I suppose the fact that the New York Fed hosted a meeting last week with a group of solons is a sign that it is finally taking mortgage documentation and resulting foreclosure issues seriously. But the Fed’s spin diverges from the reading I got from attorneys who have a vantage on the process. Per Housing Wire:
But the New York Fed said solutions are on the way. The Uniform Law Commission and the American Law Institute, which facilitated the recent meetings, seek to clarify and update federal and state laws governing the securitization process.
I’m bothered by the dishonest presentation, which a close reading of the related NY Fed document confirms. Let’s start with its opening paragraph:
Problems with mortgage foreclosures have been in the headlines during the past several months. The media attention arises from several concerns. One concern relates to whether lending institutions have followed proper foreclosure procedure. Another reflects a popular misconception among many that a mortgage can become separated from the note it secures. Yet another concern arises out of the complexity of some of the structured transactions involving the mortgages.
This seeks to present the concerns as mere noise in the media, rather than a result of troubling incidents and widespread abuses. In addition, notice the failure to mention the elephant in the room: chain of title issues, which are so widespread that a borrower challenging a foreclosure in a post 2004 securitization has a decent chance of winning if he argues that the trust lacks standing.
The Big Lie here is that the problem lies with “the complexity, and the outdated nature of the relevant law.” The NY Fed argues that the real estate regime was fine when banks held the mortgage to maturity and everything that was important that needed to happen took place in the same local area.
The paper, astonishingly, acts as if the operational requirements of mortgage securitization have led servicers to lose money. The argument made in these two paragraphs is pure fabrication:
The process of selling loans and mortgages requires that there be some method of determining the current owner of each particular loan and mortgage. In fact, that is a necessary component of the foreclosure process. The loan and mortgage owner, or a servicer who is acting as the owner’s agent, must determine whether it is appropriate to exercise foreclosure rights. When a loan and mortgage securing the loan is created, the initial lender will ensure that the mortgage is recorded in the correct real estate records based upon the location of the real property. However, when the loan and mortgage are sold, the manner of transferring the right to realize on the security for the loan does not typically require that an assignment of the mortgage be recorded in the real estate records. In many cases the loan and mortgage will be registered with an entity called MERS, which is a tracking system, so that interests in it can be followed when the loan and mortgage are transferred. In some cases, MERS also is listed as the mortgagee in the mortgage as an agent of the initial lender and all of the initial lender’s subsequent assignees (buyers of the loan and mortgage).
This division and fractionalization whereby there are entities that are owners of the loan and mortgage (or some part of the loan and mortgage), a servicer for the loan and mortgage, and a named mortgagee that is not necessarily the owner of the loan and mortgage has caused significant confusion. Mark Kaufman, Commissioner of the Maryland Office of Financial Regulation (OFR) testified about the remarkable changes in securitization and third-party servicing before a Congressional legislative committee, noting that these developments “forever changed the mortgage landscape.” Today, he said community banks only hold a fraction of mortgage loans in Maryland and account for next to none of the foreclosure complaints received. “The unbundling process may have facilitated the flow of cheap capital, but it has also fragmented roles, distorted market incentives, and severely complicated the task of modifying loans to avoid preventable foreclosures.” Moreover, Kaufman continued, the same economies of scale drove consolidation in the mortgage servicing business line, so that today the top five mortgage servicers are responsible for over 60% of the mortgages serviced. Every one of the five is owned by a major bank holding company. He noted that this concentration not only created an enormous management challenge, but left money losing servicers trapped in too-big-to-fail institutions. As a result, “the invisible hand of the market will not fix this.”
Notice how there is no timeline in this discussion? If you were to read the paper, you’d think banks created this great system called securitization which “enables the initial lender to replenish its supply of capital to make new loans.” But whoops! They somehow didn’t realize there would be a lot of operational demands, and now we have “money losing servicers trapped in too-big-to-fail institutions.” Notice NO OTHER EXPLANATION is offered. The only possible culprit is therefore those pesky but important legal requirements that bit the securitizers in the ass.
Utter hogwash. Securitization has been around since 1970. Private label securitization started to become a meaningful activity in the later 1980s. And most important, the industry managed to satisfy all those operational requirements and servicing was seen as a decent, even attractive business Remember how Bank of America was falling all over itself to buy Countrywide? The prize was Countrywide’s servicing unit.
An aside: that dramatic quote also implies these horrible servicing operations are a serious drain on those fragile too big to fail banks. Yes, they are cash flow negative, but no, they do not pose a threat to their health.
So what happened? Three things. First, the banks created MERS to improve their profits. That took place in the later 1990s but it did not start to be widely used until the early 2000s. Second, starting in the 2002-2003 refi boom, originators and packagers started cutting corners on the carefully crafted procedures for notes (the borrower IOU) to be conveyed to the securitization trust. This change not only ran afoul of some legal requirements but also was a violation of the requirements of the pooling and servicing agreements, the contracts that govern the securitization. Third was the global financial crisis left a record number of foreclosures in its wake, far higher than ever contemplated when these deals were designed. Servicing highly delinquent portfolios is a money-losing proposition.
So the real reason that industry is having trouble with foreclosures and servicers are losing money has absolutely nothing to do with the reasons suggested by the Fed. Two of the three are due to the industry running roughshod over the law. MERS was vetted only on a Federal law level; no review was ever undertaken of whether it would work under the laws of all the states. It was brazenly assumed that if MERS was imposed, the states would roll. That proved to be a tad optimistic. The second reason, the abandonment of established procedures, is fraud pure and simple. The packagers and trustees lied in the PSAs and the ongoing certifications.
And since any fix is going to be prospective rather than retrospective, invoking the losses servicers have now is irrelevant. The “invisible hand” contention is nonsense. If the servicers are losing money on their current pricing, they have to live with that and figure out how to reprice their offerings once their current portfolios run off. Businesses make bad decisions all the time and get in situations where they are losing money on a product or in a certain geography. They don’t go running to some of the best legal minds in the US demanding waivers to fix their business models. Oh, I forgot, we are dealing with banks, who will try any and every trick they can if there is a buck to be made.
There was another worrisome bit, per Housing Wire:
The two organizations also drafted a report to guide judges and lawyers involved in the transactions, and, the central bank said, should make the application of present laws more transparent.
The Housing Wire declaration that “solutions are on the way” is wildly premature. At this stage, the legal heavyweights are simply discussing whether to draft to provisions. Thus the Fed is trying to prod them to do so.
The good news is the lawyers who are watching the state of play seem to think this is more bluster than real. If anything were to happen, it would involve amending the Uniform Commercial Code, which is about as fast-moving a process as drafting and implementing new Basel rules, but with more philosophizing involved (see here for an overview). Moreover, the fact that a change to the UCC is published does not mean states will adopt it. A major revision to Article 2 of the UCC was proposed in 2003 and no state has implemented it.
One DC source indicated this was all theatrics to try to sway state court judges; all stressed that any change would have no impact on the current mess.
I’m nevertheless disturbed by the Fed trying to insert itself in a process in which it has no legitimate role, and as its paper indicates, in which it is willing to misrepresent facts to assist banks. Its concern instead should be for the public and the integrity of the housing market, both of which are victims of securitization industry greed and recklessness. But it will take root and branch reform of the Fed before that could ever happen.
28 comments
Comments are closed.
Conceptually this has to be the easiest Gordian knot to cut of all time. Securitization is worthless and destructive, so outlaw it. (Get rid of the Fed itself, too.)
Even the criminals like this Kaufman admit there was and is no problem with the original community bank model. So anyone who’s looking for a reformist solution, there you go.
Needless to say, this:
these developments “forever changed the mortgage landscape.”
is a lie.
“These developments”, as they put it in passive criminal-speak, are nothing but the result of a political choice.
At will we the people can make a completely different political choice.
The Fed is owned and run by the banks. The legislative and executive branches are effectively captured by the banks.
Our only hope is for some real law enforcement from a sizable state.
If the Fed derived authority over land titles, then we have no choice but to repeal their charter and arrest their officers for treason.
What was the Federal Reserve Bank of New York doing to prevent this mess in the first place?
*The Federal Reserve Bank of New York plays a “special” role in the Federal Reserve System for several reasons.
First, its district contains many of the largest commercial banks in the US, the safety and soundness of which are paramount to the health of the US financial system.
The Federal Reserve Bank of New York conducts examinations of bank holding companies and state-chartered member banks in its district, making it the SUPERVISOR of many of the largest financial institutions.
Not surprisingly, given this responsibility, the bank “supervision group” is one of the largest units of the New York Fed and is by far the largest bank supervision group in the Federal Reserve System.
The New York Fed is a also the only Federal Reserve bank to be a member of the Bank of International Settlements (BIS), which means that the NY Fed has a special role in international relations, both with other central bankers and private market participants.
(maybe they were over at the SEC’s office watching porn)
**Also, in case you didn’t know: the Board of Governors of the FEDERAL RESERVE made an amendment allowing bank Section 20 subsidiaries to trade Mortgage Backed Securities without having to prove that the underlying collateral met the Boards appraisal standards.
They didn’t think it would cause ‘systemic risk’ to the banking industry.
What MERS does is legal in only one state – Minnesota (Al Franken was on the radio, not in the senate). The state passed a bill – apparently lobbied by the banks to make the shell game legal, so they had to know state laws weren’t all in their favor. It does not however fix the pooling agreements for the securitizatons – which I think say “new york law” anyway, as well as saying they have to have the paper inside in 90 days.
The NY Fed does seem to be facing up to some of the facts but you’re definitely right to keep their feet to the fire. I think the achilles’ heel in their argument is to try and talk about MERS with a straight face. It is being thoroughly discredited in the courts. I’m still somewhat baffled that Obama pocket vetoed an attempt by the Senate to give MERS more credibility… and the NY Fed’s conflicting positions…
http://neweconomicperspectives.blogspot.com/2010/11/support-representative-kapturs-bill.html
Support Representative Kaptur’s Bill: Time to Shut Down MERS and to Restore the Rule of Law
By L. Randall Wray
“”The truly scary thing is that MERS could win. Congress had already tried to legalize fraudulent forgery with its Interstate Recognition of Notarizations Act of 2009. President Obama used his pocket veto to decline to sign it. But we cannot be sure that he will block MERS’s latest attempt to ex post validate past illegal practices.
Congress is being told that nothing short of legalization of fraud will end the crisis of improper foreclosures as well as the lawsuits by investors in the fraudulent securities. It is claimed that we must let the banks continue to seize homes—even where they can provide no proof that they are creditors. We must stop the suits by investors like the NYFed and PIMCO, who claim that the mortgages put into securities did not correspond to the representations made by the investment bankers. And we have got to prevent the counties from collecting the fees they are owed. In short, we have to legalize robbery to save Wall Street’s robber barons.
Nothing could be farther from the truth. This crisis will not end until the fraud stops and the fraudsters are securely behind bars. The rule of law must be restored before faith in our institutions and our economy can be renewed.””
Communist land records, what do they look like?
http://libraries.maine.edu/Spatial/gisweb/spatdb/acsm95/ac95016.html
*The communists were experts at destroying so-called capitalist institutions and records. Land records were no exception.
*While the incentive system was generously applied to party hacks and loyal comrades, the need to own land and to have rights was rejected for the average citizen.
*Poorly kept land records are obstacles, and an entrenched bureaucracy is often the enemy of progress and prosperity. Economic recovery is delayed when land information is delayed.
Did you intend to post on RedState.com and lost your way? Or are you seriously trying to contrast systematic rape of the rule of law by Wall Street as being better than what the “communists” (which ones are alluding too, BTW? Pol Pot? Castro? Andropov? Abdel Nasser? Tito?) did elsewhere, in a bygone era?
Please do not confound us with MichelleMalkin.com or Fox News: We think over here!
*Francois – in reply to your first question “Did you intend to post on RedState.com and lost your way?”
Answer: NO
re: your second question: “Are you seriously trying to contrast systematic rape of the rule of law by Wall Street as being better than what the “communists” (which ones are alluding too, BTW? Pol Pot? Castro? Andropov? Abdel Nasser? Tito?) did elsewhere, in a bygone era?”
Answer: NO
Please do not confound us with MichelleMalkin.com or Fox News: We think over here!
Answer: you have made a handful of assumptions here… neither of which are correct. my point is that when you look at what has happened in other countries regarding their land records (being destroyed and information obscured) then you have a form of communism being installed.
What don’t you understand about that?
RE: “we think over here”
*you may want to speak for yourself!
I tend to agree with the crisis not ending until “rule of law” is restored. However, the defenders of the status quo, our current monetary system, will gladly change the law to suit their purposes. Not only did the Fed inject $T’s in liquidity to banks all over the world, but toxic mortgages were bought from these banks, leaving the public holding both end of the bag. $6.5T lost in housing equity, and $T’s more in public debt. This isn’t going to end well. A balanced budget amendment and tax reform will go a long way. Let the big banks have their way, as long as everyone pays their fair share of the tax burden, and our federal government quits spending more than it takes in in tax reciepts.
Sorry, Nonanonymous,you started well with:
“I tend to agree with the crisis not ending until “rule of law” is restored.”
But you finished with the nonsense of:
“Let the big banks have their way, as long as everyone pays their fair share of the tax burden, and our federal government quits spending more than it takes in in tax reciepts [sic].”
Now, if you’d finished with:
“Let the big banks [FAIL AND BE FORENSICALLY DIS-ASSEMBLED AND LET ALL THE FINANCIAL CRIMINALS BE INDICTED, CONVICTED, FINED AND JAILED]; [LET] everyone pay their fair share of the tax burden, and [LET] our federal government quit spending more than it takes in in tax [receipts].”?
Then your comment would have earned some credit … ?
“This change not only ran afoul of some legal requirements but also was a violation of the requirements of the pooling and servicing agreements, the contracts that govern the securitization. Third was the global financial crisis left a record number of foreclosures in its wake, far higher than ever contemplated when these deals were designed.”
WTF?!! The Global Financial Crisis was independent of your first two points? Ever contemplated? Bullshit!! The criminal fucks knew exactly what they were doing.
What possible benefit is there to securitizing home loans?
So some people can get rich by fucking others?
It went hand in hand with the insanity of real estate throughout the decades following the 1970s, bolstering real estate interests, banksters into a powerful enterprise that has seized our Government. The fact that this blog still discusses solutions with the perpetrators when so many people have suffered is a bad, bad joke.
The issue is not whether the state laws should be changed. The issue is that the banks have to follow the state laws in their foreclosure procedures and they didn’t.
I don’t even think the laws were that complex. The laws specifically stated what the foreclosure rules were. The banks chose to ignore the law and then trot out these arguments that the foreclosure laws are outdated.
This is exactly the reason we need judges who will not make law and who will follow the law as it was written. The judge should not change the foreclosure law to suit the banks because the banks think it is outdated.
The banks and their lawyers should be sued by any investors adversely affected by their recklessness.
“The good news is the lawyers who are watching the state of play seem to think this is more bluster than real.”
Then they’re too jaded.
“If anything were to happen, it would involve amending the Uniform Commercial Code”
Not true. All you need is one new federal law.
“One DC source indicated this was all theatrics to try to sway state court judges; all stressed that any change would have no impact on the current mess.”
Yeah, right. Like there’s no way to retroactively sweep everything under the rug. (Telecom immunity? Impossible.)
What we’ve been witnessing over the last few years is a vulgar display of power, a coup by the FIRE sector, that nobody is even trying to stop because everybody is too shocked by it to believe they’re seeing what they’re seeing.
“I’m nevertheless disturbed by the Fed trying to insert itself in a process in which it has no legitimate role”
The legitimate role of power is to be wielded. Might makes right, right?
It’s not so much that the people who could change it (i.e. Congress and financial regulators) are shocked, as the fact that they’re on the take.
Here comes the MERS whitewash.
In addition to changing the UCC, there is one other easy route the banks and government could try. They could get the IRS to issue a revenue ruling that states that flow-through tax status shall be retained in cases where the mortgage is transferred to the trusts post-facto. This would solve the tax status problem, and wouldn’t require much arm-twisting – the IRS would only be changing its “position” on the issue, and that happens every now and then.
YS: “I’m bothered by the dishonest presentation, which a close reading of the related NY Fed document confirms.” Me too! Your analysis of the Fed paper, not just about the authors’ description of the mechanics of the securitization market, but also how you spot-lighted their method of framing the issues that caused the crisis, clearly call into question the integrity of the paper. They’ll never uncover appropriate solutions without first identifying the actual underlying causes
I strongly agree with the reasons you stated – “So what happened? Three things. First, the banks created MERS to improve their profits…Second, starting in the 2002-2003 refi boom, originators and packagers started cutting corners on the carefully crafted procedures for notes …Third was the global financial crisis left a record number of foreclosures in its wake, far higher than ever contemplated when these deals were designed…”
Of the three, I find the second reason most relevant. To me, the illegal origination activities including critical omissions, misrepresentations and fabrications in the preparation of the original loan documents, is what truly enabled the nefarious deeds to be perpetrated at all the levels of the securitization process. This point is important and needs to be more clearly communicated to refute faulty industry assumptions such as the one espoused by the Maryland Commissioner of OFR in the Fed paper when he stated “…The unbundling process may have facilitated the flow of cheap capital…”.
Seems to me a more accurate assumption would be that the unbundling process was actually facilitated by the large overwhelming number of subprime mortgages that should have never come to pass, but did because of the lack of any meaningful underwriting. We should be careful to sequence the horse and cart properly before proceeding down the road to recovery.
I wonder if there’s any empirical evidence available that validates or invalidates industry claims that private label securitizations (sans the illegal subprime originations) actually do increase the amount capital available for nonconforming loans?
The MERS system bifurcated reality and tried to make it meta reality. By undisputed law, in order to be an owner of a note or obligation you must be the beneficiary of such note and you must be the owner and holder of such note in due course. MERS is nonsense. Hey MERS, how many counties are there in Michigan; Massachusetts, North Carolina, Florida, Alabama, New York, New Jersey, Maine, South Carolina, Ohio, Missouri, Kansas, Illinois, Oregon, even Texas, Alabama, Arkansas, Arizona, Nevada, California, etc. And hang on cowboy, here comes Commercial Mtg Backed Securities! And you have even already committed suicide. But the New York Fed is digging you up by claiming it is a “popular misconception that a mortgage can become separated from the note.” And they and some “Law Commission” are going to send out an “advisory” to state judges? No. Let’s just abolish the Fed. I used to think this was too reactionary. But I can see now that if we do not abolish the Fed they will just move from one crime to another.
Right on… I hear ya! But Dodd-Frank seems to have expanded power for the FED. Sad.
Translation; hello foxes, welcome, so glad to see you again!
here are your NEW keys to the hen house
The Fed will abolish democracy before democracy can abolish it.
They’re just doing their job, and their job is to transfer wealth from the middle classes (labor) to the upper class (owners) as well as to trasfer capital from the more liquid aspects of the economy to the more hoarding side–which allows the buying out of competition instead of investing in RnD. This shrinks the real economy. Our economy is becoming more about credit issuance than about capital, more about power than productivity.
They won’t stop chomping ’till the food’s all gone.
This is just one more waypoint on the move by the powers that want to be more powerful to change the basis of land ownership.
Remember the Enclosure Laws in your English history? Much the same’s happening in the Far East with Cambodian peasants chased off their land in favor of local businessmen. In both cases, the method is changing land ownership from traditional, oral, cooperative system to government-tracked, written, individual ownership. And if the peasants, either Merrie Olde England or the Mekong Basin, don’t have their names on the paper, they’re on the road.
Here in the US, the government-tracked, written, individual ownership is giving way to ownership by corporate fiat. Any property that gives any basis for the banks to transfer themselves ownership, so it’s done. Ownership by the consumer is becoming more illusory, with the banks, the real owners, putting out and pulling in properties almost at whim. It’s a slow process, but sure, since almost every piece of land in the country comes under a mortgage somewhere in the course of time.
It is always useful to compare situations/industries. Suppose the Insurance industry, or any public utility or say the 401K markets acted and then continued to act as the NY Fed and the Banking industry as a whole has? It would not take long at all for the AG, Congress and other bodies to act to prosecute and/or restore equitable harmony or some reasonable relative facsimilie thereof. People would have been prosecuted. I don’t think that if the insurance industry acted so clearly afoul of the law that there would be much consideration of an amendment to the UCC or any other laws. Are the banks that powerful? Do we really have a shadow or sub government headed by the NY Fed and GS? Certainly no other industry, not even the military could have the brass balls to conduct themselves like the Banks have.
The Banks/Fed Resv. panoply is like a Bram Stoker horror movie that seems to have no end, but in fact one of two outcomes seems inevitable: (1) The Banks get their way, get enough legal and political support to paper over their actions and unlawfulness. That could be a catastrophic result. Or (2), the light of Justice and just plain sound reason prevails and the banks take their lumps, are (hopefully) restructured, as Chris Whalen correctly calls for, and we learn from this debacle.
The battle lines have been so severly drawn that it seems no other eventuality is plausible.
We’re definitely not in Kansas anymore.
The Fed was a corrupt imposition on the citizens of this country and is simply showing this nature. It needs to be brought under the democratic control of its citizens excluding captured politicians.
“The paper, astonishingly, acts as if the operational requirements of mortgage securitization have led servicers to lose money. The argument made in these two paragraphs is pure fabrication:”
I have never heard so many excuses for failed business models or seen so much effort to coddle whining CEO’s who claim the system is causing them to fail.
How ridiculous is this? I have never heard anyone stand up for the small business that is going bankrupt because the “banking system” screwed the entire working and middle class out of most of their life savings.
We are now living by the rule of elites no rule of law or rule of the people.
“The argument made in these two paragraphs is pure fabrication”
If I had done the same thing while discussing a treatment plan for a patient in a medical chart, I could’ve lost my license. Yet, for an economist or a financier, no such thing can ever happen.
And they wonder why they are the object of so much contempt?
Duh!
If we are to allow bankers, for the sake of expediency to; press foreclosure without absolute proof they hold the note (wet ink), have standing, did not make multiple copies, commit securities fraud, tax fraud, etc. then property rights in this country are at an end.
A form of communism, plain and simple.
Steve Schwarzman would not stand for it, Carl Icahn would not stand for it, Warren Buffet would not stand for it, and no judge would disagree with them – a homeowner behind on payments is no different just because his lawyer costs less than a billionaire’s. These are fundamental principles that set us apart from the Middle Ages.
Banks cannot turn upside down the entire reason for our existence as a society and 800 years of progress from the Magna Carta forward – there is no ‘Grand Compromise’ that smooths out the minor detail of not holding the note.
Otherwise, a lawyer could claim a skid-row bum in NYC for a client and sue in Florida to foreclose on a Palm Beach mansion in arrears. The bum would have as much standing as anyone else, including any neighbor to the home-owner in Palm Beach.
If the banks persist in this, we just as well replace the 50 stars on Old Glory with a banana and then hold yearly auctions for licensing rights between Chiquita, Dole and Del Monte – that would fit nicely with selling signage to the highest bidder on the side of the SCOTUS building; wasted space begging for a use.
All I have to say is it is all fraud, plain and simple for these greedy Banksters to make profits… It time to fight back, we have rights as homeowners, and it is time to exercise them, do not lay down and get scared. Check out the link below for the landmark Lawsuit sweeping the country.
FYI, this is not a class action case for the attorneys to make all the money like they normally do, you get 3/4 of the settlement, which should be pretty hefty with how bad the fraud has already proven to be. In this type of case you have individual standing in the courts, this is the best way to throw your hat in the ring… I am here to facilitate homeowners to assert their legal rights through litigation and sharing in the cost not having to do it all on their own w/ this type of case. Litigation is the only way, DO NOT try this on your own folks!! Check out link with attorneys introduction video and fraud exposed videos on other side after opting in with your information for FREE consultation at http://www.BigBanksBusted.com
Its time to fight back & win!!