In 1916 the Easter Rising Failed.
Men were hanged.
Casemate came home to face the music and he was hanged. Ah, those Black Diaries.
He was in Jarmany tryin' to arrange for the u-boats to deliver a load of weapons to support the Patriots. The Jarmins, the u-boat, the weapons, never arrived.
Same thing happened in the Year of the French. 1798, I think it was.
I dunna know how stupid the Irish are, but if they can't, once every hunnert years, stand up and die, they're stupider than the good Lord himself can save.
Mind you, I'm not talking about knee capping and the religious stuff.
Friday, November 12, 2010
Saturday, November 6, 2010
Foreclosure, Fiasco and Frolic with MERS
A week blessedly silent on the 'fraudclosure' front came to an end yesterday when the decline in pending sales for existing homes was attributed by the National Association of Realtors spokesperson to the bottleneck in the foreclosure pipeline. To hit the refresh button, here is a Q and A, supplemented with some judgment calls:
1. Will MERS work? MERS is the electronic recording system used by the 'industry' in lieu of compliance with recording requirements that vary by the jurisdiction in which the secured property is located. First, for some purposes MERS was such a success that it was extended from residential to commercial properties, so in some sense MERS works. But the question that has everyone excited is:will MERS work when the rubber hits the road in a foreclosure?
The answer to that is--MERS should work some of the time for some purposes, but it almost certainly won't work all of the time, and there is an unacceptable degree of uncertainty surrounding how it will play out. When it doesn't work, it should be fairly easy to fix, assuming the backup documentation is in order.
2. What's wrong with MERS? There is an effort being made to portray the problem as simply one of paperwork lapses and antiquated local filing requirements. It actually runs deeper than that. There is a conceptual (and constitutional) limitation on judicial power--courts only decide cases and controversies in disputes brought to them by litigants. Courts do not go shopping for opportunities to flex judicial muscle (unlike, say, a police force, that should chase criminals rather than simply waiting for them). To bring a lawsuit, the prospective litigant must be a 'real party in interest.' A real party in interest is someone with a injury or other legally recognisable stake in the outcome of the controversy. In a nutshell, MERS more closely resembles a custodian or a registrar, who wouldn't be a real party in interest, than a trustee or a beneficial owner, who could be. To put it in lay terms, if you have a warranty issue with your car, the owner of the garage where you park it can't sue the car maker for you, you have to do something about it yourself.
The good news is that it's not generally that hard to figure out who should be bringing the lawsuit, again, assuming the backup documentation is in order.
3. That's the second time you've qualified an answer with that comment about backup documentation. What gives? Over the last several decades a complex and standardized process has developed in which home loans were made, mortgages originated, warehoused, deposited in trusts and used as backing for the issuance by the trusts of 'mortgage backed' securities. Then, until the loan was refinanced or otherwise paid off, a 'mortgage servicer' collected monthly payments, distributed the proceeds to the securities owners and handled any administrative or similar issues that came up (for instance, usually made sure that property insurance and taxes were paid). That was how the system was supposed to work.
It has recently come to light that in many instances chunks of this work, mostly in the middle of the chain, simply weren't done. In other words, at the front end the house closing came off without a hitch. At the back end, the MBS were issued and sold without a hitch. But, the transfers in the middle--the movement of the note and the mortgage through the conduit of bankruptcy remote vehicles--didn't happen, for whatever reason.
There are also allegations that in some jurisdictions the loan documentation was routinely destroyed. (Gretchen Morgenstern recently made this claim in a New York Times article about the situation in Florida). If true, this is mindboggling, since the legal genome is deeply imprinted with the bedrock belief that certain kinds of promises, to be legally enforceable, have to be in writing. There is something called the Statute of Frauds, dating back to the English common law, not only before the American Revolution, but before the colonization of North America. We inherited it, it runs through our legal system the same way trial by jury does. It's common sense, really. There are two kinds of promises. One, is, for example, "I'll never forget our anniversary." The other is, for example, "from even date herewith, borrower promises to pay lender $857.62 on the fifth day of each month until August 5, 2035." The latter you can sue on in court, good luck with the former.
If there are widespread documentation problems of this sort, regulators of the financial institutions responsible for those back office failures will face a challenge to their supervisory authority concerning, not the liquidity and solvency of the responsible institutions, but the adequacy and soundness of their managements, systems and controls. It may be enough to sink a couple of boats.
4. But assuming the backup documentation is there, the MERS issue can be fixed easily?
Easily may be an overstatement. Let's qualify it with three considerations: (1) economies of scale, (2) the example of bankrupt originators, and (3) the question of who owned what, when?
Economies of scale. This is a high volume process. We are talking assembly line justice, not a handcrafted approach tailored to each borrower's unique circumstances. A lawyer's rule of thumb is that it costs three times as much to fix a problem as it costs to do it right the first time. And keep in mind, it is totally appropriate for the borrower (or her lawyer) to object to any shortcut or impropriety. If the shoe was on the other foot, you can be sure the bank and its lawyer would be.
Unfortunately for the servicers and the MBS holders, I don't think these fixes are going to lend themselves to economies of scale. It will cost as much to correct the documentation on a $100,000 mortgage as on a $300,000 one. There may be more walkaways at the low end and more contested proceedings at the high end, but that is not so much an opportunity for economies of scale as a recognition of additional unpredictable cost in certain circumstances.
One area worth paying particular attention to is commercial real estate. In the bankruptcies and workouts of various failed commercial development projects, it's reasonable to expect all the MERS issues to be litigated completely and expensively. That will litigation among creditors--there won't be any homeowner victim/deadbeats in that arena. Those stakes are worth litigations. And that's an arena in which technical deficiencies in documentation (such as failure to timely perfect a security interest) tend to be penalized severely, to the benefit of the competing creditor/vultures.
Bankrupt originators. The outfits that originators mortgages weren't the most stable financial institutions. A number of them have gone belly up and are in their own bankruptcy proceedings. If, because of 'paperwork deficiencies' there are pools of assets potentially available to the creditors in those proceedings, those claims will be made. The problem has nothing to do with homeowners and mortgage servicing outfits. But you can bet it will gum up the works.
And it offers a good example of the simple fact that in this situation everyone is not going to pull together. The situation is rife with conflicting interests (and internal conflicts of interest). There is not much point to ascribing evil motives to litigants (or their lawyers) in civil proceedings, though it is certainly common.
Who owns what, when? The big issues in a foreclosure are getting the property back, of course. But there are also issues of past due amounts and servicer fees. Taking care of the MERS problem does not address the question of who is owed what, how the proceeds from the sale of the foreclosed property are distributed, what is the fate of any second lien holders, whether there will be a deficiency judgment, etc., etc. On one level, these issues are technical. But they are also disputable. It's a safe guess that they will be disputed.
5. Does resolving the procedural questions involving MERS solve the whole problem?
No, it doesn't even begin to. It's a good first step, but no, no, no . . .
Wednesday, November 3, 2010
Earthquake?
We've shifted from Change You Can Believe in to change you can't believe in. And that's the transition from Obamanos to the Tea Partiers. Party like it's 1773, I guess.
This is the third consecutive election in which the American electorate has collectively asserted a more or less coherent opinion. In each case, it boiled down to 'throw the bums out.' So far, nothing of the sort has happened. In 2006 with the Republican losses, in a parliamentary system a new government would have been formed. In 2008, with the sweeping Democratic victory, a new government with an ability to implement new policies would have been installed.
Does anyone seriously think that control of the House will give the Republicans the ability to do anything more than formally, finally and completely stalemate the Democrats in control of the Senate and the Presidency? That, and perhaps shut down the government. That, and utterly preclude effect action at the national level on any of the issues concerning the economy.
This country is starting to look like a richer version of China (or maybe Mexico back in the days of the PRI). With a better human rights record, in either case.
Postscript.
Mrs. Sarah Palin, the former governor of Alaska, announced the results of the midterm elections with a video of a roaring grizzly bear, forepaws waving in the air, alluding to her 'mama grizzly' theme. Elsewhere, in the People's Republic of China, the Party announced the results of the 2012 presidential succession with the appointment of Mr. Xi Jinping to the Central Military Commission. While Sarah Palin has expressed a taste for grizzly bears, Xi Jingping has expressed a distaste for overfed foreigners with nothing better to do than criticize China.
This is the third consecutive election in which the American electorate has collectively asserted a more or less coherent opinion. In each case, it boiled down to 'throw the bums out.' So far, nothing of the sort has happened. In 2006 with the Republican losses, in a parliamentary system a new government would have been formed. In 2008, with the sweeping Democratic victory, a new government with an ability to implement new policies would have been installed.
Does anyone seriously think that control of the House will give the Republicans the ability to do anything more than formally, finally and completely stalemate the Democrats in control of the Senate and the Presidency? That, and perhaps shut down the government. That, and utterly preclude effect action at the national level on any of the issues concerning the economy.
This country is starting to look like a richer version of China (or maybe Mexico back in the days of the PRI). With a better human rights record, in either case.
Postscript.
Mrs. Sarah Palin, the former governor of Alaska, announced the results of the midterm elections with a video of a roaring grizzly bear, forepaws waving in the air, alluding to her 'mama grizzly' theme. Elsewhere, in the People's Republic of China, the Party announced the results of the 2012 presidential succession with the appointment of Mr. Xi Jinping to the Central Military Commission. While Sarah Palin has expressed a taste for grizzly bears, Xi Jingping has expressed a distaste for overfed foreigners with nothing better to do than criticize China.
Friday, October 29, 2010
Home and Away
Consider a country in another time and space. It is big and sprawling. It is too big and and too sprawling to be governed by a cadre, ruling class or oligarchy. It is a veritable nation-state of quasi-continental dimensions. In form it is a representative government, somewhere between a people's republic and a constitutional monarchy. But its political processes are as captured and as ossified as one might expect of an ancient, honored and imperial republic. Not a single party state by any means, but two parties jointly rule in a comfortable though occasionally unruly duopoly. This country still imagines itself as a Beacon on a Hill.
As might be expected, it has a political class and a financial elite. They are not exactly open, and not exactly closed. Porous is perhaps the best way to think of them. And much of the rest of the place is not particularly interested in joining either. There is also a cultural elite (several, in fact), various underclasses of varying hue and diverse origins, and all the complications and ramifications of several centuries of development as a civilization (all the while trying to imagine itself as a source of innovation and progress). For whatever reason, that bit is critical to its identity.
A few years ago, an economic crisis developed, mostly as a result of internal contradictions in organization, but in the aftermath of a some fairly miserable foreign adventures. And the situation had enough external aspects that it is possible, as most peoples are want to do, to blame the rest of the world for the current difficulties. As a result these people find themselves is a slow and tedious recovery without the instant return to happy prosperity that they believe is their due as the world's Beacon on a Hill and source of innovation and progress. That has soured the politics and the economy, and made them a bit more unruly, but so far had no greater ramifications.
In the throes of the economic crisis, that financial elite successfully held the political class hostage with a threat that boiled down, according to a domestic humorist, to 'save our banks or we'll kill your economy.' A reasonable number of the banks were saved, and since then the government has papered over (literally, printing gobs of the stuff) the inability of the banking systems to meet broad swaths of the mandate its social contract implies. In the process, interestingly, various agencies of the government have developed a set of procedures, capacities and competencies that significantly reduce the necessity for a financial services sector as presently constructed. But that has occurred almost by stealth, with virtually no public comment.
In the aftermath of the crisis, the political class was collectively enraged by the failure of the financial elite that it had just saved to 'stay bought.' This is entirely understandable. As a group the political class is premised on relationships rather than transactions. Relationships come in all varieties and strengths, but they are generally characterized by concepts of power, obligation, and nuanced flexibility through time. As a group, the financial elite is oriented towards transactions. Transactions come in equal variety, but they are generally one-off, creating no long term obligations, and the terms are set at the outset, lived up to, then renegotiated (or confirmed) before the next piece of business is done.
From the point of view of the financial elite, the political class were suckers. They didn't extract enough advantage at the outset of the transaction and so they sold their assistance too cheaply. To come back afterwards and expect to recut the deal is naive beyond words. Once past the crisis, the sensible thing to do, for the financial elite, was address the urgent rebuilding of their wealth--both at the institutional and the personal level. The public optics of that exercise would be manageable.
Fairness compels a distant observer to note that the first match of this series was fought in the home court of the financial elite. The political class was operating on the turf of the financial elite, for high stakes. The early innings moved at a fast moving pace, without time or space for reflection, compromise or error. When in its latter stages the political class attempted to collect for its assistance, it got stiffed (so did the public interest, but only a fool would expect optimal policy outcomes in a game played by these rules).
And there will be a rematch. It may come fairly soon. But it will not play out quickly. It will not play out on the home turf of the financial barons. It may not play out in public. And the result is not foreordained.
I have the sense that the opening volleys are being fired in this whole mortgage fiasco. The early efforts to quantify the impact are fairly amusing. We haven't even figured out how to characterize what's been going on. Is it a paperwork snafu caused by antiquated real estate filing requirements under state law? Is it the commission on an almost heroic scale of routine criminal acts of forgery and perjury for which bank charters should be surrendered and senior executives imprisoned. Is it a systems breakdown that with the commitment of organizational resources on a massive scale can be remediated. Is it the sort of back office failure of epic proportions that delivered the final blow to so many Wall Street brokerages of the Go-Go Years and required a regulatory reshaping of that landscape?
So damage assessment is way premature. How this plays not only will depend on what needs to happen to fix the problem that first brought it to light. It will depend on a variety of other agendas: internal agendas, public agendas, regulatory agendas, private agendas. And the battle lines aren't drawn yet, the roles haven't been defined. Look at the New York Fed--it is a regulator, customer, agent, plaintiff, etc., etc.
And just because the financiers won their home game, that doesn't give them any advantage when they play away. If the way they've run their operations in the past is any sign, Big D has never been a strong point on their side. And that's what will be needed. Nor have cohesion, class solidarity or anything else along the lines of cooperative, collective, united front activities been strong points. Their leadership are the alpha fish of a shark tank--cold, slimy, powerful, dangerous and stupid.
Furthermore, on the basis of their behavior since the crash, I think it is more likely that they will be hooked, netted and filleted. But time--lots of it--will tell.
As might be expected, it has a political class and a financial elite. They are not exactly open, and not exactly closed. Porous is perhaps the best way to think of them. And much of the rest of the place is not particularly interested in joining either. There is also a cultural elite (several, in fact), various underclasses of varying hue and diverse origins, and all the complications and ramifications of several centuries of development as a civilization (all the while trying to imagine itself as a source of innovation and progress). For whatever reason, that bit is critical to its identity.
A few years ago, an economic crisis developed, mostly as a result of internal contradictions in organization, but in the aftermath of a some fairly miserable foreign adventures. And the situation had enough external aspects that it is possible, as most peoples are want to do, to blame the rest of the world for the current difficulties. As a result these people find themselves is a slow and tedious recovery without the instant return to happy prosperity that they believe is their due as the world's Beacon on a Hill and source of innovation and progress. That has soured the politics and the economy, and made them a bit more unruly, but so far had no greater ramifications.
In the throes of the economic crisis, that financial elite successfully held the political class hostage with a threat that boiled down, according to a domestic humorist, to 'save our banks or we'll kill your economy.' A reasonable number of the banks were saved, and since then the government has papered over (literally, printing gobs of the stuff) the inability of the banking systems to meet broad swaths of the mandate its social contract implies. In the process, interestingly, various agencies of the government have developed a set of procedures, capacities and competencies that significantly reduce the necessity for a financial services sector as presently constructed. But that has occurred almost by stealth, with virtually no public comment.
In the aftermath of the crisis, the political class was collectively enraged by the failure of the financial elite that it had just saved to 'stay bought.' This is entirely understandable. As a group the political class is premised on relationships rather than transactions. Relationships come in all varieties and strengths, but they are generally characterized by concepts of power, obligation, and nuanced flexibility through time. As a group, the financial elite is oriented towards transactions. Transactions come in equal variety, but they are generally one-off, creating no long term obligations, and the terms are set at the outset, lived up to, then renegotiated (or confirmed) before the next piece of business is done.
From the point of view of the financial elite, the political class were suckers. They didn't extract enough advantage at the outset of the transaction and so they sold their assistance too cheaply. To come back afterwards and expect to recut the deal is naive beyond words. Once past the crisis, the sensible thing to do, for the financial elite, was address the urgent rebuilding of their wealth--both at the institutional and the personal level. The public optics of that exercise would be manageable.
Fairness compels a distant observer to note that the first match of this series was fought in the home court of the financial elite. The political class was operating on the turf of the financial elite, for high stakes. The early innings moved at a fast moving pace, without time or space for reflection, compromise or error. When in its latter stages the political class attempted to collect for its assistance, it got stiffed (so did the public interest, but only a fool would expect optimal policy outcomes in a game played by these rules).
And there will be a rematch. It may come fairly soon. But it will not play out quickly. It will not play out on the home turf of the financial barons. It may not play out in public. And the result is not foreordained.
I have the sense that the opening volleys are being fired in this whole mortgage fiasco. The early efforts to quantify the impact are fairly amusing. We haven't even figured out how to characterize what's been going on. Is it a paperwork snafu caused by antiquated real estate filing requirements under state law? Is it the commission on an almost heroic scale of routine criminal acts of forgery and perjury for which bank charters should be surrendered and senior executives imprisoned. Is it a systems breakdown that with the commitment of organizational resources on a massive scale can be remediated. Is it the sort of back office failure of epic proportions that delivered the final blow to so many Wall Street brokerages of the Go-Go Years and required a regulatory reshaping of that landscape?
So damage assessment is way premature. How this plays not only will depend on what needs to happen to fix the problem that first brought it to light. It will depend on a variety of other agendas: internal agendas, public agendas, regulatory agendas, private agendas. And the battle lines aren't drawn yet, the roles haven't been defined. Look at the New York Fed--it is a regulator, customer, agent, plaintiff, etc., etc.
And just because the financiers won their home game, that doesn't give them any advantage when they play away. If the way they've run their operations in the past is any sign, Big D has never been a strong point on their side. And that's what will be needed. Nor have cohesion, class solidarity or anything else along the lines of cooperative, collective, united front activities been strong points. Their leadership are the alpha fish of a shark tank--cold, slimy, powerful, dangerous and stupid.
Furthermore, on the basis of their behavior since the crash, I think it is more likely that they will be hooked, netted and filleted. But time--lots of it--will tell.
Tuesday, October 26, 2010
Throwing in the Towel
Is this the beginning of the end,
for our old friend,
extend and pretend?
At least as far as the commercial and residential real estate markets and the continued viability of the financial services sector as presently constituted are concerned?
Consider the following seven data points/factoids/developments:
1. Over the summer the first time home buyer incentive program came to an end. There is no political appetite for resuming it.
2. All of the housing indexes are indicating a resumption in house price declines. Good news for home buyers, bad news for home owners and lenders.
3. Residential and commercial construction is dead. Still dead. Not yet undead. Making no contribution to the 'recovery,' such as the recovery is.
4. HAMP was a failure. And servicer footdragging/non-cooperation that contributed to that preceded the inevitable homeowner redefaults to come.
5. There is the nasty little problem of a huge slug of not-yet-written down second mortgage loans on the books of various TBTF financial institutions (arguably a reason for the footdragging mentioned in point 4?).
6. The commercial real estate market, which hasn't been supported with the kind of governmental effort that has distorted the residential market, has resumed its decline and continues to set new lows. A contributor to continuing weakness of bank balance sheets and a harbinger of the residential real estate market?
7. The foreclosure gate scandal is leading all kinds of revelations about how the originate-to-distribute business model has actually been functioning (perhaps since inception?).
And a bonus, freebie, consideration--18 months ago the feds required the major banks to prepare stress tests predicated on a pair of assumptions concerning the path of residential real estate prices and unemployment levels. House prices could drop slightly more than 15% from where they are today without dropping to the the price levels projected in that exercise for the base case. House prices would have to drop almost 25% before reaching the levels projected in the more adverse case for the stress tests.
All of this suggests that a strategy of 'let's just hold things together 'til things get better' may have exhausted its utility and that the the time may have come to actually address the problems.
for our old friend,
extend and pretend?
At least as far as the commercial and residential real estate markets and the continued viability of the financial services sector as presently constituted are concerned?
Consider the following seven data points/factoids/developments:
1. Over the summer the first time home buyer incentive program came to an end. There is no political appetite for resuming it.
2. All of the housing indexes are indicating a resumption in house price declines. Good news for home buyers, bad news for home owners and lenders.
3. Residential and commercial construction is dead. Still dead. Not yet undead. Making no contribution to the 'recovery,' such as the recovery is.
4. HAMP was a failure. And servicer footdragging/non-cooperation that contributed to that preceded the inevitable homeowner redefaults to come.
5. There is the nasty little problem of a huge slug of not-yet-written down second mortgage loans on the books of various TBTF financial institutions (arguably a reason for the footdragging mentioned in point 4?).
6. The commercial real estate market, which hasn't been supported with the kind of governmental effort that has distorted the residential market, has resumed its decline and continues to set new lows. A contributor to continuing weakness of bank balance sheets and a harbinger of the residential real estate market?
7. The foreclosure gate scandal is leading all kinds of revelations about how the originate-to-distribute business model has actually been functioning (perhaps since inception?).
And a bonus, freebie, consideration--18 months ago the feds required the major banks to prepare stress tests predicated on a pair of assumptions concerning the path of residential real estate prices and unemployment levels. House prices could drop slightly more than 15% from where they are today without dropping to the the price levels projected in that exercise for the base case. House prices would have to drop almost 25% before reaching the levels projected in the more adverse case for the stress tests.
All of this suggests that a strategy of 'let's just hold things together 'til things get better' may have exhausted its utility and that the the time may have come to actually address the problems.
Monday, October 25, 2010
G20 Meeting and the Lessons of Japan
The truth that was illuminated at the G20 meeting.
If you assess currency manipulation by the impact of policy on exchange rates rather than the announced intentions of policymakers, we are all manipulating our exchange rates.
Er, so let's change the paradigm?
The Lesson of Japanese Lost Decade.
In a world of globalized trade and free international capital flows, the effects of a Keynesian approach to economic stimulus at the nation state level will dissipate across the globe and cannot be effectively targeted within the geographical boundaries of a national economy actively participating in the international trade (probably either as an exporter or an importer). You simply turn your currency into a funding vehicle for the carry trade.
Anyone care to speculate in the emerging markets using the dollar as a funding currency?
If you assess currency manipulation by the impact of policy on exchange rates rather than the announced intentions of policymakers, we are all manipulating our exchange rates.
Er, so let's change the paradigm?
The Lesson of Japanese Lost Decade.
In a world of globalized trade and free international capital flows, the effects of a Keynesian approach to economic stimulus at the nation state level will dissipate across the globe and cannot be effectively targeted within the geographical boundaries of a national economy actively participating in the international trade (probably either as an exporter or an importer). You simply turn your currency into a funding vehicle for the carry trade.
Anyone care to speculate in the emerging markets using the dollar as a funding currency?
Sunday, October 24, 2010
Blood on the Knife
We need some blood on the knife.
That's my takeaway on the progress of the financial crisis so far. There is a public appetite for blood on the knife, and it hasn't been satiated. To put a finer point on it, the retributive aspect of justice has been sacrificed to the pragmatic interest in keeping the wheels on the system. It's time to shift gears.
There is an inchoate sense of rage that the people who made this mess, and profited handsomely from it, are getting off scot-free, leaving the rest of us to clean it up and pay for it. I think that's a big part of the Tea Party rage and will be the explanation for the midterm success of the Republicans (one of whom in Texas, my God, is calling for armed insurrection, claiming it is constitutionally permissible. Not since Edmund Ruffin of South Carolina in 1861 has such nonsense, oh, wait a minute, I forget Rick Perry of Texas about 18 months ago . . . )
I wish I could say that those in authority above us are too principled and committed to the rule of law to indulge such a taste. But I don't think so. The perp walks following Enron and the other scandals of a decade back suggest not. I think they are simply gutless, spineless and clueless.
It's time to throw some resources into criminal task forces. Now, there's a shovel ready project everybody can agree on.
That's my takeaway on the progress of the financial crisis so far. There is a public appetite for blood on the knife, and it hasn't been satiated. To put a finer point on it, the retributive aspect of justice has been sacrificed to the pragmatic interest in keeping the wheels on the system. It's time to shift gears.
There is an inchoate sense of rage that the people who made this mess, and profited handsomely from it, are getting off scot-free, leaving the rest of us to clean it up and pay for it. I think that's a big part of the Tea Party rage and will be the explanation for the midterm success of the Republicans (one of whom in Texas, my God, is calling for armed insurrection, claiming it is constitutionally permissible. Not since Edmund Ruffin of South Carolina in 1861 has such nonsense, oh, wait a minute, I forget Rick Perry of Texas about 18 months ago . . . )
I wish I could say that those in authority above us are too principled and committed to the rule of law to indulge such a taste. But I don't think so. The perp walks following Enron and the other scandals of a decade back suggest not. I think they are simply gutless, spineless and clueless.
It's time to throw some resources into criminal task forces. Now, there's a shovel ready project everybody can agree on.
Thursday, October 21, 2010
Appalling Wall Street Journal Attack on Lawyers
The Wall Street Journal published one of those stupid 'shoot the messenger' articles about the consumer lawyers who by doing their jobs brought to light the robosigning and document fabrication that has become endemic in the foreclosure process. The article reeked of implicit class bigotry, which will play well with the WSJ's intended demographic. And properly reflects the complete capture by paradigm of the formerly ink-stained wretches who currently inhabit the gilded cage of the higher reaches of salaried journalism.
The denizens of Wall Street whom the WSJ serves elected to jettison the safeguards, procedures and formalities of the credit culture they had inherited. That credit culture had developed over generations. Remember the three C's? Probably not. For the last decade, those pillars of financial innovation shoved money out the door with utter abandon and cut a lot of corners doing that. They lent a lot of money to customers they shouldn't have.
Now, surprise, they're taking the same cavalier approach to getting the money back.
The great public was willing to take the money pushed its way. But when it comes to cowboy recklessness in getting the money back, not so fast, hombre. The legal and judicial safeguards and procedures developed over generations in real property matters exist to protect legal rights. They evolved and reflect a prudent and painfully developed set of accomodations and balances. Just because the financial services sector lost its collective sanity and jettisoned the credit culture is no reason for the judicial system to follow its example.
And the news of the last couple of months suggest that those legal safeguards and procedures need to be strengthened, not diminished. Which, of course, is what the New York courts took a step towards yesterday by rule imposing additional duties on counsel for foreclosing financial institutions.
The denizens of Wall Street whom the WSJ serves elected to jettison the safeguards, procedures and formalities of the credit culture they had inherited. That credit culture had developed over generations. Remember the three C's? Probably not. For the last decade, those pillars of financial innovation shoved money out the door with utter abandon and cut a lot of corners doing that. They lent a lot of money to customers they shouldn't have.
Now, surprise, they're taking the same cavalier approach to getting the money back.
The great public was willing to take the money pushed its way. But when it comes to cowboy recklessness in getting the money back, not so fast, hombre. The legal and judicial safeguards and procedures developed over generations in real property matters exist to protect legal rights. They evolved and reflect a prudent and painfully developed set of accomodations and balances. Just because the financial services sector lost its collective sanity and jettisoned the credit culture is no reason for the judicial system to follow its example.
And the news of the last couple of months suggest that those legal safeguards and procedures need to be strengthened, not diminished. Which, of course, is what the New York courts took a step towards yesterday by rule imposing additional duties on counsel for foreclosing financial institutions.
Wednesday, October 20, 2010
Wells Fargo and the New York Fed: Three Fronts and A Big Issue
Yesterday was big for the New York Fed on the MBS problem. Bill Dudley implicitly questioned the adequacy of the current back office operations in a speech and in a demand letter the New York Fed joined a group of other potential plaintiffs in starting the clock ticking on BofA in a situation involving bad loan putbacks.
Meanwhile, out on the left coast Wells Fargo today vigorously defended its own mortgage servicing operation. Admittedly, the defense could be interpreted, depending on one's perspective, as either 'our operations meet and exceed industry standards' or 'we're not as lame as the rest of the business.' But it was vigorous.
All of this has been freighted with much meaning. But I'm not so sure that the people either dismissing or heralding these developments have enough to go on to be very persuasive. The old joke about litigators--frequently wrong but never in doubt--comes to mind.
So I'm not going to say anything about the viability of the litigation implicitly threatened by a demand letter. I'm not going to speculate on the course of regulatory response to the possibility that material operations of some too big to fail financial institutions suffer from inadequate systems, procedures and controls, or management failures that have resulted in a pattern of routine violations of law. And I don't know how to sort out what Wells Fargo senior management says on the quarterly earnings call versus what Wells Fargo operating managers say under oath in deposition (beyond observing that maybe neither bank officers nor sworn testimony enjoy the confidence they'd once earned).
Instead, I'll offer something organizational--three fronts and a big issue. There are three fronts on which the mortgage backed securities business is being challenged.
Front No. 1. The originate to distribute part of the model. This where the put back issue comes from. There appear to be some problems with the disclosures made in offering documents. This will all be the grist of expensive and lengthy litigation. Both the plaintiffs and the defendants will be drawn from the financial services sector. There may be tax issues, though I'd be stunned if the IRS challenged the conduit status of the REMICs. The separation of record and beneficial ownership of the notes and security interests occurred at this point, but the problems it is now presenting lead directly to Front No. 2.
Front No. 2. The ongoing mortgage servicing operations of trustees and servicing organizations. In a kinder and gentler time (the boom of five years ago), these operations were seen as essentially custodial (the trustee holding the property for the benefit of the trust that issued the MBS) and ministerial--the accounting, recording keeping, reporting, disbursing of cash flows, etc.--of the mortgage servicer. These systems are now being stressed past the breaking point. In the first instance, that stress showed up in the foreclosure scandal, but it's rapidly spreading to other issues (viz., the demand letter). That first stress takes us to Front No. 3.
Front. No. 3. The legal issues coming out of the foreclosure disclosures. This is rough stuff. Without prejudging the question of whether the actual conduct was an endemic and indefensible as it appears to have been, the policy question of what to do about it is just beginning to surface. Do you settle for a patch and a local fix? Or do you conclude that the too big to fail financial institutions require rethinking? One relevant observation--those institutions seems to have many, many problems in a wide variety of different arenas. Foreclosure gate is part of a pattern, not a one-off. Consider the pay to play scandals in state and municipal finance. Consider the pay practices. And, don't forget the meltdown in the financial markets two years ago (a situation salvaged by bureaucrats and the taxpayer, though the leadership of those institutions and their publicists have conveniently forgotten that).
And, finally, the big issue. It's less global than pondering what to do about too big to fail financial institutions, but it's an aspect of their size. Conflicts of interest are a huge problem in the mortgage servicing business. The extent to which the different roles are intertwined in different operations of the same ultimate parent organization are going to be an enormous obstacle to resolving this mess. (It also may be a fatal weakness in legal attempts to contain it). One of the institutions joining in the demand on Bank of America is 34% owned by BofA. Wells Fargo is famous for making both first and second mortgages on the same property. One reason HAMP is believed to have had such dismal results is that the servicers were in a blatant conflict of interest situation.
All in all, interesting times. A lovely mess of policy issues, legal complications, operational challenges, all in a stew of tangled jurisdictional questions, potential criminal liabilities, and so on. A recipe for . . .
Meanwhile, out on the left coast Wells Fargo today vigorously defended its own mortgage servicing operation. Admittedly, the defense could be interpreted, depending on one's perspective, as either 'our operations meet and exceed industry standards' or 'we're not as lame as the rest of the business.' But it was vigorous.
All of this has been freighted with much meaning. But I'm not so sure that the people either dismissing or heralding these developments have enough to go on to be very persuasive. The old joke about litigators--frequently wrong but never in doubt--comes to mind.
So I'm not going to say anything about the viability of the litigation implicitly threatened by a demand letter. I'm not going to speculate on the course of regulatory response to the possibility that material operations of some too big to fail financial institutions suffer from inadequate systems, procedures and controls, or management failures that have resulted in a pattern of routine violations of law. And I don't know how to sort out what Wells Fargo senior management says on the quarterly earnings call versus what Wells Fargo operating managers say under oath in deposition (beyond observing that maybe neither bank officers nor sworn testimony enjoy the confidence they'd once earned).
Instead, I'll offer something organizational--three fronts and a big issue. There are three fronts on which the mortgage backed securities business is being challenged.
Front No. 1. The originate to distribute part of the model. This where the put back issue comes from. There appear to be some problems with the disclosures made in offering documents. This will all be the grist of expensive and lengthy litigation. Both the plaintiffs and the defendants will be drawn from the financial services sector. There may be tax issues, though I'd be stunned if the IRS challenged the conduit status of the REMICs. The separation of record and beneficial ownership of the notes and security interests occurred at this point, but the problems it is now presenting lead directly to Front No. 2.
Front No. 2. The ongoing mortgage servicing operations of trustees and servicing organizations. In a kinder and gentler time (the boom of five years ago), these operations were seen as essentially custodial (the trustee holding the property for the benefit of the trust that issued the MBS) and ministerial--the accounting, recording keeping, reporting, disbursing of cash flows, etc.--of the mortgage servicer. These systems are now being stressed past the breaking point. In the first instance, that stress showed up in the foreclosure scandal, but it's rapidly spreading to other issues (viz., the demand letter). That first stress takes us to Front No. 3.
Front. No. 3. The legal issues coming out of the foreclosure disclosures. This is rough stuff. Without prejudging the question of whether the actual conduct was an endemic and indefensible as it appears to have been, the policy question of what to do about it is just beginning to surface. Do you settle for a patch and a local fix? Or do you conclude that the too big to fail financial institutions require rethinking? One relevant observation--those institutions seems to have many, many problems in a wide variety of different arenas. Foreclosure gate is part of a pattern, not a one-off. Consider the pay to play scandals in state and municipal finance. Consider the pay practices. And, don't forget the meltdown in the financial markets two years ago (a situation salvaged by bureaucrats and the taxpayer, though the leadership of those institutions and their publicists have conveniently forgotten that).
And, finally, the big issue. It's less global than pondering what to do about too big to fail financial institutions, but it's an aspect of their size. Conflicts of interest are a huge problem in the mortgage servicing business. The extent to which the different roles are intertwined in different operations of the same ultimate parent organization are going to be an enormous obstacle to resolving this mess. (It also may be a fatal weakness in legal attempts to contain it). One of the institutions joining in the demand on Bank of America is 34% owned by BofA. Wells Fargo is famous for making both first and second mortgages on the same property. One reason HAMP is believed to have had such dismal results is that the servicers were in a blatant conflict of interest situation.
All in all, interesting times. A lovely mess of policy issues, legal complications, operational challenges, all in a stew of tangled jurisdictional questions, potential criminal liabilities, and so on. A recipe for . . .
Tuesday, October 19, 2010
Back Office Collapses in History
Of course it's still way too early to tell just how systemically important the back office failings of the mortgage servicers will turn out to be. But NY Fed President Dudley referenced the importance of robust back office operations underpinning a functioning mortgage securities markets in his speech this morning. And that is important.
Indeed, the financial markets were wrecked by a back office meltdown the living of memory man, indeed in the memory (just barely) of non-retirement age living man--and woman, for that matter, though back then the women weren't the, ah, players they've since become. Actually, the back office meltdown just finished the job. It came after a market boom followed by a meltdown had stressed the whole system, against the backdrop of prolonged and unsatisfying military entanglements on the Asian landmass and a rickety economy.
Maybe that all sounds familiar. And in the last three years we've had a debate about whether we were headed for a reprise of the 1930s or the 1970s. What I'm talking about here happened early in the 1970s, and was really the final inning of a game started in the 1960s.
The 1960s were the Go-Go years. You had mutual funds instead of program trading and conglomerates rather than hedge funds, but you had the same psychology of boom. Which was followed by bust. And throughout it all, elevated levels of transactional activities.
All of which settled on paper. And all that paper swamped the back offices. Now these were the back offices of the member firms of New York Stock Exchange firms. Those firms were partnerships and the partners were frequently more interested in playing golf at Winged Foot, racing sailboats on Long Island City or drinking at the Brook Club.
By the time anybody started paying any attention, the systems had broken down. As in, knee deep in trade slips, lost stock certificates, daily ledgers weeks behind in recording transactions, blown settlements, broken trades, etc. A number of firms failed.
Unlike the current situation, all of these failures were internal, pretty much confined to Manhattan, maybe bleeding over to Jersey City. An effort today is being made to portray the problem as one of antiquated state property laws and filing requirements. As far as I can tell, those antiquated state systems and procedures work just fine, and 'time-tested' might be a more polite adjective.
The problem is a systemic back office failure to comply with state legal requirements, leaving the beneficial owners of the notes in a position where they are unable to efficiently and quickly assert their rights under state law. At worst, they lose the benefit of their security interest and become general creditors in a bankruptcy. At best, at considerable expense to the trusts, servicers and perhaps even the deal sponsors, the remedial work necessary to comply with well-established state law requirements.
But it's difficult to challenge the notion that, if a litigant wants to assert rights in a state court under the laws of that state, it should be compelled to comply with the procedural requirements of that forum. And it that litigant is a federally regulated financial institution, it's about time that federal regulators look into the situation. If those institutions have by their own strategic decisions, operating procedures, and resource allocation, put themselves in a position where they can't obtain state legal remedies, then there need to be some changes--in the financial institutions, not in the state laws.
Indeed, the financial markets were wrecked by a back office meltdown the living of memory man, indeed in the memory (just barely) of non-retirement age living man--and woman, for that matter, though back then the women weren't the, ah, players they've since become. Actually, the back office meltdown just finished the job. It came after a market boom followed by a meltdown had stressed the whole system, against the backdrop of prolonged and unsatisfying military entanglements on the Asian landmass and a rickety economy.
Maybe that all sounds familiar. And in the last three years we've had a debate about whether we were headed for a reprise of the 1930s or the 1970s. What I'm talking about here happened early in the 1970s, and was really the final inning of a game started in the 1960s.
The 1960s were the Go-Go years. You had mutual funds instead of program trading and conglomerates rather than hedge funds, but you had the same psychology of boom. Which was followed by bust. And throughout it all, elevated levels of transactional activities.
All of which settled on paper. And all that paper swamped the back offices. Now these were the back offices of the member firms of New York Stock Exchange firms. Those firms were partnerships and the partners were frequently more interested in playing golf at Winged Foot, racing sailboats on Long Island City or drinking at the Brook Club.
By the time anybody started paying any attention, the systems had broken down. As in, knee deep in trade slips, lost stock certificates, daily ledgers weeks behind in recording transactions, blown settlements, broken trades, etc. A number of firms failed.
Unlike the current situation, all of these failures were internal, pretty much confined to Manhattan, maybe bleeding over to Jersey City. An effort today is being made to portray the problem as one of antiquated state property laws and filing requirements. As far as I can tell, those antiquated state systems and procedures work just fine, and 'time-tested' might be a more polite adjective.
The problem is a systemic back office failure to comply with state legal requirements, leaving the beneficial owners of the notes in a position where they are unable to efficiently and quickly assert their rights under state law. At worst, they lose the benefit of their security interest and become general creditors in a bankruptcy. At best, at considerable expense to the trusts, servicers and perhaps even the deal sponsors, the remedial work necessary to comply with well-established state law requirements.
But it's difficult to challenge the notion that, if a litigant wants to assert rights in a state court under the laws of that state, it should be compelled to comply with the procedural requirements of that forum. And it that litigant is a federally regulated financial institution, it's about time that federal regulators look into the situation. If those institutions have by their own strategic decisions, operating procedures, and resource allocation, put themselves in a position where they can't obtain state legal remedies, then there need to be some changes--in the financial institutions, not in the state laws.
Monday, October 18, 2010
Political Fallout from the Foreclosure Mess
As far as I can tell, so far there hasn't been any.
On a personal level, our political classes don't have a dog in the fight. They may be collectively regretting the purchase of that vacation condo back in 2005, but they are current on the mortgage of their principal residence (except for that California representative).
On an professional level, the foreclosure mess is as much a problem as it is an opportunity. It lies awkwardly on top of a construct created by various spin meisters at a great expenditure of time, effort and treasure, to paint in the darkest colors a collection of deadbeat borrowers who took out liar loans to speculate in homes they never should have been allowed to buy, then, to top it off, ruthlessly defaulted. Now, to use Ron Zeigler's words from his time as Nixon's press secretary, those facts are no longer operative.
Now, in Congressional district by Congressional district, media outlet after media outlet develop endless heart rending stories of incredible abuses. Well, in the context of millions of foreclosures, if you have thousands of horror stories, that's a rate of one in a thousand. As long as those stories sell newspapers, atttract eyeballs or goose the ratings, that vein will be mined. So it's reasonable to expect the stories to continue, at least through the midterms.
Inside the Beltway, the political leadership is doing what comes natural to it. Congress will grandstand with hearings. Those may not help homeowners or shed much light on the situation, but they'll put the heat on the mortgage servicers and provide some entertainment. If they have anyeffect, it will be to jell public opinion and (more importantly) the political calculus against any legislative accommodation of the financial services sector on this one.
And within the agencies and executive branch, those politicians are doing what comes naturally to them when tossed a hot potato. They're handing the hot potato off to the professionals. Of course, in this case the professionals will be teams from enforcement, compliance, regulatory oversight, and perhaps the criminal division of DOJ (in a liaison capacity, at first). That's already happening. Those mills grind slowly and implacably and are pretty hard to turn off, once fired up.
So there, the process is at work. But as far as political fallout in the run up to the midterm elections, nothing has developed so far. Maybe, given the timing of all this, the problem has to be a post-election issue.
Which brings us back to the bigger question of what kind of construct to put on foreclosure-gate. Is it a story of modern innovative and creative financial institutions who've developed new and better ways of making the American Dream possible being tripped up by a few ancient legal technicalities in a few backwards state jurisdictions? Is it a crisis threatening the integrity of our largest securities market and most important financial institutions that requires a federal fix to a patchwork of outmoded state real property laws? Or it is an arrogant, out-of-control Wall Street, not satisfied with destroying the retirement savings of millions, not satiated by shipping the jobs of more millions off to China, launching a criminal attack on the American Dream of home ownership?
My gut tells me that the first choice is so ludicrous at this juncture that even the toadies and lackies still mouthing it will be told by their masters to shush. So the alternatives likely come down to some blend of the second and the third. The problem with the second choice is that the card has already been played once in the last couple of years, and I sense that the political classes feel betrayed in the aftermath by the financial elite. The problem with the third choice is that it sounds like so much tea party dementia and drivel.
I suppose an ideal outcome would be to cloth the policies implicit in the third in the phraseology of the second. That'll happen when pigs fly.
On a personal level, our political classes don't have a dog in the fight. They may be collectively regretting the purchase of that vacation condo back in 2005, but they are current on the mortgage of their principal residence (except for that California representative).
On an professional level, the foreclosure mess is as much a problem as it is an opportunity. It lies awkwardly on top of a construct created by various spin meisters at a great expenditure of time, effort and treasure, to paint in the darkest colors a collection of deadbeat borrowers who took out liar loans to speculate in homes they never should have been allowed to buy, then, to top it off, ruthlessly defaulted. Now, to use Ron Zeigler's words from his time as Nixon's press secretary, those facts are no longer operative.
Now, in Congressional district by Congressional district, media outlet after media outlet develop endless heart rending stories of incredible abuses. Well, in the context of millions of foreclosures, if you have thousands of horror stories, that's a rate of one in a thousand. As long as those stories sell newspapers, atttract eyeballs or goose the ratings, that vein will be mined. So it's reasonable to expect the stories to continue, at least through the midterms.
Inside the Beltway, the political leadership is doing what comes natural to it. Congress will grandstand with hearings. Those may not help homeowners or shed much light on the situation, but they'll put the heat on the mortgage servicers and provide some entertainment. If they have anyeffect, it will be to jell public opinion and (more importantly) the political calculus against any legislative accommodation of the financial services sector on this one.
And within the agencies and executive branch, those politicians are doing what comes naturally to them when tossed a hot potato. They're handing the hot potato off to the professionals. Of course, in this case the professionals will be teams from enforcement, compliance, regulatory oversight, and perhaps the criminal division of DOJ (in a liaison capacity, at first). That's already happening. Those mills grind slowly and implacably and are pretty hard to turn off, once fired up.
So there, the process is at work. But as far as political fallout in the run up to the midterm elections, nothing has developed so far. Maybe, given the timing of all this, the problem has to be a post-election issue.
Which brings us back to the bigger question of what kind of construct to put on foreclosure-gate. Is it a story of modern innovative and creative financial institutions who've developed new and better ways of making the American Dream possible being tripped up by a few ancient legal technicalities in a few backwards state jurisdictions? Is it a crisis threatening the integrity of our largest securities market and most important financial institutions that requires a federal fix to a patchwork of outmoded state real property laws? Or it is an arrogant, out-of-control Wall Street, not satisfied with destroying the retirement savings of millions, not satiated by shipping the jobs of more millions off to China, launching a criminal attack on the American Dream of home ownership?
My gut tells me that the first choice is so ludicrous at this juncture that even the toadies and lackies still mouthing it will be told by their masters to shush. So the alternatives likely come down to some blend of the second and the third. The problem with the second choice is that the card has already been played once in the last couple of years, and I sense that the political classes feel betrayed in the aftermath by the financial elite. The problem with the third choice is that it sounds like so much tea party dementia and drivel.
I suppose an ideal outcome would be to cloth the policies implicit in the third in the phraseology of the second. That'll happen when pigs fly.
Sunday, October 17, 2010
The State of Play or . . .
moving slowly and implacably.
Two very important things to remember as the robo-signing scandal morphs into something more interesting and systemically threatening.
First, we are only in the earliest stages of the unfolding of this situation. It's too early to tell what we are dealing with. The problem may have been brewing for some time (and with benefit of hindsight it may come to be regarded as having been inevitable). But until the large servicers started voluntarily suspending foreclosures the situation didn't occupy that much bandwidth. It was possible to assume that lenders had simply adapted to the subprime market and underwater houses the aggressive repo techniques they'd always used to grab cars securing bad car loans and the furniture involved in various tawdry lease to buy schemes.
The shock of the public announcements that the country's largest mortgage servicers were suspending foreclosures grabbed public attention. It made the Daily Show. Unfortunately, as a culture we've become addicted to the idea that everything should be resolved in a 30 or 60 minute media window, or over the course of a week (the length of a made-for-TV mini-series), or (at the longest) a viewing season.
So far, not one aspect of the financial crisis has conformed to those dramatic dictates. Don't expect this one to, either.
The second is like unto it. This situation does not lend itself to quantification. We've developed a taste in this country for measuring, quantifying, modelling the impact of a development or a decision on (you chose) a divisional P&L statement, an investment portfolio, a tranche is a securitization, etc. The important decisions in that process were always veiled in the model's assumptions or the financial statements footnotes. But not worry. Those things didn't lend themselves to sound-bite treatment, anyway.
What's happening--foreclosure gate--presents a legal, regulatory, management and operational set of issues, and their interplay that defy prediction, much less forecasting, modelling or quantifying for purposes of throwing a number up on a trading screen, modelling impacts on tranches of differeing seniorities of changes in cash flow projections or determining the adequacy of a litigation reserve. Unfortunately, there's a reason they call them talking heads, not thinking heads.
That idea that a non-trivial part of the operations of too big to fail financial institutions have involved recurring violations of law, and that those operations cannot as currently configured by conducted without those legal violations is something to think about. It requires more than a knee jerk reaction.
If spending that time gives industry apologists, shills and lobbyists time to regroup, that is a cost of how things work. It also gives time to determine whether some of these institutions should be indicted, and at what organizational levels.
Two very important things to remember as the robo-signing scandal morphs into something more interesting and systemically threatening.
First, we are only in the earliest stages of the unfolding of this situation. It's too early to tell what we are dealing with. The problem may have been brewing for some time (and with benefit of hindsight it may come to be regarded as having been inevitable). But until the large servicers started voluntarily suspending foreclosures the situation didn't occupy that much bandwidth. It was possible to assume that lenders had simply adapted to the subprime market and underwater houses the aggressive repo techniques they'd always used to grab cars securing bad car loans and the furniture involved in various tawdry lease to buy schemes.
The shock of the public announcements that the country's largest mortgage servicers were suspending foreclosures grabbed public attention. It made the Daily Show. Unfortunately, as a culture we've become addicted to the idea that everything should be resolved in a 30 or 60 minute media window, or over the course of a week (the length of a made-for-TV mini-series), or (at the longest) a viewing season.
So far, not one aspect of the financial crisis has conformed to those dramatic dictates. Don't expect this one to, either.
The second is like unto it. This situation does not lend itself to quantification. We've developed a taste in this country for measuring, quantifying, modelling the impact of a development or a decision on (you chose) a divisional P&L statement, an investment portfolio, a tranche is a securitization, etc. The important decisions in that process were always veiled in the model's assumptions or the financial statements footnotes. But not worry. Those things didn't lend themselves to sound-bite treatment, anyway.
What's happening--foreclosure gate--presents a legal, regulatory, management and operational set of issues, and their interplay that defy prediction, much less forecasting, modelling or quantifying for purposes of throwing a number up on a trading screen, modelling impacts on tranches of differeing seniorities of changes in cash flow projections or determining the adequacy of a litigation reserve. Unfortunately, there's a reason they call them talking heads, not thinking heads.
That idea that a non-trivial part of the operations of too big to fail financial institutions have involved recurring violations of law, and that those operations cannot as currently configured by conducted without those legal violations is something to think about. It requires more than a knee jerk reaction.
If spending that time gives industry apologists, shills and lobbyists time to regroup, that is a cost of how things work. It also gives time to determine whether some of these institutions should be indicted, and at what organizational levels.
Saturday, October 16, 2010
So Why Did They Stop?
Why have most of the major banks stopped foreclosing on residential property? Let's discard a bunch of possibilities:
1. They are torn by conscience stricken concerns over possible errors ejecting innocent homeowners from their residences? There is utterly no factual support for this answer, and it's inconsistent with all the past talk of liar loans, ruthless defaulters and so on.
2. They were cowed into it by the aggressive law enforcement efforts of a posse of 50 state attorneys general. Nah, the posse formed up after the announcements of the suspensions. Classic reactive government, not proactive at all.
3. They were responding to public outrage in a crisis management mode. The problem with this theory is that so far the public is more perplexed than outraged. Neither Wall Street nor Main Street has quite figured out what to think. The same goes for the political class inside the Beltway and the Main Stream Media.
I have a theory, and it is only a theory. The only way that the mortgage servicers have of filing foreclosures in the volumes current circumstances dictate requires the filing of sworn affadavits that contain misstatements of facts and documents that have been fabricated ('recreated'). Since knowingly swearing to false testimony (which is what an affadivit is) and since fabricating documents to be filed in judicial proceedings are criminal activities, the servicers had to stop. To continue would be to knowingly continue in criminal activities. Stopping may not be sufficient, but it is certainly necessary.
This is completely independent of the issue of whether there 'should' as a policy matter be a moratorium on mortgage foreclosures. This is completely independent of any 'harmful impact of the housing recovery.' This has nothing to do with the state of the MBS market, or put backs. Very simply, if the robo-signing foreclosure mill activities may involve routine forgery and perjury, the legal risk to responsible corporate officers and the institutional risk to regulated financial institutions is too great to permit it to continue.
Foreclosures will resume on a routine basis when the servicers can develop a new routine.
1. They are torn by conscience stricken concerns over possible errors ejecting innocent homeowners from their residences? There is utterly no factual support for this answer, and it's inconsistent with all the past talk of liar loans, ruthless defaulters and so on.
2. They were cowed into it by the aggressive law enforcement efforts of a posse of 50 state attorneys general. Nah, the posse formed up after the announcements of the suspensions. Classic reactive government, not proactive at all.
3. They were responding to public outrage in a crisis management mode. The problem with this theory is that so far the public is more perplexed than outraged. Neither Wall Street nor Main Street has quite figured out what to think. The same goes for the political class inside the Beltway and the Main Stream Media.
I have a theory, and it is only a theory. The only way that the mortgage servicers have of filing foreclosures in the volumes current circumstances dictate requires the filing of sworn affadavits that contain misstatements of facts and documents that have been fabricated ('recreated'). Since knowingly swearing to false testimony (which is what an affadivit is) and since fabricating documents to be filed in judicial proceedings are criminal activities, the servicers had to stop. To continue would be to knowingly continue in criminal activities. Stopping may not be sufficient, but it is certainly necessary.
This is completely independent of the issue of whether there 'should' as a policy matter be a moratorium on mortgage foreclosures. This is completely independent of any 'harmful impact of the housing recovery.' This has nothing to do with the state of the MBS market, or put backs. Very simply, if the robo-signing foreclosure mill activities may involve routine forgery and perjury, the legal risk to responsible corporate officers and the institutional risk to regulated financial institutions is too great to permit it to continue.
Foreclosures will resume on a routine basis when the servicers can develop a new routine.
Friday, October 15, 2010
The Kid Who Grew Up To Be President
There was this kid, real smart, a hard worker. He went to law school. He became president of the Harvard Law Review. Must have done well in those first year law courses. Like Paper Chase. He had to really, really grok the property law and the civil procedure and all that stuff. Drunk the koolaid big time. You don't get to be an editor of the law review unless you really, really buy into it. It forms the way you think for the rest of your life.
So this kid grows up to be president. Of the United States. And he has a lot on his plate. He wanted the job, of course, but he never thought fate would heap a financial crisis on his plate. I mean, he turned his back on those high Wall Street salaries when he left Harvard and instead took the path that led to the White House. And now, once there, what's he staring at, but a steaming heap of Wall Street.
Now, how does the kid inside the man react to learning that those big Wall Street banks have been hiring people to routinely perjure themselves (so routinely that the job title is 'Limited Signing Officer') and have outsourced their forgery needs to a third party which actually published a price list for 'file reconstruction.'? Not once, not twice, but tens of thousands of times.
I don't know how the kid inside the man reacts. But one last tidbit, the kid was raised by his grandma. And she had a low level functionary job in a bank. She was in charge of the loan files, and promissory notes, or something like that. At the bank she did women's work in an era when the men were the executives, and took home the big paychecks. Then she came home and raised the kid and his sister.
Will the kid let the system put the modern day equivalent of his grandma in jail, or maybe he'll go after bigger fish. Depends on what kind of man he is, I guess.
So this kid grows up to be president. Of the United States. And he has a lot on his plate. He wanted the job, of course, but he never thought fate would heap a financial crisis on his plate. I mean, he turned his back on those high Wall Street salaries when he left Harvard and instead took the path that led to the White House. And now, once there, what's he staring at, but a steaming heap of Wall Street.
Now, how does the kid inside the man react to learning that those big Wall Street banks have been hiring people to routinely perjure themselves (so routinely that the job title is 'Limited Signing Officer') and have outsourced their forgery needs to a third party which actually published a price list for 'file reconstruction.'? Not once, not twice, but tens of thousands of times.
I don't know how the kid inside the man reacts. But one last tidbit, the kid was raised by his grandma. And she had a low level functionary job in a bank. She was in charge of the loan files, and promissory notes, or something like that. At the bank she did women's work in an era when the men were the executives, and took home the big paychecks. Then she came home and raised the kid and his sister.
Will the kid let the system put the modern day equivalent of his grandma in jail, or maybe he'll go after bigger fish. Depends on what kind of man he is, I guess.
Thursday, October 14, 2010
Technically Accurate Comment on Mortgage-Gate
The amount of confusion, posturing and excitement over recent developments on the foreclosure front, and the implications, plausible and impausible of it, is something else. One good thing about it--the rise of the robo-signers has purged the idea of ruthless defaulters from the public vocabulary--although I'm a bit perplexed at the attempted canonization of deadbeat borrowers.
Here is a stab at what all this means and doesn't mean.
Overstatement No. 1. This does not impact the title of every piece of residential real estate that was purchased or refinanced since the turn of the century. Real property is conveyed by deed, and the deed is recorded in the the jurisdiction where the property is located. If the transfer involved borrowing money (a note and a mortgage), a sensible noteholder will also record the mortgage in the same jurisdiction to create a perfected security. Once the security interest is perfected (or filed) it is a matter of public record and anyone who proposes to acquire the property (or lend money against it) does so with knowledge of the pre-existing loan.
But, unless the borrower defaults and we have a--bingo--foreclosure, the mere existence of the perfected security interest doesn't transfer the property to anybody (there is a slight qualification of this in jurisdictions like Texas where deeds in lieu are closing documents, but this is the general rule). The deed, from current owner to the acquiring owner, is the document that transfers title.
There is a mess here, all right. But it doesn't impact every property that has been financed or refinanced since mortgage backed securities came into existence.
Overstatement No. 2. Everybody who has bought a mortgage backed security that went from triple A to junk can put their bad paper back to the deal sponsors because the trust wasn't funded, the conduit tax status has been broken, and the prospectus was full of lies and omissions.
By and large these trusts are instruments of and governed by New York law, not the law of the jurisdictions in which the properties securing the notes are found. The one trust document that I've read clearly contemplated a bulk assignment in blank of all MERS eligible mortgages. Without ever reaching the question of whether a bulk assignment in blank of promissory notes and mortgages is any good in most jurisdictions (it probably is not), it most certainly satisfied the requirements of the trust instrument. Why New York law would disregard the language of the trust instrument isn't clear to me. And if the trust was funded as contemplated by the trust certificate, the likelihood of the IRS coming in to challenge the conduit tax treatment of the vehicle is slim to none. If, as I'm sure happened, the IRS issued revenue rulings blessing standard industry practice, the chances of that goes to zero.
With the two overstatements out of the way, four things are pretty clear:
Problem No. 1. Systematic perjury and forgery seems to have become industry practice in dealing with documentation deficiencies. The judicial system very properly polices itself pretty strictly on this stuff. A price list for 'file recreation' and related services is making the rounds. Finding a euphemism for forgery doesn't make it any less objectionable. I've never met a judge who was in the least bit impressed with the 'we do this all the time' explanation (that excuse being considered an aggravating rather than an ameliorating circumstance). In view of how widespread the activity was, current efforts by industry apologists to minimize the involvement of more senior management in these practices merely makes out a prima facie case for their failure to supervise or take reasonable steps to insure compliance with applicable law.
Problem No. 2. Servicers and trustees are under a fiduciary duty to the owners of the MBS issued by the trusts to rectify the consequences of past sloppy practices and negligence. Without spending some time under the hood it is a little difficult to say just how that plays out. But it is quite likely that a too big too fail bank is on too many sides of the problem to be in a position to deal with the conflicts of interest and fiduciary duties of a trustee and servicer. This is a structural problem with the way the originate to distribute system of financing residential real estate has developed.
Problem No. 3. From what has surfaced so far, there are quite likely some serious issues with the way in which the results third party due diligence on the loan portfolios was disclosed in the offering materials. This is currently being posed an an information asymmetry between deal sponsors and investors, and maybe in an era so tolerant of proprietary trading that's a way of explaining it. But, on a more basic level, if the fail rates on portfolio samples are anything like what has been reported, there is some question why the pools were ever securitized in the first place. If one assumes that the samples accurately reflected the composition of the loan portfolios, any claim that the mortgages in the pools had been underwritten in compliance with anyone's standards seems a stretch. This is the stuff of years and years of securities litigation.
Problem No. 4. The process of foreclosure just got a lot more expensive, in terms of time, money, management attention, etc. The fact that the notes weren't properly transferred in accordance with the law of the jurisdiction in which the foreclosure is occuring (even if New York law was satisfied), doesn't mean the debt goes away, or that there is not a valid security interest in the mortgage. It just means an added step of determining the record owner and bringing it (or its successor in interest, if it is defunct) into the proceeding.
And the interplay between this and the prior pattern of perjury and forgery will exacerbate the whole situation.
And that's the state of play today. We'll see about tomorrow.
Here is a stab at what all this means and doesn't mean.
Overstatement No. 1. This does not impact the title of every piece of residential real estate that was purchased or refinanced since the turn of the century. Real property is conveyed by deed, and the deed is recorded in the the jurisdiction where the property is located. If the transfer involved borrowing money (a note and a mortgage), a sensible noteholder will also record the mortgage in the same jurisdiction to create a perfected security. Once the security interest is perfected (or filed) it is a matter of public record and anyone who proposes to acquire the property (or lend money against it) does so with knowledge of the pre-existing loan.
But, unless the borrower defaults and we have a--bingo--foreclosure, the mere existence of the perfected security interest doesn't transfer the property to anybody (there is a slight qualification of this in jurisdictions like Texas where deeds in lieu are closing documents, but this is the general rule). The deed, from current owner to the acquiring owner, is the document that transfers title.
There is a mess here, all right. But it doesn't impact every property that has been financed or refinanced since mortgage backed securities came into existence.
Overstatement No. 2. Everybody who has bought a mortgage backed security that went from triple A to junk can put their bad paper back to the deal sponsors because the trust wasn't funded, the conduit tax status has been broken, and the prospectus was full of lies and omissions.
By and large these trusts are instruments of and governed by New York law, not the law of the jurisdictions in which the properties securing the notes are found. The one trust document that I've read clearly contemplated a bulk assignment in blank of all MERS eligible mortgages. Without ever reaching the question of whether a bulk assignment in blank of promissory notes and mortgages is any good in most jurisdictions (it probably is not), it most certainly satisfied the requirements of the trust instrument. Why New York law would disregard the language of the trust instrument isn't clear to me. And if the trust was funded as contemplated by the trust certificate, the likelihood of the IRS coming in to challenge the conduit tax treatment of the vehicle is slim to none. If, as I'm sure happened, the IRS issued revenue rulings blessing standard industry practice, the chances of that goes to zero.
With the two overstatements out of the way, four things are pretty clear:
Problem No. 1. Systematic perjury and forgery seems to have become industry practice in dealing with documentation deficiencies. The judicial system very properly polices itself pretty strictly on this stuff. A price list for 'file recreation' and related services is making the rounds. Finding a euphemism for forgery doesn't make it any less objectionable. I've never met a judge who was in the least bit impressed with the 'we do this all the time' explanation (that excuse being considered an aggravating rather than an ameliorating circumstance). In view of how widespread the activity was, current efforts by industry apologists to minimize the involvement of more senior management in these practices merely makes out a prima facie case for their failure to supervise or take reasonable steps to insure compliance with applicable law.
Problem No. 2. Servicers and trustees are under a fiduciary duty to the owners of the MBS issued by the trusts to rectify the consequences of past sloppy practices and negligence. Without spending some time under the hood it is a little difficult to say just how that plays out. But it is quite likely that a too big too fail bank is on too many sides of the problem to be in a position to deal with the conflicts of interest and fiduciary duties of a trustee and servicer. This is a structural problem with the way the originate to distribute system of financing residential real estate has developed.
Problem No. 3. From what has surfaced so far, there are quite likely some serious issues with the way in which the results third party due diligence on the loan portfolios was disclosed in the offering materials. This is currently being posed an an information asymmetry between deal sponsors and investors, and maybe in an era so tolerant of proprietary trading that's a way of explaining it. But, on a more basic level, if the fail rates on portfolio samples are anything like what has been reported, there is some question why the pools were ever securitized in the first place. If one assumes that the samples accurately reflected the composition of the loan portfolios, any claim that the mortgages in the pools had been underwritten in compliance with anyone's standards seems a stretch. This is the stuff of years and years of securities litigation.
Problem No. 4. The process of foreclosure just got a lot more expensive, in terms of time, money, management attention, etc. The fact that the notes weren't properly transferred in accordance with the law of the jurisdiction in which the foreclosure is occuring (even if New York law was satisfied), doesn't mean the debt goes away, or that there is not a valid security interest in the mortgage. It just means an added step of determining the record owner and bringing it (or its successor in interest, if it is defunct) into the proceeding.
And the interplay between this and the prior pattern of perjury and forgery will exacerbate the whole situation.
And that's the state of play today. We'll see about tomorrow.
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