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.
Saturday, October 16, 2010
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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