Note: This is a long post, so I have bifurcated it - placing part two with the heavy graphics and the financial stuff on by blog. The intro and legal theory suggested by readers is here in part one. I would suggest one read it in its entirety before dismissing any one part of it, though.
Is it possible for the US Government to choose to forgive mortgage
debt? Sounds outrageous? Read on for the legal theory behind this claim
and let me know what you think? I thought it was little esoteric as
well, but as I looked deeper… Well, I’ll let you be the judge.
A lot of attention accrued to Representative Grayson’s calling out of
foreclosure fraud, and for good reason. The story is absolutely
amazing, and kudos to a member of congress that defends his
constituency.
It’s not as if other entities have failed to take notice. ZeroHedge has its usual witty commentary regarding the possibility of foreclosure transactions potentially being unwound due to fraudulent foreclosure activity. The NYT
ran an article stating that Fitch will look into lowering the credit
rating of companies that participated in the submission of inappropriate
foreclosure paperwork, which apparently seems to include an awful lot
of companies. It goes on to state (as excerpted by Zerohedge):
Fitch Ratings said that Wednesday
it was asking mortgage companies about their internal processes for
executing foreclosure affidavits. If it finds the processes lacking,
Fitch will consider downgrading the company’s rating.
The agency also said if the
issue is widespread, the resulting delays and extra costs to
foreclose could increase losses related to residential mortgage-backed
securities.
Here’s the twist. A lawyer who happens to have
followed my writings over the years has suggested that most are missing
the big picture in focusing on fraudulent foreclosure documents. He
contends (and I’m paraphrasing here, these are not my words, per se) “that
since the U.S. has ownership interest in many (if not most) delinquent
and distressed mortgages, this fact will be counted as policy in
litigation. As a consequence it matters A LOT if you can
say that your client has a Fifth Amendment Due Process right (or third
party beneficiary Federal common law right) to a HAMP modification
which is in FACT a minimization of the risk of default (not that flaky
31% number) BECAUSE, among other things, the U.S. has no economic
incentive to foreclose”. Now, I am no lawyer and thus the legal
issues are beyond my domain, but I must admit I found the theory
interesting. So, I’ve decided to crowdsource this one in anticipation
that some of the more astute legal minds can shed some light on the
validity of the theory. I’ll supply the financial stuff in this post,
and I’ll rely on the legal eagles to peer review the theory.
This all stemmed from a chart and “what if”
scenario I post on the 23rd of September in which showed the increasing
decline in recoveries from gross charge-offs from banks.
As a matter of fact, things are so
bad that I believe banks will have a perverse incentive to actually
walk away. Now wouldn’t that be something??? Next, we take a look into
the home builder that makes more money doing distressed investing
than it does building and selling homes.
The legal argument from the BoomBustBlogger in question is as follows:
Things are
moving pretty fast now, especially since so many states are moving to
ban home foreclosures, and since your comments on the lack of economic
incentive to foreclose is coming to the fore. It’s becoming
a question of, Hey Uncle Sam, what is your policy? This may result in
actions to quiet title, against the banks and the United States. The basis will be that in fact, the United States has forgiven home mortgage indebtedness. Your own observation of the economics of foreclosure is part of the mix. But the entire argument that the U.S., has in FACT (no matter what it CLAIMS) forgiven home mortgage indebtedness, is this:
Through its
1. ownership
stake in banks (creating Fifth Amendment Due Process rights to what is
in FACT–not the arbitrary 31%–minimization of the risk of housing loss:
see Huxtable v. Geithner Order on this (not the Order to Dismiss, sounds
like a settlement was reached since Huxtable filed no opposition); 2.
contracts with servicers (creating third party contract rights in
borrowers–see Marques v. Wells Fargo); 3. mortgage principal reduction; 4. adjustments to gross income for principal reduction; and 5. loss of economic incentive to foreclose,
the United States has in fact forgiven home mortgage indebtedness.
And here is more on the topic…
The
big divide in the United States District Courts, with regard to HAMP,
is the language of HAMP which seems to give the Government discretion as
to whether to modify or not. Here is typical language from a court
decision saying there is no right to a modification:
“Notably, the statute provides that loans may be modified “where
appropriate” – a phrase that limits the Secretary’s obligation and
evinces a Congressional intent to afford discretion in the decision
whether to modify loans in certain circumstances.”
The way
to defeat this (as was done in Huxtable v. Geithner, before the case was
settled or abandoned) is to show FACTS which demonstrate that the
Government is actually enforcing a different policy. In that case, it
doesn’t matter what the enabling language says, what decides the policy
is what the government is DOING. What OTHER facts show that the
Government is pursuing this different policy? That is where your
observation comes in.
One of
those facts is the factual conclusions the government ITSELF has come
to. What has it really concluded in the secret, back rooms?
This is
why I was interested in your analysis of the returns on taking title to
defaulting properties (the link being the Government ownership stake in
these properties). If the Government ITSELF has decided there is no
further economic incentive to foreclose, then its policy can ONLY be to
prevent foreclosures, because economics shows no facts in favor of going
forward with foreclosing and taking title. Government policy must be
based on facts–if it is not, then the policy is simply prejudice, and
the courts will not uphold factless prejudice. It’s a matter of
determining what policy the Government is pursuing, as a process of
eliminating all those policy options for which there is no factual
basis. Weeding out one prejudice after another. One such prejudice, I
submit, is the idea that there is an economic incentive for the
Government NOT to grant HAMP modification. If there is no economic
incentive to foreclose, then this supposed economic incentive is
revealed to be a prejudice, and unenforceable. A right to HAMP
modification follows as a matter of elimination of other options.
That is
where you come in. It would greatly help if, on your site, you would
give an estimate of the month/year on which the data clearly show that
the economic incentive to foreclose is ZERO. Once it became clear that
the U.S. had no further economic incentive to foreclose, it would be
very clear that the U.S. has in FACT forgiven home mortgage debt. That
is what zero incentive to foreclose, means. It means that, in FACT, the
debt has been forgiven.
I get
the feeling that, privately, the U.S. is racing ahead based on this
knowledge. I would not be at all surprised to see Obama simply ban home
foreclosures nationwide.
But we are still in limbo, because there is still this notion that
robo-affidavits are the only problem with foreclosure documents, and
once that is “cleared up” it’s full speed ahead with foreclosures.
That
is certainly not the case, and people need to realize that that is not
the case. Above all, their lawyers need more ammo, and the best ammo
would be a detailed examination of the rapidly declining economic
incentive to foreclose.
By the
way, if you assume that the Government already knows we are fast
approaching zero incentive to take title, what signs tell you that the
Government is already acting on the idea that there is zero incentive to
take title? That is, what actions of the U.S. Government tell you that
it has in FACT forgiven home mortgage debt, that it has ALREADY written
it all off as a loss, and is now acting in the AFTERMATH of that
writeoff. Because I think that’s where we are. The United States is
ahead of ALL of us on this. They know how bad. What I’m asking you is,
where is evidence that they know there is nothing to be gained from
foreclosure, and have moved ahead and have IMPLEMENTED that conclusion?
So if you
could deal with that in some big public way, that would be best… That
would attract the attention of every lawyer, judge and investor in the
country–it would immediately resolve every legal question surrounding
home foreclosures, and it would provide an opportunity to get more of
the truth into court cases. Even from the analysis you provided on
9/23, it is clear to me that it’s game over for home mortgages. They
are simply not a part of the economy any more–they’re social policy and
the U.S. is dealing with them as social policy: but what IS the
Government’s new policy? Well, what do the FACTS show it is?
Since you’re not a lawyer, you greatly underestimate the importance of this observation. When the United States has a stake in a matter, facts relating to that matter are imputed to it as United States POLICY.
Well, he’s right. I am not a lawyer. Actually
far from it, but it does appear he is on to some creative legal theory. I
invite any and all competent legal type to weigh in on this. There is
even more on this topic, which at first sounds a bit far fetched, but
actually congeals into a cogent argument as you read on…
It is a BIG mistake to read this as just a matter of cleaning up a few documents. These phony affidavits [as referenced above]
were part of an effort to hide bad debt on banks’ books. It is also
hiding something else, which is that the United States has forgiven home
mortgage indebtedness. Look:
1. ownership
stake in banks (creating Fifth Amendment Due Process rights to what is
in FACT–not the arbitrary 31%–minimization of the risk of housing
loss(on this prong, please see online the Huxtable v. Geithner Order
(not the Order to Dismiss–sounds like a settlement was reached since
Huxtable filed no opposition). The reasoning of Huxtable is sound and is
pretty generally accepted now. There IS a Fifth Amendment Due Process
right based on U.S. ownership of banks, and this Due Process right is a
right to a modification based on what is in FACT the minimization of
risk of default–this means that the 31% is simply the Government’s
assertion on this point–it is LITIGABLE;
2. contracts
with servicers (creating the same rights as above, but on a third party
beneficiary theory–see Marques v. Wells Fargo–online). The reasoning of
Judge Lorenz is also sound and is simply another basis for claiming a
factual minimization of the risk of default, rather than simply
accepting the Government’s 31%. Again, the 31% is going to be litigated.
People have to get used to that–it’s not off limits anymore;
3. mortgage principal reduction through HAMP;
4. adjustments to gross income for principal reduction through HAMP; and
5. loss of
economic incentive to foreclose (this is Reggie Middleton’s analysis on
his blog). The Middleton analysis is new (it’s at www.boombustblog.com, the September 23 story on housing prices). The return/chargeoff is rapidly hitting 0.
Litigants in
HAMP will certainly have the right to civil discovery as to what the
United States has concluded with respect to the economics of
foreclosure.
It will
probably turn out to be just what the facts show: that the policy is in
FACT to minimize the risk of default because there is no economic
incentive to foreclose.
Of course this
seems impossible, unacceptable, blah blah blah. But if the economic
facts bear it out, then the economic facts bear it out and you just have
to wrap your head around it. What will happen next/is happening now:
1. litigants
will sue to quiet title (among other causes of action such as fraud,
conspiracy, Civil Rights violations, etc., naming Tiny Tim, the IRS
commissioner and the United States, among others); and
2. the U.S. is
scrambling right now to decide what to do if people who have a gazillion
dollars and are sitting in a house which is soaring in value,
nevertheless decide to simply stop paying on their mortgages.
Of course, the
first instinct of Uncle Sam will be some sort of coercion. When that
fails in court, the next gambit will be to try to provide some incentive
to people to keep paying those damned mortgages. Who knows how this
will end?
In any event,
it’s Reggie Middleton’s analysis which broke the back of this. Indeed,
I’m sure his analysis was already made in the dark of night at the
Treasury Department.
Accounts of abuse, ignoring procedural law and gross incompetence are now legion. For instance, one Florida homeowner who didn't even have a mortgage was foreclosed by Bank of America (BAC). Only after a local newspaper began investigating the case did the bank move to sort out what could be viewed as an illegal "taking" of real property.
In another case, Deutsche Bank National Trust filed to foreclose even though it had sold the mortgage to Goldman Sachs, meaning it had no legal right to foreclose. One judge found that roughly half (46 out of 104) of the foreclosure motions filed in his court were so full of errors that he refused to approve them.
Many commentators have already dismantled the bank/mortgage servicers' claims that the legal issues are all just trivial technicalities. It's hardly trivial that documents filed in court are the foundation of our legal system. A signed affidavit is legally equivalent to providing live testimony in court. If an affidavit is untrue, that's the same as lying in court, which is a crime called perjury.
Yet the current system is filled with "robo-signers" who electronically signed up to 10,000 foreclosure filing a month, making a legal claim of their accuracy. Furthermore, though attorneys are prohibited from making a material misrepresentation to the court, it's clear that such misrepresentations of fact (such as who actually owns the mortgage) are widespread in foreclosure proceedings.
3. The system of slicing up mortgages into pieces and then bundling the pieces into securities is structurally flawed.
In essence, the widespread "packaging" of hundreds of mortgages into mortgage-backed securities (MBS) marketed by Wall Street investment banks has bypassed the property rights laws that underpin ownership and transfer of home loans and deeds.
In the pre-MBS days, a bank would originate a home mortgage and then hold the loan as an asset, collecting the interest and principal payments from the homeowner. But Wall Street banks divided the payments that go toward interest and loan principal into "tranches," or slices, which were assembled by risk and rate of return into pools of mortgages that were then sold as a single security.
With the mortgages divided into pieces that were then bundled into securities that were bought and sold numerous times, the ownership of the underlying mortgage and home often became muddled. This is how two different companies can end up filing foreclosure documents on the same house.
Add in the large number of securitized home equity loans that piggyback on first mortgages and derivative securities such as collateralized debt obligations (CDOs), and you get a nightmarish mishmash of "senior tranches" and multiple claims on the same property.
Stripped of complexity, the issue is straightforward: Every time these securities changed hands, the various claims on the underlying house should have been transferred as well. In many cases, they weren't. In some cases, foreclosures have been allowed even when the original mortgage has been lost.
If you don't need the original document to take someone's home, then exactly what rule of law is at work in America?
4. The nation's system for recording mortgages is woefully inadequate to the task of tracking home loans that have been sliced and diced into tranches and traded freely as securities.
To enable a smooth trading system of these MBS, the banking/mortgage industry set up a privately owned loan-tracking service known as the Mortgage Electronic Registration System (MERS) in 1997. The registry acts a sort of legal proxy of ownership, thereby eliminating the need to record changes in property ownership in the traditional manner, i.e. in local land records.
MERS records loan assignments electronically. It doesn't own the mortgages it registeres, but it's listed in public records as a nominee for the actual owner of the loan or as the original mortgage holder.
Assigning ownership of mortgages to this registry saved the industry a bundle. MERS was estimated to have saved the mortgage industry an $1 billion in its first decade of existence. Some 60 million loans are registered to MERS.
5. Outright foreclosure fraud is now systemic. This includes forged signatures, falsified mortgage numbers, false claims of ownership, false claims that the paperwork has been properly reviewed and document fabrication.
Indeed, for a price, you can have any missing document you might need to file a foreclosure motion "recreated" or "created" out of thin air.
Now that this systemic reliance on falsified documents, forged signatures and myriad "shortcuts" (such as not having the original mortgage) has been revealed, several lenders have halted foreclosures and evictions. Some have stopped proceedings in the 23 states that require a judge's approval, while others such as Bank of America have halted foreclosures in all 50 states.
In response to a public outcry about these widespread abuses, the attorneys general of 40 states are pooling resources to investigate the mortgage and foreclosure industries. One state AG has already filed suit against a leading mortgage servicer, alleging fraud in foreclosures processed by the firm. Ohio Attorney General Richard Cordray said the fraud was the "tip of an iceberg of industrywide abuse of the foreclosure process" and is asking for civil penalties of up to $25,000 for each violation of consumer laws.
Freezing the U.S. Real Estate Market
This systemic breakdown of the procedural laws intended to protect property rights may well have far-reaching consequences beyond lawsuits by public agencies and by individuals who have been harmed or defrauded.
Flawed foreclosure documents mean sales of foreclosed home are in limbo: How can any future owner obtain title insurance when the ownership of the mortgage and thus the integrity of the foreclosure itself is in question?
If millions of foreclosed homes cannot be sold with unambiguously clear titles, then that will effectively freeze a significant portion of the American real estate market. After all, about a third of all home sales involve residences in default or foreclosure.
Fannie Mae has been pulling foreclosed homes off the market, scotching signed deals and removing properties from inventory of unsold homes. Homeowners already in the foreclosure process are now wondering if the foreclosure-fraud debacle can delay or even cancel their impending eviction.
Indeed, the widespread fraud and blatant flouting of the law by politically powerful lenders is eroding many Americans' belief in the fairness of the financial and legal systems. As a result, some are asking why they should continue following the rules when lenders and mortgage servicers evade and abuse the law with impunity.
How Does the U.S. Solve Its Real Estate Crisis?
Stories about middle-class homeowners ensnared in what's either fraud or misrepresentation, depending on one's interpretation, now include a troubling subtext: Some of these once rock-solid citizens are refusing to comply with the demands of lenders.
Some high-visibility commentators are characterizing the foreclosure and MBS debacle as "the biggest fraud in the history of the capital markets." Hyperbole, or simply the truth few dare to state?
While that can be debated, what cannot be debated is the massive loss of trust in the foundations of property rights and rule of law that has occurred. Also not debatable is the impact this loss of trust is having on the housing market, large sections of which are effectively locked.
If distressed mortgages cannot be foreclosed and impaired debts can't be liquidated via auctions or sales on the open market, then how does the U.S. unburden itself of the overhang of housing supply and uncollectible mortgages? It cannot do so with this cloud hanging over the housing and mortgage markets. That will have serious consequences for banks that aren't collecting mortgage payments, for servicers facing massive lawsuits and, eventually, for the value of housing in a market stuffed with a "shadow inventory" of distressed or defaulted homes that can't be sold.
Could the foreclosure mess end up stalling the economic recovery? Perhaps the answer can be found by rephrasing the question: How can an economy be healthy if its mortgage, banking and housing markets are in a state of profound financial and legal disruption?
Nevada Voters Complain Of Problems At Polls - Las Vegas <b>News</b> Story <b>...</b>
LAS VEGAS -- Some voters in Boulder City complained on Monday that their ballot had been cast before they went to the polls, raising questions about Clark County's electronic voting machines. Wednesday, October 27, 2010.
Sony announces PlayStation Rewards PlayStation 3 <b>News</b> - Page 1 <b>...</b>
Read our PlayStation 3 news of Sony announces PlayStation Rewards.
GM hiring nuggets: Alderson, Daniels, Ryan, Ricco etc.
We don't yet know if new GM Sandy Alderson (the process is underway of making his hiring official with the commissioner's office and scheduling a news conference for either Friday or Tuesday) will turn the Mets into a championship team, ...
atlanta property management
Nevada Voters Complain Of Problems At Polls - Las Vegas <b>News</b> Story <b>...</b>
LAS VEGAS -- Some voters in Boulder City complained on Monday that their ballot had been cast before they went to the polls, raising questions about Clark County's electronic voting machines. Wednesday, October 27, 2010.
Sony announces PlayStation Rewards PlayStation 3 <b>News</b> - Page 1 <b>...</b>
Read our PlayStation 3 news of Sony announces PlayStation Rewards.
GM hiring nuggets: Alderson, Daniels, Ryan, Ricco etc.
We don't yet know if new GM Sandy Alderson (the process is underway of making his hiring official with the commissioner's office and scheduling a news conference for either Friday or Tuesday) will turn the Mets into a championship team, ...
Note: This is a long post, so I have bifurcated it - placing part two with the heavy graphics and the financial stuff on by blog. The intro and legal theory suggested by readers is here in part one. I would suggest one read it in its entirety before dismissing any one part of it, though.
Is it possible for the US Government to choose to forgive mortgage
debt? Sounds outrageous? Read on for the legal theory behind this claim
and let me know what you think? I thought it was little esoteric as
well, but as I looked deeper… Well, I’ll let you be the judge.
A lot of attention accrued to Representative Grayson’s calling out of
foreclosure fraud, and for good reason. The story is absolutely
amazing, and kudos to a member of congress that defends his
constituency.
It’s not as if other entities have failed to take notice. ZeroHedge has its usual witty commentary regarding the possibility of foreclosure transactions potentially being unwound due to fraudulent foreclosure activity. The NYT
ran an article stating that Fitch will look into lowering the credit
rating of companies that participated in the submission of inappropriate
foreclosure paperwork, which apparently seems to include an awful lot
of companies. It goes on to state (as excerpted by Zerohedge):
Fitch Ratings said that Wednesday
it was asking mortgage companies about their internal processes for
executing foreclosure affidavits. If it finds the processes lacking,
Fitch will consider downgrading the company’s rating.
The agency also said if the
issue is widespread, the resulting delays and extra costs to
foreclose could increase losses related to residential mortgage-backed
securities.
Here’s the twist. A lawyer who happens to have
followed my writings over the years has suggested that most are missing
the big picture in focusing on fraudulent foreclosure documents. He
contends (and I’m paraphrasing here, these are not my words, per se) “that
since the U.S. has ownership interest in many (if not most) delinquent
and distressed mortgages, this fact will be counted as policy in
litigation. As a consequence it matters A LOT if you can
say that your client has a Fifth Amendment Due Process right (or third
party beneficiary Federal common law right) to a HAMP modification
which is in FACT a minimization of the risk of default (not that flaky
31% number) BECAUSE, among other things, the U.S. has no economic
incentive to foreclose”. Now, I am no lawyer and thus the legal
issues are beyond my domain, but I must admit I found the theory
interesting. So, I’ve decided to crowdsource this one in anticipation
that some of the more astute legal minds can shed some light on the
validity of the theory. I’ll supply the financial stuff in this post,
and I’ll rely on the legal eagles to peer review the theory.
This all stemmed from a chart and “what if”
scenario I post on the 23rd of September in which showed the increasing
decline in recoveries from gross charge-offs from banks.
As a matter of fact, things are so
bad that I believe banks will have a perverse incentive to actually
walk away. Now wouldn’t that be something??? Next, we take a look into
the home builder that makes more money doing distressed investing
than it does building and selling homes.
The legal argument from the BoomBustBlogger in question is as follows:
Things are
moving pretty fast now, especially since so many states are moving to
ban home foreclosures, and since your comments on the lack of economic
incentive to foreclose is coming to the fore. It’s becoming
a question of, Hey Uncle Sam, what is your policy? This may result in
actions to quiet title, against the banks and the United States. The basis will be that in fact, the United States has forgiven home mortgage indebtedness. Your own observation of the economics of foreclosure is part of the mix. But the entire argument that the U.S., has in FACT (no matter what it CLAIMS) forgiven home mortgage indebtedness, is this:
Through its
1. ownership
stake in banks (creating Fifth Amendment Due Process rights to what is
in FACT–not the arbitrary 31%–minimization of the risk of housing loss:
see Huxtable v. Geithner Order on this (not the Order to Dismiss, sounds
like a settlement was reached since Huxtable filed no opposition); 2.
contracts with servicers (creating third party contract rights in
borrowers–see Marques v. Wells Fargo); 3. mortgage principal reduction; 4. adjustments to gross income for principal reduction; and 5. loss of economic incentive to foreclose,
the United States has in fact forgiven home mortgage indebtedness.
And here is more on the topic…
The
big divide in the United States District Courts, with regard to HAMP,
is the language of HAMP which seems to give the Government discretion as
to whether to modify or not. Here is typical language from a court
decision saying there is no right to a modification:
“Notably, the statute provides that loans may be modified “where
appropriate” – a phrase that limits the Secretary’s obligation and
evinces a Congressional intent to afford discretion in the decision
whether to modify loans in certain circumstances.”
The way
to defeat this (as was done in Huxtable v. Geithner, before the case was
settled or abandoned) is to show FACTS which demonstrate that the
Government is actually enforcing a different policy. In that case, it
doesn’t matter what the enabling language says, what decides the policy
is what the government is DOING. What OTHER facts show that the
Government is pursuing this different policy? That is where your
observation comes in.
One of
those facts is the factual conclusions the government ITSELF has come
to. What has it really concluded in the secret, back rooms?
This is
why I was interested in your analysis of the returns on taking title to
defaulting properties (the link being the Government ownership stake in
these properties). If the Government ITSELF has decided there is no
further economic incentive to foreclose, then its policy can ONLY be to
prevent foreclosures, because economics shows no facts in favor of going
forward with foreclosing and taking title. Government policy must be
based on facts–if it is not, then the policy is simply prejudice, and
the courts will not uphold factless prejudice. It’s a matter of
determining what policy the Government is pursuing, as a process of
eliminating all those policy options for which there is no factual
basis. Weeding out one prejudice after another. One such prejudice, I
submit, is the idea that there is an economic incentive for the
Government NOT to grant HAMP modification. If there is no economic
incentive to foreclose, then this supposed economic incentive is
revealed to be a prejudice, and unenforceable. A right to HAMP
modification follows as a matter of elimination of other options.
That is
where you come in. It would greatly help if, on your site, you would
give an estimate of the month/year on which the data clearly show that
the economic incentive to foreclose is ZERO. Once it became clear that
the U.S. had no further economic incentive to foreclose, it would be
very clear that the U.S. has in FACT forgiven home mortgage debt. That
is what zero incentive to foreclose, means. It means that, in FACT, the
debt has been forgiven.
I get
the feeling that, privately, the U.S. is racing ahead based on this
knowledge. I would not be at all surprised to see Obama simply ban home
foreclosures nationwide.
But we are still in limbo, because there is still this notion that
robo-affidavits are the only problem with foreclosure documents, and
once that is “cleared up” it’s full speed ahead with foreclosures.
That
is certainly not the case, and people need to realize that that is not
the case. Above all, their lawyers need more ammo, and the best ammo
would be a detailed examination of the rapidly declining economic
incentive to foreclose.
By the
way, if you assume that the Government already knows we are fast
approaching zero incentive to take title, what signs tell you that the
Government is already acting on the idea that there is zero incentive to
take title? That is, what actions of the U.S. Government tell you that
it has in FACT forgiven home mortgage debt, that it has ALREADY written
it all off as a loss, and is now acting in the AFTERMATH of that
writeoff. Because I think that’s where we are. The United States is
ahead of ALL of us on this. They know how bad. What I’m asking you is,
where is evidence that they know there is nothing to be gained from
foreclosure, and have moved ahead and have IMPLEMENTED that conclusion?
So if you
could deal with that in some big public way, that would be best… That
would attract the attention of every lawyer, judge and investor in the
country–it would immediately resolve every legal question surrounding
home foreclosures, and it would provide an opportunity to get more of
the truth into court cases. Even from the analysis you provided on
9/23, it is clear to me that it’s game over for home mortgages. They
are simply not a part of the economy any more–they’re social policy and
the U.S. is dealing with them as social policy: but what IS the
Government’s new policy? Well, what do the FACTS show it is?
Since you’re not a lawyer, you greatly underestimate the importance of this observation. When the United States has a stake in a matter, facts relating to that matter are imputed to it as United States POLICY.
Well, he’s right. I am not a lawyer. Actually
far from it, but it does appear he is on to some creative legal theory. I
invite any and all competent legal type to weigh in on this. There is
even more on this topic, which at first sounds a bit far fetched, but
actually congeals into a cogent argument as you read on…
It is a BIG mistake to read this as just a matter of cleaning up a few documents. These phony affidavits [as referenced above]
were part of an effort to hide bad debt on banks’ books. It is also
hiding something else, which is that the United States has forgiven home
mortgage indebtedness. Look:
1. ownership
stake in banks (creating Fifth Amendment Due Process rights to what is
in FACT–not the arbitrary 31%–minimization of the risk of housing
loss(on this prong, please see online the Huxtable v. Geithner Order
(not the Order to Dismiss–sounds like a settlement was reached since
Huxtable filed no opposition). The reasoning of Huxtable is sound and is
pretty generally accepted now. There IS a Fifth Amendment Due Process
right based on U.S. ownership of banks, and this Due Process right is a
right to a modification based on what is in FACT the minimization of
risk of default–this means that the 31% is simply the Government’s
assertion on this point–it is LITIGABLE;
2. contracts
with servicers (creating the same rights as above, but on a third party
beneficiary theory–see Marques v. Wells Fargo–online). The reasoning of
Judge Lorenz is also sound and is simply another basis for claiming a
factual minimization of the risk of default, rather than simply
accepting the Government’s 31%. Again, the 31% is going to be litigated.
People have to get used to that–it’s not off limits anymore;
3. mortgage principal reduction through HAMP;
4. adjustments to gross income for principal reduction through HAMP; and
5. loss of
economic incentive to foreclose (this is Reggie Middleton’s analysis on
his blog). The Middleton analysis is new (it’s at www.boombustblog.com, the September 23 story on housing prices). The return/chargeoff is rapidly hitting 0.
Litigants in
HAMP will certainly have the right to civil discovery as to what the
United States has concluded with respect to the economics of
foreclosure.
It will
probably turn out to be just what the facts show: that the policy is in
FACT to minimize the risk of default because there is no economic
incentive to foreclose.
Of course this
seems impossible, unacceptable, blah blah blah. But if the economic
facts bear it out, then the economic facts bear it out and you just have
to wrap your head around it. What will happen next/is happening now:
1. litigants
will sue to quiet title (among other causes of action such as fraud,
conspiracy, Civil Rights violations, etc., naming Tiny Tim, the IRS
commissioner and the United States, among others); and
2. the U.S. is
scrambling right now to decide what to do if people who have a gazillion
dollars and are sitting in a house which is soaring in value,
nevertheless decide to simply stop paying on their mortgages.
Of course, the
first instinct of Uncle Sam will be some sort of coercion. When that
fails in court, the next gambit will be to try to provide some incentive
to people to keep paying those damned mortgages. Who knows how this
will end?
In any event,
it’s Reggie Middleton’s analysis which broke the back of this. Indeed,
I’m sure his analysis was already made in the dark of night at the
Treasury Department.
Accounts of abuse, ignoring procedural law and gross incompetence are now legion. For instance, one Florida homeowner who didn't even have a mortgage was foreclosed by Bank of America (BAC). Only after a local newspaper began investigating the case did the bank move to sort out what could be viewed as an illegal "taking" of real property.
In another case, Deutsche Bank National Trust filed to foreclose even though it had sold the mortgage to Goldman Sachs, meaning it had no legal right to foreclose. One judge found that roughly half (46 out of 104) of the foreclosure motions filed in his court were so full of errors that he refused to approve them.
Many commentators have already dismantled the bank/mortgage servicers' claims that the legal issues are all just trivial technicalities. It's hardly trivial that documents filed in court are the foundation of our legal system. A signed affidavit is legally equivalent to providing live testimony in court. If an affidavit is untrue, that's the same as lying in court, which is a crime called perjury.
Yet the current system is filled with "robo-signers" who electronically signed up to 10,000 foreclosure filing a month, making a legal claim of their accuracy. Furthermore, though attorneys are prohibited from making a material misrepresentation to the court, it's clear that such misrepresentations of fact (such as who actually owns the mortgage) are widespread in foreclosure proceedings.
3. The system of slicing up mortgages into pieces and then bundling the pieces into securities is structurally flawed.
In essence, the widespread "packaging" of hundreds of mortgages into mortgage-backed securities (MBS) marketed by Wall Street investment banks has bypassed the property rights laws that underpin ownership and transfer of home loans and deeds.
In the pre-MBS days, a bank would originate a home mortgage and then hold the loan as an asset, collecting the interest and principal payments from the homeowner. But Wall Street banks divided the payments that go toward interest and loan principal into "tranches," or slices, which were assembled by risk and rate of return into pools of mortgages that were then sold as a single security.
With the mortgages divided into pieces that were then bundled into securities that were bought and sold numerous times, the ownership of the underlying mortgage and home often became muddled. This is how two different companies can end up filing foreclosure documents on the same house.
Add in the large number of securitized home equity loans that piggyback on first mortgages and derivative securities such as collateralized debt obligations (CDOs), and you get a nightmarish mishmash of "senior tranches" and multiple claims on the same property.
Stripped of complexity, the issue is straightforward: Every time these securities changed hands, the various claims on the underlying house should have been transferred as well. In many cases, they weren't. In some cases, foreclosures have been allowed even when the original mortgage has been lost.
If you don't need the original document to take someone's home, then exactly what rule of law is at work in America?
4. The nation's system for recording mortgages is woefully inadequate to the task of tracking home loans that have been sliced and diced into tranches and traded freely as securities.
To enable a smooth trading system of these MBS, the banking/mortgage industry set up a privately owned loan-tracking service known as the Mortgage Electronic Registration System (MERS) in 1997. The registry acts a sort of legal proxy of ownership, thereby eliminating the need to record changes in property ownership in the traditional manner, i.e. in local land records.
MERS records loan assignments electronically. It doesn't own the mortgages it registeres, but it's listed in public records as a nominee for the actual owner of the loan or as the original mortgage holder.
Assigning ownership of mortgages to this registry saved the industry a bundle. MERS was estimated to have saved the mortgage industry an $1 billion in its first decade of existence. Some 60 million loans are registered to MERS.
5. Outright foreclosure fraud is now systemic. This includes forged signatures, falsified mortgage numbers, false claims of ownership, false claims that the paperwork has been properly reviewed and document fabrication.
Indeed, for a price, you can have any missing document you might need to file a foreclosure motion "recreated" or "created" out of thin air.
Now that this systemic reliance on falsified documents, forged signatures and myriad "shortcuts" (such as not having the original mortgage) has been revealed, several lenders have halted foreclosures and evictions. Some have stopped proceedings in the 23 states that require a judge's approval, while others such as Bank of America have halted foreclosures in all 50 states.
In response to a public outcry about these widespread abuses, the attorneys general of 40 states are pooling resources to investigate the mortgage and foreclosure industries. One state AG has already filed suit against a leading mortgage servicer, alleging fraud in foreclosures processed by the firm. Ohio Attorney General Richard Cordray said the fraud was the "tip of an iceberg of industrywide abuse of the foreclosure process" and is asking for civil penalties of up to $25,000 for each violation of consumer laws.
Freezing the U.S. Real Estate Market
This systemic breakdown of the procedural laws intended to protect property rights may well have far-reaching consequences beyond lawsuits by public agencies and by individuals who have been harmed or defrauded.
Flawed foreclosure documents mean sales of foreclosed home are in limbo: How can any future owner obtain title insurance when the ownership of the mortgage and thus the integrity of the foreclosure itself is in question?
If millions of foreclosed homes cannot be sold with unambiguously clear titles, then that will effectively freeze a significant portion of the American real estate market. After all, about a third of all home sales involve residences in default or foreclosure.
Fannie Mae has been pulling foreclosed homes off the market, scotching signed deals and removing properties from inventory of unsold homes. Homeowners already in the foreclosure process are now wondering if the foreclosure-fraud debacle can delay or even cancel their impending eviction.
Indeed, the widespread fraud and blatant flouting of the law by politically powerful lenders is eroding many Americans' belief in the fairness of the financial and legal systems. As a result, some are asking why they should continue following the rules when lenders and mortgage servicers evade and abuse the law with impunity.
How Does the U.S. Solve Its Real Estate Crisis?
Stories about middle-class homeowners ensnared in what's either fraud or misrepresentation, depending on one's interpretation, now include a troubling subtext: Some of these once rock-solid citizens are refusing to comply with the demands of lenders.
Some high-visibility commentators are characterizing the foreclosure and MBS debacle as "the biggest fraud in the history of the capital markets." Hyperbole, or simply the truth few dare to state?
While that can be debated, what cannot be debated is the massive loss of trust in the foundations of property rights and rule of law that has occurred. Also not debatable is the impact this loss of trust is having on the housing market, large sections of which are effectively locked.
If distressed mortgages cannot be foreclosed and impaired debts can't be liquidated via auctions or sales on the open market, then how does the U.S. unburden itself of the overhang of housing supply and uncollectible mortgages? It cannot do so with this cloud hanging over the housing and mortgage markets. That will have serious consequences for banks that aren't collecting mortgage payments, for servicers facing massive lawsuits and, eventually, for the value of housing in a market stuffed with a "shadow inventory" of distressed or defaulted homes that can't be sold.
Could the foreclosure mess end up stalling the economic recovery? Perhaps the answer can be found by rephrasing the question: How can an economy be healthy if its mortgage, banking and housing markets are in a state of profound financial and legal disruption?
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