Posted by Karl Denninger
From a report emailed to me over the weekend:
At the core of the foreclosure-prevention strategy is
ignoring delinquencies. The percentage of older delinquent loans not
yet in foreclosure is startling: 60% have at least 12 missed payments,
and 35% have at least 18 missed payments. Add to this that
three-fourths of delinquent loans are not in foreclosure, and we see
that hidden losses well exceed those in the open.
Uh, they’re not being “ignored” – this is systemic and
Remember, these loans are either being held by someone or
securitized into some sort of package. When you have a loan that has no
chance of “curing” (to cure a loan with 12 missed payments the
borrower would have to come up with the 12 payments to bring it
current!) that loan should be carried at its recovery value – that is,
the value of the collateral that can be seized and sold, LESS the cost
of eviction, remediation and resale.
Does anyone recall all the entries I’ve written about
getting competent legal and accounting (tax) advice before proceeding
with any sort of action regarding walking away, short sales or
foreclosure? This same report says:
Many homeowners would be better off going into foreclosure,
than doing a short sale. Short sales are fraught with potential legal,
credit, and complicated tax issues. For example, someone who
refinanced could owe capital gains taxes, which are not forgiven under
federal and California temporary debt relief acts. In the foreclosure
route, borrowers can live in their house mortgage-free for at least one
year, maybe two years. Both short sales and foreclosures are reported
as “account not paid in full”, and are equally damaging to a credit
score. An exception exists if short sellers can negotiate better terms
with their lender on recourse liens. The other possible advantage to a
short sale is the ability to get a mortgage again in 2 years (Fannie,
Freddie), rather than having to wait 3-5 years after a foreclosure.
Homeowners pursue short sales, unaware of the problems they
are creating for themselves. Their agents never warned them of
deficiencies, ruined credit, taxes due on forgiven debt, or legal
consequences. Agents made flowery promises to get listings, and now the
lawsuits are starting.
No, really? You mean that people in the real estate
business are less than truthful with their clients? That would never,
ever happen with licensed professionals, right?
Then there’s this, which I also have written about:
Another gray area is junior lien holders asking buyers for
additional payments. As the market improved, juniors were no longer
content with $3k thrown to them from the senior. They now want 10% of
the junior note. They argue the additional payment is legal practice
because the payment is made to escrow and appears on the HUD-1. However,
they are actually hoping the senior lien holder does not read the
HUD-1. The California Association of REALTORS® position is that
all payments made by the buyer or agent in the purchase of a short
sale must be part of the written short sale agreement signed by the
senior lien holder. Concealing payments from seniors is loan
fraud, and omitting these payments from the HUD-1 closing statement may
violate RESPA. Some seniors reinstate their security interests because
of the fraud. It’s surprising that the biggest banks are
responding, when pressed on the fraud of their request, “just do it if
you want the deal done”.
Right. Big banks saying “just do it”? Why would they do
that? Is it so they can re-instate their security interests? No,
nobody would ever do anything that hoses the consumer, would they?
Few people understand that the bank that gave them their
mortgage turned around and sold it into a mortgage bond, and the “bank”
on their mortgage statement is actually a servicer.
Actually, it’s a bit more complicated than that.
As I’ve been working on (and writing on) for a long time,
and as a few attorneys are now starting to understand, the
entirety of this process was corrupted and is rife with outright fraud
from top to bottom.
Let’s go through a (partial) list of the problems:
The originator of the loan (which often was some chop-shop mortgage
boutique) was the place that got funding via a warehouse line of
credit with a major bank. They paid the seller of the house. The
seller thus is “whole” and has no further interest.
The originator was shortly paid in full when the loan was sold to a
major bank that was intending to (or did) securitize the paper. They
were also paid in full and thus have no further legal
interest in the property or the paper.
The banks, in turn, set up “bankruptcy remote” trusts to hold all
this paper. This is (of course) done so that whatever happens to the
paper doesn’t impact the bank’s earnings itself. Or does it…. we will
get to that later.
Many of the assignments from this point onward in the loan are
legally defective. In particular, many of the assignments of the loans
were made in blank, that is, in bearer form. But in most
states trusts cannot hold bearer paper of any sort – period. In
addition, in many states you cannot record a bearer instrument. To get
around recording fees the industry has even created its own “clearing
house” called MERS, which alternately claims to be an agent or the
actual holder in due course, whichever suits the position of the trust
(or itself) any given time. Whether this is legal under state law
varies from jurisdiction to jurisdiction – what is known is that only
one state has actually made the “reach around” games MERS plays
The trusts that are the “vessel” in which the securitized
instruments are formed and then sold to investors thus hold paper they
can’t legally hold. This may in fact be sufficient to void
the trust. Worse, they issued prospectuses and offering
circulars to investors claiming that they had good recordable title
to each and every loan in the trust. In many cases they never did and
can’t cure this retroactively. That is, there is at least
the appearance of fraud in the sale of these securities, in that the
buyers were led to believe they were buying a note backed by a security
interest in an asset, when in fact there is no such backing at all –
the note is a “bare” promissory note!
Cities, counties and states were ripped off to the tune of hundreds
of billions of dollars over the previous ten years as a consequence of
these intentional failures to properly record. Specifically, the
states, counties and localities have laws governing the requirement to
record and pay doc stamps – that is, taxes – on transactions of this
sort. The necessity of recording these transactions varies from
jurisdiction to jurisdiction, and thus the economic damage done by this
avoidance varies, but the banksters and their cronies simply kept this
money instead of filing and remitting it to the taxing authorities as
required by law.
The mess doesn’t end here. If you buy a house where the original
note was not satisfied in full and a full chain of assignments cannot
verify that all security interests are released the title
chain is severely clouded, perhaps to a degree that is almost impossible
to unravel. Wise title insurance companies are beginning
to recognize this problem and refuse to issue owners policies against
properties where a broken chain of assignment exists, especially
where a foreclosure or short sale took place, as those
properties may still have an enforceable lien against them!