, a law professor at the University of Utah who has consulted in cases against MERS. "The mortgage industry just changed how the land title system worked without getting anyone's okay."
MERS has consistently claimed authority to act as a representative, or "nominee," on behalf of banks and lenders.
double fruit loop award.
three good links. some would call that a hat trick!
nope...everyone would call it boring. as usual.
When no doc mortgages meet no doc foreclosures it sure creates a lot of paperwork...
Ezra Klein: What’s happening here? Why are we suddenly faced with a crisis that wasn’t apparent two weeks ago?
Janet Tavakoli: This is the biggest fraud in the history of the capital markets. And it’s not something that happened last week. It happened when these loans were originated, in some cases years ago. Loans have representations and warranties that have to be met. In the past, you had a certain period of time, 60 to 90 days, where you sort through these loans and, if they’re bad, you kick them back. If the documentation wasn’t correct, you’d kick it back. If you found the incomes of the buyers had been overstated, or the houses had been appraised at twice their worth, you’d kick it back. But that didn’t happen here. And it turned out there were loan files that were missing required documentation. Part of putting the deal together is that the securitization professional, and in this case that’s banks like Goldman Sachs and JP Morgan, has to watch for this stuff. It’s called perfecting the security interest, and it’s not optional.
EK: And how much danger are the banks themselves in?
JT: When we had the financial crisis, the first thing the banks did was run to Congress and ask for accounting relief. They asked to be able to avoid pricing this stuff at the price where people would buy them. So no one can tell you the size of the hole in these balance sheets. We’ve thrown a lot of money at it. TARP was just the tip of the iceberg. We’ve given them guarantees on debts, low-cost funding from the Fed. But a lot of these mortgages just cannot be saved. Had we acknowledged this problem in 2005, we could’ve cleaned it up for a few hundred billion dollars. But we didn’t. Banks were lying and committing fraud, and our regulators were covering them and so a bad problem has become a hellacious one.
EK: My understanding is that this now pits the banks against the investors they sold these products too. The investors are going to court to argue that the products were flawed and the banks need to take them back.
JT: Many investors now are waking up to the fact that they were defrauded. Even sophisticated investors. If you did your due diligence but material information was withheld, you can recover. It’ll be a case-by-by-case basis.
The system described in the article seems pretty sensible , actually. I'd be surprised if they didn't have solid legal opinions underlying the practice in all the states where mortgages were originated (if not, that's amazing). However, whether securitization of mortgages was good policy is a seperate issue.
Sorry, If one does not know who the lender of record is then the system doesn't has failed.
Are you talking to yourself?
Truth, what are you talking about? Did someone else say anything?
Fruit loops in love.
Riversider.."of record" in many legal contexts is handled by an entity performing a kind of trustee function, and it isn't necessary that the ultimate economic owner be reflected at the county courthouse (but this is state specific and should be addressed by a legal opinion). My point is that having this kind of function is not inherently wrong, and actually sounds quite efficient.
You really are pushing it, aren't you?
One of the topics we discussed at length with Todd in the mid-1980s was the way in which Wall Street firms underwriting of residential mortgage backed securities or "RMBS" failed to perfect the collateral lien of the securities against the home or other real estate. This was a serious legal problem, especially if you believe in property rights and due process of law. Yet because the value of the real estate that served as collateral was rising pretty much continuously during the past several decades (Hello -- What's wrong with this picture?), the issue of imperfect collateral liens in ABS received little attention from the Fed or other regulators.
Now let's walk through the process of creating an RMBS to illustrate the problem facing many home owners, lenders and investors. We'll use the actual example of IRA cofounder Christopher Whalen. Back in 1998, Chris and his wife bought a home in Westchester County NY. The primary mortgage was originated by and independent broker and placred with Roslyn Savings Bank, which retained the paper for its own portfolio. In 2001, Chris refinanced with the Bank of New York Mellon (BK) (Q2 2010 Sress Rating: "A"), which immediately sold the "Alt-A" loan to the firm formerly known as Lehman Brothers. But that was only the start of this mortgage's journey.
The loan was then resold by Lehman Brothers to a special purpose vehicle (SPV) and then sold again to a Delaware trust created to securitize the mortgage into an ABS. Lehman controlled the trust, but the vehicle was administered as though it were in fact separate. Servicing was provided by Aurora Loan Servicing, a wholly owned subsidiary of Lehman, which is now being liquidated. When the time came to sell bonds to investors, the trustee for the Delaware vehicle issuing the securities repeated the process performed thousands of times before and merely took the documentation describing the mortgages into a file folder and went on to the next deal.
Here's the problem. If you go down to the Courthouse in White Plains, New York, and pull up the title record for the property purchased a decade ago by the Whalens, the only indication of any encumbrance over the collateral that is supposed to back up the securitization sold to investors by Lehman Brothers is the original assignment to Roslyn Savings and later to the Bank of New York. There is no change in recordation of the collateral lien on the property to Lehman Brothers much less the SPV or the Delaware trust that acted as the securitization vehicle in the ABS.
In the event of a default, it could be argued that Lehman Brothers never owned the loan and thus never had the power to assign ownership to the SPV or the Delaware trust. Indeed, in plain legal terms, Bank of New York (and now JPMorgan, the successor to the Bank of New York retail business), is the only party with legal standing to enforce the lien on the property. But as far as Bank of New York is concerned, the loan was sold to Lehman Brothers more than a decade ago.
Now you are probably wondering why the good people at Lehman Brothers never bothered to send a paralegal to the New York State Courthouse in White Plains to record a change in the collateral lien -- at least regarding the sale to Lehman Brothers. The cost of perfecting the lien on the hundreds or even thousands of loans in a typical ABS costs money, but in aggregate would have added less than half a point to the cost of the deal. But the investment bankers at Lehman Brothers took that half point as profit instead of doing their jobs.
You can argue that the banks were greedy and stupid for failing to perform their legally required duties as securities dealers and fiduciaries. You can also argue rightly that many banks are doing stupid things in foreclosures as they are being overwhelmed by mortgage defaults. But these very real concerns miss the larger issue. The bigger point that members of the media and the other happy campers who are following the foreclosure mess need to understand is that a poorly managed documentation trail does not change the fact that the loans are bad. Focusing on the foreclosure mess at the expense of paying attention to the larger, secular threat from the deflation of the mortgage sector could be a fatal choice for American consumers, banks and the nation as a whole.
This really is a break-down in the rule of law. Barry Ritholtz is 100% on top of the issues(unlike our stupid politicians who thin mis-understand the issue as one of keeping people in their homes)
The process of purchasing a home in America culminates with an event called “the Closing.” It is an hour plus long contract signing that ensures the buyer is legitimately taking title, possession and legal ownership of a unique parcel of land and any structures upon it. The process gives any buyer specific rights to that property that cannot be abrogated under the laws of the United States.
At the closing, buyers sign and initial numerous documents. The goal is to accomplish the following:
1) Papers are signed that will be filed with the County Clerk (or appropriate officer) along with recording fees, for the official transfer of title from the prior owner to the new owner. The enabling purchase loan (i.e., mortgage note) is also filed with the Clerk.
2) The buyer receives title (ownership) of the land;
3) The mortgage lender establishes a new interest in that property contingent upon their mortgage note;
4) All other claims, liens, tax obligations and prior mortgages, home equity lines or second notes are satisfied and extinguished before title passes to the new owner.
5) Third party claims of any interest in that property superior to the buyer are eliminated;
6) Title Insurance is purchased and issued so the buyer has a recourse in case of defects in ownership occurs.
Every step of the process is designed to protect the property rights of all parties. The result is more than a mere transaction selling property from one party to another; rather, this has created a system where ownership interests are clearly defined; where title history can be reviewed going back decades and centuries. There is a certainty to the purchasers of this property against all future claims.
There will ben an attempt by the banks via the Fed(which they control) to sneak in legislation to do an end-run to bypass property law rules.
Some loans to borrowers with poor credit before 2007 may not have been transferred to mortgage trusts in the manner required by their pooling and servicing agreements. That raises questions about the ownership of the loans and may allow investors to force lenders to buy back the securities, Rosner wrote yesterday in a note to clients.
The failure to include MBS trust names on documents and to properly assign loans to the trust may encourage MBS holders to challenge the entire securitization, rather than press lenders to take back individual loans that were fraudulently issued, according to Rosner, whose firm advises investors and regulators. That could set off legal fights over almost all subprime MBS sold to investors.
“If plaintiffs bring suit it could rock the market,” Rosner, 44, said in a telephone interview. “If courts allowed those suits to proceed it would well feel much like 2008,” when the bankruptcy of Lehman Brothers Holdings Inc. led to the biggest market collapse since the Great Depression, he said.
Here’s how it would work:
First, the bank would put in a winning bid for the pool of mortgages, with the intention of slicing it up into mortgage bonds and selling those bonds off to investors at a profit.
After submitting the winning bid, the bank would commission Clayton to take a closer look at a representative sample of loans in the pool. Clayton controlled as much as 70% of the market for this service, which is known as third-party due diligence. But Clayton’s not at fault here, and the problem is likely to apply no matter who performed this service.
The size of the representative sample would vary according to the size of the loan pool; it could be anywhere between 5% and 35% of the loans in the pool. Essentially, Clayton would go back to the loans, one by one, and re-underwrite them after the fact, checking that the originator’s underwriting standards were in fact being upheld.
Clayton would either accept or reject the loans it was looking at, according to whether or not they met underwriting standards. Here’s the results of what it found for one bank, Citigroup; the chart comes from this document filed with the Financial Crisis Inquiry Commission. I’m just using Citi as an example, here; all banks behaved in basically exactly the same way.
Look at the first line. Clayton reviewed 1,280 loans on behalf of Citigroup in the first quarter of 2006. Of those, it accepted 554 outright: they lived up to the originator’s underwriting standards. It also waived another 144, on the grounds that there were mitigating factors (a large downpayment, say). And it rejected 582 for a rejection rate of 45%.
This kind of information was valuable to Citigroup: it showed them that the quality of the loan pool was much lower than you’d think just by looking at the ostensible underwriting standards.
Armed with this information, Citigroup would do two things. First of all, it would take those 582 rejects and put most of them back to the underwriter. Essentially, they said, the loans weren’t as advertised, and they didn’t want them. But Citi would still keep some of them in the pool.
But remember that Clayton had tested only a small portion of the loans in the pool. So Citi knew that if there were a bunch of bad loans among the loans that Clayton tested, there were bound to be even more bad loans among the loans that Clayton had not tested. And those loans it couldn’t put back to the originator, because Citi didn’t know exactly which loans they were.
If there had been any common sense in the investment banks, that would have been the end of the deal. But there wasn’t. Rather than simply telling the originator that its loan pool wasn’t good enough, the investment banks would instead renegotiate the amount of money they were paying for the pool.
Looks bad for the shadow banking system...
This rule is not dense legalese at all. In fact Section 15E(s)(4)(A) is written in very plain English. Here it is in full (see page 231 of the PDF):
The issuer or underwriter of any asset-backed security shall make publicly available the findings and conclusions of any third-party due diligence report obtained by the issuer or underwriter.
I can’t for the life of me work out how every single mortgage bond that Clayton taste-tested didn’t violate this rule.
RS: Can't understand why everyone on this site is not buzzing about this foreclosure/mortgage fraud mess. It could have a significant effect on NY RE -- not necessarily through fraudulent mortgages, but because if the XLF crashes, then RE is toast everywhere. Especially if the title insurers go bust with an avalanche of law suits.
The fraud that was perpetuated for years by banks, mortgage brokers etc, then kicked down the road by the govt with TARP, is finally coming home to roost. Who knows if there will be another short term govt fix but one way or another all that fraud will reach the courts.
Apt23, I think this could be the financial story of 2010. Nobody is buzzing because for most it's too complex.
RS: Agree that it could be the financial story of the decade. But I don't think it is too complex for the garrulous brainiacs on this site. I do think that if there is a market melt down in the next few years for whatever reason --currency, trade deficit, etc-- this issue will be original bad seed.
There was a pundit on CNBC today who was a sober sort of fellow and in mid sentence he said, "and this is the frightening part, that possibly no one in the US will have clear title to their property." I was working but I had to stop and replay it. I will try to find it for you. Needless to say, my work suffered today.
Agree, but it's also true the Wall Street people don't see it that way. They've seen countless challenges to MERS turned down by the courts. There's also the possibility that the banks push through legislation(what I don't know.. since having clear title on property is a state issue). For now the banks have to dot the I's and cross the T's.,
Until the Title insurance companies agree to insure things will not be moving forward. Just my two cents.
"The Mortgage Fraud Scandal Is The Biggest In Human History"
"We have long known that lender fraud was rampant during the real estate boom. The FBI began warning of an “epidemic” of mortgage fraud as early as 2004. We know that mortgage originators invented “low doc” and “no doc” loans, encouraged borrowers to take out “liar loans”, and promoted “NINJA loans” (no income, no job, no assets, no problem!). All of these schemes were fraudulent from the get-go. Property appraisers were involved, paid to overvalue real estate. That is fraud. The securitizers packaged trash into bundles that ratings agencies blessed with the triple A seal of approval. By their own admission, raters worked with securitizers to provide the rating desired, never looking at the loan tapes to see what they were rating. Fraud. Venerable investment banks like Goldman Sachs packaged the trashiest securities into collateralized debt obligations at the behest of hedge fund managers--who were allowed to choose the most toxic of the toxic waste—then sold the CDOs on to their own customers and allowed the hedge funds to bet against them. More fraud.
Indeed, the largest financial institutions were run by their management as what my colleague Bill Black calls “control frauds”. That is, the banks used accounting fraud to manufacture fake profits so that they could pay huge bonuses to top management. The latest data out on Wall Street bonuses show that these institutions are still run as control frauds, with another record year of bonuses paid by cooking the books. The fraud continues unabated.
This is the biggest scandal in human history. Indeed, all previous scandals from around the globe combined cannot even touch this one in terms of scale and scope and stench. This is the mother of all frauds and it will be etched into the history books for all time."
It should have been a routine foreclosure, with Mrs. Bradbury joining the anonymous millions quietly dispossessed since the recession began. But she was savvy enough to contact a nonprofit group, Pine Tree Legal Assistance, where for once in her 38 years, she caught a break.
Her file was pulled, more or less at random, by Thomas A. Cox, a retired lawyer who volunteers at Pine Tree. He happened to know something about foreclosures because when he worked for a bank he did them all the time. Twenty years later, he had switched sides and, he says, was trying to make amends.
Suddenly, there is a frenzy over foreclosures. Every attorney general in the country is participating in an investigation into the flawed paperwork and questionable methods behind many of them. A Senate hearing is scheduled, and federal inquiries have begun. The housing market, which runs on foreclosure sales, is in turmoil. Bank stocks fell on Thursday as analysts tried to gauge the impact on lenders’ bottom lines.
Mr. Cox vowed to a colleague that he would expose GMAC’s process and its limited signing officer, Jeffrey Stephan.
“When Stephan says in an affidavit that he has personal knowledge of the facts stated in his affidavits, he doesn’t. When he says that he has custody and control of the loan documents, he doesn’t. When he says that he is attaching ‘a true and accurate’ copy of a note or a mortgage, he has no idea if that is so, because he does not look at the exhibits. When he makes any other statement of fact, he has no idea if it is true. When the notary says that Stephan appeared before him or her, he didn’t.”
There is a reason states require a process for foreclosures and why notaries must swear that they actually witness the signatures they notarize. It’s because this offers a tad more protection against bogus foreclosures. It is supposed to force a little more care, attention to detail and respect for property rights before forcing a homeowner to give up shelter.
You’ve read about cases where a judge tosses out evidence, say, a murder weapon or cocaine, because police busted into someone’s home without a proper warrant. Anyone who has watched a single episode of “Law & Order” knows the importance of doing things right.
Otherwise, the case is dismissed and the suspect walks free, all because of a so-called technicality.
Now let’s look at the bigger picture. Where were the banking regulators while all this mischief was going down? For years the leaders of the Federal Reserve and the Office of the Comptroller of the Currency, among others, have been assuring the public they have onsite examiners and supervisors at all of the country’s largest banks. Before IndyMac was seized, its primary regulator had been the Office of Thrift Supervision.
Yet there’s no sign these agencies did anything to stop any of these institutions from treating the country’s courts so contemptuously. Perhaps the regulators were clueless. Or maybe they knew there was a problem and decided to let the banks run wild in the interest of keeping their foreclosure mills humming.
Whatever the case, they let the banking industry deal another huge, self-inflicted blow to its reputation. That’s the sort of damage regulators are charged with preventing, as part of their mission to preserve public confidence in the financial system. And to think Congress just gave the banking regulators, including the FDIC, even more authority under the Dodd-Frank Act. The more they fail, the more power they get.
Meanwhile, it’s an open question why the mortgage servicers and their lawyers resorted to tactics such as filing bogus court affidavits. Was it just about cutting corners? Or was it because they often don’t know who owns the mortgages on which they’re foreclosing, and decided to cheat?
Americans expect banks to do shady things to promote their own self-interest. It’s what banks do. That’s why we have regulators -- to keep the banks from putting the country at risk of, say, a nationwide foreclosure fiasco.
The regulators keep blowing it. At IndyMac, though, the FDIC wasn’t just overseeing the bank. It was operating the bank. The industry’s minders have hit a new low.
Turbo Timmy smoking crack...
Last time I checked the point of a foreclosure IS TO EVICT THE CURRENT HOME OWNER
Once again we see that Geithner is a tool of the banks
"A national moratorium would be very damaging to exactly the kind of people we're trying to protect," Treasury Secretary Tim Geithner said on Wednesday, "because the consequence of that would be in neighborhoods that have been most affected by the foreclosure crisis, where you see lots of houses on the block empty, unoccupied, what it means is those communities will be living longer with houses unoccupied, with more pressure on their house price with the people still in their houses."
The banks and their defenders mutter that this is all a bureaucratic technicality and much ado about nothing. Almost all the borrowers had defaulted on their mortgages, they point out, and the problem is simply of the paperwork being improperly prepared, which can be corrected.
They are wrong, and the fact that they regard court proceedings to repossess homes so lightly is a worrying reflection on Wall Street’s ethical standards, or lack of them. At worst, the banks may have been lying to courts over a vital safeguard in property law – the sanctity of documents.
First, kudos to Riversider for coverage of this issue. I may not be a fan of every article he links to in his SE posts, but at least in this thread it's all really good, on-point stuff. Speaking for myself, this has helped me to get my head around what a big deal the foreclosure process mess could be.
Second, the following paragraph caught my attention a few posts up: "Meanwhile, it’s an open question why the mortgage servicers and their lawyers resorted to tactics such as filing bogus court affidavits. Was it just about cutting corners? Or was it because they often don’t know who owns the mortgages on which they’re foreclosing, and decided to cheat?"
With respect to the lawyers, can anyone comment on the legal ethics / code of conduct issues here? For example, if it could be shown that a lawyer knowingly filed false affidavits (albeit at the client's direction), would they be subject to sanction? Could they be disbarred? Would it have to be proven that the lawyer knew the filing to be false, or would some other standard - negligence, recklessness, willful blindness - apply? I ask because the surest way to stop misconduct like this would be to make public examples of a few agents/enablers (no objection if we throw in a few bank executives as well) so that the rest stop perpetuating the scam. Nothing like a few lawyers losing their livelihood (and getting foreclosed on - poetic justice, no?) to scare the rest onto the straight and narrow. Basically the Chinese saying kill the chicken to scare the monkey.
Knowingly submitting false documents to a court is perjury(lying to the courts). Three years prison accoridng to wikipedia..
Perjury, also known as forswearing, is the willful act of swearing a false oath or affirmation to tell the truth, whether spoken or in writing, concerning matters material to a judicial proceeding. That is, the witness falsely promises to tell the truth about matters which affect the outcome of the case. For example, it is not considered perjury to lie about one's age unless age is a factor in determining the legal result, such as eligibility for old age retirement benefits.
Perjury is considered a serious offense as it can be used to usurp the power of the courts, resulting in miscarriages of justice. In the United States, for example, the general perjury statute under Federal law defines perjury as a felony and provides for a prison sentence of up to five years. In the United Kingdom a potential penalty for perjury is a prison sentence of up to 7 years. However prosecutions for perjury are rare. In some countries such as France, Italy, and Germany, suspects cannot be heard under oath or affirmation and thus cannot commit perjury, regardless of what they say during their trial.
The rules for perjury also apply when a person has made a statement under penalty of perjury, even if the person has not been sworn or affirmed as a witness before an appropriate official. An example of this is the United States' income tax return, which, by law, must be signed as true and correct under penalty of perjury (see 26 U.S.C. § 6065). Federal tax law provides criminal penalties of up to three years in prison for violation of the tax return perjury statute. See 26 U.S.C. § 7206(1).
As the process has been reported in the press, it seems that it's the robo-signer who is committing perjury, since s/he signs the affidvait and claims to have reviewed the loan documents, hold the loan note, etc. In other criminal enterprises, the technical term for this role in the process is "patsy." I'm wondering if / how any responsibility attaches to the lawyers who prepare the documents but don't swear to their veracity before a court.
Here's a fun story of a homeowner with no mortgage on his house, but that didn't stop BoA from foreclosing on it:
When Jason Grodensky bought his modest Fort Lauderdale home in December, he paid cash. But seven months later, he was surprised to learn that Bank of America had foreclosed on the house, even though Grodensky did not have a mortgage.
[more more more]: http://www.sun-sentinel.com/business/fl-wrongful-foreclosure-0922-20100921,0,36776.story
And another, similar story different house (Texas), with reference to the same story playing out in Kentucky: http://www.huffingtonpost.com/2010/01/12/alan-schroit-bank-of-amer_n_420800.html
Sorry, full story is here: http://www.galvnews.com/story.lasso?ewcd=4e1cfb1bebbf31e1
Texas Attorney General Greg Abbott said many of the documentation abuses could mean that “foreclosure sale[s] would have been invalid.” Ohio and Iowa could levy fines of $25,000 and $40,000, respectively, for “every instance of an affidavit that was filed improperly or every time facts were attested to that weren’t true,” as Ohio’s attorney general put it. Connecticut Attorney General Richard Blumenthal called the mortgage documents “a possible fraud on the court.”
And New York is a judicial state. Lying to the court is basically as seriouss as you get.
With subpoenas coming in from law enforcement agencies around the country, GMAC is the first to crumble, aware that the choice was to either take a massive commercial hit for damages or face criminal charges. Finger pointing will start in earnest as the big boys claim plausible deniability in a scheme they hatched and directed. The little guys will flip on them like pancakes as they testify under oath about the instructions they received which they knew were contrary to law and the rules governing their licenses and charters. Real Estate Brokers, licensed appraisers, licensed mortgage mortgage brokers, notaries, witnesses, title agents and their collective title and liability insurance carriers will soon discover that their licenses, livelihood and reputations are not only at risk but almost certainly headed for a major hit.
Mortgage-bond buyers are losing faith in the accuracy of remittance reports, and some say the apprehension could soon factor into their investment strategies.
Remittance reports, distributed monthly by securitization trustees, are supposed to provide routine snapshots of the cashflow-collection and distribution activities of servicers. However, investors say there has been a rash of recent instances in which the reported data differed considerably from what actually happened - making it impossible to determine values for their holdings.
Frustrated with what they consider insufficient efforts by servicers to address the discrepancies, certain buysiders are even grumbling that they'll direct their money elsewhere. Should they take such steps en masse, the conflict could undermine both recent gains in the secondary-market values of mortgage bonds and plans by issuers to bring new deals to market.
In fact, some are suggesting that flawed remittance reports already have emerged as an obstacle to the mortgage-bond sector. "It's a real mess. I wouldn't be surprised if some investors start moving into other sectors altogether. I know I've been thinking about it," one buyer said. "It's just become impossible to rely on these reports."
Servicers for private-label mortgage securitizations have always released remittance reports, typically on the 25th of each month. But the documents only began to receive widespread attention as the real estate market unraveled in 2007 and investors sought more details of their deals' underlying loans. Now, buysiders rely on the information to calculate their own cashflow expectations, much as holders of agency mortgage paper do with pass-through reports.
Many Wall Street Banks also have used remittance data to help set their trading strategies.
Why have the once-reliable reports been wrong? Investors point in part to increasing use this year of mortgage-modification programs that government agencies and lenders have implemented to aid troubled borrowers. They claim some servicers fail to verify when the changes take effect, resulting in mismatches between when a given loan's cashflows actually shift and when those adjustments are reported.
Servicers argue the volume of recent modifications has become overwhelming in comparison to their staffing levels. They also have faced ongoing struggles in figuring out how to treat loans that are in the trial phases of modification programs. "It has made it nearly impossible for us to appropriately account for changes," one servicing professional said.
Buysiders call that a red herring, saying servicers are equipped to account for modifications as they occur. "The servicers simply don't pay enough attention to what's happening to the underlying loans," one source said.
The AG of Ohio was just interviewed by Maria Bartiromo on CNBC. He basically said that the banks they have looked at (Ally/GMAC, Bof A and JP Morgan) were engaged in fraud as a business model.
The banks are fried. Watch out for an XLF crash.
Apt23, It's kind of scary how long it took the stock market to react to this. Once again the efficient market theory is disproven.
RS: Robert Albertson from Sandler O'Neil --and former director of bank research for Goldman Sachs--was just on CNBC and he said that it is not really a problem for banks. He has been very astute about the banks in the past but I just don't understand how these analysts are not tagging this as a problem for the banks. 50 AG's are not going to let this problem just ride and not get their pound of flesh.
The only way that this is not a problem for the banks is if there was no fraud on the origination of the loans or on the paperwork on the foreclosures. Highly unlikely.
I do not as a rule view Fox Business or CNBC could business sources .They have a lot of corporatists on. Of course if you know and trust the guest like Josh Rosner, Chris Whalen or Barry Ritholtz..then of course.
Real-estate law requires the physical transfer of paperwork whenever mortgages trade hands, and analysts are raising questions about how often that happened during the housing boom. One concern is that banks may have lost, or didn't ever have, mortgage certificates. If that happened, banks will have to pause foreclosures for months as they track down certificates and refile paperwork.
"The best case is this is going to slow the process considerably but not change the outcome," says Joshua Rosner, managing director at investment-research firm Graham Fisher & Co.
For example, in Florida, which requires banks to foreclosure through the court system, the average borrower had spent 678 days without paying before being evicted through foreclosure, according to J.P. Morgan.
Under a far gloomier scenario, the problems created by using robo-signers may be irrelevant if, instead of being lost, mortgage documents weren't ever properly transferred during each step of the securitization process, says Adam Levitin, a professor of law at Georgetown University. If that happens, "the whole system comes to a halt," he says. Investors could argue in court that they never owned the mortgages backing their money-losing securities.
Banks and their attorneys say such fears are overblown. Procedures for transferring loans into mortgage-backed securities "are sound and based on a well-established body of law governing a multi-trillion dollar secondary mortgage market," said Tom Deutsch, the executive director of the American Securitization Forum, in a statement Friday.
A MUST READ!!!
omorrow, a bank—not your bank, but any bank—could evict you from your home. Even if you didn’t know the bank was foreclosing. Even if your mortgage is paid off. Even if you never had a mortgage to begin with. Even if the bank doesn’t hold a single piece of paper that you signed. And major banks not only know this fact, but have spent millions of dollars to defend it in court. Why? The answer starts with a Jacksonville homeowner named Patrick Jeffs.
In 2007, Deutsche Bank sued Jeffs for his home, which is a necessary step in the process of foreclosing on a homeowner in the state of Florida. Curiously, despite the fact that he immediately hired a law firm to defend his property when he found out about the foreclosure, neither Jeffs nor his attorneys were at the trial. That’s because it had already happened. Deutsche won by default because Jeffs wasn’t able to travel backwards in time to attend, even though the trial featured a signed affidavit indicating that he had been served his court summons.
The only problem with the summons Jeffs supposedly received was that it had been conjured out of thin air.
In June of this year, a Florida court ruled that the document was fraudulent, as the person who was supposed to make sure Jeffs was served had mysteriously received a copy of the summons before the lawsuit had even been filed, and Jeffs never even saw the copy. The text of that ruling was posted on various financial news websites in September. The lawyers that Jeffs hired to defend his case say that fraud such as this is not uncommon. It’s a widespread problem, and it has cost countless families their homes.
Read more: http://dailycaller.com/2010/10/14/thedc-op-ed-one-nation-under-fraud/#ixzz12VxiJcxf
YOU THINK NANCY & HARRY & BARNEY READ THIS ONE?
The federal government recently tried to “fix” the mortgage mess with HR3808...
One Hundred Eleventh Congress
United States of America
AT THE SECOND SESSION
Begun and held at the City of Washington on Tuesday,
the fifth day of January, two thousand and ten
To require any Federal or State court to recognize any notarization made by a notary public licensed by a State other than the State where the court is located when such notarization occurs in or affects interstate commerce.
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘Interstate Recognition of Notarizations Act of 2010’.
SEC. 2. RECOGNITION OF NOTARIZATIONS IN FEDERAL COURTS.
Each Federal court shall recognize any lawful notarization made by a notary public licensed or commissioned under the laws of a State other than the State where the Federal court is located if--
(1) such notarization occurs in or affects interstate commerce; and
(2)(A) a seal of office, as symbol of the notary public’s authority, is used in the notarization; or
(B) in the case of an electronic record, the seal information is securely attached to, or logically associated with, the electronic record so as to render the record tamper-resistant.
SEC. 3. RECOGNITION OF NOTARIZATIONS IN STATE COURTS.
Each court that operates under the jurisdiction of a State shall recognize any lawful notarization made by a notary public licensed or commissioned under the laws of a State other than the State where the court is located if--
SEC. 4. DEFINITIONS.
In this Act:
(1) ELECTRONIC RECORD- The term ‘electronic record’ has the meaning given that term in section 106 of the Electronic Signatures in Global and National Commerce Act (15 U.S.C. 7006).
(2) LOGICALLY ASSOCIATED WITH- Seal information is ‘logically associated with’ an electronic record if the seal information is securely bound to the electronic record in such a manner as to make it impracticable to falsify or alter, without detection, either the record or the seal information.
Speaker of the House of Representatives.
Vice President of the United States and
President of the Senate.
Law firms competed with one another to file the largest number of foreclosures on behalf of lenders - and were rewarded for their work with bonuses. These and other companies that handled the preparation of documents were paid for volume, so they processed as many as they could en masse, leaving little time to read the paperwork and catch errors.
And the big mortgage companies overseeing it all - including government-owned Fannie Mae - were so eager to get bad loans off their books that they imposed a penalty on contractors if they moved too slowly.
The system was so automated and so inflexible that once a foreclosure process began, homeowners and consumer advocates say, there was often no way to stop it.
"The problem is when you try to fight back against this machine, well, it's a machine," said Michael Alex Wasylik, an attorney for homeowners in Dade City, Fla. "You have to be able to get your case off the mass production line and to someone who will take the time to read what they file, but in many mortgage firms that person doesn't exist."
The financial incentives show that the problems plaguing the foreclosure process extend well beyond a few, low-ranking document processors who forged documents or failed to review foreclosure files even as they signed off on them. In fact, virtually everyone involved - loan servicers, law firms, document processing companies and others - made more money as they evicted more borrowers from their homes, creating a system that was vulnerable to error and difficult for homeowners to challenge.
"This was a systemic problem. It's not like a few renegade employees made mistakes," said lawyer Peter Ticktin, who defends Florida homeowners facing foreclosure. "It was industry-wide and pervasive, and everyone knew about it."
$1,300 per case
The law firm of David J. Stern in Plantation, Fla., for instance, assigned a team of 12 to handle 12,000 foreclosure files at once for big financial companies such as Fannie Mae, Freddie Mac and Citigroup, according to court documents. Each time a case was processed without a challenge from the homeowner, the firm was paid $1,300. It was an unusual arrangement in a legal profession that normally charges by the hour.
The office was so overwhelmed with work that managers kept notary stamps lying around for anyone to use. Bosses would often scream at each other in daily meetings for "files not moving fast enough," Tammie Lou Kapusta, the senior paralegal in charge of the operation, said in a deposition Sept. 22 for state law enforcement officials who are conducting a fraud investigation into the firm. In 2009 alone, Stern's law firm handled over 70,000 foreclosures.
"The girls would come out on the floor not knowing what they were doing," Kapusta said. "Mortgages would get placed in different files. They would get thrown out. There was just no real organization when it came to the original documents."
Law firms were rewarded with additional bonuses from document processing companies if they met deadlines for preparing and filing foreclosures in courts. One of the nation's major processors, Lending Processing Services in Jacksonville, Fla., confirmed that it had paid such bonuses but said it no longer offers them. The company is under investigation by federal and state law enforcement.
Meanwhile, Fannie Mae imposes a $100 fee on contractors for each day they fail to notify the firm that the foreclosure process was a success and that it has the right to move ahead with the resale of a home. On top of that, Fannie charges a penalty - which escalates for larger mortgages - on contractors who delay selling off such properties.
To keep up with the crush of foreclosures, document processors and mortgage service firms rushed to hire anyone they could - hair stylists, Wal-Mart clerks, assembly-line workers who made blinds - and gave them key roles in their foreclosure departments without formal training, according to court papers.
A number of these employees have testified that they did not really know what a mortgage was, couldn't define "affidavit," and knew they were lying when they signed documents related to foreclosures, according to depositions of 150 employees for mortgage companies taken by the law firm run by Ticktin, the Florida lawyer.
Other major banks felt the sting of the widening foreclosure crisis Friday. Wells Fargo's stock fell 4.6 percent, JPMorgan Chase's fell 4.1 percent, and Citigroup's fell 2.7 percent. By contrast, the Standard & Poor's 500 index, a broad measure of the stock market, rose slightly.
The sharp price movements are partly a reflection of confusion and uncertainty about the scope of the problems and how they will play out. Against that backdrop, a bearish report written in August by a hedge fund called Branch Hill Capital gained widespread attention this week, contributing to the sell-off.
The Branch Hill report said Bank of America could face losses of $74 billion on loan repurchases. The hedge fund disclosed that it was betting that the bank's stock or bonds would decline, and by influencing investors' outlook the report might have helped that bet pay off.
In a rebuttal this week, Oppenheimer & Co. analyst Chris Kotowski said the report was "demonstrably exaggerated and sensational." Oppenheimer disclosed that it, too, might have a conflict because it does business with companies it analyzes.
Fannie and Freddie are threatening to penalize banks if they do not rapidly fix their foreclosure processes.
Delays in foreclosures could cause a profound cash-flow problem for Fannie and Freddie, said Karen Shaw Petrou of Federal Financial Analytics in a report.
The companies have told banks that they will have to pay for any costs the mortgage giants incur as a result of foreclosure delays and are trying to force the banks to buy back billions of dollars of mortgage investments. Goldman Sachs analysts said Friday that these expenses could total $44 billion for the banking industry.
Fannie and Freddie maintain that they were sold the disputed mortgages on deceptive grounds - and that the banks that sold them the loans should be held responsible for the resulting losses. But the industry has resisted efforts by Fannie and Freddie to obtain documents that would show whether the investments were aboveboard.
RS: Here is the Georgetown University Law Professor who posits the possibility that no one in the US might have clear title to their property. Really frightening to hear over the business news airwaves. The second interview is a regional bank guy who talks about the long term effects of strategic defaulters on the housing market.
Good stuff. Thx!
Excellent coverage of this issue.
IMO, the entire freakin mess is like a microcosm of the fall of this nation: greed, corruption, sloppiness.
Recording interests in real property (deeds, mortgages, liens, etc) is one of the first things lawyers learn in the first year of law school. Why a mtg needs to be recorded (to give notice to third parties) & the basics of how it's recorded (at the courthouse with the county clerk) are very simple, basic things every lawyer learns in the first yr of law school. The system of recording interest in real estate goes back hundreds of years, but these aholes f it up. This is why this fiasco has me so astounded & sickened, although, the fact that banks did liar loans like NINJAS & it's ilk, is also really sickening & astounding.
Not being able to prove someone has "good title" not only creates an economic mess, but also effects the Constitutional Rights (5th amendment: taking of property & 14th amendment: Due Process) of wrongfully foreclosed homeowners.
Perhaps one way to foreclose on a "legitimate" bad loan is to recognize the last recorded mortgagee as the proper party to foreclose & then after foreclosure, assign the deed to the most recent owner of the loan.
Thanks Dwell, Truth,Apt23,Sidelinesitter
It's truly a remarkable story not only because it is based it on fundamental property law and due process... but also because it shows so many schisms taking place in our society starting with the banking system's total disregard for law and the ever increasing Corporatacy taking place in our country and the inability of the fourth estate to properly vet the issue.
It's to Obama's credit that he exercised the pocket veto on HR 3808. Where were the regulators?
what is remarkable? that the same group of people who did a bunch of shitty things did another bunch of shitty things? what the hell is remarkable about that? you, riversider are the epitome of another significant problem....the i love to blame somebody syndrome.
you have no interest in fixing anything. all you want to do all day and all night is blame, blame, blame.
Yes, River. We're no better than a banana republic.
So, do you think this mess could cause a run on the banks?
Yes, re: obama & the veto; just goes to show how potentially dire the situation could become.
I do believe that Citibank and Bank of America are technically insolvent, but that the Federal Reserve (an institution basically run by the banks for the banks) are providing so much funding and liquidity that we will not see a bank run on either. There's so much transfer of wealth from the general public/tax payer to the banking system it should make any sane person sick.
And it is not the entire banking system, because the smaller banks are superivsed by the FDIC who when run into trouble get taken over, assets sold and debt holders paid at 30 cents on the dollar. We're basically talking about five or so very large banks.
What's yr view on Chase?
JP Morgan Chase has exposure via Washington Mutual and Bear(EMC). but on whole they're much better off than the other big banks or so I would think. The CDS market would seem to agree with that assessment. I am not knowledgeable or smart enough to quantify it further.
"true value of assets" Less Liabilities.
talking to yourself again?
I heard Jamie Diamond after JP Morgans' earning report. He basically dismissed it saying it will take a couple of months to go thru each mortgage diligently but from further research, I think he just dodged the question. The real question -- are they liable for all the bad mortgage tranches that Bear Stearns sold. I like Jamie Diamond. But this is a nightmare and Bear Stearns was the absolute worst of the bunch. Bear knew that the mortgage companies they were using were hiring pizza delivery boys to get more mortgages. Wait till they depose all those angry brokers. Someone will screw the company just as the company screwed their workers. Those mortgages were fraudulent at origin and they were fraudulent when they went into the trust. The only recourse any one who lost money on the billions of Bear Stearns bad MBS is to go after JP Morgan.
There will not be a run on the banks -- just a run on the stocks. I sold all my bank stocks on Friday. As this story really gets out, everyone that has a mutual fund with bank stocks will sell. The market is going down when people get wise and the lawsuits start in earnest. BofA has the most exposure thru countrywide.
The attorney general of Ohio. He is not going to cut the banks any slack whatsoever. And, he is just one of 50
We are about to become a nation of squatters.
You may be right, but for now my theory on JP Morgan is they have a NIM(net interest margin) issue. They get zero funding costs and for a year or so they could invest in treasuries and get a guaranteed huge spread, but investable products yield less so while they stil borrow at zero banks like JP Morgan earn far less.
You probably did the right thing though.....time will tell for sure
1) When rates are falling and borrowers are refinancing. The servicers get paid a slice of each monthly payment, however their fixed costs are front-loaded. So if people are refinancing too quickly, the servicer doesn't receive enough payments to recoup their fixed costs, and ...
2) When the 90 day delinquency bucket is increasing rapidly. Although the servicer will eventually recoup the costs for foreclosure, the servicers are usually required to pay property taxes, insurance and all the expenses of foreclosure until the REO is sold.
And right now mortgage rates are falling, and many borrowers are refinancing. And at the same time the 90 day bucket is at record levels and the servicers are swamped with foreclosure activity. So these are the worst of economic times for servicers.
So, it to cut costs and control cash flow, some servicers outsourced foreclosures to the lowest bidders. Here is a possible example from Barry Meir at the NY Times: Foreclosure Mess Draws in the Lawyers Who Handled Them.
And this brings us to another key point that Tanta made in 2007:
[W]hen recovery values in a foreclosure are high (in an RE boom), servicers can noodle along and rack up expenses you didn’t know existed—i.e., shove as much of your “overhead” into FC expenses as you can get away with, since someone else will eventually pay the tab. That’s what we mean when we say that you used to be able to make money off a foreclosure. When the liquidation value starts to approach or drop under the loan amount, on the other hand, investors and insurers start going over those expense reports with a fine-toothed comb, and it can end up in [a] “war”.
To no ones surprise, most liquidation values are far below the loan amounts, and investors and insurers are fighting over every servicer expense. This has pushed the servicers to do foreclosures as cheaply as possible (along with the cash flow reasons).
So my guess is a combination of getting swamped with foreclosures, lack of experienced staff, the poor economic environment for servicers, and outsourcing to the lowest bidder, all contributed to the servicers using "robo-signers". This doesn't excuse their behavior - I'm just trying to understand why this happened - and why it happened at more than one servicer.
Of course using the lowest bidders, and ending up with a flawed legal process, is going to lead to even larger battles over expenses between the investors and servicers. So instead of saving money, this is going to be far more expensive for certain servicers.
RS i think it is possible the govt might bail them out in some way because after all, Paulson had to "beg" him to take on Bear Sterns But according to the Branch Hedge Fund report the banks don't have enough in reserves to cover the potential liabilities. So unless the govt comes in to limit their liabilities.......
As for selling the stock, I have learned the hard way to shoot first and ask questions later. I don't think time will be very kind to this situation.
Not "will" but "is"
you and I will not be permitted to earn interest on our savings until the banks have earned sufficient capital
How soon will you be erased?