Foreclosure moratorium - why?

[clifp]

s unscathed, including taxpayers. And only the taxpayers are going to come out of this with no part of the blame.

Second:



I hope they get tougher. But I think you go overboard, at least on one thing - 20% down.

I bought my home with 5% down in 1998. Excellent credit, acceptable income, blah blah. But I wasn't ready to come up with 20%. Since then I've refinanced twice. Went from [6.125% 30 yr] to [5.75% 20 yr] to [5% 10 yr]. Each time I knew exactly what I could afford, and I plan to pay things off in Q1 2013.

None of this could have happened if I had to have 20% down. (Remember, no exceptions.)
.

I don't agree. Prior to the depression mortgages required closer to 70% or 80%, but stocks only required 20-25% down which is why we had a bubble in the stock market in the 20s which spread to the housing market.

My first house was 10% down, had graduated payments and negatively amortized this was back in 1984. Meaning that each year the payments increased, I was not even paying the interest (13.75% ) until year 3 and I think by year 5, I owed 5% more than I borrowed so effectively a 5% down. I was 24 years old, and while my credit was good I didn't have much history and I had excellent job prospect. They had my parents co-sign but since they were retired and California is non-recourse state them cosigning didn't really help since they were in no position to take over the payments. Over course because housing prices were soaring in Silicon Valley everything worked great for both the bank and myself. In hindsight it was a crazy risk for the banks to take for a a couple percent interest rate premium over a conventional home loan of about 12% (inflation was double digits at this time).

I think making me wait 3 to 5 more years to save up for a down payment would have been a much smarter move on the part of the banks. Yes, it would have a cost me a lot money since the house went from 150K to between 200-250K in those few years, meaning I would have needed a much bigger down. In fact one of the reasons I was so desperate to get into a house and took such horrible mortgage was because prices were going up so quickly, I felt I had to act quickly. Removing a young kid with no savings from the housing market is a good thing because it reduce speculation.

Requiring 20% down is no guarantee that a bank won't lose money on a loan as Chris points out, but letting people use 20x leverage (5% down) is practically a guarantee that in the future we will have another bubble

 

[Gumby]

Personally I think electronic registration is a great idea. It benefits almost everyone. But if the law in a particular state says something must be recorded and a bank failed to record its lien or mortgage, the bank loses! That's the price of arrogance for thinking they can just create their own system and ignore the law.

I'd add that recording property ownership and liens is not merely an anachronistic requirement to help creditors. It is also to protect property owners against illegal takings, fraud, and that sort of thing. In most states, recording a deed establishes legal ownership. Mortgages and such can only encumber the deed. When the banks tried to take over the process they left out important safeguards to property owners.

I would also add that, in many states, when a mortgage is transferred (as they were in creating the RMBS/CDO monster), there is a fee or tax owed to the city or the state to record/recognize the transfer. By creating MERS, banks were able to evade these fees or taxes, ultimately to the detriment of local taxpayers.

 

[Nords]

Couple of interesting links from AP in our morning news website:
StarAdvertiser.com - Mobile Edition

Bank of America halted foreclosures across the country to address paperwork problems, but three other banks did so only in 23 states. Other banks holding millions of mortgages have not suspended any foreclosures.
In the other 27 states, judges don't have to review foreclosures. A homeowner must sue the bank for that to happen. Paperwork mistakes and fraud are even harder to discover, legal experts say.
Those states without judicial oversight for foreclosures include eight of the top 10 foreclosure states in America, including California, Arizona and Nevada.
As with all real estate matters, location is everything.

StarAdvertiser.com - Mobile Edition

In one deposition taken in Houston, a foreclosure supervisor with Litton Loan couldn't define basic terms like promissory note, mortgagee, lien, receiver, jurisdiction, circuit court, plaintiff's assignor or defendant. She testified that she didn't know why a spouse might claim interest in a property, what the required conditions were for a bank to foreclose or who the holder of the mortgage note was. "I don't know the ins and outs of the loan, I just sign documents," she said at one point.
Until now, only a handful of depositions from robo-signers have come to light. But the sheer volume of the new depositions will make it more difficult for financial institutions to argue that robo-signing was an aberrant practice in a handful of rogue back offices.

I think the best way to solve the problem lies in these two articles: give the foreclosed homeowners a new and lucrative career as robo-signers...

There's gotta be a logic flaw in there somewhere.

 

[Htown Harry]

Good comments everyone. I'm learning a lot.

I keep waiting for a political blast from right or left field, but so far it looks like my OP could have been in FIRE and Money.

Random comments and recommended reading:

1. Why correct paperwork is the Right Thing To Do:

I'd add that recording property ownership and liens is not merely an anachronistic requirement to help creditors. It is also to protect property owners against illegal takings, fraud, and that sort of thing.

Absolutely correct, but it goes deeper. A case can be made that central to any country's economic strength is the stability of its legal system, in particular the laws related to property rights, property titles and the security of collateral for debts.

One blogger quoted some legal language I recognized, which boils down all the legal issues of this foreclosure mess to an essential point. It applies to all of us, deadbeats included:

"#5 - No person shall...be deprived of life, liberty, or property, without due process of law;..."

2. The mortgage service organizations lost sight of risk / reward relationships over a period of years.

One of the blogs I found had a link to a fascinating - and very entertaining - first-person insider’s account from 2007:
Calculated Risk: Deutsche Bank FC Problems and Revenge of the Nerd

The first point of this little exercise is to convince you that sometimes things happen because somebody screwed up a bit of paperwork; it is not always a case of things happening because of Organized Predatory Conspiracy to Defraud mortgagors. The second point is to indulge myself in a few minutes of childish vindication of my years spent as Detail Obssessed Literal-Minded Small Picture Pain in the Ass Who Doesn't Play Ball…

Several years ago I represented a large bank in the process of securitizing a big chunk of its seasoned portfolio loans. Among other things that meant I reviewed several thousand notes...

Many of the pressures she describes greatly enlightened me on the way an MBS’s component notes are / were assembled in a paper system. Of course, we now know as MERS and other electronic recordkeeping systems gained favor, the risks associated with paperwork shortcuts were greatly compounded by recordation shortcuts.

3. This ain’t good for the banks that securitized mortgages. Not good at all.

This interview of a bank analyst was interesting. Same pessimistic tone as the guy from Diana Olick’s blog quoted in my post above, but with more details.
Foreclosure Fear: Q&A Risk Analytics Chris Whalen - TheStreet

“…So when you have an imperfection in the record, you're in big trouble as a lender. You basically have an unsecured loan. That's the issue that's really going to commit the banks this year and next year. Investors are going to sue them because they were sold a security that was fraudulent. It was not collateralized. And the underwriter of the security did not take the steps required to go out there and perfect the collateral lien, because they wanted to keep the extra half point for themselves as profit in the underwriting instead of having it as the expense for the underwriting…”

4. The news isn’t all bad

The giant federal finance reform bill passed this summer has quite a few prohibitions against the worst practices of mortgage lenders during the boom. Two summaries, the first a one-pager and the second very detailed:

Some Mortgage Tidbits from the Dodd-Frank Mortgage Reform Act | Aurora Mortgage

http://www.mbaa.org/files/ResourceCenter/MIRA/MBASummaryofDoddFrank.pdf


However, I didn’t see anything that addresses this latest set of problems related to foreclosure paperwork. Much of the Dodd-Frank language relates to the mortgage's financial terms and the disclosures owed to borrowers.

Since foreclosure is an area of law largely delegated to the states, one has to be at least somewhat encouraged that all 50 states AGs joined in today's action to get the bad practices exposed and stopped.

 

[Texas Proud]

Personally I think electronic registration is a great idea. It benefits almost everyone. But if the law in a particular state says something must be recorded and a bank failed to record its lien or mortgage, the bank loses! That's the price of arrogance for thinking they can just create their own system and ignore the law.

I'd add that recording property ownership and liens is not merely an anachronistic requirement to help creditors. It is also to protect property owners against illegal takings, fraud, and that sort of thing. In most states, recording a deed establishes legal ownership. Mortgages and such can only encumber the deed. When the banks tried to take over the process they left out important safeguards to property owners.

I agree... and I don't think my post said otherwise...

I am just guessing here, but I would think that SOMEONE filed a lien at some point in time.... I think the problem is that Bank A filed the lien, then put the loan in MERS... sold it to Bank B who did not file, sold to Bank C who did not file, sold it to consolidator Z who did not file, who sold it to Trust ABC who did not file... and now the trust wants to foreclose and the courts say 'you don't own this mortgage... Bank A does...'



As for people who say that there was a foreclosure on a paid off mortgage... can you give links I still have not seen any proof of this.

 

[Brat]

Maybe the solution is that each of the lien holders document the chain and pay the filing fees they avoided. Those fees pay for the service of assuring that title passes without default and the lien holders attempted not to pay their share.

Not much different IMHO than folks who try to take a ride on the subway/light rail without paying the fare.

 

[Emeritus]

As for people who say that there was a foreclosure on a paid off mortgage... can you give links I still have not seen any proof of this.

Banks foreclose on houses where there never was a mortgage
Bank Mistakenly Starts Foreclosure Process On Wrong House In Kissimmee - News Story - WFTV Orlando

Bank of America has been screwing up regularly
Bank of America Forecloses on Wrong House, Abducts Macaw
Bank Tries to Foreclose on Wrong House! -- Must Read

 

[Texas Proud]

Banks foreclose on houses where there never was a mortgage
Bank Mistakenly Starts Foreclosure Process On Wrong House In Kissimmee - News Story - WFTV Orlando

Bank of America has been screwing up regularly
Bank of America Forecloses on Wrong House, Abducts Macaw
Bank Tries to Foreclose on Wrong House! -- Must Read

Thanks... it does show that people have forclosed on the wrong house which is horrible... but I did not see where they forclosed on a house that was 'paid off'.... IOW, what it seemed like people were saying... using your articles as an example.... someone had a loan with BOA.... they paid on the loan until it was paid in full... but BOA came and forclosed on it anyhow... at least that is what I assumed people were talking about...

Now, getting the addressed mixed up has been happening for many things over many years.... the utility company cuts off utilities at the wrong house, a delivery of something to the wrong house, etc. etc.... not quite the same as what had been said.

And I think the people who this happend to should get a decent settlement.... I know BOA or any other bank does not want to deal with it, but they did wrong and should pay to fix everything plus at least $50K in the pocket of the homeowner....

 

[DoingHomework]

As for people who say that there was a foreclosure on a paid off mortgage... can you give links I still have not seen any proof of this.

I'm not sure how it works in other places. I just checked my county's records. I found lots of lien filings listing MERS as the lienholder. But I am fairly certain that no one actually borrowed from MERS so it is unlikely that MERS, the lienholder can produce a mortgage in its name to support the lien. And if,for example, BofA then decides to foreclose, it has no lien to support a foreclosure because the lien is in the name of MERS.

I'm sure that internally between the banks and MERS they documented proper assignment of the liens. But that is basically irrelevant. If the law required the assignment be recorded and it was not then it is invalid and can't be foreclosed against. I understand that legally this does not mean the borrower is off the hook. It just means that the bank then has to follow a much more expensive and laborious process to enforce its rights.

When we put our house, which is paid off, into a trust a few years ago, we had to file a series of deeds to get a clear deed in the right name. My wife and I had bought the house together before we got married. We had to file a quit claim deed, then a community property deed,then a deed to the trust. Each of these cost us recording fees, and, we were told, the sequence had to be properly recorded just in case a future claim arose during one of the periods when ownership was in an entity other than the trust. In other words, if someone popped up 10 years from now and claims to have been injured on our property after we got married but before the trust was formed there needs to be a deed on record documenting proper ownership.

 

[Texas Proud]

I'm not sure how it works in other places. I just checked my county's records. I found lots of lien filings listing MERS as the lienholder. But I am fairly certain that no one actually borrowed from MERS so it is unlikely that MERS, the lienholder can produce a mortgage in its name to support the lien. And if,for example, BofA then decides to foreclose, it has no lien to support a foreclosure because the lien is in the name of MERS.

I'm sure that internally between the banks and MERS they documented proper assignment of the liens. But that is basically irrelevant. If the law required the assignment be recorded and it was not then it is invalid and can't be foreclosed against. I understand that legally this does not mean the borrower is off the hook. It just means that the bank then has to follow a much more expensive and laborious process to enforce its rights.

When we put our house, which is paid off, into a trust a few years ago, we had to file a series of deeds to get a clear deed in the right name. My wife and I had bought the house together before we got married. We had to file a quit claim deed, then a community property deed,then a deed to the trust. Each of these cost us recording fees, and, we were told, the sequence had to be properly recorded just in case a future claim arose during one of the periods when ownership was in an entity other than the trust. In other words, if someone popped up 10 years from now and claims to have been injured on our property after we got married but before the trust was formed there needs to be a deed on record documenting proper ownership.

I have not looked at who has filed the lien on my house... don't know if I can... but let's just continue with the theme of your post...

Say the MERS is not a proper lien... but BofA owns the note... then if they want to foreclose all they have to do is file a proper lien and then foreclose... sure, a lot of unwanted paperwork but it is not like they can not perfect their lien at all... unless of course someone got a second and the second lienholder is really the first.... that could be a problem...

 

[MichaelB]

One of the unanswered questions is where are the auditors. Auditing the trail from book entry to physical doc is mandatory and routine. I suspect some auditors are also soon to be dragged into this.

What a mess. I suspect this is a real live example of business just pushing too hard to cut costs by eliminating employees but not the work. If that's the case, makes you wonder what else is out there...

 

[Cattusbabe]

Here is a possible answer to the OP original question Foreclosure moratorium - why?
Gonzalo Lira On The Second Leg Down Of America's Death Spiral | zero hedge

 

[Htown Harry]

Here is a possible answer to the OP original question Foreclosure moratorium - why?
Gonzalo Lira On The Second Leg Down Of America's Death Spiral | zero hedge

Thanks, CB.

Funny and depressing at the same time...

 

[clifp]

Here is a possible answer to the OP original question Foreclosure moratorium - why?
Gonzalo Lira On The Second Leg Down Of America's Death Spiral | zero hedge

A great explanation of the mess.
The language is a bit over the top, although if anything in recent memory deserves streams of profanity it is mortgages and mortgage back securities.

 

[Emeritus]

A great explanation of the mess.
The language is a bit over the top, although if anything in recent memory deserves streams of profanity it is mortgages and mortgage back securities.

It does have one legal flaw. the article claims


Therefore, legally, the mortgage note is no longer valid. That is, the person who took out the mortgage loan to pay for the house no longer owes the loan, because he no longer knows whom to pay.
To repeat: If the chain of title of the note is broken, then the borrower no longer owes any money on the loan.

A failure in the chain of title means that a subsequent purchaser of the note cannot enforce the note. It does not mean the debtor does not owe the loan. The note has to go back to the last person with a clear title, who on reacquiring the note can enforce the note or endorse it.

 

[Brat]

...
A failure in the chain of title means that a subsequent purchaser of the note cannot enforce the note. It does not mean the debtor does not owe the loan. The note has to go back to the last person with a clear title, who on reacquiring the note can enforce the note or endorse it.

The challenge for some lenders is that they don't have the original note or title (as the case may be), it was destroyed or lost in their process. Just what will be required will depend on the statutes in each jurisdiction. What a mess the mortgage writers & re-sellers made!!!

 

[Texas Proud]

It does have one legal flaw. the article claims


Therefore, legally, the mortgage note is no longer valid. That is, the person who took out the mortgage loan to pay for the house no longer owes the loan, because he no longer knows whom to pay.
To repeat: If the chain of title of the note is broken, then the borrower no longer owes any money on the loan.

A failure in the chain of title means that a subsequent purchaser of the note cannot enforce the note. It does not mean the debtor does not owe the loan. The note has to go back to the last person with a clear title, who on reacquiring the note can enforce the note or endorse it.

This is a point that most people try and ignore... also, if there was a mortgage filed by someone at the beginning of this process... then it is easy to produce one... just have the county print one out..


Also, the article seems to say that the CMO did not want title to the mortgage.... back when I was doing it the trust DID own all the mortgages... I don't know why they changed. To me, that made it easy to slice and dice the payments for the bondholders... and there is one owner...

 

[Emeritus]

The challenge for some lenders is that they don't have the original note or title (as the case may be), it was destroyed or lost in their process. Just what will be required will depend on the statutes in each jurisdiction. What a mess the mortgage writers & re-sellers made!!!

All jurisdictions have a system for dealing with lost "pieces of paper"

 

[Brat]

Ah, but the mortgagors will need to start paying filing fees. One of the causes of this mess is that they set up a flawed system to avoid that 'trouble'. It probably would have worked fine when few homes went to foreclosure and they could devote a lot of attention to those actions and pay filing fees if necessary. Save a penny, spend a dime.

Here is an interesting article from the Washington Post: http://www.washingtonpost.com/wp-dy...0/15/AR2010101506541.html?sid=ST2010101406553

 

[cardude]

I don't know if this has already been posted, and I'm too lazy to check, but this was kind of interesting. Don't know if all, or any, of it is true. Hope not.

The Subprime Debacle, Act II -- Seeking Alpha

 

[Brat]

Oh, I think this is very true. The administrative costs of resolving this mess will be huge. It will be interesting to hear what folks who advocate that banks in trouble should fail (goodbye too big to fail) propose as a solution.

I agree with the writer that first it must be fixed, then heads should roll. The FIDC should immediately put all bank employee bonuses in trust until the mess is fixed and the employee's role in this examined.

 

[Nords]

I don't know if this has already been posted, and I'm too lazy to check, but this was kind of interesting. Don't know if all, or any, of it is true. Hope not.

A few years ago I got so freakin' tired of waiting for John Mauldin to write his own stuff that I stopped reading "his" column, and it looks like he's had no reason to change. The least he could do would be to link to Schiller's material.

"To repeat: if the chain of title of the note is broken, then the borrower no longer owes any money on the loan.

I suspect this is a hypersensationalized oversimplification.

 

[Brat]

I think the borrower owes money on a loan but the issue is who has authority to enforce the loan terms. It is the chain of title on the loan document, not the property.

 

[MichaelB]

If for whatever reason any of these signatures is skipped, then the chain of title is said to be broken. Therefore, legally, the mortgage note is no longer valid. That is, the person who took out the mortgage loan to pay for the house no longer owes the loan, because he no longer knows whom to pay.
To repeat: if the chain of title of the note is broken, then the borrower no longer owes any money on the loan.

This might be true in Venezuela, but that's not where it was written. I think this was written for the benefit of the non-thinking segment of our population. It only resonates now because we're in election season when the gullibility factor is in overdrive.

Ours is a system that protects property ownership. If a physical document is lost or a signature is skipped, the disadvantaged party (mortgage provider) will incur additional costs to ensure recovery, but that in no way relieves the homeowner from the burden of repayment.

I think the borrower owes money on a loan but the issue is who has authority to enforce the loan terms. It is the chain of title on the loan document, not the property.

If you own the mortgage and the chain of signatures is incomplete, you go to court, establish the existence of the mortgage, affirm it is not repaid, then the previous participants attest it is not repaid up to the break, then allow the homeowner to demonstrate it is. IOW, you bring all the parties together that were involved at one time and they all agree. It is expensive and time consuming but there's no way the homeowner is relieved of his/her obligation to pay.

 

[kcowan]

...It is expensive and time consuming but there's no way the homeowner is relieved of his/her obligation to pay.

I think that is the core problem. The shortcuts will have to be corrected and the extra time and costs will bring the system to its knees.

Banking stock anyone?