Bad Housing Paperwork Matters

You know how the lax paperwork in securitized mortgages was just going to get cleaned up and then we’d go back to foreclosing as usual?

Maybe not (from the WSJ).

Ohio’s attorney general threw a wrench into the banking industry’s push to quickly restart foreclosures by fixing faulty paperwork, and pressed them to modify mortgage loans.

In two letters released Friday, Attorney General Richard Cordray criticized a number of banks and loan-servicing companies, including Wells Fargo & Co.; Ally Financial Inc.’s GMAC Mortgage; Bank of America Corp.; and J.P. Morgan Chase & Co. Mr. Cordray said the banks are trying to paper over fraud committed in foreclosures with temporary fixes that don’t address underlying problems in the banks’ practices.

“It is not acceptable for a party who believes they submitted false court documents to merely replace those documents. Wells Fargo and any other banks are not simply allowed a ‘do-over,'” he wrote in the letter to Wells. The other letter was sent to Ohio judges, who were asked to notify Mr. Cordray when banks file substitute affidavits.

He demanded that the banks vacate any court order or motion that was based on an improper paperwork. In an interview Friday, Mr. Cordray said the banks would “be well-served to work out a settlement with the borrowers to modify the loans and work out payments.”

It’s going to get interesting. The reality is that politics deeply impacts out interpretation of the law. Right now – in large part because the Administration has tipped so far in favor of the banks and large-scale finance community, I think we’re seeing the beginning of a wave in which law will be interpreted – by people like Cordray – in ways that leads to interesting remedies for homeowners.

21 thoughts on “Bad Housing Paperwork Matters”

  1. I’m not sure where beef is in this particular bun.

    It’s not surprising that gathering original documentation required for a proper foreclosure is difficult when mortgages are securatized and sold multiple times. When a large volume of such foreclosures occur simultaneously because of a massive volume of loan defaults . . . this inevitably will lead to an administrative migrane. So what?

    I’d be surprised to hear that there are many mistakes being made (a) about who owns the mortgage at a particular time, and (b) whether the loan is in default or not. Mistakes of that variety are quickly cleared up.

    So we are not talking about banks foreclosing on homeowners who are making payments. To the extent that banks are rushing the process and messing up the paperwork, not fully crossing t’s and dotting i’s, the courts and state attorney’s general will have an interest, and homeowners may have something to talk about. But I don’t see this as a case of putting people out of their homes who shouln’t be. From a public policy standpoint this is much ado about nothing.

  2. The problem isn’t that the banks are “rushing the process and mixing up paperwork”. The problem is that banks are finding themselves without the correct paperwork, and relying on affidavits “that we used to have the correct paperwork, really” from people who never saw the paperwork, never looked for the paperwork, and who would not have been interested in examining the paperwork even if it had existed.

    The problem is that foreclosures were mostly procedural before, and now can’t be. If I go up to a judge and say “I want this guy’s house, he has a mortgage with me, I don’t have the paperwork but here’s Mrs. Jones’ affidavit that we’ve got all the paperwork on file,” should the judge proceed? Previously the answer was “yes”. But once the judge knows that Mrs. Jones is a compulsive liar who will sign any paper put in front of her, in good conscience he can’t do that anymore; he’s going to have to demand paperwork or go tell you to pound sand. That’s true _whether the mortgage actually ever existed or not_.

    The banking industry has been caught employing several thousand Mrs. Jones, in essence.

    The real trouble here is that foreclosure relies on local authorities, and property records are kept at the county level. This makes a single, over-arching federal solution difficult. Furthermore, it opens up the possibility of regional interests getting involved. I’ll bet that for the vast majority of the counties in the nation, significantly more mortgages are held by people living outside the county (and probably the state) than are held from outside the county by people living there.

    So if I’m County Property Examiner for West Podunk County, I can just say “if you don’t have the paperwork, you can sit and spin, you will not get a foreclosure”, and transfer significant wealth from outside the county to the residents of the county… without doing anything illegal or even questionable. My personal prospects for political advancement go up tremendously as well – forget tax breaks, how many votes can you buy with whole neighborhoods of people whose major debts you just wiped out?

    However, you put enough West Podunk Counties together and you’ve got a powder keg big enough to blow the whole banking system sky-high…

  3. Roland, Avatar has it right here – both in terms of the core legal problem (although I think it’s a bit more nuanced) and in terms of the politics.

    I think you’re going to see a lot of state and local officials who go “Gosh, the paperwork isn’t 100% right, so while Ms. Doe is wildly in arrears, you’d best go try and make a deal with her”… much as the commercial lenders have been trying to make deals with their borrowers.

    And when that happens, you’ll force the banks to write their mortgage portfolios to market.



  4. Marc

    The banks, unless they have personal recourse against borrowers, are writing their assets to market by foreclosing. The County officials don’t have the power to deny foreclosures: that’s the jurisdiction of the courts. The brouhaha will surely cause courts to take a closer look; but that’s what they should have been doing all along.

    Some banks may decide that it’s more expedient to renegotiate lower interest rates or loan balances than to pay the increased attorney fees required to jump through all the right hoops. I don’t see this as a problem. Losses have occurred, if more homeowners get to stay in their houses as areault of this that doesn’t sound like an additional “systemic” problem.

  5. Marc:

    I assuem we are talking past each other here. I’m not sure how the accounting shenaigans work. However, if the Bank carries a property as worth $600,000 on its books (because that’s what the loan says), but the property prices drop so its worth only $300,000 and the homeowner defaults on the loan–once the bank forcloses on the property they have something that has value of $300,000. Anything else is fiction.

    I’m skeptical that the bank will continue to reflect value of $600,000 after foreclosure. If they did, that would be a fraud on somebody. Are you suggesting that it would be a problem if banks can’t perpetuate a (now ficitional) value of $600,000 after foreclosure. I trust that’s not what you’re saying. But if not, I’m not sure I understand what you mean.

  6. I’m also not sure what the beef is. So long as the homeowner is getting notice of the foreclosure, the homeowner will have the opportunity to defend title. I’m guessing 99% of the time, the homeowner does not appear or challenge the foreclosure because they owe the money. The homeowner would not appear likely to challenge whether it owes Bank A or Bank B, unless lawyers start promising that they can buy a few extra months of free rent in exchange for legal fees.

  7. What are the local property tax — a big source of revenue for most local governments/schools — implications of mortgage writeoffs?

    Assuming the above case of a $600K -> $300K drop in mortgage, wouldn’t any sane home”owner” immediately run off to their local tax office and demand a reassessment in valuation to $300K? Even if they’re only partly successful, that would mean a drop in effective property taxes. And once a few properties do this, their neighbors — behind on mortgages or not — would also start demanding re-evaluations.

    Are you willing for local tax revenues to drop 50% all of a sudden? Have your local government & schools basically assumed that they’re recession-proof and will always get in more $$$ than they did last year? (This cynic says: yes.) If property tax rates start ratcheting up 100% to account for the 50% valuation drops, will people stand for that? If such things started happening nationwide, then there would be a huge groundswell of “throw the bums out” of local government.

    “Fixing” bad mortgages is going to have knock-on effects. To pretend they won’t happen is shortsighted. Any local government that isn’t flexible enough to reduce spending in bad times — which may last a year or few more — is going to make things worse.

  8. The problem, as I see it is more difficult than whether mortgages will be written off or people who are in arrears will get their houses free, or the banks want a do over (which is an excellent way to describe it. And I wish them good luck on that one.)

    Seeking Alpha published this about three weeks ago that raises some pretty nasty issues.
    Also, all that has been spoke about here has been the “retail” end of the Problem.

    If you take a look at the other end. PIMCO, Blackrock and The NY FED going after BofA to the tune of nearly 50 billion,

    Suits by institutions worldwide against major Wall Street Banks for representing the validity of title in the synthetic securities during the meltdown and talk of fraudulent representation of the percentage of Sub primes that were bundled into these instruments, then, I think this makes 2008 look like a walk in the park.

    I would normally dismiss this as wild talk, but before 2008, I would dismiss the idea that a major wall street firm could be leveraged at 170 to 1 as wild talk.

    I have been to court in New York over Real Estate matters many times as a commercial broker. I acannot imagine a judge accepting do over documents, affidavits that essentially say trust me or God knows what else in exchange for a clear wet ink chain of title.

    Ultimately I do not think this can be fixed by legislation, it will only be settled in The Supreme Court and if they rule against a proper chain of title, the basic elements of a contract like:

    *Mutual Consideration* (The mutual exchange of something of value)
    In order to be valid, the parties to a contract must exchange something of value. In the case of the sale of a piano, the buyer receives something of value in the form of the piano, and the seller receives money. (which could be ruled to be lacking in the case of the synthetic securities)


    *Good Faith* It is implicit within all contracts that the parties are acting in good faith. For example, if the seller of a “mustang” knows that the buyer thinks he is purchasing a car, but secretly intends to sell the buyer a horse, the seller is not acting in good faith and the contract will not be enforceable. (which could be ruled to be lacking in the case of the synthetic securities)

    There other areas which may have to be explored Vis-a/vis Mers which may be attacked by localities as being a construct created by the mortgage financing industry to avoid paying transfer fees.

    I could go on. but I am tired and there is plenty of stuff on the net. There will be a congressional hearing after the election (I wonder why, then?)

    I look at this as not being a political issue, a political problem, yes, but not a political issue. It will be fun to watch the roaches on both sides of the aisle scatter when the lights are turned on.

    See you, many, many times in court before this one is over.

  9. I used to work on Mortgage Backed Securities, so let me try to fill in a few of the details here.

    The paperwork that has been screwed up was supposed to properly transfer the loan, mortgage, everything from the bank to an MBS Trust. If it was screwed up (or as appears to be most often the case just dumped in a box and never done) in all likelihood, the bank still owns the mortgage – even though everyone has been acting like the MBS Trust did. Once the homeowner defaults, they look at the paperwork and try to foreclose. Then the judge may read it and since it says Bank, not MBS Trust… they’re not going to let MBS Trust foreclose, or at least not without further assurances, affidavits, etc.

    The problem for the bank is that when they created MBS Trust, they said that they were doing the paperwork correctly. If it wasn’t done correctly, they agreed that the MBS Trust could force them to repurchase the mortgage. Since this only comes up (and in most cases is probably only required) if the mortgage isn’t performing, the banks are worried about being forced to repurchase all these bad loans that they thought were someone else’s problem.

    Meanwhile, the investors theoretically have a bunch of people looking out for their interests (Servicers, Trustees, possibly others) but those people tend to be part of the bank. So, they have been looking out for the bank’s interest more than the investors. Now they are starting to get organized to sue (often you need a certain percentage of the investors to get together in order to sue) to enforce their rights.

    Ironically, if the paperwork was just not done (as opposed to lost), once the bank is forced to repurchase the mortgage they (if they’re the originator anyway) can probably foreclose. When they try, the paperwork is correct again.

    They won’t be able to do much in the way of mark to market funny business though. The value of the MBS Trusts have all been written down already. When they repurchase the mortgage it’s cash out the door for a non-performing loan. Pretending that it’s worth face value on the books might well land you in jail under Sarbanes Oxley.

  10. I read what Ritzhold is quoting weeks ago. He is taking the (maybe?) worst case scenario. But, following the amateurish behavior of the financial industry during the melt down, I would not rule anything out. Look at the lasting effect that sub-prime and other synthetic securities have wrought on the world economy.

    There are so many criss-crossing currents, so many powerful characters that have an interest in this drama, that it appears top me to beyond legislative remedy.

    The foreclosure side will be worked out since the homeowner debt will not be expunged but will remain, except as an unsecured debt. the ramifications of that alone, even in the most simple terms of securing a date on the court calender is daunting.

    The last time I went to court for a commission in NYC, it took me 7 years to get a date. Add another 100,000 spots on the calendar.

    I believe, in the end, The Supreme Court will have to issue any number of opinions on all facets of this mess. Only opne of which Alois excellently lays out above again.

    Again, we are talking about claims that flow from the basic elements of a contract.

    Anyone that thinks this is going away anytime soon, I think, is whistling past a graveyard.

    The movements by Blackrock, The NY Fed and Pimco against B of A for nearly 50 Billion dollars on bundled mortgage instruments sold to them by B of A, looks to me like the tip of the iceberg.

    I wonder what it will be like in November when our Big Bank executives make a encore before the Senate, which of the Clerical Error, Risk Management, Sophisticated Investor or Normal Operating Procedure arguments do you think that the American people will swallow?

  11. Is there any reason the Federal Government can’t take possession of foreclosures from Fannie and Freddie and take those houses off the market? Taking off the market a couple hundred billion dollars worth of housing selling for nothing (or trying to) would surely shore up the market.

  12. Alois, I agree (as I understand your post) that the bigger problems lie on the investment side and the possibility that investors might find a right to back out of their MBS investments on a technicality.

    Is that a public policy concern? I’m not sure that it is, but to the extent we don’t want investors to entirely escape the market losses they undertook, I don’t know why legislation cannot “clarify” the requirements of what constitutes a true sale.

  13. PD,

    Sure legislation could change things. But the problem is fundamentally one of not doing the paperwork, not what the law says. The cases toc3 cites illustrate this: it is well understood what you have to do to transfer ownership of a mortgage. But if you don’t do it, then you have real problems when the courts asks you to prove that you did do it.

    The law might change to make it easier to fix the paperwork, but it would still need to be fixed.

    I’m actually pretty sympathetic to the investors seeking to back out. They were told that they were investing in mortgage backed securities, and if it turns out that they don’t actually own the mortgages that doesn’t seem like a technicality to me. Especially when the terms say that they’ll either get the mortgages transfered properly or the creator of the trust will fix the problem. Remember, the entity that gets stuck with the repurchased mortgage is the one that didn’t do the paperwork in the first place. That said, this may also be a slow painful process legally.

    There are lots of incentives to find shortcuts here. I imagine that somehow something will be worked out.

  14. Toc: In the Walker case, the judge dismissed the claim with leave to refile. I don’t know that these problems are unfixable, they still strike me as cost to cure items.

    Just from a practical standpoint, I don’t know why a debtor in a bankruptcy case would file documents saying that he has a mortgage that he owes money on, but this or that bank has not proven it has the mortgage.

    My best guess is it’s personal. On June 28, 2010, the U.S. District Court affirmed sanctins againsts the debtor’s attorney and referral to the California state bar. That arose from a lawsuit with Citibank.

  15. Alois, I would be sympathetic to the investors if they ended up with a risk they did not bargain for, but I think investor losses are losses from the bubble, not paperwork.

  16. PD,

    I agree that people who make bad investments should be stuck with the losses. And for that matter, I think a lot of the losses on MBS were the fault of investors who couldn’t get enough of them, but also couldn’t be bothered to figure out whether it was a good buy.

    Nonetheless, from the beginning the deal was typically that if the mortgage wasn’t transfered properly, it could be forced back on the bank. As it has worked out, it will serve to bail the investors out of a bad investment to some extent, but not I think unfairly. It is still what everyone agreed to.

  17. Actually, no. The property is held at the loan’s face value (what they bought the house back for); banks have aggressive depreciation they have to take on ORE, which is a hit to current earnings, but can usually maintain the fiction that the property is worth more than it’s true value if they choose to.

    I can’t speak for current bank practices, just regulations (used to work for a bank in just this area a million years ago).


  18. Nathan, in many jurisdictions the assessed value of the property can only be raised by a specific percentage each year. As a result, the real estate bubble rapidly outpaced the assessed value increases. Therefore, you can find counties where the market value of homes has decreased but the assessed value has gone up anyway. I know of a number of counties in Texas where that was the case last year. So my question is, what are the tax valuation regulations in places that had the insanely rapid rise in prices, like CA, NV, AZ, etc.?

  19. The courts are ruling that this is not a technical flaw but one of substance. See the following rulings:

    California Precedent:

    The latest of these court decisions came down in California on May 20, 2010, in a bankruptcy case called In re Walker, Case no. 10-21656-E – 11. The court held that MERS could not foreclose because it was a mere nominee; and that as a result, plaintiff Citibank could not collect on its claim. The judge opined: “Since no evidence of MERS’ ownership of the underlying note has been offered, and other courts have concluded that MERS does not own the underlying notes, this court is convinced that MERS had no interest it could transfer to Citibank. Since MERS did not own the underlying note, it could not transfer the beneficial interest of the Deed of Trust to another. Any attempt to transfer the beneficial interest of a trust deed without ownership of the underlying note is void under California law.”

    In support, the judge cited In Re Vargas (California Bankruptcy Court); Landmark v. Kesler (Kansas Supreme Court); LaSalle Bank v. Lamy (a New York case); and In Re Foreclosure Cases (the “Boyko” decision from Ohio Federal Court). (For more on these earlier cases, see here, here and here.) The court concluded: “Since the claimant, Citibank, has not established that it is the owner of the promissory note secured by the trust deed, Citibank is unable to assert a claim for payment in this case.”

    As to legislation clarifying what represents a true sale, I doubt that it would fly (but who knows these days)one of the main reasons being that we would have to back date what constitutes a true sale.

    Now that sounds like a lot of time in court. If there was even talk about that I think we would see a ton of Pimco and Blackrock actions to force the banks to take back the mortgages as they stand now. The banks are so weakened now and so out of favor with the electorate. there would be political hell to pay for this osrt of legislation, I also doubt that it could be written and further that it could stand up to legal challenge.

    One other thing, the banks will be up against very powerful interest both domestically and internationally. Things could get pretty ugly pretty fast.

    But we will see.

  20. Take what you just said in reply to Alois

    “I would be sympathetic to the investors if they ended up with a risk they did not bargain for…”

    Take away that this is about mortgages, and enormous amounts of money and foreclosures and whatever else. Why you object to this is because it violates the very basis of a contract, any contract.

    Then you say

    “I think that investor’s are losses from the bubble not from the bubble, not paperwork.”

    Well, It’s great that you feel this way, but I doubt that everyone involved will just say, “OK, I accept that.”

    Nor do I think it will be anything the courts will be comfortable with.
    Nor, as we see, are PIMCO, Blackrock or the NY Fed.

    This also leaves open all contracts to the idea that you can promise what you don’t have if you can fix it with paperwork later.

    I don’t think that the courts will be very happy with this either.

    Having worked in Real Estate for a number of years, done international licensing, run a couple of my own businesses, spent too much of my life defending my interests in court and lawyers offices, I am not very sympathetic to the sloppy paperwpork defense.

    Nor, has it been my experience that the Courts are either.

    The problem, as I see it, is that some very naive people thought they could figure out a way to make some money by trying to jam property law into a construct of their own devise. Apparently, they didn’t realize:

    1. That the Promissory Note is indivisable form the Mortgage Document.

    2. That there are basic elements of any contract without which the contracts are voidable or unenforceable.

    This paperwork excuse appears to be just that, an excuse. But, we will see. The onus is more and more coming upon the shoulders of the Banks to convince the court of that. It will be quite a trick if they can, but it does not end there. There are any number of very powerful interests that will Keep this in the courts for years.

    I was a commercial Broker in Manhattan. Trust me, if there are problems on the commercial side, the large landholders there will definitely have their pound of flesh.

    But, we will see. This one is not going to go away. It saound eerily likewhat was being said during the meltdown by the same people. “There is no threat of contagion.”

    I would think that Alois would agree with me that this goes well beyond your garden variety stupidity, I would’nt be surprised in a lot of criminal cases come out of this.

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