There are quite a few misunderstandings, denials, and exaggerations floating around as to what the final outcome might be of “Fraudclosure.”

At the current stage, we really do not know how extensive the problems are. We could make wild and unsubstantiated conclusions, but we prefer reason and logic.

So let’s break this down as to the primary concerns. As I see this, what facts are revealed and how these errors get resolved will determine the resolution of the current fiasco, as well as the costs.

1. Errors in Securitization:  We have learned that many of the Residential Mortgage-Backed Securities (RMBS) were constructed in a way that did not include two key components: The Mortgage Note, and the Assignment of that Note. Because of this, the subsequent sale and resale of both mortgages and CMOs have confused or even lost the chain of title.

We do not know exactly how many structured products contain errors of Notes or Assignments, but a rough estimate is “More than a few.”

2. Securitization Warranties:  Structured Fin products come with warranties that assure a buyer they were created properly (i.e., legally). The short cuts noted above may place the underwriters at risk of Putbacks. The buyers of flawed structured products get to return the CDOs.  One analysis from Branch Hill Capital put the exposure of BofA alone at $70B — but the truth is, we have no idea of the total number.

3. MERS: It appears that electronic mortgage filing was little more than a legal fiction, designed to save banks and securitizers a billion plus dollars in filing/transfer fees. The risk in doing these things down and dirty (aka on the cheap) is that in many cases, we have lost the ability to determine exactly who is the lien holder of record. (Repeat after me, “There is no Free Lunch“).

4. Assembly Line Financial Services:  Like MERS, the costs of doing things fast and cheap — versus doing them correctly – has been revealed as far greater than advertised. Could mass securitization have taken place without these shortcuts, bad documentation, and illegalities? If the true costs of doing this correctly were actually accounted for, could sub-prime securitization even have occurred at half the size and pace it did?

5. Regulatory Oversight: The banks have demonstrated — yet again — that they are too irresponsible and reckless to operate without strong oversight. Just a few quarters after being bailed out for their reckless lending, they find themselves in trouble for irresponsible foreclosure proceedings and all manner of illegal behavior. Is it they — or we — who never learn history’s lessons ?

6. Selling REOs & Foreclosed Properties:  Relative to the economy, here is the greatest concern: Banks are sitting on millions of foreclosed properties. Given their mishandling of foreclosures, there are now credible concerns that Title companies will not insure new REO transactions due to the banks’ administrative negligence. Without Title insurance, these houses are worth from 25-50% less than they would have otherwise sold for at REO sale or auctions. If this affects a million REOs times even $100k, that is a lot of money. And, it is potentially much worse.

7. Government Ownership of Banks Is Bad: When the government has a substantial stake in major financial institutions, they fail to discharge their duties of enforcing the law. Under normal circumstances, the reckless illegality we have seen from banks  would have caused the US Attorney to become involved in the investigations. Instead, the nation’s chief law enforcement officer has a conflict of interest.

Yet another reason why:

8. Bailouts Are Bad: We once again see the fallout from rescuing reckless, irresponsible financial entities. Had we performed GM-like prepackaged bankruptcies, these issues would not exist. Courts would be resolving the errors in equity (doing what was fair to all parties). Instead, this becomes yet another potential taxpayer headache.


Possible Solutions: This is going to be challenging to resolve, as the parties involved are sophisticated investors who will seek to enforce their warranties and contracts via the courts.

The resolution of this could include the flawed structured mortgage products getting put back the to the original underwriter/securitizer. The banks have acted somewhat responsibly, albeit belatedly, voluntarily stopping foreclosures until they can resolve these problems.
But do not misunderstand these circumstances: These are problems of the banks own making, and we should make sure that the costs of these do not fall to the taxpayers.

Category: Derivatives, Foreclosures, Legal

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

61 Responses to “The Impact of Error From Securitization to Foreclosure”

  1. And no, this is not about keeping deadbeats in their homes.

  2. VennData says:

    “…Had we performed GM-like prepackaged bankruptcies…” while – slightly – speculative and can surely be argued …has one unarguably powerful benefit: future bond investors will not expect to be bailed out. And that, as the list of pluses and minuses are drawn, trumps them all.

  3. chartist says:

    I just saw a lawyer on CNBC bringing up one situation where fraud occurred: People got mortgages on the pretense that it was for their primary residence, hence getting a lower mortgage rate. But, it was obvious they were for investing or othewise not for their primary residence and hence should have been given a higher rate….and the buyers of those loans were not told this and therefore overpaid for the mortgages….Now that’s fraud and a big problem for somebody.

  4. hammerandtong2001 says:

    Hold your horses…

    I thought this whole mess was just some book-keeping technicality mumbo jumbo…

    (har, har…)

    Said this the other day: I’m happy to pay my mortgage on the first of the month to somebody (anybody!) — that is — if you can PROVE that I owe you the money. Until then, it’s escrowed.


  5. dead hobo says:

    Barry Ritholtz Says:
    October 15th, 2010 at 12:02 pm

    And no, this is not about keeping deadbeats in their homes.

    Not even just a few? Mean bastard. These people aren’t deadbeats. They’re payment impaired.

    Otherwise, best story to data anywhere on the problem.

  6. DL says:

    “Had we performed GM-like prepackaged bankruptcies, these issues would not exist”.

    . . . . . . . . . . . . . . . . . . . . . .

    So, throwing taxpayer money, and bondholder money at the UAW is a good thing?

  7. DM RTA says:

    We do not know exactly how many structured products contain errors of Notes or Assignments, but a rough estimate is “More than a few.”

    I feel like this is a dumb question but how are the securitized issues receiving the expected cash flow if there are mistakes that amount to more than a few? If the assignments are not in place properly then how do the various servicers know where to send the monthly principle and interest payments? And wouldn’t errors be showing up with the MBS holders?

  8. Mr.Sparkle says:

    @chartist – Everyone likes to trot out their favorite anecdotes to make their case.

    Maybe we’re just all too fixated on examining this issue through the “rule of law” lens. Perhaps we should be looking at this as an “unintended stimulus package.”

    It seems that this is only going to be really resolved on a case-by-case basis that will take years to sort out. And considering the different set of legal standards in each state, this probably makes some sense. So in the meantime, there should be a bonanza for lawyers and “allied tradespeople” extracting fees from the banks and servicers. Call it a trickle-down stimulus even, since we all know where the TARP money went.

    When uncovered in these cases, fraud should be punished severely. Let the DAs wanting to make names for themselves roll the little fish robosigners/filers on the bigger fish in the banks. Someone borrowed and falsified the intent? That’s probably not only fraud against the bank but it wouldn’t surprise me if there were some property tax fraud thrown in the mix. Bust them too. Punish them all. I suspect that the truly innocent parties in this whole fiasco are few and far between.

  9. HEHEHE says:

    “These are problems of the banks own making, and we should make sure that the costs of these do not fall to the taxpayers.”

    Good luck with that;)

  10. deanscamaro says:

    I was wondering when you would put out a post such as this! Back long ago, in the clouds of time, I remember when you had a post or two about the problem of losing sight of ownership on mortgages as these securitization packages were sliced and diced and sold off to the highest bidder.

    What comes around, goes around. Speed kills! Where were/are we to turn to stop things like this from happening…….the banksters???……our congressmen who were/are being paid off by the banksters???

    Bend over, please, while you receive our latest delivery.

  11. Mutant_Dog says:

    @DM RTA, good question. IF the legality of any assignment to the MBS is in question, the cash-flow stream paid as a result of that assignment should be under review as well. Off-the-cuff, I’d say that, now the foreclosed parties have much more stringent legal representation, and discovery, in their current predicament, than is routine to a mortgage-payer. IOW, the MBS world has just now become aware, itself, of the potential problems in this regard.

  12. cwf says:

    To those few who have argued here, “the system is not perfect”, and that errors will happen when such a large number of loans/foreclosures are processed (the same argument several pro-bank analysts on CNBC have used), I ask this question:

    Does US Law treat differently

    a) A corp that does 1,000,000 transactions with 1,000 of them breaking the law (perjury, false docs, forgery, fraudulent representations, etc.)
    b) A corp that does 1,001 transactions with 1,000 of them breaking the law?

    If so, banks should find out what the tolerable (by US Law) ratio of criminal transactions vs. proper transactions is, and try to maintain a level of criminal transactions just under that ratio. Easy money.

  13. Arequipa01 says:

    Speaking of solutions:

    Howzabout a lil thing we like ta cawl “adverse possession”

    Hit it boys:

  14. alnval says:

    “At the current stage, we really do not know how extensive the problems are.” (BR)

    IMO regardless of the extent of the problems associated with errors in the foreclosure process and how resolving them will impact the resolution of the current crisis, if the Amherst report is to be believed, we’re still looking at the possibility of 20 percent of the 55 million existing mortgages going into default.

    It seems to me that these two problems cannot be separated. Any resolution of the mortgage crisis is going to have to consider both issues. Having mechanisms in place to resolve both will be essential. Given the potential magnitude of the default problem some deference should probably be given to stopping the forest fire before it consumes the fire house and the local water supply. That may mean that the government will be forced to install a moratorium on any court action designed to resolve questions of ownership until the impact of a 20 percent foreclosure rate on the national economy can be brought under control.

    I continue to fear, however, that our culture of self-serving denial will continue to prevent us is from accurately scoping this problem so we can get on with fixing it. What iceberg?

  15. Arequipa01 says:

    This is for all the deadbeats and you know who you are (Kenny L- I’m lookin at chu!):

    Blues Comin’ Home Baby (Melvin Taylor- Chicago based axe swinger)

  16. obsvr-1 says:

    @Speaking of solutions:

    Howzabout a lil thing we like ta cawl “adverse possession”

    Hit it boys:

    — Reply

    Nice try, the statue of limitations varies by state, but it takes anywhere from 10 – 30 years to make an adverse possession claim – this is a dog that won’t hunt.

  17. pintelho says:

    Maybe some previous astute commenter has already raised this concern..

    Does anyone know how much of this affects the three stooges…you know Fannie, Freddie, and Ginnie?

    That makes this a tax payer issue as well…


  18. S Brennan says:

    Yes, the elites have decided, once again, as it always has been and will forevermore be…

    Patricians: “It’s the Plebeians, it they would just fight and die in our imperial wars, pay for our tax cuts and shut up. I mean it’s not like we keep everything of theirs. We let them benefit a little from their labor don’t we…don’t we?”

    Plebs: “We who are about to be crushed in your wars and brought to destitution in Patrician financial schemes salute you!”

    Details here:

  19. “… Under normal circumstances, the reckless illegality we have seen from banks would have caused the US Attorney to become involved in the investigations. Instead, the nation’s chief law enforcement officer has a conflict of interest…”

    ” Under normal circumstances ” ? Really ? Like, When?

    Long Story Short, AG “Bag” Holder, like the Line of AGs before him, Is a walking ‘Conflict of Interest’.

    Sorry, but that ain’t what that ‘Office’ does..

  20. [...] Congress won’t let the too-big-to-fail banks to get torpedoed by foreclosure-gate.  (NetNet also Big Picture) [...]

  21. Pocket QQ says:

    The Impact of Error From Securitization

    What impacts (if any?) does this have on all RE transactions past and present? Are forged documents in refi and sales? Are people being economically impacted because nobody can figure out who owns what?

  22. bman says:

    I am getting rather bored with homeowners referred to as deadbeats. How about we think up something creative, Pioneers for homeowners, Vultures or some similar carrion creatures for bankers.

    The pontificating drolls who go on about “well if the homeowner had just respected his usurious mortgage agreement,” while the whole economy went to hell as a result of the same bankers running a gambling based con game on the rest of the world, are quite repulsive, and in the process shine a light on their level of ignorance, or their conflicts of interests.

  23. mbelardes says:

    I’m tearing through analyst opinions and they are not paying any respect to the legal implications of this in their belief that this isn’t a big deal.

    Due process of law in the deprivation of real property is a big deal. Fraudulent Affidavits to the court to begin the foreclosure of a property is a big deal.

    IF this was as widespread as I bet it is, the banks are going to get ripped from the bully pulpit to the balance sheet.

  24. obsvr-1 says:

    Why should the SEC settle a civil case and not go for jail time for one of the most corrupt CEO’s behind this mess ? !!!

    Public May Be Deprived of Seeing Angelo Mozilo Tried in the ‘Flesh’

  25. Freestate says:

    Does anyone know what the potential impact on title insurance companies is? Do they get stuck holding the bag here?

  26. Jonke says:

    Even the Swedes figured out 18 years ago that you shall not bail out banks or keep the toxic assetts in the mis-managed banks. Let the fundamental law be valid even in banking: too little equity = company gone from your ownership. Governements shall not own banks in a long term perspective, they shall create strong regulators that have the authority to ask tough questions and enforce regulation indpendent of how much money a bank or a banking organisation has donated or if a politician has worked their earlier. The bailed out bank shall be placed under public ownership in a special banking vehicle that seperates the good parts from the bad and does IPO’s on the good parts, place the bad parts in a toxic fund that is given minimum 5 years to dispose the assetts in an optimal way, both from a return perspective and market disruption perspective. The banking vehicle should be run by professionals and not politicains or left over managers from the failed banks.
    It is many times better to let the property then evict on of the few who wants to live their and a bank is not suited for that but a toxic assett fund would be able to do that.
    The American bank solution is a typical example that validates Barry’s statement that politics in the US today is not left-right it is individual vs corporation.

  27. sahillyard says:

    The Fed owns a good portion of the mortgage backed securities. Will they force the underwriters to take them back? This could get more interesting. Anybody know how well Maiden Lane is doing?

  28. AGORACOM says:

    I’ll second the motion that this is one of the best, clear articles on the subject.

    Further, I repeat from my post yesterday that the Feds do not have a “waive to wand”. This bank cluster f*$k is beyond their reach. As Barry stated:

    “This is going to be challenging to resolve, as the parties involved are sophisticated investors who will seek to enforce their warranties and contracts via the courts.”

    Barry forgot to add in the fact that these parties are “highly motivated” (i.e. very pissed off) at being taken by the Wall Street machine and are salivating to take them for everything they have. On the one hand, you have investors like that little town in Norway that are all but broke thanks to buying these non-performing assets.

    On the other hand, you have ARM homeowners that lost everything thanks to mortgage brokers selling Wall Street crack. To be clear, I have little sympathy for the NINJA homeowners – but that is not the point. They are a pissed off group and now they have some leverage.

    The banks dodged the first bullet, they won’t dodge this one.

    What is still up for debate is whether the costs will be fall to taxpayers. In my opinion, US taxpayers ultimately gave TARP a pass the first time (though they did put up a strong fight) based on fears of economic catastrophe. They won’t do it again.

    George … The Greek …. From Canada

  29. Michael says:


    I like the tone of this piece…. more a focus on the facts, less on emotion. Plus as I stated before in a comment, I tend to believe INCOMPETENCE is at the root of most, but not all, problems; rather than outright devious/fraudulent behavior.

    On a high level, I think one can argue that our society has become too complex for the skill level of the average employee to handle, e.g. the skill level of the people putting together mortgages and now foreclosing on them. It may surprise you to learn that half the people are below average! :)


  30. “Banks are sitting on millions of foreclosed properties. ”

    I’d love to see you prove that assertion.. you can’t because it isn’t true!

    There are many homes in the foreclosure process, the number of homes foreclosed on is a much smaller number. If the float is a million at any one point in time i’d be absolutely shocked, it certainly isn’t 2 million (millionS).

    As for title insurance, the banks will either become self insuring or indemnify the title insurers for that specific flaw in title like BofA just did with a title insurer. It’s a minor issue that can be easily addressed.

    I think you are at the point of extreme, zero hedge level exaggeration on point #6 which makes me suspicious of all your other points.

  31. Mannwich says:

    @Effective Demand: It’s not true? You can’t prove that either. Go to places like FL, Cali, NV and AZ and there’s likely more than a million there alone.

  32. chartist says:

    Somewhere there’s a sniper with a dwindling 401K who just read Matt Taibibi in Rolling stone, practicing his nail a banker from North Jersey shot…… We’re headed for revolution…..Who will be the victim of the shot hear round Wall Street?

  33. DeDude says:

    “These people aren’t deadbeats. They’re payment impaired”

    - or sick, or unemployed, or making a (nothing personal) business decision, or…..

    until you actually talk with the individual parties involved it is not going to be possible to judge them – not that lack of specific knowledge would hold back most people. Nothing creates such a good warm feeling as condemning others as being bad immoral deadbeat people.

  34. Mannwich,

    I’ve been through this in California with many misinformed people. You look at the number of foreclosures taken in (its public record) vs the absorption rate and you can get the basic float.

    There are a large number of homes in THE FORECLOSURE PROCESS but the number of homes FORECLOSED ON and held in inventory is relatively small.

    Here is the data I have put together from public reports from Dataquick (the gold standard for RE data in CA):

    I’d estimate the inventory “float” for California to be about 1 to 1.5 quarters worth of REO’s (60k -ish).

    Ask yourself why would the bank take all the risk to have a home foreclosed on and not put it for sale. It makes no sense for them to do so.. and in fact they don’t do it.

    I’ve never looked at it at a national level, I’ve got access to all the NAR data but I dont think they started reporting foreclosures as a % of sales until recently. California is a large enough sample size where I think you can get extrapolate and not be far off. Estimate 1 to 1.5 quarters worth of REO’s in inventory, round up and call it 2 quarters and you’re still only in the 500k home ballpark.

    The data doesn’t support BR’s assertion :

    Last quarter was 288k REO’s for the US, BR’s assertion would mean they have approximately 7 quarters worth of REO inventory. NOBODY ANYWHERE is seeing that, it’s data pulled from the backside, a complete fabrication.

  35. This shows the second half of point #6 is a non-issue just as the previous post shows the first half of point #6 is over-exaggerated:

    Title insurance won’t be an issue going forward.

  36. Andy T says:

    “We could make wild and unsubstantiated conclusions, but we prefer reason and logic.”

    Funny stuff, that comment, given some of the histrionic proclamations made earlier this week.

  37. kayem says:

    Earlier BR wanted to know actual stories, and others have argued that the the number of actual homeowners harmed is small. I think the magnitude of the problem should not be measured by the number of actual harmed homeowners, because really, so few of the foreclosures have actual homeowners living in them. How many stories have we all seen about vacant or half-finished developments or ghost towns (most recent: Einhorn/St Joe). So, regardless of how many individuals were harmed (or were deadbeats), the number of properties potentially without clear title (and subsequent problems with resale value and property values) is staggering.
    Local anecdote: I’ve been watching the mess from my home in south Florida since 2002. Valuations in my historic neighborhood have made a complete round trip from 200K to 425K and now, as the foreclosures occur, below 200K. The adjacent new development sold out (preconstruction in 2004 and 2005), and completed construction in 2006. That fall, I counted lockboxes on 29 of 41, and only 1 real-live homeowner living there. Most of the places sat vacant for years, and now about half have renters and asking prices have plummeted. I can tell from the county’s property search records that most “owners” mailing addresses are different than the property address and many were out of state. Harmed homeowners? None. Properties without clear title if the whole development was in some trust without assignments? 41. Impact on property values in my neighborhood? Ah, that’s the question.
    Housing recovery? Bueller? Bueller? Anyone?

  38. Mannwich:

    You were saying? Turns out my estimates match up almost exactly with Barclays and I am sure their data is much better. Check out the spiffy chart, green line.

    BR, I’d just remove #6 completely..

  39. nofoulsontheplayground says:

    The best solution I’ve heard is the “California Solution.”

    I believe in California if you challenge the ownership of the deed you need to put up the equivalent of the value of the note.

    This keeps the deadbeats from dragging out the process. There have been hardly any instances of challenges like we’re seeing in Florida in California because of this law.

    It should be adopted nationally, and that would solve the problem.

  40. ReadingFundamental says:

    To whoever asked how anyone is collecting payments if the assignments were not done. Any time a loan is made it is set up day one on a loan servicing system. The originators made loans, and every now and then when they had a big enough “inventory” of them sold off pools of them for securitization. Some Wall Street firm would buy up a bunch of pools, pay lawyers to set up a REMIC and get it registered, and then sell bonds secured by those mortgages in the REMIC.

    Now as soon as the originator sold the pool of loans it sent a “tape’ of the data – amount outstanding, interest rate, payment history, etc. to the new loan servicing company that would be handling the billing and collecting of payments for the REMIC.

    When thousands of home loans are sold, the originators don’t want to pay people to sit and sign all those assignment documents and record mortgage assignments for them all at the courthouses, then the investment bankers putting together the REMIC don’t want to have to pay a bunch of people on behalf of the holding company (the mortgages go there until the REMIC has been created) to execute assignments of that stuff from the holding company into the REMIC, and pay to have all those mortgage assignments recorded.

    In theory, a lawsuit against a borrower should not begin until someone has looked at ALL the loan documents – either originals or reliable copies, and the payment history, and signed an affidavit. All these entities were trading around data “tapes” instead of actual documents, so it appears that the folks hired at $12/hour (just a wild guess) didn’t ever look at any of this, they just signed.

    I’ve signed a few affidavits in my time (for commercial transactions) and always went over them carefully. However, I ‘m an experienced financial services person with a B.A., and M.B.A., and a pretty long history of working with transaction and litigation attorneys.

  41. dss says:

    Record number of foreclosures in 2009

    This morning RealtyTrac® released its year-end U.S. Foreclosure Market Reporttm for the year 2009.

    The report shows a total of 3,957,643 foreclosure filings (default notices, RealtyTrac Foreclosure Rate for third quarter 2009scheduled foreclosure auctions and bank repossessions) on 2,824,674 U.S. properties in 2009, a 21 percent increase in total properties affected from 2008 and a whopping 120 percent increase in total properties affected from 2007. The report also shows that 2.21 percent of all U.S. housing units (one in 45) received at least one foreclosure filing during the year, up from 1.84 percent in 2008, 1.03 percent in 2007 and 0.58 percent in 2006.


    Almost 4 million filings on 2.8 properties, in 2009. How many properties are in default and have not been served?

  42. Darmah says:

    Maybe not millions but you can search for an REO home among the 930,000 in the US according to RealtyTrac —

  43. Kris Dannon says:

    The humble settings where the robo-signer challenge began…


    BR: That was where this morning’s QOTD came from

  44. Mannwich says:

    @Effective: Maybe #6 should read: “Banks are sitting on hundreds of thousands of foreclosures AND not foreclosing on millions more”? Let’s face it, there are millions of homes the banks haven’t foreclosed on because they don’t want to take possession of the property, pay the taxes, be responsible for the upkeep, and most importantly, WRITE DOWN THE LOSS. I certainly don’t think he should remove it.

  45. Julia Chestnut says:

    BR, speaking of highly resolved — I am pretty sure that the next step will be captured title insurance companies that are essentially a sub of the bank. Many states have very loose laws regarding the capitalization required of the reserves of a title insurance company. How much you wanna bet the banks take some bank stock — or why not some MBS, even? — and capitalize them a title insurance company. They could purchase a really small one that is already licensed in a state with lax laws. Then all they do is let their own company issue the title opinion, put some really unconscionable clauses in the sale and purchase contract, and just fold the shell when the claims come rolling in? That way they can sell those properties without taking the hit because they are uninsurable.

    Of course, that’s fraud. Do you really think that will dissuade them?

    Yeah, me neither. Of course, the less fraudish way would be to quit requiring a title insurance policy in order to issue a mortgage. . . . .

  46. Casual_Observer says:

    Regarding Barry’s point 5 above, this is definitely a “Fool me once” moment.

    By the way, the title companies have to be downright petrified at this point. They are publicly saying that they aren’t worried because they can put back the insurance on the banks. I suppose that’s true, if the banks accept the tender of indemnification. If the banks don’t, then it’s time to pay the lawyers. Whom do you suppose has the most dry powder (money for lawyers) in that little battle? Pyrrhic victories are none too helpful to an industry that is already on the ropes.

  47. Darmah,

    I’m very very familiar with California RE data, realtytrac’s numbers have always been higher than everyone elses. I assume this is because of double counting loans and the difficulties of being national and scrubbing the data from the massive number of sources effectively. As far as the 930,000 number, I looked at the Bank Owned homes in my zip (something I am EXTREMELY familiar with) and see many homes that already sold long ago as well as quite a few commercial properties. There system just isn’t very good , imho. I used them in the above link because I wasnt finding the MBA report I wanted and didnt want to spend all day making a point.


    The issues you raise aren’t at the heart of the securitization/foreclosure issue, banks are clearly being pressured by regulators to meter out the foreclosures, its not a point relevant to the securitization/foreclosure issue. BR clearly made up that number to heighten the “scariness” of the foreclosure-gate issue. He says “We could make wild and unsubstantiated conclusions, but we prefer reason and logic.” and I would counter he is making wild and unsubstatiated points if we were to go by what he said in point #6.

    I just think BR is a bit over the top on this one. It is all very zerohedge like (worst case scenario, overexaggeration) and very un-TBP which is why I’m suprised he is going on the way he is about this. There are legitimate issues and concerns and BR’s great strength is usually putting things in context very well. In this particular case I think he is doing an extremely poor job but we all make mistakes, BR just makes fewer than most people. But #6 is clearly and DEMONSTRABLY false… no question.

    Note, I have come up with DATA showing why #6 is false, anyone arguing the other side of it will have to do the same. Otherwise it is pointless.

  48. Casual_Observer says:

    One other thought. The remedy for the homeowners does not necessarily have to be that they keep their homes. As Barry, and others, have said, that is neither likely nor economically optimal. However, for the class actions, those homeowners don’t have to ask to keep their homes–they need only prove some type of damages to get recovery. Plaintiffs’ attorneys are geniuses at figuring out damages claims (that is how they make their living after all). It should not be that hard for some enterprising class action attorneys to figure out a cause for damages. Once they do that, the math gets pretty staggering from a bank perspective. They will either pay their lawyers a lot in defense costs, or settle. Neither scenario bodes well for banks.

    Given that the plaintiffs’ attorneys have a ready-made class action here, with deep pocket defendants, the likelihood that this will actually go away quietly for the banks is remote. Give it about two weeks while the attorneys prepare their complaints. They will come.

  49. Mannwich says:

    @Effective: Fair enough.

  50. MinnItMan says:

    “we have lost the ability to determine exactly who is the lien holder of record. ”

    Techically this is not true. The [last] lien-holder of record is who it is, that is, whoever the public record says it is. The problem is that the note-holder (not a matter of public record) is frequently different from the lien holder of record. While MERS is a whipping boy in this (and maybe deservedly so), MERS did “solve” a very nasty problem from the S&L blow-up, that of lost assignments of mortgage from defunct companies, and consequently ineffective satisfactions or releases of liens, since the chain was so often broken (and I’m not exaggerating how bad this problem was). Yes, not recording assignments saved money, but it is not tax evasion as some claim. MERS was designed as a work-around for recording assignments (and post-recording processing), a task that many county recorders handled very poorly. In fact, unlike deeds and mortgages, which usually generate both transfer taxes and recording fees (which are constitutionally limited to actual administrative expense for a necessary government service), assignments usually only generate recording fees, so they often were not treated as carefully by recorders.


    I think you underestimate the title insurers’ problem. Indemnities and “insure-overs” are band-aids, and this problem may be more like a sucking chest wound. Furthermore, title indemnities and “insure-overs” are not universally legal – I know of three states where they are not legal between title insurers, let alone between an insurer and a non-insurer. In BOA’s case, it is likely that when they have a problem on this, it will also have a problem of unlicensed title insuring, and a very angry owner.

    Title insurance is not casualty insurance, that is, it doesn’t evaluate future risk and insure against it (although the title insurers appear to have moved this direction in the last 20 years). Instead, it looks at past problems, cures them, and issues a policy insuring that it adequately prevented the risk.

    I’m not saying that the T/Is won’t do it (they do anything the lenders tell them to do), but it will formalize their morph into casualty insurance (risk assumption) and abandonment of the traditional notion of title insurance as “risk prevention.”* In addition, known title defects will have to be disclosed for post-foreclosures sales regardless of whether they’re insured against. After all, if these foreclosured get re-opened, the new owner will be a defendant in that lawsuit, and in my experience, some folks really get upset about that even if they are covered. Some AGs do, too.

    * FWIW, title industry PR has always argued that its low payout of claims relative to other types of insurance did not reflect its costs curing title defects prior to closing (and, thus, avoiding claims), which if taken into account, would bring it into line with other types of insurance.

  51. Snickers says:

    BR, cheers for keeping on hammering on this. Private property and rule of law… the good ol’ days. Future looks much more on the Russia or Mexico model. Dare I say the US is remaking itself on the model of what it created over the past decade in Afghanistan?

  52. RadioFlyer says:

    Kris Dannon Says:

    October 15th, 2010 at 7:19 pm
    The humble settings where the robo-signer challenge began…


    Robo-signers aside, if you can’t figure out a way to earn $15 a day to pay your mortgage, you should move out without complaining, or tie a cinderblock around your neck and jump in Boothbay Harbor and relieve the rest of society of the burden of your existence.

    Or, more charitably, good luck getting a room at the Super 8, or the local cockroach motel, for $15 a day.

  53. Geoff says:

    I agree with Snickers, great digging. This is pretty big for any bank that originated RMBS in the 2004-2008 period.

    Does anyone happen to have a link to RMBS underwriting league tables from that period? I personally remember being hounded to buy this paper by a certain Merrill Lynch institutional salesman working out of Toronto. My guess is that the bulge bracket could all go through a round 2 of toasting if any judges rule that they are on the hook for the non-enforce-ability of MBS property title.

    In a way, this issue reminds me of the civil suit against OJ that sort of convicted the man after he had gotten away with murder. Say what you want about the crazy US justice system, eventually they manage to nail the guilty ones to the wall.

  54. GregP says:


    Over 2 million homes in REO inventory.
    Your data is not better than their data.

  55. Julia Chestnut says:

    Radio Flyer, that was a particularly poisonous little comment, and I think you should take it back. I don’t personally value human beings in dollars, neither cash flow statement nor balance sheet. Mozart died burning his furniture for warmth because he fell ill and had no reserve. Plenty of the world’s greatest artists and musicians starved to death, or died penniless and reliant on handouts from the monied who pitied or valued them.

    And more to the point, that attitude of yours has killed countless thousands. The poor are people. Fully formed human beings. Are you advocating killing the disabled who can’t earn a living? Those are dangerous opinions.

  56. hue says:

    John Burns Real Estate Consulting estimates that 5 million of the 7.7 million delinquent homes will go through foreclosure or a “foreclosure-related procedure.” and 6.1 million will lose their homes (via Calculated Risk.)

  57. rktbrkr says:

    I feel like this is a dumb question but how are the securitized issues receiving the expected cash flow if there are mistakes that amount to more than a few? If the assignments are not in place properly then how do the various servicers know where to send the monthly principle and interest payments? And wouldn’t errors be showing up with the MBS holders?

    How many checks are returned each quarter? Nice for banks cash flow! Escheatment bonuses coming to some states in a couple years? Wonder which states get the moola?

  58. Tom M says:

    I wonder what the merger documents provided for in the mergers of the companies that were the biggest players in sub-prime? Bear, Merrill, WaMu, Countrywide, etc. were primary sellers of MBS or the mortgages that went into them, did the buyers get indemnities from the government as to the documentation of their assets?
    How far back does that chain go? It probably ends up in the taxpayer lap either way.

  59. GregP,

    That isn’t what that says, It’s not REO inventory (note the EXACT wording) its homes that are delinquent and have been put into the foreclosure process

    From LPS Mortgage Monitor Foreclosure Inventory:”The servicer has referred the loan to an attorney for foreclosure. Loans remain in foreclosure inventory from referral to sale.”

    Once its sold it goes from Foreclosure Inventory to REO. Basically LPS calls anything in the foreclosure process a foreclosure once foreclosed on they call it an REO. So they have 4 buckets, 30, 60 , 90 days late and foreclosure inventory (homes in the foreclosure process). They used to report a 5th bucket in the MM report, REO but have stopped doing so. Their count last reported was at 1 million but I could tell they were accounting for homes being marketed and sold and made some assumption like after 6 months (or some time period) the home was no longer owned by the bank, I assume that’s why they stopped reporting the count because it was inaccurate. You need to have really good data to see both sides of the foreclosure issue (those in process, those that are REO and those that are now sold) and most sides just specialize on one side or the other.

    I have PERSONALLY downloaded forecloure data for 2 counties in California, downloaded all MLS sales (I have public record data too but I chose to use the MLS data for technical reasons), imported and scrubbed the data into a SQL server and matched up every home that was foreclosed on but not sold and then I did the Dataquick data chart with their data. My data matched their data as far as the high level trend and the barclays data matches the DQ & my data as far as the national trend.

    I don’t know why people have such a hard time with these numbers and want to believe the banks are sitting on all these homes that have already been foreclosed on but it is quite simply isn’t true.

  60. [...] The Impact of Error From Securitization to Foreclosure, by Barry Ritholtz, The Big Picture, October 15, 2010, [...]

  61. [...] •  The Impact of Error From Securitization to Foreclosure [...]