Tag: mortgage

Invasion of the Home Snatchers

Seth Anderson0 comment

Life's short enough to remain optimistic
Life’s short enough to remain optimistic.

I rented The Big Short recently (via Netflix), so I’ve been researching some of what was written about the mortgage fraud, including this great article by Matt Taibi about how the banks churned out so many mortgages they didn’t have time to actually hold the deeds before re-selling:

If you’re foreclosing on somebody’s house, you are required by law to have a collection of paperwork showing the journey of that mortgage note from the moment of issuance to the present. You should see the originating lender (a firm like Countrywide) selling the loan to the next entity in the chain (perhaps Goldman Sachs) to the next (maybe JP Morgan), with the actual note being transferred each time. But in fact, almost no bank currently foreclosing on homeowners has a reliable record of who owns the loan; in some cases, they have even intentionally shredded the actual mortgage notes. That’s where the robo-signers come in. To create the appearance of paperwork where none exists, the banks drag in these pimply entry-level types — an infamous example is GMAC’s notorious robo-signer Jeffrey Stephan, who appears online looking like an age-advanced photo of Beavis or Butt-Head — and get them to sign thousands of documents a month attesting to the banks’ proper ownership of the mortgages.

This isn’t some rare goof-up by a low-level cubicle slave: Virtually every case of foreclosure in this country involves some form of screwed-up paperwork. “I would say it’s pretty close to 100 percent,” says Kowalski. An attorney for Jacksonville Area Legal Aid tells me that out of the hundreds of cases she has handled, fewer than five involved no phony paperwork. “The fraud is the norm,” she says.

Kowalski’s current case before Judge Soud is a perfect example. The Jacksonville couple he represents are being sued for delinquent payments, but the case against them has already been dismissed once before. The first time around, the plaintiff, Bank of New York Mellon, wrote in Paragraph 8 that “plaintiff owns and holds the note” on the house belonging to the couple. But in Paragraph 3 of the same complaint, the bank reported that the note was “lost or destroyed,” while in Paragraph 4 it attests that “plaintiff cannot reasonably obtain possession of the promissory note because its whereabouts cannot be determined.”

The bank, in other words, tried to claim on paper, in court, that it both lost the note and had it, at the same time. Moreover, it claimed that it had included a copy of the note in the file, which it did — the only problem being that the note (a) was not properly endorsed, and (b) was payable not to Bank of New York but to someone else, a company called Novastar.

(click here to continue reading Invasion of the Home Snatchers | Rolling Stone.)

Protecting Bank of America
Protecting Bank of America

Still amazed that we as a nation did not storm Wall Street with pitchforks and throw a bunch of bankers on a boat headed right for Somalia or somewhere similar. And in fact, now that a few years have passed, collateralized debt obligations (CDOs) are back, and the cycle of fraud continues.

The 2008 financial crisis gave a few credit products a bad reputation. Like collateralized debt obligations, known as CDOs. Or credit-default swaps. But now, a marriage of the two terms (using leverage, of course) is making a comeback — it’s just being called something else. Goldman Sachs Group Inc. is joining other banks in peddling something they’re referring to as a “bespoke tranche opportunity.”

That’s essentially a CDO backed by single-name credit-default swaps, customized based on investors’ wishes. The pools of derivatives are cut into varying slices of risk that are sold to investors such as hedge funds. The derivatives are similar to a product that became popular during the last credit boom and exacerbated losses when markets seized up. Demand for this sort of exotica is returning now and there’s no real surprise why. Everyone is searching for yield after more than six years of near-zero interest rates from the Federal Reserve, not to mention stimulus efforts by central banks in Japan and Europe. The transactions offer the potential for higher returns than buying a typical corporate bond, especially if an investor focuses on first-loss slices or uses borrowed money, or both. Obviously, the downside may be much greater, too. Michael DuVally, a spokesman for Goldman Sachs in New York, declined to comment.

(click here to continue reading Goldman Sachs Hawks CDOs Tainted by Credit Crisis Under New Name – Bloomberg.)

U Pick Parts
U Pick Parts

Sub-prime auto loans are the next big thing, but some bankers whine that The Big Short might be interfering with their con…

Auto loans made to risky borrowers and then bundled into bonds sold to investors have been making headlines for years, with some voicing concerns over an apparent resemblance between the so-called subprime auto market and the subprime housing market that sparked the 2008 financial crisis and ensuing recession.

Indeed, the parallels may not have been lost on investors either. In a note published on Wednesday, Morgan Stanley analysts led by Jeen Ng wonder whether last year’s debut of The Big Short—the film version of the Michael Lewis book published in 2010—has played a role in sparking fresh worries over the asset class.

(click here to continue reading Morgan Stanley: People Might Be Worried About Subprime Auto Bonds Because of the ‘Big Short’ Movie – Bloomberg.)

as Gawker writer Hannah Gold puts it:

The memo reads:

“However, concerns about growing recessionary risks – and perhaps even the popularity of the recent movie The Big Short – have motivated investors to investigate any potential source of weakness. Consumer sectors that involve large initial outlays, such as housing and autos, provide a natural place to start. Combine that with recent headlines from Fitch suggesting that delinquencies in some sectors of the auto ABS market have reached 20- year highs, and you get a target sector for investors’ concerns.

Those concerns are not without merit, at least as far as delinquencies are concerned. It is interesting to highlight that as the housing market continues to heal from its post-crisis depths, mortgage delinquencies have been on a steady decline while auto delinquencies have been going in the opposite direction.”

Or maybe potential investors are suspicious of auto loans because…they’re actual villains. Critics of the auto ABS have been pointing out parallels between the subprime auto market and the subprime housing market for years. Hopefully this story has a slightly less disastrous ending.

(click here to continue reading Morgan Stanley Analyst Fears the Movie The Big Short Has Discouraged Investors From Buying Risky Auto Loans.)

Great. Just in time for a wave of deregulation if Hillary Clinton wins in 2016, or worse, Donald Trump, or even worse, Ted Cruz…

Your mortgage documents are probably fake

Seth Anderson0 comment

There Oughta Be A Law
There Oughta Be A Law

If you didn’t read about Lynn Szymoniak recently, you should familiarize yourself with her lawsuit against the corrupt mortgage banking industry. According to her research, some $1,400,000,000,000 of mortgage-backed securities are actually not mortgage-backed securities. That’s a lot of missing cheese!

If you know about foreclosure fraud, the mass fabrication of mortgage documents in state courts by banks attempting to foreclose on homeowners, you may have one nagging question: Why did banks have to resort to this illegal scheme? Was it just cheaper to mock up the documents than to provide the real ones? Did banks figure they simply had enough power over regulators, politicians and the courts to get away with it? (They were probably right about that one.)

A newly unsealed lawsuit, which banks settled in 2012 for $95 million, actually offers a different reason, providing a key answer to one of the persistent riddles of the financial crisis and its aftermath. The lawsuit states that banks resorted to fake documents because they could not legally establish true ownership of the loans when trying to foreclose.

This reality, which banks did not contest but instead settled out of court, means that tens of millions of mortgages in America still lack a legitimate chain of ownership, with implications far into the future. And if Congress, supported by the Obama administration, goes back to the same housing finance system, with the same corrupt private entities who broke the nation’s private property system back in business packaging mortgages, then shame on all of us.

(click here to continue reading Your mortgage documents are fake! – Salon.com.)

Some additional back-story here…

Sometimes That's How It Works
Sometimes That’s How It Works

and what her lawsuit revealed is systematic, intentional fraudulent activity:

A mortgage has two parts: the promissory note (the IOU from the borrower to the lender) and the mortgage, which creates the lien on the home in case of default. During the housing bubble, banks bought loans from originators, and then (in a process known as securitization) enacted a series of transactions that would eventually pool thousands of mortgages into bonds, sold all over the world to public pension funds, state and municipal governments and other investors. A trustee would pool the loans and sell the securities to investors, and the investors would get an annual percentage yield on their money.

In order for the securitization to work, banks purchasing the mortgages had to physically convey the promissory note and the mortgage into the trust. The note had to be endorsed (the way an individual would endorse a check), and handed over to a document custodian for the trust, with a “mortgage assignment” confirming the transfer of ownership. And this had to be done before a 90-day cutoff date, with no grace period beyond that.

Georgetown Law professor Adam Levitin spelled this out in testimony before Congress in 2010: “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 lawsuit alleges that these notes, as well as the mortgage assignments, were “never delivered to the mortgage-backed securities trusts,” and that the trustees lied to the SEC and investors about this. As a result, the trusts could not establish ownership of the loan when they went to foreclose, forcing the production of a stream of false documents, signed by “robo-signers,” employees using a bevy of corporate titles for companies that never employed them, to sign documents about which they had little or no knowledge.

Investor Group Sues Richmond, CA Over Eminent Domain Plan

Seth Anderson0 comment

plus ça change…
plus ça change…

Complications. This had sounded like an interesting way out of the national home owner crisis, but the banks are worried they will lose their paper money value. Of the 624 properties in discussion, 444 are still current in their payments, just that their houses assessed valuation is significantly less than the mortgaged value. Is eminent domain allowable in this sort of circumstance? The legal precedent is unclear, so presumedly, this lawsuit and similar is going to take a while to be settled.

Banks representing some of the nation’s largest bond investors filed suit against the city of Richmond, Calif., on Wednesday to block plans by city officials to seize and buy mortgages using their powers of eminent domain.

The lawsuit, filed in federal court in San Francisco, could serve as a key test for whether a city can move forward with such a strategy, which would allow it to forcibly buy mortgages from investors at a price potentially below the property’s current market value. The city would then reduce the loan balance and refinance the mortgage to help struggling homeowners avoid foreclosure.

The legal challenge could serve as a key test for whether cities from Newark, N.J., to Seattle are able to follow Richmond’s lead.

…

City leaders in Richmond, a working-class suburb of around 100,000 on the San Francisco Bay, began sending letters last week to mortgage companies seeking to purchase loans on 624 properties and threatening to force sales via eminent domain if investors resisted. The city is partnering with Mortgage Resolution Partners, a private investment firm based in San Francisco, which was also named a defendant in the lawsuit.

 

(click here to continue reading Investor Group Sues Richmond, Calif., Over Eminent Domain Plan – WSJ.com.)

Back in Feburary, 2013, The New Yorker’s Tad Friend wrote an interesting overview about Steven Gluckstern’s plan1

LETTER FROM CALIFORNIA about Steven Gluckstern’s solution for the foreclosure crisis. At sixty-one, Steven Gluckstern has extensive experience handicapping risk propositions on Wall Street. This past fall, Gluckstern, the chairman of a San Francisco-based group called Mortgage Resolution Partners, was in the midst of a tour of Southern California. In between hasty meals, he raced his rented Mercedes to meetings with mayors and activists and real-estate agents and developers, trying to interest them in his company’s sole product: a plan for cities battered by the foreclosure crisis to keep their citizens in their homes.

It’s a tool so ingenious that Wall Street treats it as the gravest threat to civilization since the breakfast burrito. Even as America’s home prices have risen for six of the past seven months, twenty per cent of homeowners remain “underwater,” owing more in principal than the house is worth. It’s a national problem that’s concentrated in a few locales, most notably California. Mentions Salinas councilwoman Jyl Lutes.

In places like Salinas, a large part of the problem is not the loans that are held by banks. It’s the ones that were pooled in “private-label securitizations.” Under Gluckstern’s plan, a city would use its powers of eminent domain to seize a homeowner’s mortgage in court, pay off the bondholders, then arrange a new mortgage for the homeowner at a price much closer to what the home is actually worth. M.R.P. started its campaign in San Bernardino County. In June, the county and the cities of Fontana and Ontario established a “joint powers authority” to examine M.R.P.’s plan. The foes of eminent domain rose up almost instantly and assailed the plan. A coalition of twenty-six financial-service and real-estate groups sent a letter threatening lawsuits.

The opposition often invoked what’s known as the “moral-hazard argument”: if you reward people for risky behavior they’ll just do it more. By the time Gluckstern visited the San Bernardino area, last fall, he was a marked man. When Gluckstern dropped by county C.E.O. Greg Devereaux’s office, Devereaux ruefully acknowledged that the opposition had gummed up M.R.P.’s plans. Without quite conceding in San Bernardino, Gluckstern began stealthier campaigns, in Michigan, Maryland, and southern Florida. He hopes to convince the opposition that his campaign will continue.

(click here to continue reading Tad Friend: Can Steven Gluckstern Solve the Mortgage Mess? : The New Yorker.)

Mini Bank In Fine Style
Mini Bank In Fine Style

and from what I recall, it turns out the mortgages are often held by multiple entities because of the mortgage derivative market.

and it is unclear if these particular legal challenges are going to stand up in court:

Legal advocates of the eminent domain plan have said that constitutional challenges aren’t likely to hold up in court. The loan strategy wouldn’t burden interstate commerce “because it doesn’t prevent credit from flowing in any particular way,” said Robert Hockett, the Cornell University law professor who was an early advocate of using eminent domain to seize underwater mortgages.

“This is a bluff,” said Mr. Hockett. “It’s meant to scare city officials into saying, ‘Oh, who are we to argue with the big guns.”

Supporters say their plan would help not only specific homeowners but also the broader community by reducing foreclosures that are hurting property values and eroding the tax base. “It’s the responsibility of banks to fix this, and they haven’t, so we’re taking it into our hands,” said Richmond Mayor Gayle McLaughlin in a call with reporters last week.

 

Footnotes:
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Greed Derivatives

Seth Anderson0 comment

Hunter and Devilstower over at Daily Kos make a strong case that the billions involved in the bailout are not for the mortgages, but rather the derivatives from the mortgages.

And that’s where we get that math problem. 1% of all mortgages — the amount now in default — comes out to $111 billion. Triple that, and you’ve got $333 billion. Let’s round that up to $350 billion. So even if we reach the point where three percent of all mortgages are in foreclosure, the total dollars to flat out buy all those mortgages would be half of what the Bush-Paulson-McCain plan calls for.

Then we need to factor in that a purchased mortgage isn’t worth zero. After all, these documents come with property attached. Even with home prices falling and some of the homes lying around unsold, it’s safe to assume that some portion of these values could be recovered. In the S&L crisis, about 70% of asset value was recovered, but let’s say we don’t do that well. Let’s say we hit 50%. Then the real outlay for taxpayers would be around $175 billion.

Which, frankly, is a number that Wall Street should be able to handle without our help. After all, the top firms on Wall Steet payed out $120 billion in bonuses alone between 2000 and 2006. If they’ve got that kind of mad money, why do they need us to step in now? And why do they need twice as much as all the mortgages that are even likely to implode?

[From Daily Kos: What Is This Money Even For?]

No, not the mortgage, the derivatives:

And despite what we’ve been told, then, we can only presume that the problem is in fact not all the bad, scary subprime mortgages. And it’s not. Yes, a lot of people are finding themselves upside-down on their houses right now, but Paulson isn’t proposing we do squat to solve that — and even the “controversial” Democratic counterproposal, that we actually do at least a little something to help those people, after they’ve already gone bankrupt, is pathetically weak.

Instead, we’re getting a Wall Street bailout not of the mortgages, but of the absurd, speculative, economy-wrecking derivatives based on those mortgages, derivatives that investors and banks ravenously sold each other at unsupportable and quite-probably-crooked prices. Those derivatives, generally speaking, are “bets” on the state of the underlying mortgages. And they didn’t just bet wrong — they bet irrationally, based on presumptions of near-zero risks to those underlying mortgages. And worse, the big banks even — bafflingly — got special permission to overleverage themselves 40 to 1, all but assuring collapse if those derivatives went south. Which they did.

The whole bailout (bipartisan or not) still smells fishy to me.

Is that the best approach? I’m not convinced, and I’m more than a little angry at the Democrats for, once again, accepting what they are given and trying to tweak it rather than coming up with true counterproposals. Propping the housing market up from the bottom may be much cheaper than trying to prop up the entire derivatives market from the top, and would seemingly have the same stabilizing market effects. Taking equity in firms in exchange for taking their crappy, non-marketable products would, yes, seem the absolute least we could do — there must be an upside for the taxpayer in providing this trillion-dollar investment at the expense of ballooning our national debt and crippling public sector works for a decade or more. But that’s still weak tea, all things considered.

Not being talked about as much, though, is that we must allow overextended companies to fail. It is an essential part of our economy that economy-threatening recklessness on the part of speculators not be rewarded, and especially not be rewarded by the government. Any actions to stabilize the economy should indeed inject liquidity — but it’s not clear that injecting liquidity through the very companies most in trouble is sustainable or even rational.