Category Archives: Real estate

Tom Adams: How Treasury’s “Kick the Can” Strategy Exacerbates Mortgage Market Woes (Mortgage Insurer Edition)

By Tom Adams, an attorney and former monoline executive

Barron’s published a detailed take down of the mortgage insurance industry weekend that highlights how Treasury’s approach to the mortgage mess will ultimately make matters worse. As the article points out, in the fairly likely scenario that mortgage claims exceed the amount of capital the insurers have available to pay them, the parties taking the biggest hit will be Fannie Mae and Freddie Mac. That means taxpayers are probably on the hook for more bailouts.

Despite having questionable capital reserves for the future claims they face, mortgage insurers are still continuing to write significant insurance business. Why would anybody want to continue to buy insurance from such shaky companies?

The continuing business of the mortgage insurers help shed light on the fact that virtually the entire mortgage industry is run through zombie companies that ought to have expired years ago.

Florida Governor Floats Huge Gimmie for Banks: Taking Foreclosures Out of the Court System

Florida continues to show a rather disconcerting willingness to throw its citizens’ rights under the bus to help the banks. The state created special foreclosure courts to clear up a substantial backlog, which might not have been such a bad idea if they had been properly implemented. However, they were staffed with retired judges, many of whom seemed to put speed over due process. There have been numerous reports of judges refusing to hear motions or evidence presented by borrowers, to the point where the ACLU contested the procedures used as violations of due process.

To some degree, this has become moot since these kangaroo courts are expected to be shuttered (they required an extension of funding to continue). Moreover, new foreclosure filings have slowed in Florida as a result of the robo-signing scandal. The revelation of widespread abuses by banks has led some judges to dismiss cases with dubious documentation; judges are also complaining that banks are seldom coming to hearings on foreclosure cases.

Never fear, with government bought and paid for in America, someone was certain to try a fix. The Florida governor has, in effect, suggested that if banks can’t meet the existing requirements for foreclosure, then the solution obviously is to lower them.

Two Michigan Counties Sue Fannie and Freddie for Nonpayment of Mortgage Transfer Fees

I’ll be brief because this article from the Michigan Messenger (hat tip furzy mouse) stands on its own. Readers may recall that some registers of deeds (the county officials responsible for recording mortgage transfers) are less than happy at the way MERS has deprived their governments of income by skipping recording fees for some mortgage transfers (that was the point, after all) and making a mess of title records.

Two counties in MIchigan, Oakland and Ingham, have decided to do something about it. To my knowledge, this is the first litigation of this type

Bill Black: Dawn of the Gargoyles – Romney Proves He’s Learned Nothing from the Crisis

By Bill Black, an Associate Professor of Economics and Law at the University of Missouri-Kansas City. He is a white-collar criminologist, a former senior financial regulator, and the author of The Best Way to Rob a Bank is to Own One. Cross posted from New Economic Perspectives

Mitt Romney chose to unveil the economic plank of his campaign for the Republican nomination with a speech in Aurora, Colorado decrying banking regulation. He could not have picked a more symbolic location to make this argument, for Aurora is the home and name of one of the massive financial frauds that caused the Great Recession. Lehman Brothers’ collapse made the crisis acute and Lehman’s subsidiary, Aurora, doomed Lehman Brothers. Lehman acquired Aurora to be its liar’s loan specialist. The senior officers that Lehman put in charge of Aurora, which was inherently in the business of buying and selling fraudulent loans, set its ethical plane at subterranean levels.

Aurora sealed Lehman’s fate by serving as a “vector” that spread an epidemic of mortgage fraud throughout the financial system and caused catastrophic losses far greater than Lehman’s entire purported capital. Aurora epitomizes what happens when we demonize the regulators and create regulatory “black holes.” Romney literally demonized banking regulators as “gargoyles” and claimed that banking regulations and regulators were the cause of the economy’s weak recovery.

Sunny Sheu: Murdered for Investigating NY Foreclosure Judge Joseph Golia?

The details are thin but they sure don’t smell right. The short form is that Sunny Sheu had his house stolen from him by fictive buyers who used forged documents. Judge Golia of Queens engaged in what appears to be highly questionable behavior in failing to reverse the sale. Sheu started investigating the judge, was told by policeman who specifically referred to information he had provided about Golia, and that if he didn’t drop it, he’d wind up dead. Sheu disregarded their warning and did wind up dead. The authorities are also refusing to honor requests for information regarding Sheu’s death made under New York’s Freedom of Information Act. This story has been publicized by Foreclosure Fraud and The Daily Bail and I hope it gets more traction.

JP Morgan Pays $153.6 Million to Settle SEC Charges on Toxic Magnetar CDO

The SEC announced that JP Morgan has agreed to pay $153.6 million to settle charges related to a $1.1 billion heavily synthetic CDO called Squared which JP Morgan placed in early 2007 and was managed by GSC Partners, a now defunct CDO manager. The SEC has a cute but not all that helpful visual on the site, save it reflects the role of Magnetar as the moving force behind the deal.

Per the SEC’s complaint against JP Morgan, Magnetar provided $8.9 million in equity and shorted $600 million notional, or more than half the face amount of the CDO (this is consistent with our analysis, which had suggested that Magnetar, unlike Paulson, did not take down the full short side of its deals, since it like staying cash flow positive on its investments. The size of its short position was limited by the cash to be thrown off by the equity tranche). And needless to say, this was a CDO squared, meaning a CDO made heavily of junior tranches of other CDOs, so it was a colossally bad deal.

The complaints (one against JP Morgan and the other against GSC employee Edward Steffelin) make clear that the SEC had gotten its hands on some pretty damning e-mails. The core of the allegation against JPM was that all the marketing materials represented that the assets in the CDO were selected by GSC when they were in fact to a significant degree chosen by Magnetar.

Magnetar made clear that it regarded its equity position as “basically nothing” and really wanted to “buy some protection”, meaning get short and that Magnetar was actively involved in choosing the exposures for the deal.

Another Layer of the Mortgage Mess: “Zombie Notes”

One of the claims we’ve heard throughout the mortgage crisis is that all the systems and records are fine, that the banks have just made a few “mistakes” and when they find out about them, they correct them promptly and cheerfully.

If you believe that, I have a bridge I’d like to sell you. Not only is evidence of widespread, and very likely systematic abuses piling up in courtrooms all over the US, but even at this late date, new types of misconduct are coming to light.

More Dubious Research: “It Would Take 62 Years in New York to Repossess the Homes in Severe Default or Foreclosure”

An article at the New York Times, “Backlog of Cases Gives a Reprieve on Foreclosures,” is more than a little frustrating in that it takes some high level factoids about the mortgage mess and fails to draw the right inferences from them.

The premise of the piece is that in some states, the average time to foreclosure has become so attenuated that it would take decades at current rates to clear the backlog. Consider these dramatic-sounding statistics:

In New York State, it would take lenders 62 years at their current pace, the longest time frame in the nation, to repossess the 213,000 houses now in severe default or foreclosure, according to calculations by LPS Applied Analytics, a prominent real estate data firm.

Clearing the pipeline in New Jersey, which like New York handles foreclosures through the courts, would take 49 years. In Florida, Massachusetts and Illinois, it would take a decade.

In the 27 states where the courts play no role in foreclosures, the pace is much more brisk — three years in California, two years in Nevada and Colorado — but the dynamic is the same: the foreclosure system is bogged down by the volume of cases, borrowers are fighting to keep their houses and many lenders seem to be in no hurry to add repossessed houses to their books.

The convention in writing is to list the most important cause first. Thus by giving “the foreclosure system is bogged down by the volume of cases” pride of place implies that the “foreclosure system” being overloaded is the biggest cause.

But this level of abstraction is misleading. There is no “foreclosure system”; that turn of phase implies a single overarching set of procedures. As the mere mention of judicial versus non-judicial states indicates, each state has its own laws and case history as to what is proper practice. Referring to a “system” when there is none is also likely to lead many readers to think in term of the system that is involved in the foreclosure process, the judicial system, and to incorrectly infer that courts being overloaded is a major culprit. The vagueness of the expression, in other words, has the effect of directing attention away from the fact that it is the banks’ own machinery that is the most gunked up.

Fraud, Anyone? Another Type of Mortgage Document Fabrication Finally Getting Attention

One of the strongest testaments to the severity of the mortgage mess is the use of document fabrication as a remedy to otherwise insoluble problems. Although the business has now been shut down, the firm DocX, which was a subsidiary of Lender Processing Services, had a notorious price sheet that showed the comparatively modest fees it charged for creating, as in fabricating, documents out of whole cloth. Foreclosure defense attorneys reacted strongly to the publication of this information. The price sheets contained codes, and they had repeatedly seen these very same codes on foreclosure related documents and had wondered what they meant.

Why would lawyers and servicers (and their enabler DocX) resort to fraud

How the Mortgage Industry Bullies Lawyers Who Sue Them (With the Help of PR Outlet Housing Wire)

One of the striking things, as the mortgage crisis has ground on, is how persistent and to some degree effective the industry incumbents have been in influencing news stories. One can argue they’ve been more successful than the TBTF banks, perhaps because if you can tank the global economy, keep your job, and still continue to pay yourself egregious bonuses, you don’t need to stoop to throttling every bit of negative coverage. The fact that near-urban legends like strategic defaults are trumpeted in the media as if they are a meaningful phenomenon, or that defenses of securitization practices by firms like K&L Gates, which have liability on their legal opinions, dominated the coverage on that issue for quite some time until more and more court decisions showed their analysis to be sorely wanting, illustrates how much spin there is in what purports to be news.

For instance, the website Housing Wire, which appears to aspire to cover the mortgage/housing space comprehensively, nevertheless has had some pretty telling omissions. You saw nary a peep of the bombshell of a story by lawyer Abigail Field in Fortune, which found that all of the mortgages securitized by Countrywide and a large proportion of those that it serviced had not been transferred to the trusts as stipulated in the pooling and servicing agreements that govern then. As we have discussed in this blog at some length, this has devastating consequences. If the borrowers challenge a foreclosure, unless the judge is bank friendly, they will probably prevail. No one wants the party that would be in a position to foreclose (someone earlier in the securitization chain) to do so; that’s an admission the securities are not mortgage backed at least in part if not in full and the investors were defrauded. And there are no retroactive fixes (why do you think document fabrications have become so common?)

Similarly, we have commented on how remarkable it is that foreclosure mills all over the US participated in widespread, systematic frauds on courts (robosigining, forgeries, affidavits being filed without the requisite personal knowledge of the affiant, document fabrication) and yet there has been a failure of state bar associations to sanction the attorneys involved.

But there is a long and proud tradition of small firm attorneys being harassed in various ways when the go up against the big dogs, and attorneys taking on the mortgage-industrial complex are getting their share of i

New York State Appellate Court MERS Smackdown: Another Nail in the Coffin

There has been a lot of buzz about a strongly worded decision by the New York Second Appellate Division in the Bank of New York v. Silverberg. This is yet another ruling against MERS, but its implications are narrower than some commentators have suggested.

It is critical to note that MERS in theory is a mortgage registry, which means whatever authority it has (a matter still being sorted out), it extends to the lien only. MERS has repeatedly said in depositions it was not a lender and has no rights to the note, the borrower IOU. Thus since in most states the note is the critical instrument (the lien is a “mere accessory”), the party foreclosing needs to be a holder of the note (that actually means more than mere possession, you need to be a party of interest, in some states).

MERS advised last year that servicers stop filing foreclosures in the name of MERS. However, there appear to be quite a few foreclosures undertaken in the name of MERS grinding their way through the system; this was one of them (I’m a bit puzzled that more in states with MERS-unfavorable precedents have not been withdraw and refiled, but that is over my pay grade).

You have to love New York judges. The ruling begins: “This matter involves the enforcement of the rules that govern real property and whether such rules should be bent to accommodate a system that has taken on a life of its own.” It’s not hard to guess where this one is going.

HUD: Bank of America “Significantly Hindered” Mortgage Probe (Updated)

We said Bank of America would rue its purchase of Countrywide shortly after it took at stake in the troubled subprime originator:

[E]ven though the financial press has almost universally hailed Bank of America’s investment in Countrywide as a bold and savvy stroke, the market has remained singularly unimpressed.

I will confess I haven’t studied the details of the deal for a simple reason: I’m appalled that B of A would even consider it. The two banks had reportedly been talking for six years. That means B of A knew, or ought to have known, Countrywide very well. An article by Gretchen Morgenson in Sunday’s New York Times paints Countrywide is, at least in spirit if not the letter of the law, a criminal enterprise…. But I know lawyers who have Countrywide in their crosshairs, and I am certain they have plenty of company.

To put it another way: there’s enough fraudulent selling in the the subprime market in general, and smoke around Countrywide in particular, to deter anyone investor who takes litigation or reputation risk seriously.

In my day, no respectable institution would make a high-profile equity investment or otherwise closely link its name with an organization that had the whiff of serious liability about it (except in liquidation or some other scenario which got rid of the incumbent management team).

It looks like Bank of America, in a misguided effort to limit Countrywide-related damage, has adopted some of its less than seemly habits, namely a disregard for oversight.

New York Attorney General Schneiderman Investigating Validity of Mortgage Transfers at Bank of America (Updated: Trustees Bank of New York and Deutsche Bank Also Being Probed)

The mortgage industry defenders are looking more and more like fools or liars.

Last year, a case called Kent v. Countrywide created a firestorm because both Bank of America’s attorney (who was admittedly just a typical foreclosure mill type) and a senior executive from Countrywide’s servicing unit said that Countrywide as a matter of business practice retained mortgage notes. That was the wrong thing to say in court. From a November post:

We’ve had a series of posts (see here, here, and here) on the judge’s decision in a case called Kemp c. Countrywide, which provided what appeared to be the first official confirmation of what we’ve long suspected and described on this blog: that as of a certain point in time post 2002, mortgage originators and sponsors simply quit conveying mortgage notes (the borrower IOUs) through a chain of intermediary owners to securitization trusts, as stipulted in the pooling and servicing agreements, the contracts that governed these deals. We say “appeared to be” because Bank of America’s attorney promptly issued a denial, effectively saying that the employee whose testimony the judge cited in his decision, one Linda DeMartini, a team leader in the bank’s mortgage- litigation management division. didn’t know what she was talking about. As we discussed, this seems pretty peculiar, since she was put on the stand precisely because she was deemed to be knowledgeable about Countrywide’s practices….

If true, this has very serious implications. As we’ve indicated, it means that residential mortgage backed securties are not secured by real estate, or as Adam Levitin put it, they are “non mortgage backed securities….With the ramifications so serious, expect industry denials to continue apace until the evidence becomes overwhelming.

That time has arrived.

California Bankruptcy Court Judge Edward Jellen Says Repeatedly He Doesn’t Care if the Creditor Asking to be Paid is Really Owed the Money

Per Georgetown Law Professor and bankruptcy specialist Adam Levitin and Tara Twomey of the National Association of Consumer Bankruptcy Attorneys in a Yale Journal on Regulation article:

The trustee will then typically convey the mortgage notes and security instruments to a “master document custodian,” who manages the loan documentation, while the servicer handles the collection of the loans. Increasingly, there are concerns that in many cases the loan documents have not been properly transferred to the trust, which raises issues about whether the trust has title to the loans and hence standing to bring foreclosure actions on defaulted loans…. In these cases, there is a set of far-reaching systemic implications from clouded title to the property and from litigation against trustees and securitization sponsors for either violating trust duties or violating representations and warranties about the sale and transfer of the mortgage loans to the trust.

Standing is a threshold issue and is a first year law school topic. It appears Judge Zellen either slept through that class or has been re-educated by the banksters since then.

The borrower is pro se (although he may have gotten some coaching from a lawyer) and appears to have comported himself well. The judge is quite another matter. This is from last year but germane because the case is going for oral arguments before the 9th Circuit Court of Appeals next week. Hat tip April Charney: