Like a blob in a low-budget horror film that grows larger and larger until it smothers everything, the foreclosure robo mess is ballooning. We now learn that there are robo signing problems with notices of foreclosure in at least some states having nonjudicial foreclosure procedures. (See http://www.cnbc.com/id/41250862). In nonjudicial foreclosure states, where a creditor doesn't need to go to court to foreclose, the trustee bank handling the foreclosure has to give notice to the homeowner of the impending foreclosure, and file the notice in a public office. One of the tiresome requirements of the law is that the person signing the notice should ascertain that there is a valid legal reason for foreclosure. However, it may be that employees of trustees or their agents were robo-signing notices of foreclosure--i.e., affixing their John Hancocks without first bestirring themselves to review the facts of the case and ensure that a valid basis for foreclosure existed.
Nag, nag, nag, nag, nag. The law is such a pain in the . . . assssssk a lawyer what the effect of a defective notice might be and you'd probably be told that it means questions come up whether the bank can obtain clear title from the foreclosure. The bank may be unable to resell the property. Bad debts would remain on its books. The real estate market would linger in its current morass, with the Sword of Robo-Damocles dangling over foreclosed properties the banks have resold or try to resell.
The robo-mess revealed last fall, with robo-signers gone wild in judicial foreclosures, mucked up the foreclosure process in close to two dozen states. The kicker about the latest revelations is that if robo-signing permeated the nonjudicial foreclosure states, then the robo-mess will have reached every state. We've previously suggested the foreclosure crisis needs a national solution. (See http://blogger.uncleleosden.com/2010/10/foreclosure-crisis-time-to-put-mortgage.html.) This would be all the more so, now that robo-signers seem to lurk the length and breadth of the nation.
When you think about it, the robo problem is the problem in the real estate markets. We got to where we are today with mortgage lenders robo-lending to every Tom, Dick and Harry who had a signature and a pulse, without regard to income, employment, assets, past credit history, or anything else that might be relevant to a borrower's ability to repay. Then, the big banks on Wall Street bought up vast quantities of hinky mortgages that the robo-lenders churned out and robo-stuffed them into asset pools underlying mortgage-backed securities and derivatives, making financial sausages containing a lot of things you really wouldn't want if you knew about them. (Investors are now trying to regurgitate the bad mortgages by making underwriters buy them back.) Then, when things fell apart, the big banks tried robo-signing their way through the foreclosure process, disregarding the dreary requirements of the law that might interfere with the bottom line. Somehow, all this robo-banking has to stop. If it doesn't, only a matter of time separates us from the next financial robo-wreck.
Showing posts with label foreclosure crisis. Show all posts
Showing posts with label foreclosure crisis. Show all posts
Tuesday, January 25, 2011
Sunday, January 9, 2011
It's Not Just a Foreclosure Problem, It's an Accounting Problem
A recent decision by the Supreme Judicial Court of Massachusetts (U.S. Bank, NA v. Ibanez, Jan. 7, 2011) to block certain foreclosures has deeper implications than has generally been reported. The court ruled that two banks, trustees holding pools of securitized mortgages that tried to foreclose on two of the mortgages, hadn't submitted the documentation required to establish valid ownership of the mortgages. Thus, the banks couldn't prove they legally held the mortgages in question, and consequently couldn't foreclose. Nor could they obtain title to the mortgaged homes when they purported to buy them at the auction, so they couldn't resell them. Although the court didn't expressly say so, the homes would appear to be still owned by the original mortgage borrowers.
The court's decision implies that, for perhaps numerous securitized mortgages in Massachusetts, foreclosure may be difficult or near impossible. Such a legal conclusion, if applied nationwide, would gum up the recovery of the real estate markets. Even though halting foreclosures will hold homes off the market (because foreclosing banks can't resell what they don't legally own), prospective buyers will be cautious with the prices they pay for the remaining houses on the market. The foreclosure problems will eventually be resolved and foreclosed homes would then be dumped onto the market. This would push prices downward. Anyone who paid an optimistic price today could end up underwater in a year or two. The real estate markets will not stabilize until the foreclosure problems are dealt with. Delaying them, which will be the result of the Massachusetts decision and similar decisions by the lower courts of other states, will only postpone the day of reckoning. And the delay will add to the costs to the banks for having been so careless about documentation requirements.
What makes things worse is that there's more than a foreclosure problem here. If mortgages haven't been legally transferred to trustee banks, the principal process for financing home purchases--securitization--would have broken down. Mortgages being securitized are supposed to be pooled together and held by trustees for the benefit of investors. The big banks that underwrote the mortgage-backed securities would have breached their contracts to the investors by failing to deliver mortgages to the securitization pool. Investors could demand their money back. And refuse to accept losses the banks claim were sustained on defaulting mortgages, on the ground that those mortgages were never validly transferred to the securitization pool and the investors have no liability for losses from mortgages not held by the pool.
Moreover, depending on how the courts interpret the law, the banks might be liable for fraud, especially if bank officers were aware of the documentation deficiencies but sold mortgage-backed investments anyway. That could result in more liabilities, to investors and in SEC enforcement actions. In the worst case scenario, criminal charges could be filed. Since trillions of dollars of mortgages have supposedly been securitized, but now perhaps weren't, the potential liabilities could be very large.
Another problem would come up with mortgages that banks bought, either directly or as part of a securitization offering. If those mortgages have the same documentation problems the Supreme Judicial Court found deficient, the banks wouldn't really own the mortgages (or securitized interests in them), but would have reported phantom assets on their balance sheets. Again, depending on how widespread the documentation problems are, the quantity of improperly reported assets could be tens of billions, or even hundreds of billions.
Banks are now closing their books for 2010, and will be filing their financial statements at the end of March. The impact of the mortgage documentation problems will grow as a result of the Massachusetts ruling. The banks will have to account for these problems, and make a variety of disclosures. The banks' auditors will likely advocate caution; the New York Attorney General's recent case against Ernst & Young over Lehman Brothers' accounting for quarter end repo transactions will surely loom large in their minds. If the banks understate their problems, they (and their auditors) could buy more fraud suits from other classes of investors or government agencies. Stay tuned. This crisis could make our times even more interesting.
The court's decision implies that, for perhaps numerous securitized mortgages in Massachusetts, foreclosure may be difficult or near impossible. Such a legal conclusion, if applied nationwide, would gum up the recovery of the real estate markets. Even though halting foreclosures will hold homes off the market (because foreclosing banks can't resell what they don't legally own), prospective buyers will be cautious with the prices they pay for the remaining houses on the market. The foreclosure problems will eventually be resolved and foreclosed homes would then be dumped onto the market. This would push prices downward. Anyone who paid an optimistic price today could end up underwater in a year or two. The real estate markets will not stabilize until the foreclosure problems are dealt with. Delaying them, which will be the result of the Massachusetts decision and similar decisions by the lower courts of other states, will only postpone the day of reckoning. And the delay will add to the costs to the banks for having been so careless about documentation requirements.
What makes things worse is that there's more than a foreclosure problem here. If mortgages haven't been legally transferred to trustee banks, the principal process for financing home purchases--securitization--would have broken down. Mortgages being securitized are supposed to be pooled together and held by trustees for the benefit of investors. The big banks that underwrote the mortgage-backed securities would have breached their contracts to the investors by failing to deliver mortgages to the securitization pool. Investors could demand their money back. And refuse to accept losses the banks claim were sustained on defaulting mortgages, on the ground that those mortgages were never validly transferred to the securitization pool and the investors have no liability for losses from mortgages not held by the pool.
Moreover, depending on how the courts interpret the law, the banks might be liable for fraud, especially if bank officers were aware of the documentation deficiencies but sold mortgage-backed investments anyway. That could result in more liabilities, to investors and in SEC enforcement actions. In the worst case scenario, criminal charges could be filed. Since trillions of dollars of mortgages have supposedly been securitized, but now perhaps weren't, the potential liabilities could be very large.
Another problem would come up with mortgages that banks bought, either directly or as part of a securitization offering. If those mortgages have the same documentation problems the Supreme Judicial Court found deficient, the banks wouldn't really own the mortgages (or securitized interests in them), but would have reported phantom assets on their balance sheets. Again, depending on how widespread the documentation problems are, the quantity of improperly reported assets could be tens of billions, or even hundreds of billions.
Banks are now closing their books for 2010, and will be filing their financial statements at the end of March. The impact of the mortgage documentation problems will grow as a result of the Massachusetts ruling. The banks will have to account for these problems, and make a variety of disclosures. The banks' auditors will likely advocate caution; the New York Attorney General's recent case against Ernst & Young over Lehman Brothers' accounting for quarter end repo transactions will surely loom large in their minds. If the banks understate their problems, they (and their auditors) could buy more fraud suits from other classes of investors or government agencies. Stay tuned. This crisis could make our times even more interesting.
Tuesday, October 12, 2010
The Foreclosure Crisis: Time to Put the Mortgage Industry in Federal Court
Another major bank, Wells Fargo, announced today that it's placing its foreclosures under review. Morgan Stanley estimated that as many as 9 million foreclosures might be open to legal challenge. (See http://www.bloomberg.com/news/2010-10-12/disputes-may-affect-9-million-foreclosures-morgan-stanley-says.html.) Mortgages whose ownership is unclear create an additional, potentially massive problem. They may have to be written off bank balance sheets. Or, if they were supposedly sold but really not, the "purchasing" investors may be entitled to reimbursement for failure of the underwriting bank to deliver the mortgages. The number of mortgages where title is unclear hasn't been reported. But it could be very large.
Legal processes are erupting nationwide. Lawsuits by the truckload are being filed. Attorneys general in 40 or more states are investigating. Federal agencies and departments are huddling and inquiring. Subpoenas are flying. The legal profession is smiling. Its recession has just ended and prosperity is around the corner.
The foreclosure crisis has become a raging bull. There are, or will be, many, many thousands of lawsuits brought over one aspect or another of the morass. The courts will be clogged for years. Title to millions of homes could be clouded for a long time. Real estate sales could slump as buyers back off and title insurance becomes far more expensive than before.
There's no easy or quick way out of the mess. Indeed, we got into this mess because banks owning or servicing mortgages wanted a quick and easy way through the complexities of recording liens against real estate and foreclosing on those liens. Those banks apparently didn't want to bother with the due process of law. They will now get a shipload of due process, from the courts of just about every state in the nation, and many federal courts as well.
Not even Charles Dickens could write so byzantine a novel, nor Mary Shelley so horrifying a story. The prospect of 50 or more judicial systems reaching every variety of result in this ocean of litigation (and taking years to do so), with no established mechanism for consistency or predictability, is stupefying. Homeowners could experience widely varying outcomes, depending on where they live. Investors in mortgage-backed investments may have little or no idea what their now increasingly illiquid investments are worth. Banks would face unenviable choices for accounting for the situation. Mortgage investors and bank shareholders may well indulge in class action litigation.
A gargantuan problem such as this needs an organized and unified nationwide process for resolution. The current multi-jurisdictional mosh pit promises only legal pandemonium. The financial markets will stomach such bedlam for only so long, and that won't be very long.
But how to institute a national claims resolution process? Federal regulators can correctly say, as they did with the Lehman situation, that they have no statutory authority to take on the problem. State officials have no authority beyond the borders of their respective states.
A claims process in federal court may offer a solution. The process would involve reviewing records relating to mortgage ownership, resolving disputes and deciding who owns what. Attorneys with appropriate backgrounds could be recruited to serve as special masters to handle the enormous amount of work this would entail. The federal claims process could also look into foreclosures, past, present and prospective, and resolve uncertainties and competing claims. (The latter process could be handled through related proceedings in federal district courts in each state, where local lawyers having knowledge of their particular state's laws could serve as special masters to resolve mortgage recordation and foreclosure issues, but as part of a national process to keep the overall resolution of the problem coordinated.) By using attorneys as special masters, the resources of the courts would be magnified exponentially. As things now stand, the foreclosure process has clogged up numerous state courts, with no obvious way to clear up the traffic jams.
Other claims, such as class actions by investors or shareholders, could also be incorporated into the master claims process and resolved as part and parcel of the nationwide cleanup of the mortgage market and foreclosure process. Judges and federal magistrates might be the best adjudicators for these other claims, as they are the most likely to resemble the kind of litigation judges and magistrates routinely handle.
A unified national process could offer at least some degree of consistency in procedures and principles. It might also provide for coordination of various claims, and some notion of a timetable. And the appeals process would be greatly simplified. Information about the mortgage problems would be centralized and presented in a more organized way, offering greater transparency to the financial markets. The big banks, which may face the greatest liabilities here, would have a single process in which to resolve the myriad claims they now likely face, simplifying their management, accounting and regulatory problems.
The federal courts have experience administering cases with vast numbers of claims. Products liability litigation over asbestos related illness and injury provides an example, in which the claims of thousands of individuals have been resolved, in some cases with substantial payments. A nationwide mortgage and foreclosure cleanup process might well be the most complex proceeding ever undertaken by the federal courts. But if there were ever a time to take on such a challenge, this is it.
There isn't an obvious way to institute such a proceeding. Perhaps a number of interested parties, including major banks, the key mortgage guarantors such as Fannie Mae and Freddie Mac, their regulator (OFHEO, or Office of Federal Housing Enterprise Oversight), the FHA, as many state attorneys general as can be mustered, federal financial regulators (citing their need to promote the safety and soundness of banks, and monitor and control systemic risk), and whoever else has legal standing to join the party could band together and petition a federal district court in Washington or New York (where the federal district courts have substantial experience handling massive litigation, and where there are hordes of lawyers who could be lined up to serve as special masters). As a legal foundation for such a process, the petitioners might invoke the equity jurisdiction of the federal courts (a body of law that, more or less, says the courts can, within certain limits, create solutions to problems that the existing legal system can't handle or doesn't handle well). Even though it's unlikely any of these parties alone could convince a court to institute such a proceeding, the combined interests of a consortium of interested parties might present a strong enough foundation that a judge would find jurisdiction.
Equity jurisprudence may be insufficient. If so, an act of Congress would be required. That's a scary thought. The temptation for the politicians to politicize such a process is obvious. But the alternative is a legal quagmire stretching from sea to shining sea. A unified national claims process, even if polluted by the underhanded, craven and disgraceful manipulations of pompous, self-interested politicians, may offer a less imperfect solution. (The biggest problem could turn out to be that Congress won't act quickly enough, a distinct possibility given today's shifting political winds; and that would aggravate a seriously aggravated situation.)
The bonfire of the mortgages is burning hot and fiercely, spreading its flames like a prairie fire on a windy day. A unified nationwide claims resolution process may be the only feasible alternative to the inferno.
Legal processes are erupting nationwide. Lawsuits by the truckload are being filed. Attorneys general in 40 or more states are investigating. Federal agencies and departments are huddling and inquiring. Subpoenas are flying. The legal profession is smiling. Its recession has just ended and prosperity is around the corner.
The foreclosure crisis has become a raging bull. There are, or will be, many, many thousands of lawsuits brought over one aspect or another of the morass. The courts will be clogged for years. Title to millions of homes could be clouded for a long time. Real estate sales could slump as buyers back off and title insurance becomes far more expensive than before.
There's no easy or quick way out of the mess. Indeed, we got into this mess because banks owning or servicing mortgages wanted a quick and easy way through the complexities of recording liens against real estate and foreclosing on those liens. Those banks apparently didn't want to bother with the due process of law. They will now get a shipload of due process, from the courts of just about every state in the nation, and many federal courts as well.
Not even Charles Dickens could write so byzantine a novel, nor Mary Shelley so horrifying a story. The prospect of 50 or more judicial systems reaching every variety of result in this ocean of litigation (and taking years to do so), with no established mechanism for consistency or predictability, is stupefying. Homeowners could experience widely varying outcomes, depending on where they live. Investors in mortgage-backed investments may have little or no idea what their now increasingly illiquid investments are worth. Banks would face unenviable choices for accounting for the situation. Mortgage investors and bank shareholders may well indulge in class action litigation.
A gargantuan problem such as this needs an organized and unified nationwide process for resolution. The current multi-jurisdictional mosh pit promises only legal pandemonium. The financial markets will stomach such bedlam for only so long, and that won't be very long.
But how to institute a national claims resolution process? Federal regulators can correctly say, as they did with the Lehman situation, that they have no statutory authority to take on the problem. State officials have no authority beyond the borders of their respective states.
A claims process in federal court may offer a solution. The process would involve reviewing records relating to mortgage ownership, resolving disputes and deciding who owns what. Attorneys with appropriate backgrounds could be recruited to serve as special masters to handle the enormous amount of work this would entail. The federal claims process could also look into foreclosures, past, present and prospective, and resolve uncertainties and competing claims. (The latter process could be handled through related proceedings in federal district courts in each state, where local lawyers having knowledge of their particular state's laws could serve as special masters to resolve mortgage recordation and foreclosure issues, but as part of a national process to keep the overall resolution of the problem coordinated.) By using attorneys as special masters, the resources of the courts would be magnified exponentially. As things now stand, the foreclosure process has clogged up numerous state courts, with no obvious way to clear up the traffic jams.
Other claims, such as class actions by investors or shareholders, could also be incorporated into the master claims process and resolved as part and parcel of the nationwide cleanup of the mortgage market and foreclosure process. Judges and federal magistrates might be the best adjudicators for these other claims, as they are the most likely to resemble the kind of litigation judges and magistrates routinely handle.
A unified national process could offer at least some degree of consistency in procedures and principles. It might also provide for coordination of various claims, and some notion of a timetable. And the appeals process would be greatly simplified. Information about the mortgage problems would be centralized and presented in a more organized way, offering greater transparency to the financial markets. The big banks, which may face the greatest liabilities here, would have a single process in which to resolve the myriad claims they now likely face, simplifying their management, accounting and regulatory problems.
The federal courts have experience administering cases with vast numbers of claims. Products liability litigation over asbestos related illness and injury provides an example, in which the claims of thousands of individuals have been resolved, in some cases with substantial payments. A nationwide mortgage and foreclosure cleanup process might well be the most complex proceeding ever undertaken by the federal courts. But if there were ever a time to take on such a challenge, this is it.
There isn't an obvious way to institute such a proceeding. Perhaps a number of interested parties, including major banks, the key mortgage guarantors such as Fannie Mae and Freddie Mac, their regulator (OFHEO, or Office of Federal Housing Enterprise Oversight), the FHA, as many state attorneys general as can be mustered, federal financial regulators (citing their need to promote the safety and soundness of banks, and monitor and control systemic risk), and whoever else has legal standing to join the party could band together and petition a federal district court in Washington or New York (where the federal district courts have substantial experience handling massive litigation, and where there are hordes of lawyers who could be lined up to serve as special masters). As a legal foundation for such a process, the petitioners might invoke the equity jurisdiction of the federal courts (a body of law that, more or less, says the courts can, within certain limits, create solutions to problems that the existing legal system can't handle or doesn't handle well). Even though it's unlikely any of these parties alone could convince a court to institute such a proceeding, the combined interests of a consortium of interested parties might present a strong enough foundation that a judge would find jurisdiction.
Equity jurisprudence may be insufficient. If so, an act of Congress would be required. That's a scary thought. The temptation for the politicians to politicize such a process is obvious. But the alternative is a legal quagmire stretching from sea to shining sea. A unified national claims process, even if polluted by the underhanded, craven and disgraceful manipulations of pompous, self-interested politicians, may offer a less imperfect solution. (The biggest problem could turn out to be that Congress won't act quickly enough, a distinct possibility given today's shifting political winds; and that would aggravate a seriously aggravated situation.)
The bonfire of the mortgages is burning hot and fiercely, spreading its flames like a prairie fire on a windy day. A unified nationwide claims resolution process may be the only feasible alternative to the inferno.
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