Note: This is a long post, so I have bifurcated it - placing part two with the heavy graphics and the financial stuff on by blog. The intro and legal theory suggested by readers is here in part one. I would suggest one read it in its entirety before dismissing any one part of it, though.
Is it possible for the US Government to choose to forgive mortgage
debt? Sounds outrageous? Read on for the legal theory behind this claim
and let me know what you think? I thought it was little esoteric as
well, but as I looked deeper… Well, I’ll let you be the judge.
A lot of attention accrued to Representative Grayson’s calling out of
foreclosure fraud, and for good reason. The story is absolutely
amazing, and kudos to a member of congress that defends his
constituency.
It’s not as if other entities have failed to take notice. ZeroHedge has its usual witty commentary regarding the possibility of foreclosure transactions potentially being unwound due to fraudulent foreclosure activity. The NYT
ran an article stating that Fitch will look into lowering the credit
rating of companies that participated in the submission of inappropriate
foreclosure paperwork, which apparently seems to include an awful lot
of companies. It goes on to state (as excerpted by Zerohedge):
Fitch Ratings said that Wednesday
it was asking mortgage companies about their internal processes for
executing foreclosure affidavits. If it finds the processes lacking,
Fitch will consider downgrading the company’s rating.
The agency also said if the
issue is widespread, the resulting delays and extra costs to
foreclose could increase losses related to residential mortgage-backed
securities.
Here’s the twist. A lawyer who happens to have
followed my writings over the years has suggested that most are missing
the big picture in focusing on fraudulent foreclosure documents. He
contends (and I’m paraphrasing here, these are not my words, per se) “that
since the U.S. has ownership interest in many (if not most) delinquent
and distressed mortgages, this fact will be counted as policy in
litigation. As a consequence it matters A LOT if you can
say that your client has a Fifth Amendment Due Process right (or third
party beneficiary Federal common law right) to a HAMP modification
which is in FACT a minimization of the risk of default (not that flaky
31% number) BECAUSE, among other things, the U.S. has no economic
incentive to foreclose”. Now, I am no lawyer and thus the legal
issues are beyond my domain, but I must admit I found the theory
interesting. So, I’ve decided to crowdsource this one in anticipation
that some of the more astute legal minds can shed some light on the
validity of the theory. I’ll supply the financial stuff in this post,
and I’ll rely on the legal eagles to peer review the theory.
This all stemmed from a chart and “what if”
scenario I post on the 23rd of September in which showed the increasing
decline in recoveries from gross charge-offs from banks.
As a matter of fact, things are so
bad that I believe banks will have a perverse incentive to actually
walk away. Now wouldn’t that be something??? Next, we take a look into
the home builder that makes more money doing distressed investing
than it does building and selling homes.
The legal argument from the BoomBustBlogger in question is as follows:
Things are
moving pretty fast now, especially since so many states are moving to
ban home foreclosures, and since your comments on the lack of economic
incentive to foreclose is coming to the fore. It’s becoming
a question of, Hey Uncle Sam, what is your policy? This may result in
actions to quiet title, against the banks and the United States. The basis will be that in fact, the United States has forgiven home mortgage indebtedness. Your own observation of the economics of foreclosure is part of the mix. But the entire argument that the U.S., has in FACT (no matter what it CLAIMS) forgiven home mortgage indebtedness, is this:
Through its
1. ownership
stake in banks (creating Fifth Amendment Due Process rights to what is
in FACT–not the arbitrary 31%–minimization of the risk of housing loss:
see Huxtable v. Geithner Order on this (not the Order to Dismiss, sounds
like a settlement was reached since Huxtable filed no opposition); 2.
contracts with servicers (creating third party contract rights in
borrowers–see Marques v. Wells Fargo); 3. mortgage principal reduction; 4. adjustments to gross income for principal reduction; and 5. loss of economic incentive to foreclose,
the United States has in fact forgiven home mortgage indebtedness.
And here is more on the topic…
The
big divide in the United States District Courts, with regard to HAMP,
is the language of HAMP which seems to give the Government discretion as
to whether to modify or not. Here is typical language from a court
decision saying there is no right to a modification:
“Notably, the statute provides that loans may be modified “where
appropriate” – a phrase that limits the Secretary’s obligation and
evinces a Congressional intent to afford discretion in the decision
whether to modify loans in certain circumstances.”
The way
to defeat this (as was done in Huxtable v. Geithner, before the case was
settled or abandoned) is to show FACTS which demonstrate that the
Government is actually enforcing a different policy. In that case, it
doesn’t matter what the enabling language says, what decides the policy
is what the government is DOING. What OTHER facts show that the
Government is pursuing this different policy? That is where your
observation comes in.
One of
those facts is the factual conclusions the government ITSELF has come
to. What has it really concluded in the secret, back rooms?
This is
why I was interested in your analysis of the returns on taking title to
defaulting properties (the link being the Government ownership stake in
these properties). If the Government ITSELF has decided there is no
further economic incentive to foreclose, then its policy can ONLY be to
prevent foreclosures, because economics shows no facts in favor of going
forward with foreclosing and taking title. Government policy must be
based on facts–if it is not, then the policy is simply prejudice, and
the courts will not uphold factless prejudice. It’s a matter of
determining what policy the Government is pursuing, as a process of
eliminating all those policy options for which there is no factual
basis. Weeding out one prejudice after another. One such prejudice, I
submit, is the idea that there is an economic incentive for the
Government NOT to grant HAMP modification. If there is no economic
incentive to foreclose, then this supposed economic incentive is
revealed to be a prejudice, and unenforceable. A right to HAMP
modification follows as a matter of elimination of other options.
That is
where you come in. It would greatly help if, on your site, you would
give an estimate of the month/year on which the data clearly show that
the economic incentive to foreclose is ZERO. Once it became clear that
the U.S. had no further economic incentive to foreclose, it would be
very clear that the U.S. has in FACT forgiven home mortgage debt. That
is what zero incentive to foreclose, means. It means that, in FACT, the
debt has been forgiven.
I get
the feeling that, privately, the U.S. is racing ahead based on this
knowledge. I would not be at all surprised to see Obama simply ban home
foreclosures nationwide.
But we are still in limbo, because there is still this notion that
robo-affidavits are the only problem with foreclosure documents, and
once that is “cleared up” it’s full speed ahead with foreclosures.
That
is certainly not the case, and people need to realize that that is not
the case. Above all, their lawyers need more ammo, and the best ammo
would be a detailed examination of the rapidly declining economic
incentive to foreclose.
By the
way, if you assume that the Government already knows we are fast
approaching zero incentive to take title, what signs tell you that the
Government is already acting on the idea that there is zero incentive to
take title? That is, what actions of the U.S. Government tell you that
it has in FACT forgiven home mortgage debt, that it has ALREADY written
it all off as a loss, and is now acting in the AFTERMATH of that
writeoff. Because I think that’s where we are. The United States is
ahead of ALL of us on this. They know how bad. What I’m asking you is,
where is evidence that they know there is nothing to be gained from
foreclosure, and have moved ahead and have IMPLEMENTED that conclusion?
So if you
could deal with that in some big public way, that would be best… That
would attract the attention of every lawyer, judge and investor in the
country–it would immediately resolve every legal question surrounding
home foreclosures, and it would provide an opportunity to get more of
the truth into court cases. Even from the analysis you provided on
9/23, it is clear to me that it’s game over for home mortgages. They
are simply not a part of the economy any more–they’re social policy and
the U.S. is dealing with them as social policy: but what IS the
Government’s new policy? Well, what do the FACTS show it is?
Since you’re not a lawyer, you greatly underestimate the importance of this observation. When the United States has a stake in a matter, facts relating to that matter are imputed to it as United States POLICY.
Well, he’s right. I am not a lawyer. Actually
far from it, but it does appear he is on to some creative legal theory. I
invite any and all competent legal type to weigh in on this. There is
even more on this topic, which at first sounds a bit far fetched, but
actually congeals into a cogent argument as you read on…
It is a BIG mistake to read this as just a matter of cleaning up a few documents. These phony affidavits [as referenced above]
were part of an effort to hide bad debt on banks’ books. It is also
hiding something else, which is that the United States has forgiven home
mortgage indebtedness. Look:
1. ownership
stake in banks (creating Fifth Amendment Due Process rights to what is
in FACT–not the arbitrary 31%–minimization of the risk of housing
loss(on this prong, please see online the Huxtable v. Geithner Order
(not the Order to Dismiss–sounds like a settlement was reached since
Huxtable filed no opposition). The reasoning of Huxtable is sound and is
pretty generally accepted now. There IS a Fifth Amendment Due Process
right based on U.S. ownership of banks, and this Due Process right is a
right to a modification based on what is in FACT the minimization of
risk of default–this means that the 31% is simply the Government’s
assertion on this point–it is LITIGABLE;
2. contracts
with servicers (creating the same rights as above, but on a third party
beneficiary theory–see Marques v. Wells Fargo–online). The reasoning of
Judge Lorenz is also sound and is simply another basis for claiming a
factual minimization of the risk of default, rather than simply
accepting the Government’s 31%. Again, the 31% is going to be litigated.
People have to get used to that–it’s not off limits anymore;
3. mortgage principal reduction through HAMP;
4. adjustments to gross income for principal reduction through HAMP; and
5. loss of
economic incentive to foreclose (this is Reggie Middleton’s analysis on
his blog). The Middleton analysis is new (it’s at www.boombustblog.com, the September 23 story on housing prices). The return/chargeoff is rapidly hitting 0.
Litigants in
HAMP will certainly have the right to civil discovery as to what the
United States has concluded with respect to the economics of
foreclosure.
It will
probably turn out to be just what the facts show: that the policy is in
FACT to minimize the risk of default because there is no economic
incentive to foreclose.
Of course this
seems impossible, unacceptable, blah blah blah. But if the economic
facts bear it out, then the economic facts bear it out and you just have
to wrap your head around it. What will happen next/is happening now:
1. litigants
will sue to quiet title (among other causes of action such as fraud,
conspiracy, Civil Rights violations, etc., naming Tiny Tim, the IRS
commissioner and the United States, among others); and
2. the U.S. is
scrambling right now to decide what to do if people who have a gazillion
dollars and are sitting in a house which is soaring in value,
nevertheless decide to simply stop paying on their mortgages.
Of course, the
first instinct of Uncle Sam will be some sort of coercion. When that
fails in court, the next gambit will be to try to provide some incentive
to people to keep paying those damned mortgages. Who knows how this
will end?
In any event,
it’s Reggie Middleton’s analysis which broke the back of this. Indeed,
I’m sure his analysis was already made in the dark of night at the
Treasury Department.
Boy, if Fitch thinks servicer problems are limited to affidavits, it is gonna learn a lot more in the coming weeks and months. This report comes via BusinessWeek:
Fitch Ratings said Wednesday it’s asking mortgage servicers about their foreclosure practices in the wake of GMAC Mortgage LLC’s recent disclosure of procedural errors.
The agency believes that if more errors are found by other servicers, that could stall foreclosures in some states and increase losses related to residential mortgage-backed securities. That could prompt Fitch to downgrade ratings on servicers that are affected, the agency said.
“Any servicer with a significant portion of their portfolio in judicial foreclosure states will be either directly or indirectly impacted by the attention focused on this problem,” wrote Diane Pendley, managing director at Fitch.
The procedural errors involve affidavits verifying who owns the mortgage note. Fitch is reviewing each servicer’s internal process for executing foreclosure affidavits. If it finds the process is lacking, Fitch will consider lowering the servicer’s rating.
This looks reactive and appears to reflect an incomplete understanding of the problem. In judicial foreclosure states, certain affidavits were required as part of the documentation needed to proceed with a foreclosure. If the affidavits were improper, they are a fraud on the court.
In non-judicial states, the same problem arises when a foreclosure is challenged. A non-judicial process moves into the court system. Bankruptcy filings routinely lead to a motion for relief the bankruptcy stay (legalese for the servicer asking to grab the house now rather than let what happens to the homeowner borrowings be resolved by the judge). So you have similar issues in non-judicial states. not just as prevalent.
In addition, as we have indicated, the affidavit problem is only one of type of servicer/mortgage mill impropriety. There is increasing proof that foreclosure mills engaged in widespread document fabrication to show that trusts (the securitization entity) owned the note (the borrower IOU), when it fact it had not been properly conveyed to them, and retroactive fixes create problems under New York trust law and the provisions of the pooling and servicing agreement that governs the securitization.
But it isn’t clear what this means for bond ratings, since servicers are not stand alone entities with rated debt but live in larger entities. Servicing historically has been at best a low margin, often a breakeven business; of late, servicing has been a cash flow negative activity. Tom Adams comments:
Note that Fitch is talking about its “servicer ratings”, which are an operational assessment of the way servicers do their job, and have their own separate scale. In the past, the main purpose of the servicer ratings was to create an adjustment, up or down, based on the quality of the servicer’s operations [servicing entity], on new MBS credit enhancement requirements. Since very few MBS are being issued currently, I am not sure how Fitch uses the ratings now.
Of course this could be a preview (even if Fitch doesn’t realize it yet) – we may see the corporate bond ratings of the banks that own large servicing companies start to get downgraded as a result of these servicing problems.
<b>News</b> Corp. Donates $1 Million to U.S. Chamber of Commerce <b>...</b>
The donation is the News Corporation's second known contribution to a group that is advertising heavily to support Republicans this year.
Feds Sue Fox <b>News</b> Over Reporter Catherine Herridge's Charges Of <b>...</b>
WASHINGTON — Federal authorities are suing the Fox News Network for allegedly retaliating against a reporter after she complained about unequal pay and job conditions based on her gender and age. The Equal Employment Opportunity ...
Catherine Herridge - Fox <b>News</b> | Gender Discrimination | Age | Mediaite
The US Equal Employment Opportunity Commission filed a complaint yesterday against Fox News for a gender and age discrimination case dating back to 2007. The FNC correspondent, Catherine Herridge, is still an employee with the company, ...
bench craft company rip off
bench craft company rip off
<b>News</b> Corp. Donates $1 Million to U.S. Chamber of Commerce <b>...</b>
The donation is the News Corporation's second known contribution to a group that is advertising heavily to support Republicans this year.
Feds Sue Fox <b>News</b> Over Reporter Catherine Herridge's Charges Of <b>...</b>
WASHINGTON — Federal authorities are suing the Fox News Network for allegedly retaliating against a reporter after she complained about unequal pay and job conditions based on her gender and age. The Equal Employment Opportunity ...
Catherine Herridge - Fox <b>News</b> | Gender Discrimination | Age | Mediaite
The US Equal Employment Opportunity Commission filed a complaint yesterday against Fox News for a gender and age discrimination case dating back to 2007. The FNC correspondent, Catherine Herridge, is still an employee with the company, ...
bench craft company rip off bench craft company rip off
Note: This is a long post, so I have bifurcated it - placing part two with the heavy graphics and the financial stuff on by blog. The intro and legal theory suggested by readers is here in part one. I would suggest one read it in its entirety before dismissing any one part of it, though.
Is it possible for the US Government to choose to forgive mortgage
debt? Sounds outrageous? Read on for the legal theory behind this claim
and let me know what you think? I thought it was little esoteric as
well, but as I looked deeper… Well, I’ll let you be the judge.
A lot of attention accrued to Representative Grayson’s calling out of
foreclosure fraud, and for good reason. The story is absolutely
amazing, and kudos to a member of congress that defends his
constituency.
It’s not as if other entities have failed to take notice. ZeroHedge has its usual witty commentary regarding the possibility of foreclosure transactions potentially being unwound due to fraudulent foreclosure activity. The NYT
ran an article stating that Fitch will look into lowering the credit
rating of companies that participated in the submission of inappropriate
foreclosure paperwork, which apparently seems to include an awful lot
of companies. It goes on to state (as excerpted by Zerohedge):
Fitch Ratings said that Wednesday
it was asking mortgage companies about their internal processes for
executing foreclosure affidavits. If it finds the processes lacking,
Fitch will consider downgrading the company’s rating.
The agency also said if the
issue is widespread, the resulting delays and extra costs to
foreclose could increase losses related to residential mortgage-backed
securities.
Here’s the twist. A lawyer who happens to have
followed my writings over the years has suggested that most are missing
the big picture in focusing on fraudulent foreclosure documents. He
contends (and I’m paraphrasing here, these are not my words, per se) “that
since the U.S. has ownership interest in many (if not most) delinquent
and distressed mortgages, this fact will be counted as policy in
litigation. As a consequence it matters A LOT if you can
say that your client has a Fifth Amendment Due Process right (or third
party beneficiary Federal common law right) to a HAMP modification
which is in FACT a minimization of the risk of default (not that flaky
31% number) BECAUSE, among other things, the U.S. has no economic
incentive to foreclose”. Now, I am no lawyer and thus the legal
issues are beyond my domain, but I must admit I found the theory
interesting. So, I’ve decided to crowdsource this one in anticipation
that some of the more astute legal minds can shed some light on the
validity of the theory. I’ll supply the financial stuff in this post,
and I’ll rely on the legal eagles to peer review the theory.
This all stemmed from a chart and “what if”
scenario I post on the 23rd of September in which showed the increasing
decline in recoveries from gross charge-offs from banks.
As a matter of fact, things are so
bad that I believe banks will have a perverse incentive to actually
walk away. Now wouldn’t that be something??? Next, we take a look into
the home builder that makes more money doing distressed investing
than it does building and selling homes.
The legal argument from the BoomBustBlogger in question is as follows:
Things are
moving pretty fast now, especially since so many states are moving to
ban home foreclosures, and since your comments on the lack of economic
incentive to foreclose is coming to the fore. It’s becoming
a question of, Hey Uncle Sam, what is your policy? This may result in
actions to quiet title, against the banks and the United States. The basis will be that in fact, the United States has forgiven home mortgage indebtedness. Your own observation of the economics of foreclosure is part of the mix. But the entire argument that the U.S., has in FACT (no matter what it CLAIMS) forgiven home mortgage indebtedness, is this:
Through its
1. ownership
stake in banks (creating Fifth Amendment Due Process rights to what is
in FACT–not the arbitrary 31%–minimization of the risk of housing loss:
see Huxtable v. Geithner Order on this (not the Order to Dismiss, sounds
like a settlement was reached since Huxtable filed no opposition); 2.
contracts with servicers (creating third party contract rights in
borrowers–see Marques v. Wells Fargo); 3. mortgage principal reduction; 4. adjustments to gross income for principal reduction; and 5. loss of economic incentive to foreclose,
the United States has in fact forgiven home mortgage indebtedness.
And here is more on the topic…
The
big divide in the United States District Courts, with regard to HAMP,
is the language of HAMP which seems to give the Government discretion as
to whether to modify or not. Here is typical language from a court
decision saying there is no right to a modification:
“Notably, the statute provides that loans may be modified “where
appropriate” – a phrase that limits the Secretary’s obligation and
evinces a Congressional intent to afford discretion in the decision
whether to modify loans in certain circumstances.”
The way
to defeat this (as was done in Huxtable v. Geithner, before the case was
settled or abandoned) is to show FACTS which demonstrate that the
Government is actually enforcing a different policy. In that case, it
doesn’t matter what the enabling language says, what decides the policy
is what the government is DOING. What OTHER facts show that the
Government is pursuing this different policy? That is where your
observation comes in.
One of
those facts is the factual conclusions the government ITSELF has come
to. What has it really concluded in the secret, back rooms?
This is
why I was interested in your analysis of the returns on taking title to
defaulting properties (the link being the Government ownership stake in
these properties). If the Government ITSELF has decided there is no
further economic incentive to foreclose, then its policy can ONLY be to
prevent foreclosures, because economics shows no facts in favor of going
forward with foreclosing and taking title. Government policy must be
based on facts–if it is not, then the policy is simply prejudice, and
the courts will not uphold factless prejudice. It’s a matter of
determining what policy the Government is pursuing, as a process of
eliminating all those policy options for which there is no factual
basis. Weeding out one prejudice after another. One such prejudice, I
submit, is the idea that there is an economic incentive for the
Government NOT to grant HAMP modification. If there is no economic
incentive to foreclose, then this supposed economic incentive is
revealed to be a prejudice, and unenforceable. A right to HAMP
modification follows as a matter of elimination of other options.
That is
where you come in. It would greatly help if, on your site, you would
give an estimate of the month/year on which the data clearly show that
the economic incentive to foreclose is ZERO. Once it became clear that
the U.S. had no further economic incentive to foreclose, it would be
very clear that the U.S. has in FACT forgiven home mortgage debt. That
is what zero incentive to foreclose, means. It means that, in FACT, the
debt has been forgiven.
I get
the feeling that, privately, the U.S. is racing ahead based on this
knowledge. I would not be at all surprised to see Obama simply ban home
foreclosures nationwide.
But we are still in limbo, because there is still this notion that
robo-affidavits are the only problem with foreclosure documents, and
once that is “cleared up” it’s full speed ahead with foreclosures.
That
is certainly not the case, and people need to realize that that is not
the case. Above all, their lawyers need more ammo, and the best ammo
would be a detailed examination of the rapidly declining economic
incentive to foreclose.
By the
way, if you assume that the Government already knows we are fast
approaching zero incentive to take title, what signs tell you that the
Government is already acting on the idea that there is zero incentive to
take title? That is, what actions of the U.S. Government tell you that
it has in FACT forgiven home mortgage debt, that it has ALREADY written
it all off as a loss, and is now acting in the AFTERMATH of that
writeoff. Because I think that’s where we are. The United States is
ahead of ALL of us on this. They know how bad. What I’m asking you is,
where is evidence that they know there is nothing to be gained from
foreclosure, and have moved ahead and have IMPLEMENTED that conclusion?
So if you
could deal with that in some big public way, that would be best… That
would attract the attention of every lawyer, judge and investor in the
country–it would immediately resolve every legal question surrounding
home foreclosures, and it would provide an opportunity to get more of
the truth into court cases. Even from the analysis you provided on
9/23, it is clear to me that it’s game over for home mortgages. They
are simply not a part of the economy any more–they’re social policy and
the U.S. is dealing with them as social policy: but what IS the
Government’s new policy? Well, what do the FACTS show it is?
Since you’re not a lawyer, you greatly underestimate the importance of this observation. When the United States has a stake in a matter, facts relating to that matter are imputed to it as United States POLICY.
Well, he’s right. I am not a lawyer. Actually
far from it, but it does appear he is on to some creative legal theory. I
invite any and all competent legal type to weigh in on this. There is
even more on this topic, which at first sounds a bit far fetched, but
actually congeals into a cogent argument as you read on…
It is a BIG mistake to read this as just a matter of cleaning up a few documents. These phony affidavits [as referenced above]
were part of an effort to hide bad debt on banks’ books. It is also
hiding something else, which is that the United States has forgiven home
mortgage indebtedness. Look:
1. ownership
stake in banks (creating Fifth Amendment Due Process rights to what is
in FACT–not the arbitrary 31%–minimization of the risk of housing
loss(on this prong, please see online the Huxtable v. Geithner Order
(not the Order to Dismiss–sounds like a settlement was reached since
Huxtable filed no opposition). The reasoning of Huxtable is sound and is
pretty generally accepted now. There IS a Fifth Amendment Due Process
right based on U.S. ownership of banks, and this Due Process right is a
right to a modification based on what is in FACT the minimization of
risk of default–this means that the 31% is simply the Government’s
assertion on this point–it is LITIGABLE;
2. contracts
with servicers (creating the same rights as above, but on a third party
beneficiary theory–see Marques v. Wells Fargo–online). The reasoning of
Judge Lorenz is also sound and is simply another basis for claiming a
factual minimization of the risk of default, rather than simply
accepting the Government’s 31%. Again, the 31% is going to be litigated.
People have to get used to that–it’s not off limits anymore;
3. mortgage principal reduction through HAMP;
4. adjustments to gross income for principal reduction through HAMP; and
5. loss of
economic incentive to foreclose (this is Reggie Middleton’s analysis on
his blog). The Middleton analysis is new (it’s at www.boombustblog.com, the September 23 story on housing prices). The return/chargeoff is rapidly hitting 0.
Litigants in
HAMP will certainly have the right to civil discovery as to what the
United States has concluded with respect to the economics of
foreclosure.
It will
probably turn out to be just what the facts show: that the policy is in
FACT to minimize the risk of default because there is no economic
incentive to foreclose.
Of course this
seems impossible, unacceptable, blah blah blah. But if the economic
facts bear it out, then the economic facts bear it out and you just have
to wrap your head around it. What will happen next/is happening now:
1. litigants
will sue to quiet title (among other causes of action such as fraud,
conspiracy, Civil Rights violations, etc., naming Tiny Tim, the IRS
commissioner and the United States, among others); and
2. the U.S. is
scrambling right now to decide what to do if people who have a gazillion
dollars and are sitting in a house which is soaring in value,
nevertheless decide to simply stop paying on their mortgages.
Of course, the
first instinct of Uncle Sam will be some sort of coercion. When that
fails in court, the next gambit will be to try to provide some incentive
to people to keep paying those damned mortgages. Who knows how this
will end?
In any event,
it’s Reggie Middleton’s analysis which broke the back of this. Indeed,
I’m sure his analysis was already made in the dark of night at the
Treasury Department.
Boy, if Fitch thinks servicer problems are limited to affidavits, it is gonna learn a lot more in the coming weeks and months. This report comes via BusinessWeek:
Fitch Ratings said Wednesday it’s asking mortgage servicers about their foreclosure practices in the wake of GMAC Mortgage LLC’s recent disclosure of procedural errors.
The agency believes that if more errors are found by other servicers, that could stall foreclosures in some states and increase losses related to residential mortgage-backed securities. That could prompt Fitch to downgrade ratings on servicers that are affected, the agency said.
“Any servicer with a significant portion of their portfolio in judicial foreclosure states will be either directly or indirectly impacted by the attention focused on this problem,” wrote Diane Pendley, managing director at Fitch.
The procedural errors involve affidavits verifying who owns the mortgage note. Fitch is reviewing each servicer’s internal process for executing foreclosure affidavits. If it finds the process is lacking, Fitch will consider lowering the servicer’s rating.
This looks reactive and appears to reflect an incomplete understanding of the problem. In judicial foreclosure states, certain affidavits were required as part of the documentation needed to proceed with a foreclosure. If the affidavits were improper, they are a fraud on the court.
In non-judicial states, the same problem arises when a foreclosure is challenged. A non-judicial process moves into the court system. Bankruptcy filings routinely lead to a motion for relief the bankruptcy stay (legalese for the servicer asking to grab the house now rather than let what happens to the homeowner borrowings be resolved by the judge). So you have similar issues in non-judicial states. not just as prevalent.
In addition, as we have indicated, the affidavit problem is only one of type of servicer/mortgage mill impropriety. There is increasing proof that foreclosure mills engaged in widespread document fabrication to show that trusts (the securitization entity) owned the note (the borrower IOU), when it fact it had not been properly conveyed to them, and retroactive fixes create problems under New York trust law and the provisions of the pooling and servicing agreement that governs the securitization.
But it isn’t clear what this means for bond ratings, since servicers are not stand alone entities with rated debt but live in larger entities. Servicing historically has been at best a low margin, often a breakeven business; of late, servicing has been a cash flow negative activity. Tom Adams comments:
Note that Fitch is talking about its “servicer ratings”, which are an operational assessment of the way servicers do their job, and have their own separate scale. In the past, the main purpose of the servicer ratings was to create an adjustment, up or down, based on the quality of the servicer’s operations [servicing entity], on new MBS credit enhancement requirements. Since very few MBS are being issued currently, I am not sure how Fitch uses the ratings now.
Of course this could be a preview (even if Fitch doesn’t realize it yet) – we may see the corporate bond ratings of the banks that own large servicing companies start to get downgraded as a result of these servicing problems.
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