more Bankers: FAIL

Yves Smith at naked Capitalism tells us of a case where Wells Fargo Bank (which acquired Wachovia 2 years ago), foreclosed and evicted a homeowner for failing to make payments.  Then Wells sold the foreclosed house at auction to a new owner.  Then Wells attempted to foreclose on the new owner for alleged failure to payoff the original first mortgage from the previous owner.  How could this happen?  It seems the mortgage Wells used to foreclose the first time was a second mortgage.  Wells took the money from the auction sale and paid off the second mortgage without paying any money to the owner of the first mortgage, which has legal precedence.  In fact, it didn’t even notify the owner of the first mortgage of the sale.  It just took the money and ran.  A gross violation of mortgage law. But it gets even more bizarre.  Turns out Wells Fargo is also the servicer and the party leading the foreclosure effort on the first mortage.

How could this happen?  Well, first off, this is the stuff that happens when mortgages (and transfers of mortgages) are not properly recorded publicly at the county and are instead kept in secret in bankers’-only databases like MERS.  Second, it most likely amounts to attempted fraud and theft.  See, Wells owned the second mortgage.  House gets sold. Wells gets all it’s money back.  But Wells Fargo is most likely only the servicer on the first mortgage. The first mortgage was most likely “securitized” and sold to the MBS trusts where ownership is by a host of bond holders.  If Wells had sold the house and paid off the first mortgage, then the bond holders would have gotten their money back (as legally they should), Wells would only get a small fee, and Wells would be left with no money for the second mortgage.  Wells Fargo most likely defrauded the bondholders.  It’s Bankers FAIL again.

Yves Smith at Naked Capitalism tells the full story:

The Times has a completely different sort of account, with a headline that is remarkably blunt: “Avoid Foreclosure Market Until the Dust Settles.” This is the sort of article that gives industry lobbyists nightmares. And with good reason. It contains a horror story that is enough to scare lots of people who are thinking of buying properties out of foreclosure.

Just as the account of a man who had his house foreclosed upon when he has no mortgage persuade a lot of people that there could be real problems with foreclosures, this one illustrates how title has become a mess.

Todd Phelps and Paul Whitehead bought at a foreclosure auction. It turns out the lender who had seized the house was the second mortgage-holder; unbeknownst to them, the property had a large first mortgage outstanding, which meant it was now their obligation.

The buyers had asked their broker to check the records to make sure the title was clear; he appears not to have done so. The auction company would not refund their payment.

But the really nasty bit here is…both loans on the house were from the same bank, Wachovia, now part of Wells Fargo. The Times story does not draw out the implication: first, that the bank foreclosed on a second, rather than a first (is that a weird way to provide a data point to justify not writing all seconds down to zero? And the fact that the buyers were saddled with the first says, in effect, that Wells defrauded the first mortgage holders, presuming, as is likely, that the first mortgage was part of a securitization, as opposed to on Wells’ books. The proceeds of the foreclosure sale should have gone to the first lien holder, not the second.

The hapless buyers did get out whole; the inquiries of the reporter led Wells to reverse the deal. But anyone in that situation who didn’t get a big media outlet shining a bright light on the transaction would have been stuck. Caveat emptor indeed.

Bankers: FAIL

A quote from Jamie Dimon, the CEO of JP Morgan Chase this week (from the Wall Street Journal via Yves Smith at Naked Capitalism):

“We’re not evicting people who deserve to stay in their house,” James Dimon, J.P. Morgan chief executive, told analysts Wednesday.

Now let’s turn to the Lansing State Journal reporting the day before Jamie Dimon made his comment (emphasis mine):

HOLT – Army National Guard Capt. Bill Krieger was talking to his wife, who’s stationed in Iraq, at the very moment his mail carrier came to his Delhi Township home Saturday with a registered letter requiring Krieger’s signature.

It was a foreclosure notice from Chase Home Finance:

“THIS NOTICE …,” it growled, “AFFECTS YOUR RIGHT TO CONTINUE LIVING IN YOUR HOME.”

Let me pause here to inject a little background into this story. Capt. Krieger served in Iraq in 2006-07. His wife, Army National Guard Sgt. Kristin Krieger, is there now, as is their 21-year-old son, Pfc. Aaron Krieger, who’s regular Army. They keep in touch via Skype, software that allows voice calls over the Internet.

Let me point out, furthermore, that JPMorgan Chase is one of the banks American taxpayers bailed out in 2008. Chase is currently under investigation for its alleged sloppy approach to foreclosures.

Oh – and one other thing … since they bought their house five years ago, the Kriegers have never missed a payment. Not one.

Mr. Dimon’s assertion that all foreclosures deserve it is demonstrably false.  He is either lying or ignorant.  If ignorant, then we can conclude that the organization he heads, JP Morgan Chase, is our of control and cannot account for it’s own assets properly and report them properly.  Either way, it’s FAIL on the bank.

Unfortunately, Mr. Dimon will not only not suffer consequences for his and his bank’s misbehavior, he will be rewarded with hundreds of millions of dollars in bonuses.

We need a new banking system.

 

 

High Noon: Banks vs. The Law – Part 8

It’s happening fast and furious now.  It’s starting to feel like late summer 2008 IMHO.  All 50 state Attorneys General are now involved in a joint investigation.  JP Morgan Chase drops it’s use of MERS (see Part 4). And Citi circulates a research note from a Professor that suggests the problems are much deeper than the banks have admitted to.  Again we go to Yves Smith of Naked Capitalism to report the latest:

From the Associated Press:

JPMorgan Chase’s CEO says the bank has stopped using the electronic mortgage tracking system used by major financial institutions.

Lawyers have argued in court proceedings that the system is unable to accurately prove ownership of mortgages.

JPMorgan Chase & Co. and other banks have suspended some foreclosures following allegations of paperwork problems in thousands of cases.

The trigger may have been the publication of a simply devastating analysis at the end of September, “Two Faces: Demystifying the Mortgage Electronic Registration System’s Land Title Theory” by Christopher L. Peterson. Even though I have read the critical MERS unfavorable opinions, this is the first time I am aware of that someone has looked at the operation of MERS from a broader legal perspective. It finds fundamental flaws in virtually every aspect of its operation. To give a partial list: the language used by MERS in its registry at local courthouses is contradictory (it claims to be both the owner of the mortgage and as well as a nominee; legally, a single party can’t play two roles simultaneously), rendering it unenforcable; MERS has employees of servicers and law firms become “MERS vice presidents” or secretaries when fit none of the criteria that fit those roles, and also have clear conflicts of interest given that they are also full time employees of other organizations; MERS record keeping has the hallmarks of being poorly controlled (there have been cases of mortgages basically being stolen from other MERS members; some contacts have suggested that a single MERS member can assign a mortgage, meaning checks are weak; MERS members are not required to update records). And most important, every state supreme court that has looked at the role of MERS has ruled against it.

As much as I have heard the case against MERS in bits and pieces, and regarding it as very problematic, seeing it assembled in one place (with solid references to judicial decisions) makes for a overwhelming case. The best resolution the author can come up with is that lenders with MERS registered mortgages would be granted an equitable mortgage as a substitute for the flawed MERS registered mortgages:

While awarding equitable mortgages is surely a better approach for financiers and their investors than simply invalidating liens, it would not solve all their problems. Replacing legal mortgages with equitable mortgages would give borrowers significant leverage. Historically, state law has not uniformly treated equitable mortgagees vis-à-vis other competing creditors. Generally, the holder of an equitable mortgage had priority against judgment creditors. But, it is likely that an equitable mortgage could be avoided in bankruptcy. Moreover, it is likely that financiers would have less luck seeking deficiency judgments when foreclosing on equitable mortgages.

High Noon: Banks vs. The Law (Mortgage Foreclosures) – Part 7

I know the story is getting old. This is my 7th post on the subject, but it is snowballing and casting a huge shadow on the economy.  The potential exists to freeze mortgage/housing markets for a few years, run up legal costs into the hundreds of millions, if not billions of dollars, and even, potentially to topple some major banks.  Again I turn to Yves Smith at Naked Capitalism to tell the tale:

Astonishingly, despite mounting evidence that the lapses in industry conduct were egregious and widespread (the failure to adhere to their own contracts; the widespread use of fabricated documents), the industry is trying to keep the focus very narrow and pretend the only thing at issue is the, um, improper affidavits, and surely that will be fixed shortly, really there is nothing wrong with the underlying process. The abject failure to convey notes says otherwise, as does more and more evidence of people losing their homes due to servicing errors or other abuses.

Before readers start arguing that these problems are small and therefore inconsequential, consider Barry Rithotz’s remarks:

There are multiple failsafes and checkpoints along the way to insure that this system has zero errors. Indeed, one can argue that the entire system of property rights and contract law has been established over the past two centuries to ensure that this process is error free. There are multiple checks, fail-safes, rechecks, verifications, affirmations, reviews, and attestations that make sure the process does not fail.

It is a legal impossibility for someone without a mortgage to be foreclosed upon. It is a legal impossibility for the wrong house to be foreclosed upon, It is a legal impossibility for the wrong bank to sue for foreclosure.

And yet, all of those things have occurred. The only way these errors could have occurred is if several people involved in the process committed criminal fraud. This is not a case of “Well, something slipped through the cracks.” In order for the process to fail, many people along the chain must commit fraud.

That it is being done for expediency and to save a few dollars on the process is why the full criminal prosecution must occur..

In another widely-circulated sighting, Georgetown professor
Adam Levitin provided a prognosis that some sites touted as a surprisingly dour forecast. I was actually found his remarks to be pretty moderate; I’ve been told by litigants who have sought his input that his private views are more pointed (although it is possible they cherry picked his views). From the Citigroup report (hat tip Karl Denninger):

Levitin articulated three possible outcomes to the aforementioned issues and assigned an equal likelihood to each. In his best case scenario, these issues are deemed merely technical in nature and are successfully resolved but it takes at least year to do so and all foreclosures are delayed by at least a year. Levitin disputed the claim by banks that these issues can be resolved in a month or so and attributed the banks’ claims to “legal posturing.” In the medium case scenario, litigation ensues and it takes years to sort out these matters. In the worst case scenario, the aforementioned issues become a “systemic problem” which causes the mortgage market to grind to a halt as title insurers refuse to insure mortgages involving existing homes

I see the odds that the problems are “merely technical” as zero. Levitin hedged his bets on how widespread the problems are with the conveyance of the notes. The reports I am getting are providing more and more confirmation for the notion that the notes were seldom, if ever, conveyed correctly from 2005 onward. And if that is the case, the problems are not technical but fundamental.

It would be better if I were wrong, but brace yourself for a rocky ride.

A rocky ride indeed.  There is more at stake here than just the money and homes of the foreclosed.  Also at stake is the core legal system of contracts and real estate property rights.  This system was evolved over hundreds of years.  It has held up well.  Until multiple players in the banking industry decided they need not play according to the law and could write their own rules for their own profit.

Check out Part 1Part 2Part 3Part 4, Part 5 and Part 6 of my posts on this topic.

 

High Noon: Banks vs. The Law (Mortgage Foreclosures) – Part 6

Felix Salmon starts to bring out why the foreclosure mess is much bigger, and potentially much messier, than the banks or politicians are letting onto now. In The enormous mortgage-bond scandal:

You thought the foreclosure mess was bad? You’re right about that. But it gets so much worse once you start adding in a whole bunch of parallel messes in the world of mortgage bonds. For instance, as Tracy Alloway says, mortgage-bond documentation generally says that if more than a minuscule proportion of notes in a mortgage pool weren’t properly transferred, then the trustee for the bondholders can force the investment bank who put the deal together to repurchase the mortgages. And it’s looking very much as though none of the notes were properly transferred.

But that’s not even the biggest potential problem facing the investment banks who put these deals together. It also turns out that there’s a pretty strong case that they lied to the investors in many if not most of these deals.

mentioned this back in September, and I’ve been doing a bit more digging since then. And I’m increasingly convinced that the risk to investment banks isn’t only one of dodgy paperwork; there’s also a serious risk of massive lawsuits from the SEC or other prosecutors, as well as suits from individual mortgage investors.

The key firm here is Clayton Holdings, a company which was hired by various investment banks — Goldman Sachs, Bear Stearns, Citigroup, Merrill Lynch, Lehman Brothers, Morgan Stanley, Deutsche Bank, everyone — to taste-test the mortgage pools they were buying from originators…

The banks, yes, the too-big-to-fail banks, the usual suspects, the ones we bailed out just 2 years ago, could easily be in deeper trouble this time.  The trusts that handled and sold the MBS bonds, the trusts where the banks dumped the mortgages may not have actually (as in legally) ever have been in possession of the mortage notes.  That means the banks committed fraud on investors when they sold the MBS bonds.  Who were those investors? Just about everybody: pension funds, foreign banks, state and local governments, your 401(k) or IRA.  How much is potentially at risk?  Try in the TRillions of dollars invested in this MBS bond market.  That’s a lot of uncertainty and potential loss. It’s beyond the scale of the Lehman and AIG failure two years ago.

Check out Part 1, Part 2, Part 3, Part 4, and Part 5 of my posts on this topic.

High Noon: Banks vs. The Law (Mortgage Foreclosures) – Part 4

We start to get at the root of the problems in the foreclosure crisis with this article from the Washington Post.  Essentially, the big banks decided that in the 1990’s that the existing laws governing real estate transactions and deed recording were inconvenient.  They thought they had a better way.  But rather than pushing for the law to be changed (which they could easily do with their formidable lobbying resources), the banks decided they didn’t have to conform to existing laws.  They decide to create their own (emphasis is mine):

The land title system that went largely unchallenged in the United States for centuries became an obstacle in the 1990s. That’s when financial firms began to ramp up a process called securitization, bundling and selling pools of home loans to sell to investors. Each time the loans were reassigned, the new owner had to record the transfers with local clerks.

Several executives in the mortgage industry came up with a faster, easier approach: MERS. The list of MERS shareholders includes an array of banks, lenders and title companies. Among them: Fannie MaeFreddie MacBank of America, GMAC, Washington Mutual, Wells Fargo and AIG’s United Guaranty Corp.

Here’s how MERS works: When a homeowner closes on a house, the paperwork signed at settlement often appoints MERS as a “nominee” for the lender and for whomever the lender might sell the mortgage to down the road. Each time the loan is sold and resold, MERS tracks the reassignment in its computer system, without generating paperwork.

The company says such an arrangement benefits all parties – consumers, lenders and investors.

But after the MERS computer system went live in 1997, some county recording offices complained that the company was bypassing the legal process and raking in money charging fees that were lower than those charged by municipalities. They were largely ignored.

“It wasn’t like Congress or state legislators did anything,” said Christopher L. Peterson, a law professor at the University of Utah who has consulted in cases against MERS. “The mortgage industry just changed how the land title system worked without getting anyone’s okay.”

MERS has consistently claimed authority to act as a representative, or “nominee,” on behalf of banks and lenders.

But as millions of homes have fallen into foreclosure, Peterson said, “the MERS system doesn’t provide a substitute for all the recordkeeping” that never took place during the boom years. “MERS created the illusion of record keeping when it wasn’t really done.”

To convince courts that they have the right to foreclose on homes, banks and lenders have often found it difficult – when challenged – to provide the paperwork showing they indeed own the loans. Financial firms, which bought mortgages from other companies, have also been challenged in court over whether MERS even had the legal right to reassign the loans.

These problems contributed to the use of flawed and fraudulent paperwork, including backdated assignments and forged documents, that have prompted firms such as Ally Financial, J.P. Morgan Chase and Bank of America to halt foreclosures.

For more on this crisis, which is admittedly rather complex if you’re not a real estate lawyer, see Part 1, Part 2, and Part 3.

High Noon: Banks vs. The Law (Mortgage Foreclosures) – Part 3

Ok, continuing the series on the mortgage foreclosure crisis here. For background on the legal side of the problem see Part 1 and for a humorous look by Jon Stewart at the crisis see Part 2.

The banks are claiming that the problems are only paperwork glitches, that all the people being foreclosed on are in default and owe serious money, and that foreclosures will resume soon.  Kind of a “nothing to see here, move along” response.  This pitch is getting echoed by politicians, the Wall Street Journal (I don’t link to pay sites), and, of course, the banks.  The White House seems to be falling into line with their bosses, the banks, too.  From the New York Times (free registration may be required):

The industry has argued in response that problems should be addressed without halting all foreclosures, because a moratorium would damage the economy. “It must be recognized that the mortgage market, investors and the health of the economy are all interrelated,” Tim Ryan, president of the Securities Industry and Financial Markets Association, said Monday.

The White House shares those concerns, and it has tried to defuse the issue by arguing that problems can be addressed without imposing a moratorium.

“There are, in fact, valid foreclosures that probably should go forward,” David Axelrod, a senior White House adviser, said Sunday on CBS.

Administration officials argue in part that the problems that have emerged in recent weeks do not change the fact that lenders are seeking to foreclose on people who borrowed and then failed to repay. Most of the identified problems are best described as technicalities, not miscarriages of justice.

But we also know it’s patently false.  There are clear cases of erroneous foreclosures including, but not limited to these reported in the same Times article:

Advocates for homeowners, however, say that the pattern of sloppiness allows and encourages more serious abuses. They point to a growing number of documented cases in which lenders mistakenly seized homes.

Bank of America apologized last month for foreclosing on a home in Fort Lauderdale, Fla. The homeowner didn’t even have a mortgage. The bank had failed to notice that the previous owner had repaid the mortgage loan.

Last year the company’s contractors entered the home of a Pittsburgh woman, changed the locks, cut off the utilities and seized her pet parrot. The bank later acknowledged that the woman had not missed any mortgage payments.

Other companies including Citigroup and JPMorgan Chase also have apologized for mistaken attempts to seize homes they didn’t own.

Dozens of people have sued lenders charging that their homes were foreclosed even after the lender agreed to a loan modification or repayment plan.

I just don’t accept that foreclosing and seizing (really stealing) a house that DID  NOT HAVE A MORTGAGE is more than a “paperwork glitch”.  There’s much more to this crisis.