I have a question about what’s being referred to as the “mortgage morass”, ”foreclosure crisis”, and “Foreclosure-Gate”. It’s being reported that the reason for some of the bad practices was to save a $35 filing fee. Here’s my question. If the filing fee being referred to is a fee when a mortgage changes hands, i.e. from one holder to another, would the entire MBS fiasco have even possible if the various institutions had followed the letter of the law?
As I understand things during the process millions of mortgages changed hands thousands or even tens of thousands of times and, presumably, would have incurred a fee at each exchange. Would the recordkeeping costs and processing fees have eaten up any possible profits?
I only claim partial knowledge. I’ve been reading a good set of econ blogs through the housing bust, but I’m not a source-expert on the thing.
I think it was less the $35 and more the requirement that physical paper be pushed around. Securitization, with paperwork, would have required a Chinese horde(*) of clerks to push it around.
* – historic and non-racist metaphor intended
It’s not clear to me that there are affirmative obligations to record anything. If I buy my house with a mortgage, I don’t think there is any requirement for the bank to record the mortgage. It would just be stupid for them not to do so, because they would not have perfected their security interest in the property and bad things might happen. As far as I can tell, the original mortgages were perfected, the subsequent deals and sidebets may not be.
One concept to consider is the difference btw/ void and voidable transactions. An example of a void transaction is a contract with a minor, there is an obvious flaw at the formation that makes the entire transaction a nullity from the very date it ocurred (it never happened, everything dependent upon it never happened). Courts don’t like void transactions because people may have relied upon the transaction over the years. Instead, they prefer to find transactions voidable, the defect only voids the contract from the point complained of to a judge and ruled upon by a judge. When voided the contract, the court can use it’s equitable powers to make sure justice is done.
I know you’ve done good research on this PD. Isn’t the main problem that a signature on paper is required for an assignment? If say Countrywide creates a loan, and just files it with MERS, sells it off …
I’m trying to understand. The bond holders are out there somewhere. Does BofA, as the entity now owning Countrywide assets, have an obligation to process a foreclosure based on the original loan creation?
I can see why they’d want to do that on the cheap. There’s no profit in it for them.
… but did “foreclosure ability” really stick with them on the last signature or did it disappear?
Signed,
Confused.
I remember another piece now. Isn’t Freddie in trouble for hiring “foreclosure houses” to process loans in their (acquired) bonds?
If so, then they are trying the foreclosure from the back end of the pipe, with title stuck somewhere at the front.
JP, Each state is going to have legal requisites for an effective assignment, so I’m not sure. But it seems like MERS may have been set up in part with deeds of trust, so the transactions may not all have necessarily been assignments of the mortgage interest, but transfers of the beneficial interest in the trust that holds the mortgage interest. Transfers of beneficial interests in trusts are generally not recordable events.
I’d really like to see some documents to see how this would be put together, and part of the problem may be that these deals have all been structured differently. But the law review article from Christopher Lewis Peterson doesn’t complain about signatures, he complains about blanks in the documents that are executed (specifically, the identity of the grantee). The blanks make it easier to transfer, but raise questions about whether the transfer was effective. Now, if he is talking about the home buyer signing a blank mortgage (?!?), the home buyer might be able to complain that there is no mortgage on his property, he just has an unsecured obligation. But the bank advancing the funds to buy the house probably has an equitable lien on the property which can be foreclosed as a mortgage.
Interestingly, Minnesota law was amended to facilitate the MERS approach to holding and foreclosing mortgages. That has obviously limited relevance across the country, but it does support the notion that MERS was not doing something obviously illegal or contrary to public policy.
C’mon, guys.
PD, the problem of the debtors is bad enough but it’s not the puzzle piece that concerns me. The piece that concerns me is institutions stuck with now-toxic MBSs. If the banks’ idiocy in handling the foreclosures opens a window through which holders of worthless paper can go after the banks themselves and the banks demand and get bailout from it, we’ll have a pipeline through which the holders of the paper (who took risks they weren’t capable of evaluating or appreciating and, consequently, deserve the pain they’re in) can go after the banks (who took risks, etc. and screwed the pooch with their reckless handling of foreclosure procedures and, consequently, deserve the pain they’re in, too) with the federal government shoving money through the pipeline.
Drew, I’m hoping you’ll enlighten me here. I’m not a finance guy and have never claimed to be.
There are quite a few people much better informed than I, e.g. Barry Ritholtz, Felix Salmon, and Dan Indiviglio, not exactly left-wing firebrands, who seem to think this thing could pose a serious problem.
Dave, I’m not sure the recent revelations change much of anything unless vast chunks of debtors suddenly become free of their debt. It looks to me like debt collection has just become more expensive, and I’m not sure why that fact alone would help investors in MBSs. The system is cheap on the front end, expensive on the back end and the investors got the benefit of cheap as well.
Just scanning my local recorder’s webpage, MERS is appearing ten years ago, primarily as assignee. During the last few years, MERS is appearing primarily as a co-mortgagee with the originating bank. It looks like the model was changing, and I’ve been looking at stuff going back ten years ago that simply may not be true today.
That would be my disclaimer.
It is completely possible that I don’t understand this situation but the way I’m reading the various commentary (particularly Dan Indiviglio’s) the situation is somewhat different than that. It’s not just that collection has become more expensive but that the banks are on the hook.
Indiviglio doesn’t explain what the problem is though (if it’s his “Doomsday” article):
“when creating a MBS, the bank who originally provides the mortgages to borrowers sells those mortgages to a trust through a legal process called a “true sale.” The trust then sells bonds to investors, which are secured by those mortgages. Due to sloppiness, that true sale may never have been legally executed in most cases.”
I take from this that a mortgage was created and perfected by the originating lender, that the lender was then paid to assign the mortgage to a trust. To put numbers on it, let’s assume the originator received $100,000 and the trust received an assignment of the note and mortgage, but there was some problem with the assigning documents. My first thought is Yippee for the trust, they might be able to sue the originating lender for reimbursement of $100,000 because it discovered it never received what it had purchased. My second thought is why can’t (or wouldn’t) the originating lender sign corrected paperwork now?
Mortgage instruments are generally governed by principles of equity, including the maxim that equity regards as done what which ought to be done. I’m just not convinced that sloppy paperwork is going to be anything but a cost to cure item, unless the debtor has been hurt by it.
To be fair, Indiviglio links to a Bloomberg story in which someone is complaining that pre-2007 assignments to MBS trusts were signed over in blank form.
PD, see my second update to the post below. Apparently, the issue is that the securitization agreements are written in such a way that the banks must take the loans back in the case of fraud.
See also the Ritholtz post linked in my third update. He does a pretty good job of suggesting where the problems may come.
re Megan, sloppy paperwork is not fraud. I’m not sure what fraud she is complaining about, but she does mention fraudulent notarization, i.e. fraud in the foreclosure process. I’d be very surprised if the MBS agreements allow complete cancellation because someone lied during one of the foreclsoures.
re Ritholz makes more sense, he says there are warranties that the MBSs were created properly, which doesn’t necessarily require fraud, but depends on how specific the warranties are and whether they foreclose an opportunity to cure.
“PD, see my second update to the post below. Apparently, the issue is that the securitization agreements are written in such a way that the banks must take the loans back in the case of fraud.”
Yes, warnings of wide “putback” are really what signal a systemic problem.
“re Megan, sloppy paperwork is not fraud. I’m not sure what fraud she is complaining about, but she does mention fraudulent notarization, i.e. fraud in the foreclosure process. I’d be very surprised if the MBS agreements allow complete cancellation because someone lied during one of the foreclsoures.”
Well, if you say you are conveying, and you don’t convey …
oh, there might have been some misrepresentations in the quality of the pool as well.
But they did convey something . . .
Here’s the odd thing to think about. We’re talking about pre-2007 mortgage documents. By now every court, every foreclsoure judge, in this country has probably foreclosed using these documents and entered an order which to a greater or lesser extent says the paperwork is sufficient to do what it intended.
It may not be the best paperwork; it certainly has not held up in unique circumstances. It’s perfectly reasonable for the investors to seek a warranty against that risk, but I think the question is going to be whether the investor’s warranty is specific enough.
I’ve read about the pool quality issues, but I believe they are independent of the issues with MERS and robo-signing. I can only try to understand two issues at a time.
Salmon has been handling the fraud issue. There is a lot of disagreement, no surprise, on whether or not it was fraud.
http://blogs.reuters.com/felix-salmon/2010/10/15/regulators-have-known-about-the-mortgage-bond-scandal-for-three-years/
“So while Allon is right that there might not have been a specific rule requiring disclosure of the diligence results, there were still general rules requiring that underwriters disclose all relevant information when they sold mortgage bonds — or any other kind of security — to investors. That’s where the huge potential liability lies.”
Steve