And The Housing Fraud Continues
Courtesy of Karl Denninger at The Market Ticker
From a report emailed to me over the weekend:
At the core of the foreclosure-prevention strategy is ignoring delinquencies. The percentage of older delinquent loans not yet in foreclosure is startling: 60% have at least 12 missed payments, and 35% have at least 18 missed payments. Add to this that three-fourths of delinquent loans are not in foreclosure, and we see that hidden losses well exceed those in the open.
Uh, they’re not being "ignored" – this is systemic and intentional fraud.
Remember, these loans are either being held by someone or securitized into some sort of package. When you have a loan that has no chance of "curing" (to cure a loan with 12 missed payments the borrower would have to come up with the 12 payments to bring it current!) that loan should be carried at its recovery value – that is, the value of the collateral that can be seized and sold, LESS the cost of eviction, remediation and resale.
Does anyone recall all the entries I’ve written about getting competent legal and accounting (tax) advice before proceeding with any sort of action regarding walking away, short sales or foreclosure? This same report says:
Many homeowners would be better off going into foreclosure, than doing a short sale. Short sales are fraught with potential legal, credit, and complicated tax issues. For example, someone who refinanced could owe capital gains taxes, which are not forgiven under federal and California temporary debt relief acts. In the foreclosure route, borrowers can live in their house mortgage-free for at least one year, maybe two years. Both short sales and foreclosures are reported as “account not paid in full”, and are equally damaging to a credit score. An exception exists if short sellers can negotiate better terms with their lender on recourse liens. The other possible advantage to a short sale is the ability to get a mortgage again in 2 years (Fannie, Freddie), rather than having to wait 3-5 years after a foreclosure.
Homeowners pursue short sales, unaware of the problems they are creating for themselves. Their agents never warned them of deficiencies, ruined credit, taxes due on forgiven debt, or legal consequences. Agents made flowery promises to get listings, and now the lawsuits are starting.
No, really? You mean that people in the real estate business are less than truthful with their clients? That would never, ever happen with licensed professionals, right?
Then there’s this, which I also have written about:
Another gray area is junior lien holders asking buyers for additional payments. As the market improved, juniors were no longer content with $3k thrown to them from the senior. They now want 10% of the junior note. They argue the additional payment is legal practice because the payment is made to escrow and appears on the HUD-1. However, they are actually hoping the senior lien holder does not read the HUD-1. The California Association of REALTORS® position is that all payments made by the buyer or agent in the purchase of a short sale must be part of the written short sale agreement signed by the senior lien holder. Concealing payments from seniors is loan fraud, and omitting these payments from the HUD-1 closing statement may violate RESPA. Some seniors reinstate their security interests because of the fraud. It’s surprising that the biggest banks are responding, when pressed on the fraud of their request, “just do it if you want the deal done”.
Right. Big banks saying "just do it"? Why would they do that? Is it so they can re-instate their security interests? No, nobody would ever do anything that hoses the consumer, would they? Naw…..
Few people understand that the bank that gave them their mortgage turned around and sold it into a mortgage bond, and the “bank” on their mortgage statement is actually a servicer.
Actually, it’s a bit more complicated than that.
As I’ve been working on (and writing on) for a long time, and as a few attorneys are now starting to understand, the entirety of this process was corrupted and is rife with outright fraud from top to bottom.
Let’s go through a (partial) list of the problems:
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The originator of the loan (which often was some chop-shop mortgage boutique) was the place that got funding via a warehouse line of credit with a major bank. They paid the seller of the house. The seller thus is "whole" and has no further interest.
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The originator was shortly paid in full when the loan was sold to a major bank that was intending to (or did) securitize the paper. They were also paid in full and thus have no further legal interest in the property or the paper.
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The banks, in turn, set up "bankruptcy remote" trusts to hold all this paper. This is (of course) done so that whatever happens to the paper doesn’t impact the bank’s earnings itself. Or does it…. we will get to that later.
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Many of the assignments from this point onward in the loan are legally defective. In particular, many of the assignments of the loans were made in blank, that is, in bearer form. But in most states trusts cannot hold bearer paper of any sort – period. In addition, in many states you cannot record a bearer instrument. To get around recording fees the industry has even created its own "clearing house" called MERS, which alternately claims to be an agent or the actual holder in due course, whichever suits the position of the trust (or itself) any given time. Whether this is legal under state law varies from jurisdiction to jurisdiction – what is known is that only one state has actually made the "reach around" games MERS plays explicitly legal.
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The trusts that are the "vessel" in which the securitized instruments are formed and then sold to investors thus hold paper they can’t legally hold. This may in fact be sufficient to void the trust. Worse, they issued prospectuses and offering circulars to investors claiming that they had good recordable title to each and every loan in the trust. In many cases they never did and can’t cure this retroactively. That is, there is at least the appearance of fraud in the sale of these securities, in that the buyers were led to believe they were buying a note backed by a security interest in an asset, when in fact there is no such backing at all – the note is a "bare" promissory note!
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Cities, counties and states were ripped off to the tune of hundreds of billions of dollars over the previous ten years as a consequence of these intentional failures to properly record. Specifically, the states, counties and localities have laws governing the requirement to record and pay doc stamps – that is, taxes – on transactions of this sort. The necessity of recording these transactions varies from jurisdiction to jurisdiction, and thus the economic damage done by this avoidance varies, but the banksters and their cronies simply kept this money instead of filing and remitting it to the taxing authorities as required by law.
The mess doesn’t end here. If you buy a house where the original note was not satisfied in full and a full chain of assignments cannot verify that all security interests are released the title chain is severely clouded, perhaps to a degree that is almost impossible to unravel. Wise title insurance companies are beginning to recognize this problem and refuse to issue owners policies against properties where a broken chain of assignment exists,especially where a foreclosure or short sale took place, as those properties may still have an enforceable lien against them!
I recently spoke with an attorney who is aggressively pursing these issues when his clients are faced with foreclosure, with some (and likely growing) success. He related to me that he spoke with the FCIC and was asked "Well, what is your solution? Are you asking that we nationalize all the (large) banks?"
If that’s not an admission that FCIC knows the large banks were and are complicit in this and if forced to admit the truth in their financial statements would be rendered insolvent I don’t know what is.
We have fixed nothing, but the can-kicking has also not pushed the bar very far down the road. The gambit was that the economy would return to a "boom" in the two years that have passed, and that the problems would be "absorbed" in that time.
It hasn’t happened.
Now we’re faced with having structuralized a $1.5 trillion annual budget deficit into the indefinite future while those who were "helped" by HAMP and similar programs are facing re-default a few months to a couple of years down the road. DTIs over 60% virtually guarantee that outcome. At the same time the holders of these notes were sold a bill of goods and eventually some of them will wise up to the fact that the so-called "bankruptcy remote trusts" that allegedly hold the paper (and thus immunize the banks that created them) are legally defective. Those holders, when (not if) they suffer actual principal and coupon loss, can be reasonably expected to pursue their remedies at law with the aim of voiding the trust and opening the assets of the creating financial institution to attack.
If this line of inquiry is pursued it is entirely possible that these trusts would in fact be voided, and the resulting exposure landing on the major financial institution balance sheets would render them insolvent.
Again, we had the choice in 2007 and 2008 to force the institutions that did these things to "eat their own cooking", which would have likely bankrupted many or even most of them. But while we need a banking system, we do not need any particular set of individual banks. Instead of "bailing people out" and playing "extend and pretend" we could (and should) have taken the $700 billion in TARP funds and used it to charter 10 new banks with strictly-limited 10:1 leverage and reserve ratios, which would have provided the ability to take up $7 trillion in new and rollover lending – and let the overlevered behemoths fail.
Yes, the FDIC would have had to step in, and it might have cost us a trillion or more in FDIC insurance payouts. But even that would have been cheaper than what we have done, and in addition, we would have a safe, sound and stable financial system today.
Instead we have allowed the banksters to rob us once again, fixing nothing. As this mess continues to unravel – and it will – we will find that in fact we have simply blown more than $4 trillion in borrowed funds and in fact gotten nothing in return for it.
