It demonstrates that the bubble was a supply-side phenomenon, attributable to an excess of mispriced mortgage finance: mortgage finance spreads declined and volume increased, even as risk increased, a confluence attributable only to an oversupply of mortgage finance
The issue a week or three ago was "robo-signing." Banks, before going the foreclosure route, certified that the file had been completely reviewed by a real person. Instead, it seems, files with missing data were signed off on with little review. There were some horrific stories about the results. Attorney General's in (I think) all 50 states + D.C. forced lenders to stop foreclosures. But they have now resumed.
I am certainly not suggesting that the banks should get off the hook for their sloppiness. I do think that halting foreclosures is a disruption to the evolutionary process needed to deflate the bubble in housing prices.
October 22, 2010
Big Problem for Banks: Due Process
By JOE NOCERA
Earlier this week, Bank of America, the nation’s largest consumer bank, reported its third-quarter earnings. It was a very good quarter; putting aside an accounting charge — a very large, $10.4 billion accounting charge, admittedly — the bank reported $3.1 billion in profits. It was the third consecutive quarter that Bank of America had earned more than $3 billion.
During the ensuing conference call Tuesday morning, there was the requisite chest-thumping from Brian Moynihan, the chief executive, and Chuck Noski, the chief financial officer. But there was also something else: tough talk about two big legal problems the bank faces as a result of the subprime bubble. Not surprising, it was the latter that caught my attention.
Like everyone else, I’d been reading with amazement the stories about one of those legal problems: the robo-signing scandal that has ensnared all the banks with mortgage servicing subsidiaries, Bank of America included. That’s the scandal in which a tiny handful of employees had signed — or allowed others to forge their signatures — on thousands of affidavits confirming that the banks had the legal right to foreclose on properties they serviced. In truth, they had often never seen the documents proving the bank had that legal right. In some cases, the documents didn’t even exist. As a result of the mounting publicity, many big banks had halted all foreclosures while they reviewed the legality of their affidavits.
Mr. Moynihan said that, at Bank of America, at least, the foreclosure halt in 23 states that require judicial proceedings was over. It had reviewed some 102,000 affidavits and — guess what? — no big problem! “The teams reviewing data have not found information which was inaccurate” or that would change the plain facts of foreclosure — namely that the homeowners it wanted to foreclose on were in serious arrears.
Thus the bank’s central position is that, since it is so doggone obvious that the homeowners can’t pay their mortgages, the fact that the affidavits might not have complied with the law shouldn’t cause anyone to break into a sweat. At one point Mr. Noski actually said, “I think it’s a big issue because people are losing homes. It’s not a big issue” for the servicers. Glad he cleared that up.
The prospect of a second legal assault is more recent. Shortly before the earnings call, Bank of America received a letter from a lawyer representing eight powerful institutional investors, including BlackRock, Pimco and — most amazing of all — the New York Federal Reserve. The letter was a not-so-veiled threat to sue the bank unless it agrees to buy back billions of dollars worth of loans that are in securitized mortgage bonds the investors own.
Mainly, they are saying that Bank of America was servicing loans in these bonds that the bank knew violated the underwriting standards that the investors had been led to believe the bank was conforming to. What’s more, they said, the bank had never come clean about all the bad loans, as it was required to do. Therefore, say the investors, the bank has a contractual obligation to buy back the bad loans.
During the conference call, Mr. Moynihan and Mr. Noski made it clear that Bank of America was going to use hand-to-hand combat to fight back these claims. “We’re protecting the shareholders’ money,” Mr. Moynihan said. Mr. Noski questioned whether the investors even had the right to bring the case. “We continue to review and assess the letter and have a number of questions about its content including whether these investors actually have standing to bring these claims,” he said.
So there you have it. Having convinced millions of Americans to buy homes they couldn’t afford, Bank of America is now revving up its foreclosure efforts on these same homeowners. At the same time, having sold tens of thousands of these same terrible loans to investors, it is going to spend tens of millions of dollars on lawyers to keep from having to buy back their junky loans.
Apparently, being the biggest bank in the country means never having to say you’re sorry.
In truth, it’s not really Bank of America itself that persuaded so many people to borrow beyond their means and then sold those terrible loans to investors. It was Countrywide, which Bank of America purchased in July 2008, by which time the company was on the verge of collapse because of all the corrosive subprime loans it had made.
Before the acquisition, Bank of America was already one of the biggest servicers of mortgages. After the acquisition, it was gargantuan. From a standing start in 1968, Countrywide had become — by far — the No. 1 mortgage originator in the country, and the No. 1 servicer as well.
But during the subprime bubble, it had debased itself to maintain that No. 1 position, becoming a hotbed of fraud and predatory lending. Take, for instance, the facts that have been revealed in a lawsuit filed against Countrywide by the Mortgage Guaranty Insurance Corporation, which insured many of Countrywide’s loans. Mortgage Guaranty investigators tracked down some of the people who had gotten subprime mortgages from Countrywide. What they discovered was startling.
A loan for $360,000 went to a Chicago woman who supposedly earned $6,833 a month at an auto body shop. In truth she was a part-time housekeeper who was posing as the buyer to help her sister. The Countrywide loan officer not only knew these facts, she came up with the idea of having the borrower pretend to work at the auto body shop.
The lawsuit uncovered a raft of similar examples — case after case where the loan officers not only knew that fraud was being committed, but were actively engaged in committing it. “By about 2006,” says the lawsuit, “Countrywide’s internal risk assessors knew that in a substantial number of its stated-income loans — fully a third — borrowers overstated income by more than 50 percent.” And that is just one small subset of what went on at Countrywide. The truth is, any rock you turn over in the Countrywide subprime portfolio, something slimy is going to emerge.
That’s why most people, myself included, have no sympathy for Bank of America’s legal predicament — and no patience for its “we’re not the bad guys here” arguments. It is absolutely true that the homeowners that Bank of America wants to foreclose on are in default on loans they should never have gotten in the first place. (Gee, whose fault was that?) But it simply does not follow that the bank therefore has an absolute right to take back the home. Under the law, it has to prove it has that right — by filing documents that show that the owner of the mortgage has conveyed that right to it. That’s why this affidavit scandal isn’t some legal nicety. It’s about the single most important value of American jurisprudence: due process.
“Just because the homeowner hasn’t paid his mortgage doesn’t mean anybody in the world can kick him out,” said Katherine Porter, a visiting law professor at Harvard. “The bank has to have the standing to do that.” She added that the bank’s argument was a little like saying that someone who committed a crime shouldn’t receive a trial because he’s so obviously guilty. America just isn’t supposed to work that way.
That’s also why the bank’s contention that the foreclosure scandal will soon be behind it is unlikely to hold true. Peter Ticktin, a Florida lawyer who represents some 3,000 homeowners, told me that he did not believe it was possible for Bank of America to have properly vetted those 102,000 affidavits in a matter of weeks.
“My hat is off to them for doing the impossible,” he said, his voice dripping with sarcasm. “They figured out how to take a massive amount of perjured affidavits and turn them into real ones without robo-signers.” Mr. Ticktin said he had every intention of continuing to challenge Bank of America foreclosures. Most other lawyers specializing in these cases plan to do likewise. The affidavit scandal isn’t over yet, no matter how much Mr. Moynihan might wish it to be so.
As for the potential lawsuit with BlackRock and the New York Fed, the week before the investors sent the letter to Bank of America, three Countrywide executives, including former C.E.O. Angelo Mozilo, settled charges brought by the S.E.C. that they had engaged in fraudulent conduct. Internal Countrywide e-mail clearly show that they knew how dangerous their lending had become. Once the loans were sold to Wall Street — which, I should note, aggressively pushed the subprime companies to lower their standards — they went through a due diligence process that investors never knew about. Banks took advantage of investors every bit as much as they took advantage of home buyers.
And it would be nice, if just once, they would admit it. Instead, we get Mr. Noski, the chief financial officer, promising that the bank will fight these cases to the death because they’re looking out for shareholders. It’s appalling, really.
I admit it: I want to see the banks feel some pain. Most people do, I think. Banks did terrible things during the subprime bubble, and they still haven’t paid any real price. I find myself rooting for judges to rule against banks in foreclosure cases. I would love to see these big investors put the serious hurt on Bank of America, which will encourage other investors to pile on. I know this colors my thinking. I can’t help it.
Yet I also know the flip side. If the foreclosure lawyers start winning a lot of cases, if judges halt foreclosures on a widespread basis, if investors start to extract billions upon billions of dollars from the banks — and if banks become seriously weakened as a result — we’ll be right back where we were two years ago. The banks will need to be saved for the good of the economy. The taxpayers will have to come to the rescue. That’s an appalling prospect too.
Banks: We can’t live with them, and we can’t live without them. It stinks, doesn’t it?
I suspect, and he alludes to this, that while many feel that the banks are getting what they deserve, we could end up right back where we were a couple of years ago with the taxpayer having to step in. I fear that that could be true. It is important that the shareholders take the 1st hit.
Some judges chastise banks over foreclosure paperwork
By Ariana Eunjung Cha
Washington Post Staff Writer
Tuesday, November 9, 2010; 12:07 AM
EAST PATCHOGUE, N.Y. - A year ago, Long Island Judge Jeffrey Spinner concluded that a mortgage company's paperwork in a foreclosure case was so flawed and its behavior in negotiations with the borrower so "repugnant" that he erased the family's $292,500 debt and gave the house back for free.
The judgment in favor of the homeowner, Diane Yano-Horoski, which is being appealed, has alarmed the nation's biggest lenders, who say it could establish a dramatic new legal precedent and roil the nation's foreclosure system.
It is not the only case that has big banks worried. Spinner and some of colleagues in the New York City area estimate they are dismissing 20 to 50 percent of foreclosure cases on the basis of sloppy or fraudulent paperwork filed by lenders.
Their decisions illustrate the central role lower court judges will have in resolving the country's foreclosure debacle. The mess came to light after lawsuits and media reports showed lenders were routinely filing shoddy or fraudulent papers to seize the homes of borrowers who had missed payments.
Justice for Some
Joseph E. Stiglitz
NEW YORK – The mortgage debacle in the United States has raised deep questions about “the rule of law,” the universally accepted hallmark of an advanced, civilized society. The rule of law is supposed to protect the weak against the strong, and ensure that everyone is treated fairly. In America in the wake of the sub-prime mortgage crisis, it has done neither.
Part of the rule of law is security of property rights – if you owe money on your house, for example, the bank can’t simply take it away without following the prescribed legal process. But in recent weeks and months, Americans have seen several instances in which individuals have been dispossessed of their houses even when they have no debts.
To some banks, this is just collateral damage: millions of Americans – in addition to the estimated four million in 2008 and 2009 – still have to be thrown out of their homes. Indeed, the pace of foreclosures would be set to increase – were it not for government intervention. The procedural shortcuts, incomplete documentation, and rampant fraud that accompanied banks’ rush to generate millions of bad loans during the housing bubble has, however, complicated the process of cleaning up the ensuing mess.
To many bankers, these are just details to be overlooked. Most people evicted from their homes have not been paying their mortgages, and, in most cases, those who are throwing them out have rightful claims. But Americans are not supposed to believe in justice on average. We don’t say that most people imprisoned for life committed a crime worthy of that sentence. The US justice system demands more, and we have imposed procedural safeguards to meet these demands.
But banks want to short-circuit these procedural safeguards. They should not be allowed to do so.
To some, all of this is reminiscent of what happened in Russia, where the rule of law – bankruptcy legislation in particular – was used as a legal mechanism to replace one group of owners with another. Courts were bought, documents forged, and the process went smoothly.
In America, the venality is at a higher level. It is not particular judges that are bought, but the laws themselves, through campaign contributions and lobbying, in what has come to be called “corruption, American-style.”
It was widely known that banks and mortgage companies were engaged in predatory lending practices, taking advantage of the least educated and most financially uninformed to make loans that maximized fees and imposed enormous risks on the borrowers. (To be fair, the banks tried to take advantage of the more financially sophisticated as well, as with securities created by Goldman Sachs that were designed to fail.) But banks used all their political muscle to stop states from enacting laws to curtail predatory lending.
When it became clear that people could not pay back what was owed, the rules of the game changed. Bankruptcy laws were amended to introduce a system of “partial indentured servitude.” An individual with, say, debts equal to 100% of his income could be forced to hand over to the bank 25% of his gross, pre-tax income for the rest of his life, because, the bank could add on, say, 30% interest each year to what a person owed. In the end, a mortgage holder would owe far more than the bank ever received, even though the debtor had worked, in effect, one-quarter time for the bank.
When this new bankruptcy law was passed, no one complained that it interfered with the sanctity of contracts: at the time borrowers incurred their debt, a more humane – and economically rational – bankruptcy law gave them a chance for a fresh start if the burden of debt repayment became too onerous.
That knowledge should have given lenders incentives to make loans only to those who could repay. But lenders perhaps knew that, with the Republicans in control of government, they could make bad loans and then change the law to ensure that they could squeeze the poor.
With one out of four mortgages in the US under water – more owed than the house is worth – there is a growing consensus that the only way to deal with the mess is to write down the value of the principal (what is owed). America has a special procedure for corporate bankruptcy, called Chapter 11, which allows a speedy restructuring by writing down debt, and converting some of it to equity.
It is important to keep enterprises alive as going concerns, in order to preserve jobs and growth. But it is also important to keep families and communities intact. So America needs a “homeowners’ Chapter 11.”
Lenders complain that such a law would violate their property rights. But almost all changes in laws and regulations benefit some at the expense of others. When the 2005 bankruptcy law was passed, lenders were the beneficiaries; they didn’t worry about how the law affected the rights of debtors.
Growing inequality, combined with a flawed system of campaign finance, risks turning America’s legal system into a travesty of justice. Some may still call it the “rule of law,” but it would not be a rule of law that protects the weak against the powerful. Rather, it would enable the powerful to exploit the weak.
In today’s America, the proud claim of “justice for all” is being replaced by the more modest claim of “justice for those who can afford it.” And the number of people who can afford it is rapidly diminishing.
Joseph E. Stiglitz, a Nobel laureate in economics, is University Professor at Columbia University. The paperback version of his latest book, Freefall: Free Markets and the Sinking of the Global Economy, with a new afterword, was published in October.
Copyright: Project Syndicate, 2010.
"Countrywide Routinely Failed to Send Key Docs to MBS Trustees"
Kate Berry of American Banker reports that B of A may have run into some new trouble regarding documentation that "could complicate attempts by the company to foreclose on soured loans" (via email from David Cay Johnston):
Countrywide Routinely Failed to Send Key Docs to MBS Trustees, B of A Employee Says, by Kate Berry, American Banker: Countrywide, the mortgage giant that's now part of Bank of America Corp., routinely didn't bother to transfer essential documents for loans sold to investors, an employee testified.
The testimony — which a New Jersey bankruptcy judge cited in dismissing a B of A claim against a debtor — could complicate attempts by the company to foreclose on soured loans that Countrywide originated...
The B of A employee's admission that the lender customarily held on to promissory notes could also undermine the industry's position that document transfers to securitization trusts are fundamentally sound.
O. Max Gardner, a North Carolina consumer bankruptcy lawyer who was not involved in the case, called the testimony "a major problem" for B of A, which acquired Countrywide ... in 2008. "These original notes were supposed to be transferred and delivered all the way up the line and for this witness to admit they were never transferred is pretty amazing," Gardner said. "I've never see this admitted anywhere." ...
Linda DeMartini, a supervisor and operational team leader in B of A's litigation management department, testified that "the original note never left the possession of Countrywide"... DeMartini "testified further that it was customary for Countrywide to maintain possession of the original note and related loan documents"...
Whether a servicer or investor has the standing to foreclose on a borrower has become a major issue... Adam Levitin, an associate law professor at Georgetown University, said in Congressional testimony Nov. 16 that ... "If the notes and mortgages were not transferred to the trust, then the trust lacks standing to foreclose"...
Sunday, November 21, 2010
Countrywide Admits to Not Conveying Notes to Mortgage Securitization Trusts
Testimony in a New Jersey bankruptcy court case provides proof of the scenario we’ve depicted on this blog since September, namely, that subprime originators, starting sometime in the 2004-2005 timeframe, if not earlier, stopped conveying note (the borrower IOU) to mortgage securitization trust as stipulated in the pooling and servicing agreement. Professor Adam Levitin in his testimony before the House Financial Services Committee last week described what the implications would be:
Quote:If mortgages were not properly transferred in the securitization process, then mortgage-backed securities would in fact not be backed by any mortgages whatsoever. The chain of title concerns stem from transactions that make assumptions about the resolution of unsettled law. If those legal issues are resolved differently, then there would be a failure of the transfer of mortgages into securitization trusts, which would cloud title to nearly every property in the United States and would create contract rescission/putback liabilities in the trillions of dollars, greatly exceeding the capital of the US’s major financial institutions….
Recently, arguments have been raised in foreclosure litigation about whether the notes and mortgages were in fact properly transferred to the securitization trusts. This is a critical issue because the trust has standing to foreclose if, and only if it is the mortgagee. If the notes and mortgages were not transferred to the trust, then the trust lacks standing to foreclose…
If the notes and mortgages were not properly transferred to the trusts, then the mortgage-backed securities that the investors’ purchased were in fact non-mortgage-backed securities. In such a case, investors would have a claim for the rescission of the MBS, meaning that the securitization would be unwound, with investors receiving back their original payments at par (possibly with interest at the judgment rate). Rescission would mean that the securitization sponsor would have the notes and mortgages on its books, meaning that the losses on the loans would be the securitization sponsor’s, not the MBS investors, and that the securitization sponsor would have to have risk-weighted capital for the mortgages. If this problem exists on a wide-scale, there is not the capital in the financial system to pay for the rescission claims; the rescission claims would be in the trillions of dollars, making the major banking institutions in the United States would be insolvent.
As we indicated back in September, it appeared that Countrywide, and likely many other subprime orignators quit conveying the notes to the securitization trusts sometime in the 2004-2005 time frame. Yet bizarrely, they did not change the pooling and servicing agreements to reflect what appears to be a change in industry practice. Our evidence of this change was strictly anecdotal; this bankruptcy court filing, posted at StopForeclosureFraud provides the first bit of concrete proof. The key section:
As to the location of the note, Ms. DeMartini testified that to her
knowledge, the original note never left the possession of Countrywide, and that
the original note appears to have been transferred to Countrywide’s foreclosure
unit, as evidenced by internal FedEx tracking numbers. She also confirmed
that the new allonge had not been attached or otherwise affIXed to the note.
She testified further that it was customary for Countrywide to maintain possession of
the original note and related loan documents.
This is significant for two reasons: first, it points to pattern and practice, and not a mere isolated lapse. Second, Countrywide, the largest subprime originator, reported in SEC filings that it securitized 96% of the loans it originated. So this activity cannot be defended by arguing that Countrywide retained notes because it was not on-selling them; the overwhelming majority of its mortgage notes clearly were intended to go to RMBS trusts, but it appears industry participants came to see it as too much bother to adhere to the commitments in their contracts.
As one hedge fund investor noted, “Whenever we’ve gotten into situations on the short side, no matter how bad we think it is, it always proven to be worse.” The mortgage securitization mess looks to be adhering to this script.
MERS: Stop Foreclosing in Our Name
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By Barry Ritholtz - February 17th, 2011, 6:05AM
Mortgage Electronic Registration Systems, aka MERS, finds itself in a bit of a pickle. The bank owned entity created to facilitate mass securitization and skip out on billions in local property filing fees, has sent a directive to its membership (See MERS: Foreclosure Processing and CRMS Scheduling).
In short, the memo states:
“In recent months legal challenges have arisen regarding alleged inadequacies and improprieties in the foreclosure process including allegations of insufficient or incorrect supporting documentation and challenges to the legal capacity of parties’ right to foreclose . . . MERS is planning to shortly announce a proposed amendment to Membership Rule 8. The proposed amendment will require Members to not foreclose in MERS’ name. Consistent with the Membership Rules there will be a 90-day comment period on the proposed Rule. During this period we request that Members do not commence foreclosures in MERS’ name.” (emphasis added)
Keep in mind, that MERS has always been a legal fiction, simultaneously principle and agent. The courts are increasingly recognizing this, and finding they do not have any standing to bring foreclosure actions.
Housing Wire sums up the increasing judicial and legal antagonism MERS is facing:
The drumbeat against MERS became louder last fall as robo-signing — the signing of foreclosure affidavits of indebtedness en masse, without proper review — surfaced. The robo-signing scandal caused several large servicers to temporarily halt foreclosures as they reviewed their procedures, and prompted an investigation of lenders and their servicing shops by all 50 attorneys general. A proposed settlement could involve some of the nation’s biggest servicers.
I expect we will continue to see a ongoing reduction in the role of MERS over the next several quarters.
What follows will either be its eventual dissolution, and replacement with a legal entity — or retroactive legislation making its reckless illegality somehow legal. Watch Congress closely for signs they are rolling over for this.>