Mortgage Papers

rimrocker · Oct 14, 2010

Been following this for a while... seems like a decent time to post on it.

Lack of proper mortgage paper trail could leave big banks reeling again

By Ariana Eunjung Cha and Jia Lynn Yang
Washington Post Staff Writers
Wednesday, October 13, 2010; 10:44 PM
http://www.washingtonpost.com/wp-dyn/content/article/2010/10/13/AR2010101307597_pf.html

The federal government's pressure on lenders Wednesday to fix the paperwork problems plaguing foreclosures left unaddressed a far greater potential threat facing the financial system and the U.S. economy.

Beyond sloppy documents, the foreclosure debacle has exposed one of Wall Street's little-known practices: For more than a decade, big lenders sold millions of mortgages around the globe at lightning speed without properly transferring the physical documents that prove who legally owned the loans.

Now, some of the pension systems, hedge funds and other investors that took big losses on the loans are seeking to use this flaw to force banks to compensate them or even invalidate the mortgage trades themselves.

Their collective actions, if successful, could blow a hole through the balance sheets of big banks and raise fundamental questions about the financial system, financial analysts and a lawmaker said.

If judges rule in favor of such lawsuits, "it could be 2008 all over again," said Josh Rosner, managing director at Graham Fisher & Co., referring to the Wall Street meltdown that occurred after Lehman Brothers collapsed.

Financial and legal analysts are divided over how the ownership questions will be resolved and the scope of the potential damage. Lenders and investigators are in the midst of a painstaking process of unraveling the complex chain of loans that were sold from one party to another, a process that some analysts say could take years.

Of the nearly $11 trillion in mortgages in the United States, about two-thirds was turned into securities that were traded around the globe.

After a home buyer gets a mortgage, the lender typically pools that loan with hundreds of others to create a security that can be traded like a stock. This process is commonly called securitization and has been the preferred method of financing debt in America for more than a decade.

Wall Street firms would set up partnerships called "trusts" and would raise money from pension funds, university endowments, hedge funds and other investors to buy these mortgage securities. The investors would then share the cash flow from the payments made by homeowners every month.

However, local laws in most states dictate that each time a mortgage changes hands, the transaction needs to be recorded in courts or county offices. But the speed with which the loans were being generated during the housing boom and then pooled together and passed around Wall Street meant that big financial firms took shortcuts, consumer lawyers said.

Often the proper paperwork got lost or was passed along without being filled out, lawyers say. Some documents have been found retroactively signed or even forged.

"It now appears that in many cases: 1. the paperwork was not properly transferred and 2. it is unclear in many cases where the actual paperwork actually rests today," Citigroup Global Markets analyst Josh Levin wrote in a note to investors this week.

Some analysts doubt whether the consequences will be dire.

"Does it call into question all securities? I think that's flying way, way too far," said Laurie Goodman, a securities analyst at Amherst Mortgage Insight. Goodman said there should be an easy way to go back and transfer documents correctly, which she says some firms are already doing.

Yet officials at the ratings agency Moody's say they are watching the courts very closely.

If they rule that the securitization process muddied the ownership of the loans, "then basically the whole thing winds down," said Debash Chatterjee, senior vice president at Moody's.

Adam Levitin, an associate professor of law at Georgetown University, who briefed Citigroup's clients on a conference call this week, said in an interview that it's hard to predict the scope of the problem.

"If you read through court decisions, there's a pretty consistent picture that there are all kinds of problems in the chain of title," Levitin said. "It's not clear how it's going to be resolved. There's a question mark hanging over the whole housing system."

Big lenders have said the issues could be solved in a month or so, but Levitin questioned that, saying that any resolution could take at least a year. In the worst-case scenario, this becomes a "systemic problem" and the mortgage market grinds to a halt.

"The liability here for the major banks is potentially enormous, and can lead to systemic risk," wrote Rep. Alan Grayson (D-Fla.) in a letter last week to Treasury Secretary Timothy F. Geithner, Federal Reserve Chairman Ben S. Bernanke and other senior regulators.

A number of investors, who are already suing trusts for losses related to mortgage securities, are seeking to expand their lawsuits or file new ones focused on whether the trusts actually owned the loans, according to lawyers involved in the discussions. Lawyers said the investors could try to force the banks to buy back the assets if contracts were violated.

"If we can't come up with a system for investors to enforce their contract rights here, then there shouldn't be a securitization market," said Bill Frey, chief executive of the hedge fund Greenwich Financial Services. "It's just as simple as that.

"Ultimately, the resolution of this is in the hands of the investors, and they have to have the political and economic will to stand up," he added.

That might already be happening. The Association of Mortgage Investors is pressuring trustees to investigate the transfer of loans in the securitization process. The trade organization has said big lenders should be liable for losses due to their negligence.

A key case before the supreme court of Massachusetts should shed more light on whether the trusts have valid ownership of the loans. A lower-court judge ruled that Wells Fargo and U.S. Bank did not have the right to foreclose on two properties because of errors in the securitization process, a decision the banks dispute.

A search of court records by an attorney for homeowners in Florida turned up nearly 80 cases in which a trust initiated foreclosure proceedings before it registered its ownership of the mortgage with county offices. Citibank, for instance, started foreclosure proceedings on a home in May 2008 but recorded the trust's ownership of the mortgage in March 2009.

Ann Rutledge, chief strategist of the structured finance advisory firm R&R Consulting, said not much more could go wrong in the mortgage-backed securities market.

"It's certainly not an indication that [the market] doesn't work," she said. "It's one more indication that it hasn't worked."
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Here's more...

Bankers Ignored Signs of Trouble on Foreclosures
By ERIC DASH and NELSON D. SCHWARTZ
http://www.nytimes.com/2010/10/14/business/14mortgage.html?_r=1&pagewanted=print

At JPMorgan Chase & Company, they were derided as “Burger King kids” — walk-in hires who were so inexperienced they barely knew what a mortgage was.

At Citigroup and GMAC, dotting the i’s and crossing the t’s on home foreclosures was outsourced to frazzled workers who sometimes tossed the paperwork into the garbage.

And at Litton Loan Servicing, an arm of Goldman Sachs, employees processed foreclosure documents so quickly that they barely had time to see what they were signing.

“I don’t know the ins and outs of the loan,” a Litton employee said in a deposition last year. “I’m not a loan officer.”

As the furor grows over lenders’ efforts to sidestep legal rules in their zeal to reclaim homes from delinquent borrowers, these and other banks insist that they have been overwhelmed by the housing collapse.

But interviews with bank employees, executives and federal regulators suggest that this mess was years in the making and came as little surprise to industry insiders and government officials. The issue gained new urgency on Wednesday, when all 50 state attorneys general announced that they would investigate foreclosure practices. That news came on the same day that JPMorgan Chase acknowledged that it had not used the nation’s largest electronic mortgage tracking system, MERS, in foreclosures, since 2008.

That system has been faulted for losing documents and other sloppy practices.

The root of today’s problems goes back to the boom years, when home prices were soaring and banks pursued profit while paying less attention to the business of mortgage servicing, or collecting and processing monthly payments from homeowners.

Banks spent billions of dollars in the good times to build vast mortgage machines that made new loans, bundled them into securities and sold those investments worldwide. Lowly servicing became an afterthought. Even after the housing bubble began to burst, many of these operations languished with inadequate staffing and outmoded technology, despite warnings from regulators.

When borrowers began to default in droves, banks found themselves in a never-ending game of catch-up, unable to devote enough manpower to modify, or ease the terms of, loans to millions of customers on the verge of losing their homes. Now banks are ill-equipped to deal the foreclosure process.

“We waited and waited and waited for wide-scale loan modifications,” said Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corporation, one of the first government officials to call on the industry to take action. “They never owned up to all the problems leading to the mortgage crisis. They have always downplayed it.”

In recent weeks, revelations that mortgage servicers failed to accurately document the seizure and sale of tens of thousands of homes have caused a public uproar and prompted lenders like Bank of America, JPMorgan Chase and GMAC Mortgage to halt foreclosures in many states.

Even before the political outcry, many of the banks shifted employees into their mortgage servicing units and beefed up hiring. Wells Fargo, for instance, has nearly doubled the number of workers in its mortgage modification unit over the last year, to about 17,000, while Citigroup added some 2,000 employees since 2007, bringing the total to 5,000.

“We believe we responded appropriately to staff up to meet the increased volume,” said Mark Rodgers, a spokesman for Citigroup.

Some industry executives add that they’re committed to helping homeowners but concede they were slow to ramp up. “In hindsight, we were all slow to jump on the issue,” said Michael J. Heid, co-president of at Wells Fargo Home Mortgage. “When you think about what it costs to add 10,000 people, that is a substantial investment in time and money along with the computers, training and system changes involved.”

Other officials say as foreclosures were beginning to spike as early as 2007, no one could have imagined how rapidly they would reach their current level. About 11.5 percent of borrowers are in default today, up from 5.7 percent from two years earlier.

“The systems were not ever that great to begin with, but you didn’t have that much strain on them,” said Jim Miller, who previously oversaw the mortgage servicing units for troubled borrowers at Citigroup, Chase and Capitol One. “I don’t think anybody anticipated this thing getting as bad as it did.”

Almost overnight, what had been a factorylike business that relied on workers with high school educations to process monthly payments needed to come up with a custom-made operation that could solve the problems of individual homeowners. Gregory Hebner, the president of the MOS Group, a California loan modification company that works closely with service companies, likened it to transforming McDonald’s into a gourmet eatery. “You are already in chase mode, and you never catch up,” he said.

To make matters worse, the banks had few financial incentives to invest in their servicing operations, several former executives said. A mortgage generates an annual fee equal to only about 0.25 percent of the loan’s total value, or about $500 a year on a typical $200,000 mortgage. That revenue evaporates once a loan becomes delinquent, while the cost of a foreclosure can easily reach $2,500 and devour the meager profits generated from handling healthy loans.

“Investment in people, training, and technology — all that costs them a lot of money, and they have no incentive to staff up,” said Taj Bindra, who oversaw Washington Mutual’s large mortgage servicing unit from 2004 to 2006.

And even when banks did begin hiring to deal with the avalanche of defaults, they often turned to workers with minimal qualifications or work experience, employees a former JPMorgan executive characterized as the “Burger King kids.” In many cases, the banks outsourced their foreclosure operations to law firms like that of David J. Stern, of Florida, which served clients like Citigroup, GMAC and others. Mr. Stern hired outsourcing firms in Guam and the Philippines to help.

The result was chaos, said Tammie Lou Kapusta, a former employee of Mr. Stern’s who was deposed by the Florida attorney general’s office last month. “The girls would come out on the floor not knowing what they were doing,” she said. “Mortgages would get placed in different files. They would get thrown out. There was just no real organization when it came to the original documents.”

Citigroup and GMAC say they are no longer giving any new work to Mr. Stern’s firm.

In some cases, even steps that were supposed to ease the situation, like the federal program aimed at helping homeowners modify their mortgages to reduce what they owed, had actually contributed to the mess. Loan servicing companies complain that bureaucratic requirements are constantly changed by Washington, forcing them to overhaul an already byzantine process that involves nearly 250 steps.
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This could get messy.

robbie380 · Oct 14, 2010

yeah this is a complete train wreck. i don't really understand how this all going to be worked out.

rimrocker · Oct 15, 2010

We had a chance to blow it up and get rid of the crooks, but we went TARP and all that other crap. Now, we're in a similar spot. We need to lock these losers up and put in place a financial system that will work for America. I want the pain now so my kids won't have it so acutely.

We have long known that lender fraud was rampant during the real estate boom. The FBI began warning of an “epidemic” of mortgage fraud as early as 2004. We know that mortgage originators invented “low doc” and “no doc” loans, encouraged borrowers to take out “liar loans”, and promoted “NINJA loans” (no income, no job, no assets, no problem!). All of these schemes were fraudulent from the get-go. Property appraisers were involved, paid to overvalue real estate. That is fraud. The securitizers packaged trash into bundles that ratings agencies blessed with the triple A seal of approval. By their own admission, raters worked with securitizers to provide the rating desired, never looking at the loan tapes to see what they were rating. Fraud. Venerable investment banks like Goldman Sachs packaged the trashiest securities into collateralized debt obligations at the behest of hedge fund managers--who were allowed to choose the most toxic of the toxic waste—then sold the CDOs on to their own customers and allowed the hedge funds to bet against them. More fraud.

Indeed, the largest financial institutions were run by their management as what my colleague Bill Black calls “control frauds”. That is,

the banks used accounting fraud to manufacture fake profits so that they could pay huge bonuses to top management. The latest data out on Wall Street bonuses show that these institutions are still run as control frauds, with another record year of bonuses paid by cooking the books. The fraud continues unabated.
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This is the biggest scandal in human history. Indeed, all previous scandals from around the globe combined cannot even touch this one in terms of scale and scope and stench. This is the mother of all frauds and it will be etched into the history books for all time.

Many have called for a national moratorium on foreclosures. Even some of the banks that have been run as control frauds have voluntarily stopped foreclosing. And yet President Obama, ever the centrist, has taken sides with the Securities Industry and Financial Markets Association, which warns that “it would be catastrophic to impose a system-wide moratorium on all foreclosures and such actions could do damage to the housing market and the economy”.

No, it would expose the securities industry, itself, as the chief architect of the biggest scandal in human history.

Now we know that it was not just the mortgage brokers, and the appraisers, and the ratings agencies, and the accountants, and the investment banks that were behind the fraud. It was the securitization process itself that was fraudulent. Indeed, the securities themselves are fraudulent. Many, perhaps most, maybe all of them.

Some are trying to argue that this is just a matter of some missing paperwork. A moratorium would allow the banks to get all their ducks in a row so that they can supply all the documents needed to foreclose.

However, as reported by Ellen Brown (at Web of Debt) and by Yves Smith (at Naked Capitalism), the paperwork does not exist. Worse, as Yves has discovered, the banks are furiously working to manufacture documents, aided and abetted by companies like DocX that specialize in “document recovery solutions”—for a fee they will create fraudulent documents that banks can use in court.

The banks would like us to believe that in the speculative frenzy of the real estate boom they “forgot” to do some of the required paperwork. That is not likely. The absence of the documents was required to run the scam.

Recall that the banks invented “no doc” mortgages. This was not at the behest of no-account borrowers, high school dropouts with bad credit histories who were duping investment bankers into making mortgage loans they could not repay. No, these mortgages were created and endorsed by originators and securitizers and credit raters to create a patina of “plausible deniability” to be used later in court when they were sued for fraud by investors who bought the securities and by the borrowers who could not possibly service the mortgages. Because if the originators had ever requested the documentation from borrowers it would have demonstrated that the mortgages and the securities were frauds.

Similarly, the paperwork required for the securities was never done because the securities were fraudulent. Yves helps to explains why. The trust that purportedly underlies a mortgage backed security must hold the “note”—the borrower's IOU (in 45 US states the mortgage that is a lien on the property is an “accessory” to the note, and is not sufficient to do a foreclosure). If the note is not conveyed to the trustee (usually before closing but sometimes up to 90 days after signing) the securities are no good.

This is not just some pesky little rule imposed by a pin-headed regulator. This is IRS code. As reported by Brown, MBSs are typically pooled through a Real Estate Mortgage Investment Conduit (REMIC) that must according to the Internal Revenue Code hold all the paperwork demonstrating a complete chain of title. Done properly, taxes are avoided. Since a number of intermediaries are usually involved from the mortgage originator through to the trustee of the REMIC, there must be endorsements all along the line. However, it now appears that most of the original notes are still held in the loan originator warehouses. There are no endorsements. The trustees do not have the notes. Can anyone say “tax fraud”?

So why weren't the notes conveyed to the REMICs? There seem to be two possibilities—probably both of them correct. Karl Denninger at MarketTicker believes it was because the REMIC trustees feared an audit by investors in the securities. If the documentation existed, it would show that the mortgage loans were fraudulent. Far better to “lose” the docs, then later manufacture new ones for the foreclosure.

According to Brown (quoting Steve Liesman and Neil Garfield), the other possibility is that the tranching process actually prohibited assignment of the notes to the REMICs. Bundles of mortgages of varying quality would be tranched into a variety of securities, say from AAA to BBB. But no individual mortgage is actually assigned to a particular tranche—until it defaults. When one defaults, it is assigned to a lower tranche security and then the foreclosure process begins. This means that from inception of that BBB security, there was no way to assign a note to the trustee because the trustee did not know in advance which mortgage would default. The REMIC trustees tried to get around that by using a dummy conduit called MERS (Mortgage Electronic Registration System) that would “hold” the mortgages and assign them to the proper tranches later. But they do not have the paperwork either, and some courts have rejected their claims as owners.

This is a complete mess. What President Obama must understand is that fraud is endemic at every level of the home finance food chain. We were long told that securitized mortgages cannot be modified because of the complexity involved—modification of most mortgages would require consent of the holders of the securities that each have a piece of the mortgage. But actually it is impossible to tell how many—if any—of these securities holders have a legitimate claim on any of the mortgages. Simply imposing a moratorium will not be enough—it will just give the banks time to manufacture false documents, encouraging even more fraud. Meanwhile, half of all homeowners with mortgages are already underwater or are within spitting distance of being underwater. Many of these are drowning because the epidemic of fraud perpetrated by financial institutions destroyed our economy and caused housing prices to collapse.

The President needs to try a different approach, consisting of the following series of steps:

1. Declare a national bank holiday that would close the biggest financial institutions—say, the top dozen or so. Send in the supervisors to examine their books to uncover fraud. Determine which ones are insolvent and resolve them. While resolving them, net their claims on one another (including derivatives). Do not allow any insolvent institutions to reopen, and do not use the resolution process to merge institutions (we don't need even bigger “too big to fail” banks). Prosecute the crooks and jail the guilty.

2. Stop all foreclosures. Investigate and prosecute all institutions that have been selling or buying fake documents to be used in foreclosures. Prosecute the crooks and jail the guilty.

3. Announce that all homeowners who occupied their homes on October 1, 2010 will be allowed to remain in their homes indefinitely. Create a national mediation board to adjust all mortgage payments to “owner's equivalent rent”—the fair value of rent for the home. Establish a fund to provide rental assistance to keep low income homeowners in their homes.

4. Give purported mortgage holders 30 days to produce the original notes; if they cannot find them, hand the homes over to the owner-occupants—free and clear of debt.

5. Create a process to allow securities holders to sue for recovery of value. This must be national—state courts will not be able to handle the case load.

6. Direct the GSEs to refinance mortgages at a low fixed rate. Mortgages would be provided against real estate appraised at fair market value to any borrower for a primary residence. The GSEs would pay holders of existing mortgages only current fair market value. Those holding these mortgages can seek redress through the process outlined in step 5. Only in the case of borrower fraud would the homeowner be held responsible for losses attributed to the refinancing.

7. There will be fall-out from losses. It is better to deal with the collateral damage directly than to prop up the control fraud banks. For example, pension funds hold toxic waste securities as well as equities in the control fraud banks, and by all reasonable accounting the Pension Benefit Guarantee Corporation is already insolvent. But it is better to directly bail-out pensions than to maintain the charade that fraudulently created securities have value.

Bill Black likes to joke that economists are afraid to use the “F” word (fraud). The President must come to realize that there is no other word that can be applied to the US home finance system. Until we deal with the fraud we will never resolve this financial crisis.
http://www.benzinga.com/general/10/10/524394/time-for-a-moratorium-on-mortgage-fraud
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rimrocker · Oct 15, 2010

Krugman today...

The Mortgage Morass
By PAUL KRUGMAN
http://www.nytimes.com/2010/10/15/opinion/15krugman.html?_r=1&pagewanted=print

American officials used to lecture other countries about their economic failings and tell them that they needed to emulate the U.S. model. The Asian financial crisis of the late 1990s, in particular, led to a lot of self-satisfied moralizing. Thus, in 2000, Lawrence Summers, then the Treasury secretary, declared that the keys to avoiding financial crisis were “well-capitalized and supervised banks, effective corporate governance and bankruptcy codes, and credible means of contract enforcement.” By implication, these were things the Asians lacked but we had.

We didn’t.

The accounting scandals at Enron and WorldCom dispelled the myth of effective corporate governance. These days, the idea that our banks were well capitalized and supervised sounds like a sick joke. And now the mortgage mess is making nonsense of claims that we have effective contract enforcement — in fact, the question is whether our economy is governed by any kind of rule of law.

The story so far: An epic housing bust and sustained high unemployment have led to an epidemic of default, with millions of homeowners falling behind on mortgage payments. So servicers — the companies that collect payments on behalf of mortgage owners — have been foreclosing on many mortgages, seizing many homes.

But do they actually have the right to seize these homes? Horror stories have been proliferating, like the case of the Florida man whose home was taken even though he had no mortgage. More significantly, certain players have been ignoring the law. Courts have been approving foreclosures without requiring that mortgage servicers produce appropriate documentation; instead, they have relied on affidavits asserting that the papers are in order. And these affidavits were often produced by “robo-signers,” or low-level employees who had no idea whether their assertions were true.

Now an awful truth is becoming apparent: In many cases, the documentation doesn’t exist. In the frenzy of the bubble, much home lending was undertaken by fly-by-night companies trying to generate as much volume as possible. These loans were sold off to mortgage “trusts,” which, in turn, sliced and diced them into mortgage-backed securities. The trusts were legally required to obtain and hold the mortgage notes that specified the borrowers’ obligations. But it’s now apparent that such niceties were frequently neglected. And this means that many of the foreclosures now taking place are, in fact, illegal.

This is very, very bad. For one thing, it’s a near certainty that significant numbers of borrowers are being defrauded — charged fees they don’t actually owe, declared in default when, by the terms of their loan agreements, they aren’t.

Beyond that, if trusts can’t produce proof that they actually own the mortgages against which they have been selling claims, the sponsors of these trusts will face lawsuits from investors who bought these claims — claims that are now, in many cases, worth only a small fraction of their face value.

And who are these sponsors? Major financial institutions — the same institutions supposedly rescued by government programs last year. So the mortgage mess threatens to produce another financial crisis.

What can be done?

True to form, the Obama administration’s response has been to oppose any action that might upset the banks, like a temporary moratorium on foreclosures while some of the issues are resolved. Instead, it is asking the banks, very nicely, to behave better and clean up their act. I mean, that’s worked so well in the past, right?

The response from the right is, however, even worse. Republicans in Congress are lying low, but conservative commentators like those at The Wall Street Journal’s editorial page have come out dismissing the lack of proper documents as a triviality. In effect, they’re saying that if a bank says it owns your house, we should just take its word. To me, this evokes the days when noblemen felt free to take whatever they wanted, knowing that peasants had no standing in the courts. But then, I suspect that some people regard those as the good old days.

What should be happening? The excesses of the bubble years have created a legal morass, in which property rights are ill defined because nobody has proper documentation. And where no clear property rights exist, it’s the government’s job to create them.

That won’t be easy, but there are good ideas out there. For example, the Center for American Progress has proposed giving mortgage counselors and other public entities the power to modify troubled loans directly, with their judgment standing unless appealed by the mortgage servicer. This would do a lot to clarify matters and help extract us from the morass.

One thing is for sure: What we’re doing now isn’t working. And pretending that things are O.K. won’t convince anyone.
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We're screwed and they're about to come back for seconds.

rimrocker · Oct 15, 2010

More info...

Worries over fast-tracked foreclosures send bank stocks plummeting

By David S. Hilzenrath
Washington Post Staff Writer
Thursday, October 14, 2010; 8:13 PM
http://www.washingtonpost.com/wp-dyn/content/article/2010/10/14/AR2010101404388_pf.html

Stocks of major banks declined sharply Thursday amid concern that widespread corner-cutting in the foreclosure process could saddle the financial system with a costly and paralyzing mess.

The sell-off was one of the most vivid indications yet that, just as banks were recovering from the financial crisis of recent years, foreclosure problems could take a new toll. Indeed, J.P. Morgan Chase said Wednesday it had set aside $1.3 billion of new reserves for litigation, "including those for mortgage-related matters."

Share prices declined Thursday by 2.8 percent for J.P. Morgan, 4.2 percent for Wells Fargo, 4.5 percent for Citigroup and 5.2 percent for Bank of America. In contrast, the Dow Jones industrial average was down by 0.01 percent, and the Standard & Poor's 500-stock index, a broader market gauge, was down by 0.36 percent.

Several major lending institutions have frozen foreclosures in response to evidence that employees in what were essentially foreclosure mills signed the paperwork to seize homes without checking whether the evictions were justified.

Meanwhile, a similar but potentially broader concern has cast an additional cloud over the system. Some analysts are concerned that securities based on huge pools of mortgages might be defective.

Mortgages are routinely pooled and packaged into securities that are traded around the world like stocks and bonds. The securities are widely held by investors, including mortgage finance giants Fannie Mae and Freddie Mac, which are wards of the government. Court documents show that in many cases the paperwork transferring legal ownership of those loans to the pools was lost, ignored or even forged.

It is not yet clear what the consequences will be if large quantities of mortgage-backed securities turn out to be flawed - or how the problem could be solved.

"If the basic principles of property law have been violated here . . . it may be extremely difficult to fix," said a source involved in government oversight of financial institutions who spoke on the condition of anonymity because of the uncertainties involved. "There is a chain of questions that no one seems to know the answer to."

Banks and other players in the mortgage industry could face substantial penalties from state law enforcement officials and potentially extensive litigation from homeowners over the disputed foreclosures, as well as from investors who bought the mortgage securities.

Analysts are divided over what the final cost will be to big financial firms. Some predict the cost could run into the tens of billions of dollars. A few say the foreclosure debacle could evolve into a major crisis for the entire financial system.

In a note to investment clients Thursday, Paul J. Miller, an analyst at FBR Capital Markets, estimated that lenders could see a hit of $6 billion to $10 billion, a large sum but one the industry "could comfortably absorb."

Much depends on how courts approach the issue. Companies that service mortgages "may be in uncharted waters as they have never been challenged by the judicial system as extensively as they are now," analysts at FBR wrote.

The stock market did not provide the only sign of investor anxiety.

Another barometer - the cost of insurance contracts known as credit default swaps, which are used to protect holders of a firm's debt in case that company collapses - shows that investors see a growing risk that banks will default on their obligations.

For example, as of Thursday afternoon, the cost of insuring J.P. Morgan debt had risen 29 percent this week, said Jim Vogel, a debt analyst at FTN Financial.

Meanwhile, Maryland's top court proposed an emergency measure Thursday that grants county circuit courts the authority to review foreclosure documents and take action if they spot irregularities, including dismissing the the foreclosures.

The announcement by Maryland's Court of Appeals comes a few days after Maryland Gov. Martin O'Malley (D) and the state's lawmakers in Congress sent a letter to the court's chief judge asking him to halt foreclosures in the state for at least 60 days.

The measure giving county courts new authority could pass Friday, when the rules committee that governs the courts votes on it.

"Preliminary audits have shown that hundreds of such bogus affidavits have been filed in Maryland circuit courts," Alan M. Wilner, the retired judge who runs the rules committee, wrote in a memo to his panel. "The judges are alarmed at this development, which is an assault on the integrity of the judicial process."

At least two Maryland courts already plan to take action. In Prince George's County, the Circuit Court expects to start reviewing such cases in early December. The Montgomery County Circuit Court is putting on hold roughly 400 foreclosure cases with similar problems.

During the quarter that ended Sept. 30, one in every 139 housing units in the United States was at some stage of the foreclosure process, RealtyTrac reported Thursday. That was up nearly 4 percent from the previous quarter but down 0.8 percent from the third quarter of 2009.
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bnb · Oct 15, 2010

Isn't this mess more about the transfer of the loans between the various entities then about the loans themselves (which is a separate matter around predatory lending).

Except for isolated incidences I haven't heard of homeowners being declared in default when they were not (in a laymans definition of what would be a default), or held to terms they explicitly did not agree to. (again -- recognizing the deceptions around the granting of the mortgages).

Just more appalling sloppiness and arrogance by the industry. Any 'damages' however, are likely to be perceived misrepresentations by industry players on industry players and investors, banks and the like. Lots of fun and billable hours for the lawyers, I suppose. Maybe an "out" for borrowers -- though it seems a backdoor way of getting resolution for lending abuses that were quite separate from this particular mess.

No way Benzinga's suggestions fly. Especially the one about get a free house if the bank doesn't have the original note, or indefinite owner occupancy regardless of default. Those who paid for their homes will be very pissed!

Dubious · Oct 15, 2010

Lawyers

In the absence of title exchanges and with an undetermined ownership wouldn't homeowners have the ability to claim ownership of their homes through Adverse Possession?

Live in the house, pay the taxes, file against any foreclosure without proper documentation?

Cohete Rojo · Oct 15, 2010

I'm waiting for Kevin Martin's input.

Major · Oct 15, 2010

bnb said:

Isn't this mess more about the transfer of the loans between the various entities then about the loans themselves (which is a separate matter around predatory lending).

Except for isolated incidences I haven't heard of homeowners being declared in default when they were not (in a laymans definition of what would be a default), or held to terms they explicitly did not agree to. (again -- recognizing the deceptions around the granting of the mortgages).

Just more appalling sloppiness and arrogance by the industry. Any 'damages' however, are likely to be perceived misrepresentations by industry players on industry players and investors, banks and the like. Lots of fun and billable hours for the lawyers, I suppose. Maybe an "out" for borrowers -- though it seems a backdoor way of getting resolution for lending abuses that were quite separate from this particular mess.

No way Benzinga's suggestions fly. Especially the one about get a free house if the bank doesn't have the original note, or indefinite owner occupancy regardless of default. Those who paid for their homes will be very pissed!
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Agreed - this seems more a problem of technical and arcane rules (for example, most states require paper documentation of things where the bank may have an electronic version) than any major economic issue. It could easily be resolved by passing a simple law that changes the definition of what is acceptable.

There will still be the loans where you have a real problem of lack of information, but it would resolve 99% of the problem fairly simply and probably fairly.

glynch · Oct 15, 2010

Major said:

Agreed - this seems more a problem of technical and arcane rules (for example, most states require paper documentation of things where the bank may have an electronic version) than any major economic issue. It could easily be resolved by passing a simple law that changes the definition of what is acceptable.

There will still be the loans where you have a real problem of lack of information, but it would resolve 99% of the problem fairly simply and probably fairly.
Click to expand...

Yeah, but does it seem fair to change the laws after the fact to help the banks when the same laws were applied for many years strictly and are still being applied strictly against small folks and small businesses?

Just another version of too big to fail or perhaps as also seen too big to apply the law to. Eventually after the distractions with homos, abortions, illegals, Muslim mosques etc. we might have the type of public awareness which will have the public demanding enough financial reforms to overcome the cash to politicians by the corporations and their propaganda onslaught by Fox and other media.

It is a little thing to big banks with millions of mortgages but to the average person their house is extremely important to them financially and emotionally.

Major · Oct 15, 2010

glynch said:

Yeah, but does it seem fair to change the laws after the fact to help the banks when the same laws were applied for many years strictly and are still being applied strictly against small folks and small businesses?
Click to expand...

No - I agree. That doesn't seem fair at all. I'm not sure what the ultimate solution is, but I don't think it will be that millions of people will get free homes after failed foreclosures. I think that would be a terrible result - basically, it would incentivize people to stop paying their mortgages and see if they would get a free house as a result if the bank doesn't have good paperwork. And those that are current on their mortgages are going to feel like they were screwed over and others got free stuff, causing even more resentment amongst the middle and lower classes.

But like you said, it doesn't make sense to just let the banks off the hook either. It will be interesting to see how this all gets resolved, because it's certainly a complete mess.

Major · Oct 15, 2010

To clarify (since my two posts seem opposites) - I think changing the law would result in a fair end result since those homes haven't had their mortgages paid and should be foreclosed. But I don't think the process would be fair at all since the banks agreed to certain technical rules and didn't follow them, whereas mortgagers don't get that same leeway.

rimrocker · Oct 15, 2010

Major said:

No - I agree. That doesn't seem fair at all. I'm not sure what the ultimate solution is, but I don't think it will be that millions of people will get free homes after failed foreclosures. I think that would be a terrible result - basically, it would incentivize people to stop paying their mortgages and see if they would get a free house as a result if the bank doesn't have good paperwork. And those that are current on their mortgages are going to feel like they were screwed over and others got free stuff, causing even more resentment amongst the middle and lower classes.

But like you said, it doesn't make sense to just let the banks off the hook either. It will be interesting to see how this all gets resolved, because it's certainly a complete mess.
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Yeah, but I'd rather see my ******* neighbors with a smirk than see one more dime go to the mfing banks.

Dubious · Oct 15, 2010

Major said:

but I don't think it will be that millions of people will get free homes after failed foreclosures. I think that would be a terrible result - basically, it would incentivize people to stop paying their mortgages and see if they would get a free house as a result if the bank doesn't have good paperwork.
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You say you want a Revolution
Well you know

snowmt01 · Oct 15, 2010

don't understand why this is a big issue.

The bank should give extension to some homeowners who have short term financial difficulties, but for other deadbeat they should not stay in the house they couldn't afford.

twhy77 · Oct 15, 2010

Dubious said:

Lawyers

In the absence of title exchanges and with an undetermined ownership wouldn't homeowners have the ability to claim ownership of their homes through Adverse Possession?

Live in the house, pay the taxes, file against any foreclosure without proper documentation?
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It would take like 20 years in most jurisdictions for adverse possession to come into play, and that would be with a single lender. Of the sub-prime mortgages that are out there probably less than a percent of a percent would fall into that category.

Dubious · Oct 15, 2010

snow: because of the sheer mass of numbers, the legwork to make determinations would be impossible. If banks have people signing 500 affidavits a day, how would they possibly come up with the man hours to see who might pay and wouldn't.

The chaos will be hilarious. The legislative solutions a Republican Congress might resort to will be an unprecedented case of damned if you do and damned if you don't. Whata we do Newt?

twhy77 said:

It would take like 20 years in most jurisdictions for adverse possession to come into play, and that would be with a single lender. Of the sub-prime mortgages that are out there probably less than a percent of a percent would fall into that category.
Click to expand...

So, your saying there's a chance?

Deckard · Oct 15, 2010

glynch said:

Yeah, but does it seem fair to change the laws after the fact to help the banks when the same laws were applied for many years strictly and are still being applied strictly against small folks and small businesses?

Just another version of too big to fail or perhaps as also seen too big to apply the law to. Eventually after the distractions with homos, abortions, illegals, Muslim mosques etc. we might have the type of public awareness which will have the public demanding enough financial reforms to overcome the cash to politicians by the corporations and their propaganda onslaught by Fox and other media.

It is a little thing to big banks with millions of mortgages but to the average person their house is extremely important to them financially and emotionally.
Click to expand...

Too true. In so many instances, deregulation has proven to be a disaster, and not only in the financial industry. The bedrock philosophy of today's Republican Party has been shown to be one of the worst things to ever happen to this country. How anyone could vote for the clowns is beyond me. Sure, some Demopcrats in Congress were also culpable, but the overwhelming blame for the current financial chaos in all it's myriad permutations rests with the GOP and it's bankrupt leadership, past and present.

Dubious · Oct 15, 2010

I think they could have bought and would have bought whichever party had the power at the time. The snowball started under Clinton.

It is economic bubbles that keep a party in power. They create the tide that lifts all boats, till they don't.

Refman · Oct 16, 2010

Deckard said:

Too true. In so many instances, deregulation has proven to be a disaster, and not only in the financial industry. The bedrock philosophy of today's Republican Party has been shown to be one of the worst things to ever happen to this country. How anyone could vote for the clowns is beyond me. Sure, some Demopcrats in Congress were also culpable, but the overwhelming blame for the current financial chaos in all it's myriad permutations rests with the GOP and it's bankrupt leadership, past and present.
Click to expand...

This is a good time to remind everybody that the legislation that led to this mess was the lax underwriting standards and the reduction in capitalization of Fannie and Freddie. That legislation was pushed by Barney Frank and signed by George Bush. This was a bipartisan disaster.

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