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October 21, 2010
Bank on it! What the Foreclosures Crisis Means to You.
Theodore Reith Copyright 2010 AGS Capital Ltd. All Rights Reserved
Knowledge is power, and so I hope this information gives you an investment advantage. Please feel free to pass this message along. If you own a home with a mortgage, and are in financial distress, I suggest that you seriously consider what is written here. If you do decide to stop paying your mortgage payments, remember; do not stop paying the insurance and taxes.
Here's the main issue: Courts have started ruling that property owners can only be foreclosed on by the beneficial owner of the loan. Any agency appointed or assigned to manage a mortgage loan, is going to find it increasingly difficult to prosecute a foreclosure. Only the bona fide owner, in possession of a legal mortgage note, can foreclose on a homeowner.
Before 1995, all mortgage loans were issued by local savings & loans. A mortgage note didn't go anywhere; it stayed in the S&L and they had a legal right to foreclose if you didn't pay. Thanks to Greenspan, Bernanke and Paulson (the guys behind Mortgage Backed Securities ("MBS") the mortgage loan industry changed overnight.
Banking regulations treat MBS as securities, whereas a home mortgage is treated as a unique and protected asset class. Why is this important? If a bank holds a pile of mortgages, the law requires the bank to keep 5% cash on hand as a hedge against possible defaults. This rule was based on the lessons learned following the Great Depression which, despite what you may have read, was caused by the 1930's US real estate collapse, not the 1929 stock market collapse. From the 1940's to the 1980's, for the protection of society, banks were required to keep 7% on reserve against possible defaults. In the late 80's the Federal Reserve under Greenspan lowered the reserve requirement to 5%. That worked a charm so they went for broke.
The Fed said the rule changes were going to reduce bank cash reserves and 'free up' capital for productive uses and stimulate economic growth. All it did was cause an asset bubble. There was no increase in real and productive economic activity.
By reclassifying home mortgages as securities as opposed to mortgages, the legal requirement to keep 5% cash on reserve was avoided. And there was no need to explain to the risks to the people through Congress. The Fed wasn't asking to remove the 5% reserve for mortgages. That rule remains in place to this day. The Fed and the investment banks simply went around the 5% reserve rule by allowing the conversion of mortgages, not to mention all consumer loans, into securities that have no reserve restrictions upon them.
As soon as the Fed ushered in the new banking rules permitting bundling of mortgages and consumer loans, a frenzy of modern lending activity in real estate and consumer finance began, and we saw things like no-interest 'mortgages' and zero percent financing on boats with as many as two years before payments begin.
Thank you, Alan Greenspan!
The banks "sliced & diced" their new securities into tranches; different sections within a master bond. Each tranche was expected to experience a different number of defaults. There were other criteria implemented as well that would probably be called racist in politically correct circles.
The slicing and dicing created 'senior tranches' of loans that were thought likely to pay almost in full, and 'junior tranches' reported to contain a manageable number of defaults. A wide range of tranches was created, of course, but for the purposes of this discussion we can ignore the subtle variations. Basically it was either supposed to be good debt or crappy debt. The lower risk 'good debt' paid good returns to investors; the higher risk crappy debt paid very high returns to investors.
When these new securities were first created, the mortgages and loans were pristine... none had defaulted yet because they were new. Statistically some were expected to later default and most others were expected be paid back in full... but which specific loans would default? Nobody knew, of course, so the banks set up holding entities called REMICs (Real Estate Mortgage Investment Conduits) and an industry clearing house called MERS (Mortgage Electronic Registration System).
The purpose of the REMICs was to allow mortgages to be converted into securities in the first place and the purpose of MERS was to electronically reassigned mortgages to different bond tranches without requiring local and state real property deed registrations. The state level registrations are slow and involve filing fees that go into state coffers. Banks wanted to keep that money, too.
In theory MERS was supposed to allow banks to assign early defaults into the junior tranches and assign later defaults to the senior trances. You will recall that the media (and banks) dubbed it a “sub-prime” crisis at the beginning. That was a PR campaign to reassure senior tranche buyers that losses would not affect their tranches. Insiders knew better. Everything was coming apart at the seams. Defaults were occurring in every tranche at every level within the overall bond. It was MERS that allowed the banks to quickly react and shuffle crappy loans around.
Now here’s where the story drifts into RICO fraud. Because MERS was designed to hold mortgages in suspension until a default occurs, it is probable that benefitical ownership of title was temporarily suspended. In other words, on a given date, nobody knew for certain whom the beneficial owner was. Which mortgages were owned by the junior-tranche? Which by the senior-tranche? The notes couldn't be properly signed over to a tranche until after a default. Somewhere between the REMICs and MERS, the chain of title was very likely broken. What does 'broken chain of title' imply?
When a home buyer signs a mortgage, the key document is the note; it's the actual IOU. In order for the mortgage note to be sold or transferred and turned into a mortgage-backed security this document has to be physically endorsed to the next owner. The owner's signatures on the note are called the 'chain of title.'
Notes can be endorsed and passed along many times... but you have to have notarized signatures for the entire chain of title written on the original note. The now infamous ‘robo-signers’ were brought in to back-date and sign documents and generally keep up with ‘papering’ the electronic transfers that MERS had processed. Banks and foreclosures mills needed paper documents to process their foreclosures.
Too bad for the banks that some homeowners invited lawyers to look into their foreclosures and evictions. Lawyers in all states have found chain-of-title problems and that's when the ‘robo-signers’ came to light.
Back in 2008, right around when people started not paying their mortgages, the banks hired 'foreclosure mills' to process the huge volume of new work. The mills are legal type firms that specialize in the seizure of assets. Lawyers working inside the foreclosure mills first spotted the broken chain of titles issue and they came up with some slick solutions. They hired hair stylists and shelf stackers from Walmart and gave them titles like, "Special Assistant to the Vice President of Bank of America" etc. They sat them down in boiler rooms to sign mortgage documents on behalf of the banks all day long. Collectively they signed hundreds of thousands of mortgage documents on behalf of the banks, but that still wasn't enough because there are millions of defaulted mortgages that need paperwork created, or forged.
As we are now learning from the sworn testimony of foreclosure mill employees, most of the documents they signed were faked or falsified so as to repair the chain-of-
title and expedite foreclosures and evictions. One notorious foreclosure mill named DocX even put out a price list for their forged documents. In short, a massive fraud has been perpetrated and carried out on working class American men and women.
Because so many little people were getting evicted some brave regional judges cried, "ENOUGH!" and they demanded better evidence from the banks for chain of title. After the brave judges said, "enough," a few less brave States' attorneys general noticed the trend and begin to make some noise. After all, the November elections are coming up. The States' attorneys general activities caused an insurance industry reaction that nobody anticipated or, frankly, has even noticed. The insurers dealt another major blow to the foundations of the mortgage banking industry.
Every real estate sale involving a mortgage requires title insurance to, in effect, say that the title is free and clear. Right after the States’ attorneys began looking into the ‘robo-signers,’ the title insurance companies stopped insuring recently foreclosed properties. There’s no point in foreclosing on a property if the title insurers won’t insure the next buyer. The banks were working on a plan to fix that problem but they failed.
Here's the deal. In mid-October 2010, at the urging of the banking lobby, the United States Congress tried to sneak by the Interstate Recognition of Notarization Act. The Act would have allowed banks to cover their tracks and evade title problems. The Act calls for all 50 States to accept the foreclosure mills' forged and fraudulent chain of title documents. Our brave Senators in Congress carried out a voice vote so there would be no record of their vote come Election Day. The Act passed both houses of Congress.
President Obama quietly vetoed the measure by pocketing it. His veto will heavily damage the banking industry because no more loans can be collected and no more homes can be foreclosed upon without proper documentation and the states are now looking into suing for lost tax revenues due to the massive number of unregistered title transfers that MERS processed on behalf of the banks. It’s a royal mess and the taxpayers may soon be called upon to bailout the banks. If they are, it will certainly dwarf all previous bailouts.
If the Federal Reserve and the Treasury take control of bankrupt commercial and investment banks what will that mean? It’s a tough choice… do we want state owned banking (aka fascism), or evil profiteering banks? Putting politics aside, Obama's pocket veto was another nail in the coffin of foreclosure mania. The day after the White House announced the veto, all major banks halted foreclosures.
Will this title paperwork issue kill the banks? Probably not. They’ll figure out a way to patch up the paperwork and, after all, the homeowners didn’t pay, right? That’s not the way things are done in America. You either pay your mortgage or you’ve got to clear out. Or, maybe not…
Going back to the start of this mess, in order to be able to sell the new securitized mortgage bonds to investment funds, the banks had to first get them rated by a major independent ratings agency. How did the banks actually get their complicated bond tranches ranked AA, and even AAA by the top ratings agencies including Moodys and S&P? For one thing, the banks paid them millions of dollars every month to rate their securities. They also made it very, very easy to rate the new securities. So easy, in fact, that the so called analysts didn’t even audit the pledged assets. Why bother to audit the assets when the banks have purchase full insurance policies for each different tranche of their bonds. Even if a homeowner defaults, the insurers are going to pay the entire outstanding amount to the bank. No risk, right? Maybe concentration risk… That’s when there is so much activity concentrated into one area, that it cannot be expected to survive a crisis. Think about this. The banks bought insurance policies from just three providers. These providers were all undercapitalized and, as a result, almost immediately went bankrupt from paying off an avalanche of claims starting from 2008.
In the process of going bust and being delisted from their stock exchanges, the three insurers were bought for pennies on the dollar by big private equity groups. Were they stupid to buy the insurers? Not likely. The shareholders that owned the insurance companies got screwed – that’s for certain. They lost everything. But the new owners are smart; very smart. They are planning something big. Their first shot was fired on September 2nd. The executive director of AFGI, the Association of Financial Guaranty Insurers, sent a letter to the CEO of Bank of America saying in effect that their member insurers are preparing to sue for recovery of previously paid insurance claims because the collateral the bank pledged did not meet the quality standards the bank promised. Ouch! Insurers are planning to sue banks to recover default claims paid going as far back as 2005. The total claims paid out based on fraudulent collateral is estimated to be close to a trillion dollars. Sweet! Buy bankrupted insurer for pennies, sue banks for billions. If you want to see who the biggest, badest creeps are in this foreclosures crisis, look into groups that bought up the three insurers.
Using the same documents and facts that the insurers are now using to sue the banks, the investment funds who bought the securities from the banks are also preparing to sue. They want their money back because, again, the banks lied about the quality of the mortgages held in each tranche.
The legal discovery processes for the insurers and investors’ are well underway. From those processes we have already learned that banks recovered insurance on a huge number of defaulted loans. Wait. The banks recovered the money from insurance yet they still want to kick the homeowners out and sell off the property? Is that legal?
No, wait. The discovery process has uncovered a different story… The banks didn’t recover the full amount of the loans from insurers. Discovery has shown that the banks pledged the same loan into multiple tranches, so they were able to collect insurance not once, but 2 and 3 times over on each default. This adds a whole new twist to the foreclosures mess.
There are thousands of cases where the holder of say a 250,000 mortgage was in default and foreclosed upon, and yet the bank had already recovered 750,000 on that default from insurers. Ah ha! That’s why bankers are forced to take such high bonuses. They’ve managed to turn one mortgage into two, three or even four loans to collect on, and then sell the foreclosed property off for one last bite of the apple.
The short of it is this: banks have been actively foreclosing on people they didn't have the strict legal right to foreclose on. The dispossessed people now have a legal basis to sue to get their houses back. Furthermore, many folks who bought foreclosed properties from a bank probably don’t legally own the property.
Another way to look at this is to say that it no longer matters if a homeowner failed to pay the mortgage. The fraud committed by the banks and foreclosure mills casts so much doubt that all foreclosures are now questionable, and not only the foreclosures but, in fact, all aspects of the securitized mortgage industry are now suspect.
Most people haven't figured out what all this means yet but consider this, if the deep pocketed insurers and investors that are suing the banks manage to prove that banks were reaping 2 and 3 times profit on each default, then it’s an open invitation for homeowners to stop paying the banks and tell them, "show me that you own the title," and “prove to the court that my loan wasn’t already paid off.”
This crisis will surely be the end of the mortgage securitization business, and most likely the investment banks that largely participated in it.
If I owned a mortgage in the USA, I would do a quick check of my note’s status using MERS (they have a consumer portal) to find out who the beneficial owner of my note is. I would then contact them to request a copy of the original note with all transfers properly notarized. My guess is that they have no paperwork – MERS was supposed to be in charge of that stuff.
In my humble opinion, none of this is an accident. AGS first wrote about and described this problem in 2002, including the insurance collapse resulting from defaults. (Disclosure, we missed seeing how the private equity guys would cash in on the insurers’ collapse.) The entire scheme was a fraud from the start. But the banks have messed around with peoples’ homes, and so publicly they can go down. You cannot cheat people out of their homes like that in America.
That’s the plan; demonize the banks and then nationalize them. That’s how it will be played out. This is no accident. Problem, reaction, solution.
The privately owned Federal Reserve and the US Treasury will soon control the major investment banks courtesy of the US Taxpayer. Only Goldman Sachs will remain independent, but Goldman is already owned by the same people that own the Fed.
Nice work if you can get it…
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