Abigail Field’s latest piece at Daily Finance is a great one-stop summary of the most thorny problem underlying the securitization mess: how can we clean up title given how badly it has been screwed up? As we and many others have noted, integrity of property ownership is an essential foundation of development; this is straight Hernando de Soto gospel. And as our Richard Smith has pointed out, the various fixes to get around this mess run roughshod over well established court procedures that date back to the 1677 Statute of Frauds. Why was it necessary to implement those rules? Because without them, wealthy people could use the court system to steal property. Sound familiar?
One thing that it is important to stress: that the abuses to established real estate transfer and recording processes were not inherent to the securitization model. I’m not a fan of securitization but the sad reality is that no one is prepared to go back to the more costly in terms of equity required, model of on-balance sheet banking (it would result in a shrinkage of credit that every respectable economist would recommend against and hence will never happen). But no one (except the FDIC, which keeps being ignored) is thinking seriously enough about what it would take to make securitization safer.
Everyone, from the bank originators to the investment bank packagers, got hooked on the easy profits, and kept pushing for ways to streamline the process, to both increase their profits and increase the size of the potential market. The biggest problems result from cutting corners, including the failure of the deal sponsors to adhere to their own agreements with investors, that led to this mess. Securitization had existed since the 1970s; MERS, one of the biggest culprits in the uncertainties over title, did not become a serious player until 1999. The widespread failure to convey notes (the borrower IOU) to securitization trusts appears not to have started until sometime between 2002 and 2004.
Some of the key sections of her piece:
But the settlement doesn’t go nearly far enough to save the housing market. In fact, it can’t go far enough, because it can’t address one of the most confounding problems the banks have created: the millions of properties nationwide that now have “clouded” titles.
To put it plainly: Because of these bad titles, property owners can’t prove they own the properties they think they bought, and banks can’t prove the had the right to sell them.
Even though it’s impossible to know how many properties are affected, I have confidence in saying millions nationally for the following reasons:
More than 1 million foreclosures have been completed since 2005; nearly 200,000 were completed in the third quarter of 2010 alone.
Foreclosures involving securitized mortgages seem to be flawed as a rule, not the exception.
Even when foreclosures may have been otherwise valid, the practices of foreclosure attorneys have clouded titles.
The problems are ongoing. More flawed foreclosures are completed every day.
The clouded title problem extends well beyond foreclosures. Both MERS, the electronic database that holds more than half the mortgages nationally, and possible securitization failures could have damaged the titles of the properties even though the borrowers are current on their mortgages.
One thing her piece does not discuss as clearly as it might is the depth of the mess will be state-specific. Minnesota, which passed MERS-friendly legislation, will not deem assignments in and out of MERS to be in any way impaired. But in many states, where the note is deemed to be the controlling instrument, botching up the transfer of the note causes serious title issues (in theory the note can be assigned at any time, but the securitization documents required notes to be transferred though a particular set of parties by a date certain, which has since passed for houses now facing foreclosure. For a host of reasons, the trust that is supposed to own the note needs to be the party that forecloses, but if the note didn’t get to the trust properly, the party earlier in the chain, who is in position to foreclose, is not the party that anyone wants to foreclose. And retroactive fixes are not an option).
But even in title theory states, where merely getting the mortgage (the lien against the property) assigned correctly would suffice, judges are also taking a dim view of certain widespread securitization practices. We discussed at some length the repercussions of a recent Massachusetts Supreme Judicial Court decision, Ibanez. Field elaborates:
A few months ago, the Massachusetts Supreme Judicial Court issued its Ibanez decision, which made it clear that the banks’ foreclosure practices — and indeed, the standard securitization deal — violated longstanding basic Massachusetts real estate law, and thus, many completed Massachusetts foreclosures were invalid. The foreclosing banks, which had either since sold the properties or still “owned” them, had no right to foreclose, and therefore had never owned those properties. So who owns them now? Well, the fact that it’s a question is the very definition of “clouded title.”
Since it has been a couple of months since the Ibanez decision, I called a couple of large title insurance companies in the Boston area to see how title insurance for improperly foreclosed properties is being handled….One agent called improperly foreclosed homes in Massachusetts “uninsurable.” Another explained that the problem underscored in the Ibanez case has been around for years, and that any title company would need to look at foreclosures dating at least until the late 1970s, when securitization became more common, to make sure no improper foreclosure had happened in all those years. And some properties, she noted, had been foreclosed on multiple times.
That agent did note that the problem was worst for properties improperly foreclosed on in recent years that were still bank-owned. Those properties were truly uninsurable. That’s because the bank couldn’t make a claim on the title insurance policy it had purchased when making the original loan, since it was the entity that clouded the title. Indeed, honoring that policy would be like letting a arsonist collect on fire insurance. Thus much of the current bank-owned inventory in Massachusetts is largely uninsurable and thus unsellable.
No settlement with the servicers is going to solve that problem.
Note that this isn’t quite as cut as dried as Field suggests; law professor, securitization expert, and frequent industry Adam Levitin has dug further into pooling & servicing agreements based on Ibanez and sees plenty of cause for concern. But regardless of how bad this is, it’s clearly pretty bad if not absolutely dire in Massachusetts and their is reason to think that states with broadly similar laws will come to the same conclusion (the Massachusetts SJC is held in high esteem). And title insurers, who are not in the business of taking risk, have (as we noted months ago) been demanding that banks indemnify them for sales out of foreclosure.
A settlement cannot indemnify against this risk, but it will have the effect of halting state attorney general investigations, particularly if the release is as broad as we expect it to be.
The response by the authorities bears disturbing parallels to the Fukushima facility disaster response: a preoccupation with protecting “assets”, meaning the miscreant banks, while putting a much larger community at risk. The stakes were so high and the initial response so visibly insufficient that the prime minister intervened and ordered more aggressive measures be taken. But here, the federal government has cast its lot in with banks and is seeking to muscle the state AGs into line. The reality is that a bailout masquerading as a settlement won’t solve the underlying problem. The powers that be are deluding themselves as to how long it will be before an unaddressed mortgage mess goes critical.
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Interesting comment on Minnesota having MERS friendly legislation. Surely the transfers in and out of MERS could still be impaired in a practical sense. The audit trail for these transfers which can be multiple seems to be non-existent.
And the transfers into the securitizations seem to be problematic on several fronts. Without an audit trail how can we know a single loan didn’t end up in multiple securities? I don’t see how these securities can be unwound without the FDIC taking control of the process. Are we going to let the banks and servicers try and fix this? Their top management needs to be fired and investigated for fraud. I’m sure unwinding these securities will turn up multiple problems that the powers that be want to ignore. But ignoring large scale tax evasion and trustee malfeasance isn’t going to get us moving in the right direction…
I’m not against securitization and some of the newer ones seem to be much better structured with better transparency. But I think the current mess needs to be forensically unwound.
From homeowners perspective – I never liked the idea of loans being sold or transferred to multiple 3rd parties. If a lender had to keep the loan on his book, he’d better make sure, the borrower is creditworthy, the docs are ok and plenty of ‘bubble’ could have eben avoided.
What I’d like to know: what would happen if the borrower also had the right to easily ‘switch’ creditors, selling his loan to another borrower?
Same rights for both sides. So if I know my borrower is cash-strapped, I maybe can sell my 100k loan to another borrower for say 70k, thus reducing my monthly payment.
Would be a nicer way to recapitalize ‘nuclear’ banks instead of just dropping helicopter-dropping taxpayer money on them. Maybe even a valid business model for our German Landesbanken… but I’m getting ahead of myself…
One cure is a quiet title action initiated by the home owner. This proceeding has been used in at least one state. Actions to quiet title have a long legal precedent.
Yves,
Excellent post. It now appears that there are two ways the mortgage mess might go critical: 1) the clouded title issue or 2) investors demanding repurchase for failure to adhere to the pooling and servicing agreement.
I would like to draw your attention to the recently introduce Covered Bond Act. As you might guess, Wall Street is trying to bury the old securitization model and its problems and trot out under a new name the same flawed product.
The Covered Bond Act is a scary proposal. It is based on the theory of privatize gain and social losses. Had subprime mortgages backed covered bonds been issued instead of private label RMBS deals, when the subprime market blew up, the issuing banks would have been looking at well over $1 trillion of losses. The size of the taxpayer bailout would have been a multiple of what it has been to date (and I do not think we “made” money on TARP).
Hi Yves
I appreciate the caveats you added in discussing my piece; I did indeed oversimplify and frankly am not expert enough to avoid such oversimplification.
But all the talk about settlements seemed to me to be missing this clouded title elephant in the room. And it’s a crucial part in the framing war going on because defaulted borrowers are wholly blameless for it, and its ramifications extend to the people current on their mortgages and to people buying foreclosed properties.
And it highlights the complexities of the issues the banks et al created in their efforts to save costs/max profits without regard to the systemic consequences of their choices. Of course that sentence could apply to lots of situations lately, not just the clouded title problem.
Bottom line: people must remember that deep and fundamental damage has already been done and the work of fixing it will take, probably, years.
It’s not a matter of sloppiness or technicalities, and it’s not limited in scope. And the costs have been largely externalized. Somehow society needs force the banks and their lawyers to internalize those costs.
So when we look at holding the banks “accountable” via settlement or otherwise, we should remember just how big the bill is that reaches back to their decisions.
p.s. I know in my comment I’m not adding to what you or anyone else who reads your website knows; I’m stating the obvious. I’m just explaining why I published the piece even knowing I was oversimplifying.
p.s. I know in my comment I’m not adding to what you or anyone else who reads your website knows; I’m stating the obvious. I’m just explaining why I published the piece even knowing I was oversimplifying. (and as far as stating the obvious goes, it’s funny that your comments software wouldn’t let me post what preceded the ( on the grounds I’d already said that!)
The elephant in the closet is that if the title was not transfered properly to the securitization trust by the required date then the security had no backing when it was sold as the trust was invalidated under the NY law that it was created under. In those cases, the originator of the securities committed securites fraud as there are no trust assets backing the security since the trust did not legally exist or is lacking the assets that were reported in the trust at the time of securitiation that were backing the crated securities. This is something the SEC has completely turned it’s back on. If I created a security backed by assets and did not legally have the assets, then the SEC would be all over me as it is a common fraudulant practice they look for, except if it is done by too big to fail institutions of course.
It’s going to be the title insurers that determine the ultimate outcome. If they balk at insuring titles as being clouded, then we are in new territory in US real estate markets.
Title insurers are in denial that they have a problem. They have plent of exposure on titles they have already insured.
Title insurance will go through the roof. and title companys will make lots of money.
Imagine the mayhem that will ensue when 60 million familys discover that they cant sell their house because they cant provide the buyer with a clean title. Houses that werent flushed down the mers toilet will be worth more.
The crazy fact is that mortgages that are originated today are still getting flushed down that same mers toilet.
It won’t be title insurers because they will cave in if the banks are given a free pass. If the government twists their arm they will fold and insure everything just like they always have for a fee and then try to fight against any claims that happen later. They will have a huge fund set up to use to fight claims and a fund set up to pay claims. Just like a regular insurance company, they will delay and fight to not pay and when they get in over their heads they will come to the congress for a bailout. congress will again fold and hand over billions thinking that they can’t risk upsetting banks and mistakenly thinking they are saving the financial system as they kick home owners and property rights law one more time.
The government has failed the people horribly. It is not the America our fore fathers fought to establish. We are being dictated to by big money, big government, corporate lobby and a president so enamored with himself that he is afraid to do the right thing because his elitest lifestyle has made him unable to defy big money. They are his peeps. He has no idea what the real world is like and it is obvious by his behavior. I have seen no politician from either party really step up and stand up for the little guy or middle class americans.
The transgressions can not be downplayed and for anyone in government to allow banking institutions to put the sacred rights of home ownerships and title chain has completely lost their sense of direction. We are once again powerless over large government as it runs out of control with the banks. If the system is so screwed up that no one will be able to prove they have ownership of property unless the current laws are thrown out the window—as they have done in Minnesota——we are no longer pretending to be a democratic republic and the lies will not hold. It is government for the government and banks, by the government and banks. We are people with no voice to be abused by the powers that be as they create huge gaps between rich and poor. They are killing any chance at the American dream not be getting involved but by standing back and stamping approvals on criminal and fraudulent activity.
I am getting more sick of it every day.
I have a question on the titles. Where these titles ever registered with the proper county/city/state title registrars or title agencies. I don’t know the proper terminology. When the did a title search on my property it was hard copy all the way back to the Louisiana Purchase, I live in Tulsa, OK.
How will the county tax collector proof that someone owes taxes, or conversely how does one proof non ownership of a property?
Point three, nothing great about keeping the banks in business, but the shareholders and execs should go down with the ship if it takes taxpayers to fix the situation.
I have been fighting Thomas Malone attorney for Fidelity National Title and David K Fiveson attorney for Coronet Title in New York Supreme Court since 2008.
In 2008 Astoria Federal S & l knowing fully well they sold my two NYC condos without ever owning them stated in NYSC in front of Judge Alice Schlesinger “Its imdemnify, Indemnify Indemnify – We are stepping aside and the Title companies are stepping in.”
Fidelity Title and Coronet Title did not want to Indemnify, but wanted to be intervenors and be heard and what they told the court is time makes a forged deed good.
The title attorneys, Judge Schlesinger and I all know that a Forged deed has no equity and the only equity Malone of Fidelity and Fiveson of Coronet were speaking of when they stated to Judge Schlesinger “we have equity” was the equity under the table for Judge Schlesinger and Judge Schlesinger’s ears perked up, looked at me and said”it doesn’t look good for you” and he ruled against the law.
It appears that California courts are willing to whitewash MERS affected titles in the Gomes v. Countrywide decision, 192 Cal.App.4th 1149. However, I can see another way that titles may eventually clear as well: adverse possession. California has the shortest adverse possession period in the country at 5 years, as long as the adverse possessor pays the taxes. I can see a time when some squatters start moving to quiet title in bank owned houses that the banks seem to have forgotten.
I also believe that the time is right for a new legal theory of “constructive dispossesion” or “constructive detainer” that works like this: if a mortgagor sends notice of default, and then does nothing for years, there ought to be a point (say 12 months from the NOD), where the law will say that the person who remains after that point can consider himself ejected, since a reasonably attentive mortgagor would have completed the process by then, and the limitation period on quieting title begins to run. The mortgagor can become an adverse possesssor of his or her old home without moving. If just one California court recognized the theory, you can bet the banks would speed up their foreclosures.
This wouldn’t work in most states, where the adverse possession period is generally 20 years. Even Bank of America is faster than that.
There are a few reasons they are slow and none of them has to do with laziness or empathy.
(1) If they foreclose, they take the writedown. California has the biggest impact in terms of percent of portfolio and avergage outstanding balance. If they moved quickly, they’d bleed out in losses.
(2) Many also have second (or even third) loans, some with the original lender, others with their co-bankers. You start plowing the full field for foreclosures, again, more bleed outs.
Yves makes some good points and its got to be a fundamental shift aimed at restoring chain of (and clear) title. An across the board deal is a really thorny issue when you are talking about one homeowner current, but underwater and another six months in arrears, etc. Don’t know the answer there, but there has to be something considered on a large scale.
If Wells Fargo came to me, being current on my loan (but underwater) and said “Hey, we’d like to re-draw your loan documents to clarify title and we’ll credit you six months worth of mortage payments…”, I might consider doing that. Good deal for me, good deal for them.
Alas, I think the fact that Wells doesn’t own the dang paper but only services it and that some employee retirement fund in Dubuque, Iowa owns 38% of my note…sorta makes that happy ending more like being immobilized during a root canal and stuck listening to Milli Vanilli muzak.
What a mess.
Sean Paul Kelley over at The Agonist (www.agonist.org) pounds on the concept of accountability. Each dealer in the chain of sales from mortgage loan officer to the boiler room security dealer have no reason to make the package neat and tidy.
Each link in the chain should have to keep a percentage of the loan or package. If you own say, 1% of the thing and only get your 1% of coupon when the bond pays off, you’re going to view screwed-up paperwork in a whole new light. Even more, you will be acutely aware of the dubious legal nature of MERS.
“the complexities of the issues the banks et al created in their efforts to save costs/max profits without regard to the systemic consequences of their choices. Of course that sentence could apply to lots of situations lately, not just the clouded title problem.”
I think our economic system has always been set up to encourage participants to only think about their own profit maximization. What is new is that the social functions that looked out for the interests of the system as a whole no longer function. In many areas. I think that is the crux of the matter.
And given how pervasive this is and how accepted it is by the media and the intelligentsia, the break down of system-wide functions must originate quite deep. Much more deep than I can explain by invoking malevolence or greed on the part of those running amok. Something more is at work.
The most compelling thing about the article is the consideration that this problem may be too big to fix. All other reporting breathlessly examines the 50 state AG and any other proposals and asks, “is it finally fixed now? is this crisis over?” Yves has it right. We need to start thinking about this in terms of a nuclear disaster….it will not be fixed, it cannot be fixed. Floriduh’s Attorney General has had very public investigations of the foreclosure mills for nearly a year now and nothing at all has changed…in fact it’s only gotten worse…why is this? Why do judges just continue to sign judgments for these banks and law firms? Why is Fannie suing their own law firm in Florida(Ben Ezra Katz)? What happens when all of America wakes up and realizes we’ve all been robbed? Where is the sense of outrage?
I am a CA home owner who has read extensively on the securitization/MERS issue. I am no genius but I think I have a grasp on the subject enough to know that I have been totally robbed by my mortgage servicer. What is the point of paying anymore? I feel so insecure in this investment and totally depressed. I am a designer who lived to fix up my home and make a beautiful garden as well. I feel as if I have no right to it even though my investment is about 400K by now. Should I just give up this fight and stop paying? IS it even worth paying an attorney? Will I just waste my time in court?