Posts filed under “Foreclosures”
“In the West, this formal property system begins to process assets into capital by describing and organizing the most economically and socially useful aspects about assets, preserving this information in a recording system—as insertions in a written ledger or a blip on a computer disk—and then embodying it in a title. A set of detailed and precise legal rules governs this entire process. Formal property records and titles thus represent our shared concept of what is economically meaningful about any asset. They capture and organize all the relevant information required to conceptualize the potential value of an asset and so allow us to control it . . .
The reason capitalism has triumphed in the West and sputtered in the rest of the world is because most of the assets in Western nations have been integrated into one formal representational system . . . By transforming people with real property interests into accountable individuals, formal property created individuals from masses. People no longer needed to rely on neighborhood relationships or make local arrangements to protect their rights to assets. They were thus freed to explore how to generate surplus value from their own assets.”
-Hernando de Soto, The Mystery of Capital
The woes in the mortgage market are complex, deep and structural. This is more than just a few shortcuts taken by paralegals here and there — there are endemic structural problems within the US real estate and mortgage markets. (Yesterday, we touched upon the problems associated with foreclosure mills).
We are not discussing economic problems of too many homes for sale and falling prices. What is being discussed here is a full blown crisis underlying home titles, foreclosure procedures, and securitized mortgages. The rampant, epidemic and systemic abuse of legal property protections is now reaching a crisis.
Today, we will put that crisis into the greater context of the entire real estate industry, from purchases to the securitization of mortgages to default and foreclosure. What this discussion reveals are a series of short cuts, (il)legal fictions, and an utter disrespect for the mechanisms of legal property transfer that underlies our entire system of Capitalism. As Hernando de Soto discovered, the organized, reliable, functional systemic approach to property rights is the key reason why “Why Capitalism triumphs in the West and fails everywhere else.”
And we will see that at every step along the process, the reckless rush for easy profits has systemically undermined these legal property rights — how mortgages are recorded, the bungled bundling of notes to be securitized, the electronic system that fictionalized the process of assembling transfer documents, and how all the players along the way — The investment firms, banks, law firms, even court system, utterly lost sight of what they were doing.
If de Soto were to come to the United States today and review all of this, he would see a system that ignores its own laws, cheats on process, engages in wanton fraud, and is in danger of sliding not just backwards to the 18th century, but slipping towards a third world nation of dubious legal protections and the worst form of crony capitalism.
Welcome to 21st century America.
Capitalism in the West thrives because of our ability to legally transfer property, with confidence and certitude. A buyer knows they will be getting good title to what they are buying, a lender can confidently encumber a property.
Only, not so much any more.
Centuries of property law have been undercut by the entire Real Estate financing complex. From the mortgage brokers who told borrowers “just leave those lines blank, I’ll fill them in” to the banks that taught their own agents how to game their computer loan approval systems to the financial engineers assembling the mortgage sausage to the myriad law firms, process servers and courts that oversee those loans final resting place, the entire system has been corrupted as a cost-savings/profit maximizing exercise.
Here’s how to eviscerate the advantage of western law & economics in three simple steps
1) MERS: We start with the Mortgage Electronic Registration Systems. MERS is a computer registry that was “created by lenders seeking to save millions of dollars on paperwork and public recording fees every time a loan changes hands.” It holds over 60 million mortgages on American homes. Thanks to a legal fiction that pretends to follow the law — but actually does not — MERS has saved banks more than $1 billion. It has also turned what was a very successful system of tracking who owns what property and making it easy to transfer into a dysfunctional nightmare.
Gretchen Morgenson explains exactly how this worked, and then unraveled:
“For centuries, when a property changed hands, the transaction was submitted to county clerks who recorded it and filed it away. These records ensured that the history of a property’s ownership was complete and that the priority of multiple liens placed on the property — a mortgage and a home equity loan, for example — was accurate.
During the mortgage lending spree, however, home loans changed hands constantly. Those that ended up packaged inside of mortgage pools, for instance, were often involved in a dizzying series of transactions.
To avoid the costs and complexity of tracking all these exchanges, Fannie Mae, Freddie Mac and the mortgage industry set up MERS to record loan assignments electronically. This company didn’t own the mortgages it registered, but it was listed in public records either as a nominee for the actual owner of the note or as the original mortgage holder . . .
As long as real estate prices rose, this system ran smoothly. When that trajectory stopped, however, foreclosures brought against delinquent borrowers began flooding the nation’s courts. MERS filed many of them . . .
As cases filed by MERS grew, lawyers representing troubled borrowers began questioning how an electronic registry with no ownership claims had the right to evict people. April Charney, a consumer lawyer at Jacksonville Area Legal Aid in Florida, was among the first to argue that MERS, which didn’t own the note or the mortgage, could not move against a borrower.Initially, judges rejected those arguments and allowed MERS foreclosures to proceed. Recently, however, MERS has begun losing some cases, and the Kansas ruling is a pivotal loss, experts say. While the matter before the Kansas Supreme Court didn’t involve an action that MERS took against a borrower, the registry’s legal standing is still central to the ruling.”
Because of the egregious abuse of the property transfers in the legal system, MERS eventually lost its legal shield and cloak of privacy.
More significant than that, their unique combination of legal fictions and incompetence implies a huge underlying problem with many of the structured finance. This means that Residential mortgage-backed securities (RMBS) and Collateralized Debt Obligation (CDO) that relied on MERS have enormous structural problems.
2) Improper Construction of RMBS/CDOs:
Structured mortgage securities are typically constructed as Trusts. The Trust holds the mortgage notes, which allows the bundling to occur.
Under normal circumstances, the re should be some assignment of the Note by the original lender to the Trust. Frequently, this step did not occur. Nor did the requisite filing of the mortgage lien with the appropriate county clerk.
These errors plus the MERS issue led to very serious problems for much of the structured finance that was built on top of it. The creation of an RMBS or CDO needs at least two legal events to occur: One, the actual note the bank holds needs to be deposited into the Trust. Observe that it is the note holder who is entitled to receive principle and interest payments, who has a lien against the encumbered property, and has the right to foreclose and take the property in the event of a default.
The Note seems to have been somehow ignored in the structuring process. And on top of that, the proper filing of the mortgage note every time a structured product changes hand was mostly ignored. As Corrente noted:
“Because of the expense, time and paperwork it would take to record each of the assignments of the thousands of mortgages in each securitization, Wall Street firms decided to just issue blank mortgage assignments all along the channel of transfers, skipping the actual physical recording of the mortgage at the county registry of deeds.
Astonishingly, representatives for the trusts have been foreclosing on homes across the country, evicting the families, then auctioning the homes, without a proper paper trail on the mortgage assignments or proof that they had legal standing. In some cases, the courts have allowed the representatives to foreclose and evict despite their admission that the original mortgage note is lost. (This raises the question as to whether these mortgage notes are really lost or might have been fraudulently used in multiple securitizations, a concern raised by some Wall Street veterans.)
See also The American Banker.
Karl Denniger went so far as to suggest the entire MERS/structured finance industry engages in such systemic illegality as to be guilty of RICO — the Racketeering statute used to bring down drug lords and mafia kingpins. If he is right, and I suspect he is, our Banana Republic status is getting ever closer.
3) Foreclosure Fraud: This is the third and final step to the disassembling of Capitalism’s property rights. It is indirectly related to prior two steps. Mostly it reflects the same disrespect for legal process int he headlong rush for profits, legal and otherwise.
We’ve discussed this before. Rather than repeat that diatribe, let me show exactly how endemic this is, via the price list for fabricating Foreclosure documents. From naked capitalism, (4ClosureFraud Posts Lender Processing Services Mortgage Document Fabrication Price Sheet), we learn that for a price, a firm will fabricate whatever documents need for foreclosure, real or otherwise.
This makes Denniger’s RICO accusation even more poignant. Need paper work for a foreclosure, legal or otherwise? There’s an app for that.
You can view the entire Lender Processing Services price sheet here.
Welcome to the Banana Republic…
How to Get an “Iffy” loan approved at JPM Chase (March 28th, 2008 )
The Mortgage Netherworld (April 26th, 2009)
Mortgage Electronic Registration Systems Loses Legal Shield (September 23rd, 2009)
Gretchen Explains MERS For You (September 27th, 2009)
Slowing the Runaway Foreclosure Train (October 4th, 2010)
How ‘Flawed’ Was the Paperwork? (October 4th, 2010)
Gretchen Morgenson’s front page NYT piece is your must reading for today. She lets the facts speak for themselves; Calling these failures “problems” understate the case dramatically, but WTF: Its front page NYT. All of these errors “involve documents that must be submitted before foreclosures can proceed legally.“ (Sweet!) The flawed legal practices are so…Read More
Attached is a court order quashing a foreclosure service process service (PDF here; embed here) because of a counterfeit court summons. Apparently what’s happening is that private process servicer companies may not be serving people with summons, and are simply counterfeiting the documents so they can keep the fees without doing the work. That means…Read More
From today’s WTF file, the Florida Mortgage Mill Machinery, hard at work: “When Jason Grodensky bought his modest Fort Lauderdale home last December, he paid cash. But seven months later, he was surprised to learn that Bank of America had foreclosed on the house, even though Grodensky did not have a mortgage. Grodensky knew nothing…Read More
I thought this piece from Greg Fielding, a longtime real estate agent, was especially informative. Greg has experience in selling high end property and low end foreclosures, raw land, short sales, development work, apartment buildings, and working with investors,
He blogs at Bay Area Real Estate Trends, about both local markets and the bigger global environment. He covers most of Alameda and Contra Costa counties and lives in Danville with his wife and three kids.
A Short Sale is a very different type of transaction than a normal sale with equity. Parties in the transaction have a different set of priorities, expectations, and concerns. The Short Sale Listing Agent needs an entirely different skill-set.
Here is everything you need to know about how a short sale works. (from a Seller’s perspective
Most of the same considerations you would have when selling under normal circumstances still apply: De-clutter, touch-up the paint, keep the landscaping tidy, etc. Here are some of the extra issues that Short Sellers face and some questions they often ask…
What should you look for in a Listing Agent?
More than anything, you need an agent who has a decent amount of experience with short sales and has shown exceptional market knowledge. Fancy fliers, glamour-shots, and a “neighborhood specialist” won’t do you any good in a short sale. And don’t hire a “Short Sale Expert” just because they call themselves one.
A great Short Sale Listing Agent will have:
- Good Short Sale experience. Seeing as how we’ve been doing them for 4 years, an agent you hire should have done at least 20 or so successful short sales. Be wary of someone who says they’ve done hundreds…many of them won’t have the time or inclination to give you the extra effort when you need it most.
- Excellent industry and market knowledge. Short sale transactions are so much longer and more complex. It seems like there are a lot more things to go wrong. A good short sale agent needs to understand appraisals, different lending standards and practices, inspection and repair issues, and generally be the kind of person who can come up with the solutions needed to keep a deal moving forward.
NOTE: Some agents hire outside short sale negotiators to process the transaction with the Seller’s bank. If you are hiring an agent is going to effectively outsource their work, it is really this other company you are hiring. Ask tough questions accordingly. The biggest concerns here are that your listing agent may not be engaged and working as hard to keep your deal together AND some of these outside firms may charge you additional money.
Should you stage or spend any money on repairs?
No and No.
Do you have to be behind on your mortgage payments?
This is one of the most common misconceptions about short sales. I have personally closed short sale transactions where the sellers never missed a payment.
The issue is one of hardship. The bank will want to see that you have a legitimate reason why you can’t continue making your payments. If you have a legitimate, provable hardship that justifies why you cannot continue to own the house, then you will be a great candidate for a short sale even if you are current on your mortgage. On the same note, exaggerating your pain by not making your payments when you still could probably isn’t going to help you any. The bank will see your pay stubs and your bank statements anyway.
Obviously, credit scores are a big concern for Short Sellers. In theory, a Seller with zero or very few missed payments will have less credit damage than a Seller with many months of missed mortgage payments.
Having said that, I’m not necessarily recommending that would-be Short Sellers continue making their mortgage payments. There are other factors to weigh in that decision…