Opinion, commentary and analysis on everything that makes the U.S. housing economy tick -- not to mention the ghosts in the machine, too. Written by HW's team of editors and reporters each business day.
A little bit of sanity, please
October 18, 2010
Where to start? You might think the mortgage and banking world is ending, if you manage to read some of the financial blogs and news sources out there as of late. The world of financial writing and reporting has seemingly and collectively degraded itself into one, long version of CNBC’s Fast Money — where everyone is competing to see who can scream the loudest about the most useless information, until everyone forgets what they started talking about in the first place. This week’s column isn’t an answer to any one of them. It’s an answer to all of them. I won’t claim to have read everything that’s out there, nor will I call out the ridiculously long list of names of those involved, but it’s amazing to see that some previously ‘serious’ financial influencers have gone off the deep end on the issues surrounding ‘foreclosure-gate.’ In particular, when I see the usually level-headed and clear-minded John Mauldin repeating outright false claims surrounding securitization and foreclosures as if they were fact, it’s clear that someone needs to decide to be the grown up in the room. So, let’s start by getting everyone’s facts straight. And then we’ll discuss the real issues out there that actually should matter, but are being drowned out in the din. It’s going to be a long ride this week, so strap on in… Fact one: ‘robo-signing’ is a procedural issue. Period. I don’t care what some talking blog-head says, or what the latest conspiracy theory du jour is surrounding some greater hidden plan to scam America. The real fact is that the ‘robo-signing’ scandal is a procedural one, albeit one that offends the very nature of due process. That said, until someone can provide consistent and repeated evidence suggesting that the information contained within ‘robo-signed’ affidavits is factually incorrect — not just some of the time, but most of the time — the end result of this mess is nothing more than a very public, brand-damaging, headline-making procedural blip. Thus far? Not a whit of credible evidence has been produced suggesting that foreclosure affidavits are factually incorrect on an endemic level. And this, despite a debtor’s counsel that for years has been actively and aggressively sniffing out every possible way it can to forestall foreclosures. If false debt amounts were being pushed by banks onto the courts en masse, and there was any credible evidence to support such a claim, you can bet all the apple pie in America that every single one of us would have heard about it by now — and well before anyone started to complain about the arcane technicalities of which nameless, faceless bank employee was signing a particular document. Despite this, most financial commentators seem bizarrely content to assume that a ‘robo-signed’ affidavit is also grounds for a substantively false affidavit: call me crazy, but I tend to want to see some evidence for such wild and broad claims before I’ll start believing them. I suspect that the courts involved here will take the same tack — meaning affidavits may need to be re-filed with the court, sanctions will be meted out, and some attorneys could lose their license to practice law, while plaintiffs might even be held in contempt -- all the while adding time and expense to an already time-intensive and expensive foreclosure process. This isn’t a complex game, in the end; and I’ve written about both sides of this for the past two weeks. Debtor’s counsel are testing every aspect of the foreclosure process in an attempt to find any areas of weakness, no matter how arcane, that can be exploited for the benefit of their client. And guess what? Thanks to an industry that values cutting costs at all costs, they’ve found some — which they’re now attempting to exploit for the benefit of their client. There isn't anything inherently wrong with this, either, if you were to ask me. It's how the American legal system is designed to work, after all. The injured parties from this gross abuse of process are limited to the court, who has seen its rule of law mocked; and potentially investors, who must ultimately pay for the added time and expense of re-filing. And there are stern and strict remedies for both parties, too, up to and including criminal prosecution in certain cases. As much as some would like to convince us otherwise, however, there isn't any evidence to suggest that the already-defaulted borrower in any of these cases has been injured by these sort of procedural abuses. If anything, defaulted borrowers may ultimately benefit as the foreclosure process takes longer to run its course. Fact two: commentators have hopelessly conflated ‘robo-signing’ with other long-standing and/or played-out mortgage issues. Within minutes of the ‘robo-signing’ scandal, seemingly, commentators were giving credence to long-standing claims regarding the validity of MERS as a foreclosing party, who really owns the note, as well as highlighting put-back risks — a span of issues that are distinctly and utterly separate from the procedural challenges encompassed by ‘robo-signing.’ In all of these cases, it feels a little bit like being second to discover America; none of these issues are new, and many have already been soundly thumped in courts or by existing law, only to resurface again. It’s literally as if everyone decided that the ‘robo-signer’ issue was grounds for collective amnesia. It’s the only thing I can think of that would explain the mass stupidity I’ve seen here — and, yes, stupidity is the only word that can be used to explain it. Let’s start with MERS’ right to foreclose. In general, as numerous analysts have noted, the law favors the MERS model, with a few cases out there that have been successful in questioning it (Landmark v. Kessler in Kansas, for one, although later overturned; and U.S. Bank v. Ibanez, which questions separation of title holding). The real question at hand here is the concept of separation of legal and beneficial title interests, a concept that seems to be lost on most commentators; the question is not, as is so often incorrectly argued, who holds title. So let’s grant the critics full leverage on their criticism, and assume that MERS as a nominee is wholly insufficient to stand as a valid party to the foreclosure. What then? Does the entire system of U.S. property rights fold in on itself and expose the banana republic within? Of course not. Banks would merely take a given loan out of MERS as nominee, place it in their name since they already hold the beneficial interest in title, and then pursue the same foreclosure. In fact, this is already being done in certain jurisdictions and with certain loans. In other words: it’s a technicality, nothing more and nothing less. A costly technicality, sure, but a technicality nonetheless. As for REMIC and related loan assignment issues, more than a few talking heads have gone postal in recent weeks about how every REMIC in the U.S. is a fraud, and that the U.S. banking system is similarly fraudulent. In the latest variation on the “show me the note” strategy, these would-be experts point to the fact that when a note is transferred to a trust, it is typically endorsed “in blank” — so the trust never owned the note, right? Nobody owns the note! Chaos! Anarchy! Free homes for all! (Or at least an issue for the courts to decide.) Someone needs to inform the public about how this is really done. Namely, that notes are endorsed to the trustee or servicer only when needed to pursue a foreclosure, and not before then. Endorsing in blank is recognized in every single U.S. state, since evidence of ownership and transfer rests with the executed loan purchase agreement, and not with the assignment itself — something that has been true for well over 30 years in this country, and is just now supposed to be controversial? Are we really serious about this? Apparently, some are: Michael Pines, an attorney in California, is apparently telling his clients to break-and-enter into their former homes on the ground that evictions and related actions are fraudulently obtained, since the REMICs don’t own the loans in question. (Pines was apparently arrested last week after police caught him and another client doing the same thing.) Lastly, the issue of put-backs has been raised. Again. And unlike the first two issues I’ve discussed here, put-backs are a real concern for loans found to violate representation and warranty clauses of valid loan purchase agreements. In fact, this issue has been pressed by the GSEs for well over a year now. Market analysts at JP Morgan Chase & Co. [stock JPM][/stock] estimate that the total losses from loan repurchases could exceed as much as $120 billion. All that said, any losses here are going to take time to materialize — it’s not as simple as simply putting back a mortgage at par, and moving on. There are legal and procedural hurdles to overcome in this arena, as well. This is doubly true for any activity in the non-agency/private security marketplace, where a 25% investor threshold typically exists before any suit can be brought to force put-backs. A dismissal on Oct. 13 of a highly-publicized investor lawsuit involving Countrywide Financial loan modifications was thrown out of court for failing to meet this exact hurdle, as an example. Which means that forcing put backs in the context of private securities will be a tall, tall hurdle. “Many commentators on the issue of faulty foreclosure documents and imperfections in the documentation of securitizations fail to realize how little duty of care trustees have in RMBS deals,” according to recent commentary from colleague Christopher Whalen at The IRA Advisory Service. “Once the deal is closed, the trustee’s job is done. The phone lines of our favorite lawyers have been melting down of late with investors inquiring as to their rights with respect to RBMS and similar paper. The response by the lawyers: Read the language in the PSA.” In other words: massive GSE putbacks? Yes. Massive private-label putbacks? Eh, probably not so much. In either case, however, hardly does this seem to be the sort of end-of-the-world scenario that so many have painted recently. Fact three: there are real issues out there, but they are obscured by all of the current noisemaking. All the above discussion isn’t an attempt to say there aren’t real issues out there. It’s just that the real issues that do exist are now being clouded by the misinformed debate over ‘foreclosure-gate.’ Which, I suppose, means that the econo-blogging/news reporting machines out there will collectively be surprised when the issues that actually do impact the banks aren’t the ones they had been beating their collective chests about. First, as loan servicers have focused their limited resources into managing borrower defaults (arguably still not enough, as the 'robo-signer' mess shows), it's becoming clear that whatever resources are left aren't nearly enough to manage proper investor reporting. The real brewing issue in the markets currently -- and quietly -- is one of investor confidence, borne most lately of horrible remittance reporting. Investors have had it with inaccurate reports from servicers, and some are threatening to ditch MBS markets altogether. Colleagues at Asset-Backed Alert, an investor publication, were the first to put these concerns into print, but I’ve been hearing similar rumblings for months now. "It's a real mess. I wouldn't be surprised if some investors start moving into other sectors altogether. I know I've been thinking about it," one buyer told AB Alert. "It's just become impossible to rely on these reports." The supreme irony in all of this is that remittance data is horribly fouled up because nobody can make heads or tails out of their obligations under HAMP and other government mandates, which is messing with the computer programs that spit out remittance data, and fouling up everyone’s precious prepayment projections in the process. (‘We’re from the government, and we’re here to help,’ indeed.) Second, assuming the buy side of the mortgage business can come together and overcome the built-in hurdles (i.e., the 25% rule), there are looming issues of outright fraud that remain unsolved — but not fraud upon the borrower, as the press has been wont to allege. Instead, fraud upon the investor, who saw their investment into subprime sludge accomplished in a very one-sided manner. Reuters’ Felix Salmon does a great job of explaining this issue — and it’s this issue, not the others being batted around, that should be of greatest concern to all market participants. Did issuers know or have reason to believe that the assets underlying a given securitization deal were less-than-pristine, given the pre-issue due diligence that was done? Or worse yet, did issuers actually buy the underlying loans at a discount (because they were less-than-pristine) and then fail to disclose this material fact to investors in the subsequent securitization? What duty of care do issuers have under applicable laws to disclose any such material information to investors? These are real concerns, many hundreds of billions of dollars worth of concerns, and won’t easily be thrown out of court should investors find a way to overcome some of the built-in hurdles designed to keep the trustee impartial to the interests of all bondholders. And should these concerns materialize, there are likely real and meaningful damages to be had here, too. The third real issue facing mortgage markets today, quite frankly, is that political reality is allowed to subsume actual reality. This is the outcome that sees the mortgage industry eat its own, if it comes to pass. It’s supremely ironic, for one thing, to see the White House now advocating that foreclosures proceed as quickly as possible — after spending the better part of the past two years attempting to halt foreclosures at all costs. But that doesn’t make the White House wrong now; it means our political leaders were wrong then, wrong with the HAMP program and wrong to interfere with a housing market in dire need of a functioning clearing mechanism. (I’ve only written about this issue for the better part of three years now.) The reality here, however, is that foreclosures are by definition a state-specific thing. So any posturing from the White House is at best anecdotal; instead, we now have a coalition of Attorney Generals who are investigating ‘foreclosure fraud,’ because of the uproar surrounding the issue of ‘robo-signers’ and related process abuse. And the AGs, in unison with consumer groups, are somewhat predictably pounding the table for a national ‘foreclosure moratorium’ in order to protect their voters. Frankly, it’s probably not a horrible thing if such a moratorium were to come to pass. It placates everyone, ensures any snafus are fixed, while effectively changing little in the way of investor outlook. All banks and servicers tend to freeze foreclosures and evictions during the holiday season, starting in roughly mid-November. Is adding one extra month really that big a deal? Of course not. But at some point, adding further delays to a process that already has seen foreclosure timelines that are now measured in multiple years, instead of months, crosses the line. At some point, the investors in private securitized deals will start eat their own — because the junior class bondholders will have been benefiting at the expense of senior bondholders, the exact opposite of how things are supposed to work. And guess who owns plenty of those senior private-label mortgage bonds nowadays? I’ll save that for my next column. Paul Jackson is the publisher of HousingWire.com and HousingWire magazine. Follow him on Twitter: @pjackson