12
   

The real Foreclosure crisis has just begun.

 
 
DrewDad
 
  1  
Reply Tue 19 Oct, 2010 03:56 pm
@failures art,
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.
failures art
 
  3  
Reply Tue 19 Oct, 2010 04:06 pm
@DrewDad,
DrewDad wrote:

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.

Certainly speculation was a part of the game, but the idea was to find undervalue homes, and then invest money in house upgrades, then sell the home hoping to have improved the house's value greater than the cost to fix it.

People who did this were specifically purchasing houses to make profits. Sometimes multiple houses at once. Often the people would get home loans on houses that were far over their market and hope they could move it fast enough.

This might not be home ownership in a traditional sense, but in economic terms, it's a person buying a house either way.

A
R
T
realjohnboy
 
  1  
Reply Tue 19 Oct, 2010 04:11 pm
@DrewDad,
Duly noted, DrewDad.
I would introduce, as a big culprit, the Home Equity Loan (HEL).
Some of us participated -in our lives or in our parents' - the burning of the mortgage.
The HEL postponed that celebration as people cashed in on their houses' paper profits in order to buy stuff (or, less cynically, for needed education or medical expenses). That was fine as long as the value went up, but...
squinney
 
  1  
Reply Tue 19 Oct, 2010 05:57 pm
@realjohnboy,
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.

We know the real estate market is cyclical, and given time the market will go back up. It has to. We are much younger than other countries and at this time land is plentiful. That won't always be the case. Suburbs will continue to grow and cities will spread. Whoever owns the land, wins.
realjohnboy
 
  2  
Reply Tue 19 Oct, 2010 07:11 pm
@squinney,
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.
Thomas
 
  2  
Reply Tue 19 Oct, 2010 07:14 pm
@squinney,
squinney wrote:
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.

In the long term, the trouble with homes and land is urbanization. Over the last 100 years, for example, population density has declined on (I think) 97% of the United States' square mileage as people moved to the remaining three percent, the cities. So until this urbanization trend peters out---which it shows no signs of doing---real estate values in most American places will trend downward.
0 Replies
 
Cycloptichorn
 
  1  
Reply Tue 19 Oct, 2010 08:20 pm
@realjohnboy,
realjohnboy wrote:

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?


As a member of that very group, I can report that you are correct - at least that's been my experience. I know that I represent just a small part of our society, so I couldn't say as to the whole.

One of the biggest problems with the suburbs, is that you have to drive everywhere you go. If you live in an area where the weather sucks during a lot of the year, I can see how that would make more sense; but where the weather is nice, suburbs suck when compared to the city.

Quote:
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.


You don't have to apologize for that, RJB, just let the discussion go where it will. I'll keep dragging it back eventually.

Cycloptichorn
0 Replies
 
Cycloptichorn
 
  2  
Reply Tue 19 Oct, 2010 08:24 pm
@failures art,
Do you remember the late-night infomercials of the late 90's, or early 00's at all? They were PRIMARILY get-rich quick schemes fueled by 'no money down' mortgages. I used to see them on many channels, every night. The rise of the housing market, in my opinion, was in many ways due to a gigantic rise in speculative purchases of houses, and I've always wondered how many of them were inspired to do so by these crazy infomercials.

Cycloptichorn
0 Replies
 
Cycloptichorn
 
  1  
Reply Tue 19 Oct, 2010 08:33 pm
I really recommend reading this entire piece.

Quote:
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.)


http://rortybomb.wordpress.com/2010/10/11/foreclosure-fraud-for-dummies-3-why-are-servicers-so-bad-at-their-job/

Cycloptichorn
0 Replies
 
Cycloptichorn
 
  1  
Reply Wed 20 Oct, 2010 11:21 am
Here's a more in-depth article on the decision to sue BofA -

Quote:
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



URL: http://www.cnbc.com/id/39745128/

BofA's insistence that they can just wave their hands about and ignore this is a joke, and the markets know it. That's why their stock is 10% off in the last few days and is likely to keep falling.

Cycloptichorn
0 Replies
 
High Seas
 
  1  
Reply Wed 20 Oct, 2010 11:44 am
@squinney,
squinney wrote:

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

That's a very common misunderstanding, due primarily to confusion between shifts in supply v. shifts in demand for housing. Details (bold added):
Quote:
...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.

http://baselinescenario.com/2010/10/18/finance-and-the-housing-bubble/

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.
Cycloptichorn
 
  2  
Reply Wed 20 Oct, 2010 11:53 am
@High Seas,
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
DrewDad
 
  1  
Reply Wed 20 Oct, 2010 11:58 am
@failures art,
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.
Cycloptichorn
 
  1  
Reply Wed 20 Oct, 2010 12:02 pm
@DrewDad,
DrewDad wrote:

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.


Well, we're really arguing a subjective definition here now, aren't we? Many of these 'flippers' bought the houses to LIVE in for a few years, at which point they would sell off (when the market had risen). This actually worked for some people for about 5 years or so.

Cycloptichorn
DrewDad
 
  1  
Reply Wed 20 Oct, 2010 12:07 pm
@Cycloptichorn,
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.)
Cycloptichorn
 
  2  
Reply Wed 20 Oct, 2010 12:24 pm
@DrewDad,
DrewDad wrote:

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.)


Oh, I think it was a definite driver of the market and one of the causes of the crisis. Those people who were 'qualifying' for loans they couldn't afford were in many times doing so on investment properties. They inevitably turned around and listed these houses at higher rates (after some nominal repairs), which drove up the average rate that houses were going for by a considerable amount. This lead to more and more people taking out loans they couldn't really afford as prices went up...

Cycloptichorn
High Seas
 
  1  
Reply Wed 20 Oct, 2010 12:29 pm
@Cycloptichorn,
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).
Cycloptichorn
 
  1  
Reply Wed 20 Oct, 2010 12:58 pm
@High Seas,
High Seas wrote:

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).


I shudder to think what the implications of our four biggest banks all going through Bankruptcy (as well as MANY smaller ones) at the same time would be; surely you don't suggest that there wouldn't be some pretty negative ramifications to that?

Cycloptichorn
High Seas
 
  1  
Reply Wed 20 Oct, 2010 01:02 pm
@Cycloptichorn,
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.
Cycloptichorn
 
  1  
Reply Wed 20 Oct, 2010 01:05 pm
@High Seas,
High Seas wrote:

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.


Yes, and I support that - whole-heartedly - but I don't see how it is going to resolve the current lawsuits.

Cycloptichorn
0 Replies
 
 

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