foreclosure law

In the polarization of politics, parsing words of politicians has become a fine art form by opponents to score points as if the public has a mental scoreboard in their heads.

I’m drawing from memory here as most voters would on criticism tossed at House Speaker Nancy Pelosi and Senate

Banking chairman Chris Dodd.

After passage of the health reform legislation, Pelosi said we won’t know what’s in the law until it plays out in real time.

After the joint conference agreement on the pending financial reform package, Dodd said he hoped the new regulations would work.

That’s how I understood what they were trying to say.

The Republican attack machine framed it differently. They suggested Pelosi didn’t bother to read the health legislation. And Dodd was dabbling in some unproven experiment for heavy-handed governmental interference of the capitalist system.

Both pieces of legislation are 1,500 to more than 2,000 pages thick. Not in a million years am I so altruistic that I believe all 535 House and Senate members read every word of both legislative proposals.

Nor do I believe every subsection of each law will work as intended.

Laws are not set in concrete. They can be amended. They can be improved to meet the test of pragmatism. They can be dropped as failures. Awkwardly, it takes Congressional action to do that.

During the 1992 presidential campaign, the one proposal Ross Perot advocated I subscribed to was that each law passed by Congress have a two to five-year sunset clause to determine if it was working.

Now that’s a reasonable concept rather than the Republican battle cry to repeal the health reform law because they don’t like the one section, of hundreds, that mandates purchase of insurance coverage. Some opponents, such as former Alaska half-Gov. Sarah Palin, I presume would not settle for less than a repeal of the entire legislative act.

As for the financial reform legislation, no one other than a cheer-leading President Obama, who does not have a vote, is so bold as to predict passage, especially in the Senate.

What Dodd maybe was referring to as a “hope,” is based on what a battalion of lawyers will write as specific regulatory rules applying to each subsection of the massive legislation overhauling our financial industry how it conducts business.

How that plays out is anyone’s guess. Here are two analysis that may help in determining the prospective winners and losers.

What I object to is that the financial reform package exempted Fannie Mae and Freddie Mac which were instrumental in creating the housing market collapse.

The Congressional Budget Office says Fannie and Freddie will end up costing taxpayers more money than the historic bailout of the financial industry.

Congress voted in 2008 to effectively place the two mortgage giants in a federal receivership by taking over 80% of its paper holdings.

So far the tab stands at $145.9 billion, and it grows with every foreclosure of a three-bedroom home with a two-car garage. The CBO predicts that the final bill could reach $389 billion.

Rather than being in the lending business, Fannie and Freddie are just as active in the foreclosure end of it.

Every 90 seconds in the first quarter of this year the two giants foreclosed on a home they financed and guaranteed to pay back investors.

By the end of March they owned 163,828 foreclosed homes, about the same number of total households in Seattle.

“Our business is the American dream of home ownership,” Fannie Mae declared in its mission statement, and in 2001 the company set a target of helping to create six million new homeowners by 2014. The New York Times, reporting from Casa Grande, about an hour’s drive from Phoenix:

Fannie and Freddie increased American home ownership over the last half-century by persuading investors to provide money for mortgage loans. The sales pitch amounted to a money-back guarantee: If borrowers defaulted, the companies promised to repay the investors.

Rather than actually making loans, the two companies — Fannie older and larger, Freddie created to provide competition — bought loans from banks and other originators, providing money for more lending and helping to hold down interest rates.

They paid no heed to predator lenders requiring no money down, balloon payments nor financial statements

from new home buyers’ ability to pay.

The result is Fannie and Freddie today are the nation’s largest landlords.

The two companies together accounted for 17% of real estate sales in Arizona during the first four months of the year, almost three times their share of the market during the same period last year, according to an analysis by MDA DataQuick.

It costs the government about $10,000 to sell each foreclosed house and recoup less than 60% of what the homeowner failed to pay after a resale at deflated market values than the original mortgage purchase price.

Some sales are to investors who “flip” the houses for quick profits after the government repaired interior damage and maintained its yards.

As to the maintenance costs, just the cost of contracting mowing an empty foreclosed property costs $80 per month. The Times:

That’s a monthly grass bill of more than $10 million.

All told, the companies spent more than $1 billion on upkeep last year.

To ensure more new homeowners buy the foreclosures, Fannie and Freddie agreed to sell to nonprofits using taxpayer grants from the federal Neighborhood Stabilization Program.

Chicanos por la Causa, which won $137 million under the program in partnership with nonprofits in eight other states, plans to buy more than 200 homes in Phoenix in the next two years. It plans to renovate them to sell to local families.

Another gimmick:

Fannie Mae last summer announced that it would give people seeking homes a “first look” by not accepting offers from investors in the first 15 days that a property is on the market. It also offers to help buyers with closing costs, and prohibits buyers from reselling properties at a profit for 90 days, to discourage speculation. Fannie Mae said that 68.4% of buyers this year had certified that they would use the house as a primary residence.

Fannie Mae and Freddie Mac is our problem because Congress bought them for us without our asking.

Cross posted on

I’m not quite certain how to calibrate journalism American Banker style, but I found this article, “Challenges to Foreclosure Docs Reach a Fever Pitch,” (sadly, subscription only, e-mailed by Chris Whalen), to be both interesting and more than a tad disingenuous.

The spin starts with the headline, it’s a doozy. The “challenge to foreclosure documents” message persists throughout the article, and it’s perilously close to a misrepresentation:

Because the notes were often sold and resold during the boom years, many financial companies lost track of the documents. Now, legal officials are accusing companies of forging the documents needed to reclaim the properties.

On Monday, the Florida Attorney General’s Office said it was investigating the use of “bogus assignment” documents by Lender Processing Services Inc. and its former parent, Fidelity National Financial Inc. And last week a federal judge in Florida ordered a hearing to determine whether M&T Bank Corp. should be charged with fraud after it changed the assignment of a mortgage note for one borrower three separate times…

In many cases, [plaintiff attorney] Kowalski said, it has become impossible to establish when a mortgage was sold, and to whom, so the servicers are trying to recreate the paperwork, right down to the stamps that financial companies use to verify when a note has changed hands…

In a notice on its website, the Florida attorney general said it is examining whether Docx, an Alpharetta, Ga., unit of Lender Processing Services, forged documents so foreclosures could be processed more quickly.

“These documents are used in court cases as ‘real’ documents of assignment and presented to the court as so, when it actually appears that they are fabricated in order to meet the demands of the institution that does not, in fact, have the necessary documentation to foreclose according to law,” the notice said..

Yves here. Let’s parse the two messages:

1. Note how the problem is presented as one of “documentation”, implying it is not substantive.

2. Because everyone knows mortgages were sold a lot, (which is clearly mentioned in the piece) the idea that some somehow went missing (or as the piece suggests, the “documentation” is missing even though the parties are presented as if they know who really owns the mortgage) is presented as something routine and not very alarming.

OK, let’s dig a little deeper. Even though the media refers to “mortgages”, under the law there are two pieces: the note, which is the indebtedness, and the mortgage (in some states, a “deed of trust”), which is the lien against the property. In 45 of 50 states, the mortgage follows the note (it is an “accessory”) and has no independent existence (as in you can’t enforce the mortgage if you don’t hold the note. You need to have both the note and the mortgage. This is a bit approximate, but will do for this discussion).

Now, the note is a bearer instrument if it is endorsed in blank (as in signed by current owner but not specifically made payable to the next owner, which was common for notes that were sold). It isn’t some damned “documentation”. Remember the days of bonds, when you had the real security, or stock certificates? This is paper with a hard monetary value, the face amount of the note (as long as it’s current, anyhow).

So now go back and look at that little extract. This “oh business was so busy we mislaid a lot of paper” isn’t some mere filing error. It’s like saying you left an envelopes full of cash in the subway on a regular basis. In the late 1960s back office crisis on Wall Street, when the volume of stock trading overwhelmed delivery and settlement infrastructure, a LOT of firms went out of business, in the midst of a bull market.

OK, now the second item with the article finesses is the sale of mortgages versus the role of the servicer. For the overwhelming majority of first mortgages, and I believe about 50% of second mortgages and HELOCs, the servicer is working for a trust that holds the notes pursuant to a securitization.

The standard documentation for a RMBS calls for the trust to gave a certification at closing that it has all the notes and it has to recertify that it has all the assets at two additional future dates, usually 90 days out and a full year after closing.

So this “notes were flyin’ around, yeah we lost track” is presumably impossible if we are discussing securitizations. Or put it another way: it means the fraud here is much more extensive than servicers making up documents ex post facto. It means the fraud extended back into how the securitization took place (as in what investors were told v. what actually happened).

And before you say these reports are exaggerated, my limited sample and my discussions with mortgage professional (not merely plaitiff’s attorneys but mortgage industry lifers) suggests the reverse.

But what about the second claim in the headline, that this activity has reached a “fever pitch”? Wellie, that’s a distortion too, perhaps to energize those who would be enraged by visions of deadbeat borrowers staying in houses due to fancy legal footwork. Trust me, there are FAR more overextended borrowers living in “free” housing due to banks slowing up the foreclosure process than due to legal battles.

First, the story is ONLY about Florida, despite the hyperventilating tone. And Florida is way ahead of other jurisdictions. There is a group of lawyers that are sharing G2 on these cases, and there are also a fair number of sympathetic judges. Note some states (Minnesota in particular) have both extremely pro bank laws and a business friendly bar. So it’s misleading to make sweeping generalizations; you need to get a bit more granular, which this article fails to do.

Second, the “fever pitch” headline also conveys the impression that this is an epidemic, ergo, these cases are widespread. While it is hard to be certain (this activity is by nature fragmented), at this point, that looks to be quite an exaggeration. The vast majority of borrowers, when the foreclosure process moves forward, don’t fight. They lack the energy and the resources. And when the borrower prevails, the case is typically dismissed “without prejudice”, meaning if the servicer and trustee get their act together, they can come back to court and try again.

Most of the battles against foreclosure appear to fall into one of two categories:

1. The borrower can afford the mortgage, but has fallen behind due to what he thinks is a servicing snafu. I can give you the long form, but the way servicers charge extra fees is in violation of Federal law and is designed to put the borrower on a treadmill of escalating fees. And they do not typically inform the borrower that fees have compounded until 6 or more months into the mess, and by that time, the arrearage can be $2000 or more. The borrower is unable to fix the servicing error, the fees continue to escalate, and the house goes into foreclosure.

2. The borrower has filed for a Chapter 13 bankruptcy, but the trustee is fighting the bankruptcy stay and trying to seize the house.

So why this alarmist American Banker article? Even if the numbers of successfully contested foreclosures are not (yet) large, the precedents being set are very detrimental to the foreclosure mills, the servicers, and the trustees. Moreover, the costs of fighting these cases can quickly exceed the value of the mortgage. So it would not take much of an increase in this trend to wreak havoc with servicer economics, and ultimately, the losses on the trust, particularly on prime mortgages, where the loss cushions were considerably smaller than on subprime.

I suspect the real reason for alarm isn’t the “fever pitch,” meaning the current level of activity. It’s that a state attorney general is throwing his weight against the servicers, and what he is uncovering is every bit as bad as what the critics have been saying for some time. That may indeed kick up anti-foreclosure efforts in states with open-minded judges to a completely new level.

Mike Fuljenz Mike Fuljenz