The real Foreclosure crisis has just begun.

DrewDad wrote:

And I don't think I've seen anyone give advice to the effect that one should buy a home just to make money on it.

This part you'll just have to trust me on. These people do exist. The whole house flipping trend was a part of this philosophy. Lots of people prior to the bust bought houses with no intention on living in them.

failures art wrote:

DrewDad wrote:

And I don't think I've seen anyone give advice to the effect that one should buy a home just to make money on it.

This part you'll just have to trust me on. These people do exist. The whole house flipping trend was a part of this philosophy. Lots of people prior to the bust bought houses with no intention on living in them.

That's not home ownership; that's real estate speculation. And let's not get the two confused.

Suburbs will continue to grow and cities will spread. Whoever owns the land, wins.

I have always been of the understanding that homeownership / land is the only safe long term investment. I think that is true even with todays housing market. It isn't as if over the long term land is ever going to be worthless, save a disaster or the whole thing becomes a sink hole.

squinney wrote:

Suburbs will continue to grow and cities will spread. Whoever owns the land, wins.

I am not sure that I would agree with that statement, Squinney. I wonder if someone of Failure Art's generation (for example) aspires to get a house in the suburbs with a big lawn, picket fence and a long commute. Would they perhaps instead desire the vibrancy of an urban environment that they are accustomed to?

I would make the same argument regarding retirees looking for access to amenities located in the urban core.
I concede that I have biases against sprawl and am in favor of concentrating population growth in the urban area.
I realize we are drifting from Cyclops' original topic. Sorry about that. I will try to get back at some point.

Foreclosure Fraud For Dummies, 3: Why Are Servicers So Bad At Their Job?
Posted in Uncategorized by Mike on October 11, 2010

Whenever I hear about how there wouldn’t be a problem with foreclosures if people just paid their mortgages on time, I’m reminded of Alan Grayson’s paraphrase of the Republican Health Care Plan: “Don’t Get Sick. If You Get Sick, Die Quickly.” Yes, the world would be an easier place if people never got sick, or credit risk didn’t exist, and people made payments perfectly all the time. But they don’t, and we need a system of rules and a process for collecting and presenting evidence in order to kick a family out of their home. And we need a system where this process sets the ground rules that in turn allow for lenders and borrowers coming together and negotiating a situation that is best for both of them.

Because the first rule of mortgage lending is that you don’t foreclose. And the second rule of mortgage lending is that you don’t foreclose. I’ll let Lewis Ranieri, who created the mortgage-backed security in the 1980s, tell you: “The cardinal principle in the mortgage crisis is a very old one. You are almost always better off restructuring a loan in a crisis with a borrower than going to a foreclosure. In the past that was never at issue because the loan was always in the hands of someone acting as a fudiciary. The bank, or someone like a bank owned them, and they always exercised their best judgement and their interest. The problem now with the size of securitization and so many loans are not in the hands of a portfolio lender but in a security where structurally nobody is acting as the fiduciary.”

In the past you had Jimmy Stewart banks. The mortgages were kept on the books of the bank. You had someone who you could go to and renegotiate your mortgage. With mortgage-backed securities, the handling of payments and working-out of troubles moved to servicers. If you are learning about this crisis for the first time, understanding what is broken here is very important.

This is Not a New Problem With Servicing

Let’s get some quotes from bankruptcy judges in here:

“Fairbanks, in a shocking display of corporate irresponsibility, repeatedly fabricated the amount of the Debtor’s obligation to it out of thin air.” 53 Maxwell v. Fairbanks Capital Corp. (In re Maxwell), 281 B.R. 101, 114 (Bankr. D. Mass. 2002).

“[t]he poor quality of papers filed by Fleet to support its claim is a sad commentary on the record keeping of a large financial institution. Unfortunately, it is typical of record-keeping products generated by lenders and loan servicers in court proceedings.” In re Wines, 239 B.R. 703, 709 (Bankr. D.N.J. 1999).

“Is it too much to ask a consumer mortgage lender to provide the debtor with a clear and unambiguous statement of the debtor’s default prior to foreclosing on the debtor’s house?” In re Thompson, 350 B.R. 842, 844–45 (Bankr. E.D. Wis. 2006).

(Source has links - Cyclo.) Notice that consumer rights groups were flagging this as a major problem back in 1999 and 2002 because judges were noticing it was a major problem in their bankruptcy courts. If the late 1990s to 2006 period is a Renaissance period of servicer fraud then we can contrast it with the period we live in now, the Baroque period of servicer fraud. Whatever unity there used to be between the forms and functions of the sloppy documentation and outright fraud in the art of servicing have become detached.

The forms of fraud have gone high art: serving documents on people who could never have been served, signing 10,000 affidavits a month, etc. They are all well covered, and we’ll list more later perhaps. Here are some of my favorites from last year, the reading list in Part One has even more. But what I want to focus on is the function of servicer fraud.

What Do Servicers Do? A Case Study in Bad Design and Worse Incentives

Servicers in a mortgage-backed security have two businesses. The first is transaction processing. This means taking in your mortgage money on one end and walking it over to the crazy tranches and payment waterfalls on the other end. This is clean, efficient, largely automated, requires little discretion and works very well, and implicit in it is that it is most profitable when you can harness economies of scale.

It’s considered a “passive entity” in fact, so there are no taxes applied in this passthrough mechanism. If servicers went “active”, say by looking for mortgage notes not in the trust 90 days after the fact or mortgage notes that are not in the trust that have defaulted, which is what they’d likely have to do to get out of this foreclosure fraud crisis, they’d face very severe tax penalties.

Their other business is to handle default situations. In addition to the fixed fee they get for servicing each individual mortgage they get paid from default fees like late charges. They get to retain most, if not all, of these fees.

So right away they have an incentive to not find ways to negotiate to get a mortgage to a good state. They also have a strong incentive to keep a steady stream of fees and charges going to their books rather than to investors. So anything that puts servicers in charge of negotiating mortgages, say the Obama’s administration’s HAMP program, is designed to fail.

Because even without bad incentives, doing good work on modification is costly, time consuming, requires individual expertise and experience and doesn’t benefit from automation or economies of scale. Which is to say it is the opposite structure of their normal business.

And there are additional worries. Many of the servicers work for the largest four banks – Wells Fargo, Bank of America, Citi, and JP Morgan – and these four banks have large exposures to junior liens. These are second or third mortgages or home equity lines of credit that would have to be wiped out before the first mortgage can be modified. The four banks have almost half a trillion dollars worth of these exposures and, from the stress test, are valuing them at something like 85 cents on the dollar. Keeping a homeowner struggling to pay the second lien would be more worthwhile to these middlemen banks than getting him or her into a solid first lien to the benefit of the bond investor.

So keep these in mind as you read about the servicers here. There have been worries that they, as a designed institution, were simply not qualified for this job going back a decade. They have massive conflicts with the investors they are supposed to be working for. They profit when homeowners collapse and lose money when they are brought up to a normal payment schedule (made current). And if the instruments don’t have the notes necessary to bring standing to carry out the foreclosures they have to take a massive tax hit in order to take the note into the trust. And regulation to handle this isn’t in place.

No Regulator

Because for all the talks of regulatory burden, there is no current federal government agency that regulates the servicers. Not the Federal Reserve. Not the Treasury. This is what happens when the financial industry writes the deregulation. Instead you have a patchwork of state regulators and attorney generals. Notice how President Obama has nobody to turn to and tell the press that “So and So is on the case.” In theory the OCC regulates servicers if they are part of a bank or a thrift. This must fall to the new regulatory counsel and the Consumer Financial Protection Bureau to investigate, where it will properly belong.

(The Fair Debt Collections Act, which applies to debt collectors, doesn’t apply to servicers. Here might be a fun idea for an enterprising staffer – if there is no note producible, are servicers still legally servicers and thus exempt from the Fair Debt Collections Act? Just a thought….)

Is it any wonder that servicers are rushing these foreclosures and making a mockery of the courts and producing systemic risk in the process? There needs to be an investigation of what is being done and why, because this problem is not taking care of itself.

(Special thanks to Katie Porter and Adam Levitin, who you can read at credit slips, as well as Tom Adams and Yves Smith, who you can read at naked capitalism, for in-depth discussions on this material.)

NY Fed, 8 Firms Threaten BofA Over Mortgage Securities
CNBC.com
| 19 Oct 2010 | 05:09 PM ET

The New York Federal Reserve Bank is part of a consortium of eight large institutional investment firms that is demanding that Bank of America repurchase loans included in mortgage securities.

Bloomberg reported earlier Tuesday that the New York Fed had joined with the Pacific Investment Management Company, better known as Pimco, and investment management firm BlackRock in an attempt to force BofA to buy back $47 billion in mortgage bonds.

Kathy Patrick, lead attorney for the consortium, confirmed in a statement Tuesday that the group holds more than 25 percent of the voting rights in more than $47 billion worth of Bank of America securities.

Pimco and BlackRock had no comment when contacted by CNBC.

Shares of Bank of America , a component of the Dow Jones Industrial Average , were more than 4 percent lower Tuesday.

A law firm on Tuesday sent a notice alleging failures by Countrywide Financial to properly service loans that were part of certain mortgage-backed securities. Countrywide was acquired by Bank of America in 2008.

"We want to enforce the holders' contract rights," Kathy Patrick, the lead attorney representing the bond holders, told CNBC. "Today's action begins the clock ticking ... If these issues of non-performance are not addressed and cured, then our clients will be able to enforce their rights in court."

"There were representations made to my bond holders when they purchased these securities. They are contractual representations about the credit quality of these mortgages...and my clients are concerned," Patrick added, "that the mortgages in question did not, at the time they were securitized, conform to those representations."

Bank of America issued a response late Tuesday saying, "We're not responsible for the poor performance of loans as a result of a bad economy. We don't believe we've breached our obligations as servicer. We will examine every avenue to vigorously defend ourselves."

Patrick, an attorney with the Houston-based law firm of Gibbs Brun, also told CNBC her clients may consider asking other banks to repurchase bad mortgages.

"The group of holders (she represents) hold securities other than just the Countrywide mortgages and will invoke their rights across the board where is makes sense for them to do it," she said.

Patrick also said the RMBS trustee, Bank of NY Mellon, could be exposed to liability as the law firm had sent a letter to BNY Mellon this summer, asking it to investigate Countrywide.

A person close to BNY Mellon confirmed the receipt of the letter and the banks decision not to investigate, saying the letter did not comply with a wide array of criteria set out in the pooling and servicing agreement for the RMBS that would require the trustee to undertake an investigation.

The New York Fed has an interest in the mortgage securities by virtue of the Maiden Lane Partnerships, which the reserve bank set up in 2008 as a financial vehicle to manage transactions involving Bear Stearns and AIG .

Notably, Bank of America owns 34 percent of BlackRock .

- CNBC's Mary Thompson contributed to this report.

© 2010 CNBC.com

I have always been of the understanding that homeownership / land is the only safe long term investment.

...the motive force behind the credit bubble was an oversupply of housing finance—in other words, the big, bad, banking industry. ... key evidence is that the price of residential mortgage debt was falling in 2004-06 even as the volume of such debt was rising.... that can only happen if the supply curve is shifting outward, not if the demand curve is shifting outward (which is what would happen if it were all the fault of greedy borrowers who wanted to flip houses).

This oversupply of housing finance happened because of banks’ desire to keep the securitization pipeline flowing after the 2001-03 refinancing wave tapered off. Private mortgage-backed securities were their preferred instrument because they are both complex and heterogeneous: complexity means they are impossible to price based on fundamentals, and heterogeneity means that comparing prices between private MBS is meaningless or misleading.

There's worse news: a third round of bank bailouts will be required if these mortgage-related assets are marked down to their true value.

Yes, I understand what flipping a house is.

But that is still different from home ownership.

Home ownership is buying a house and living in it for a long time.

You're still describing real estate speculation, not home ownership.

But if you're buying the house with a plan to renovate and re-sell it, it's still real estate speculation.

That wasn't the cause of the mortgage crisis. The cause of the mortgage crisis was unscrupulous lenders getting more and more people to "qualify" for loans that they couldn't afford. (Especially with ARMs. They could afford the first few years, but as soon as the rate was adjusted, they couldn't afford it anymore.)

Quote:

There's worse news: a third round of bank bailouts will be required if these mortgage-related assets are marked down to their true value.

Yup, and that's the crux of the problem: the banks and servicers really are screwed here by the paperwork issue, but can't possibly afford to pay. There will have to be a legislative solution.

Cycloptichorn wrote:

Quote:

There's worse news: a third round of bank bailouts will be required if these mortgage-related assets are marked down to their true value.

Yup, and that's the crux of the problem: the banks and servicers really are screwed here by the paperwork issue, but can't possibly afford to pay. There will have to be a legislative solution.

You may know I'm a great supporter of the solutions advocated by Paul Volcker (his "rule" sadly didn't make it into the latest finance reform legislation) and of Elizabeth Warren, who supports applying the existing legal framework. New legislation isn't needed, bankruptcy law works fine:
http://able2know.org/topic/161537-1 has details on Prof. Warren (kindly disregard thread title, written by person who doesn't know the subject).

No, Prof. Warren isn't advocating an immediate bankruptcy filing by the TBTFs (too-big-to-fail). The "Volcker rule" for anyone unfamiliar involves separating commercial banking (subject to already existing regulation) from the TBTF banks' "hedge fund"-type units. I'll be back with details later.