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De Facto Foreclosure Moratorium Could Still Occur Regardless of White House Policy

foreclose, mortgage crisis

(photo: respres)

My colleagues have helpfully broadcast the Administration line on foreclosure fraud, basically against a national moratorium and toward allowing banks to evade the rule of law. I assume these people would have the same reaction to, say, planted evidence in a murder trial. “Well, the defendant looks pretty guilty, and a tainted investigation or not, he probably did something wrong, so might as well convict.” It occurs to me that David Axelrod and the head of the FHFA wouldn’t be allowed on a jury anywhere in the country.

But I hope nobody believes that the problem stops there, that courts of law all over the country will accept the argument of the banks and move on, rolling fraudulent foreclosures through the system. If this were a simple case of banks versus homeowners, I would maybe agree with that assessment. But it’s not. You have institutional investors and a major insurance sector, among others, on the opposite side of the banks on this one. The Wall Street Journal explained the investor situation this weekend, which is basically a tug-of-war between senior tranche and junior trache MBS investors, something you might term “tranche warfare”:

When houses that have been packaged into a mortgage bond are liquidated at a foreclosure sale—the very end of the foreclosure process—the holders of the junior, or riskiest debt, would be the first investors to take losses. But if a foreclosure is delayed, the servicer must typically keep advancing payments that will go to all bondholders, including the junior debt holders, even though the home loan itself is producing no revenue stream.

The latest events thus set up an odd circumstance where junior bondholders—typically at the bottom of the credit structure—could actually end up better off than they expected. Senior bondholders, typically at the top, could end up worse off.

Not surprisingly, senior debt holders want banks to foreclose faster to reduce expenses. Junior bondholders are generally happy to stretch things out. What is more, it isn’t entirely clear how the costs of re-processing tens of thousands of mortgages will be allocated. Those costs could be “significant” said Andrew Sandler, a Washington, D.C., attorney who represents mortgage companies.

“This is sort of an extraordinary situation,” said Debashish Chatterjee, a vice president for Moody’s Investors Service who covers structured finance. By delaying foreclosures, “it means the subordinate bondholders don’t get written down for a much longer period of time, and they keep getting payments.”

And the WSJ buried the lede, actually: “The Association of Mortgage Investors, a trade association, has called on trustees, who oversee loan pools on behalf of investors, to demand that loans be repurchased by their originators if required documents are missing.” This is what should have been done on a rolling basis within 90 days of the security purchases. But basically, everyone turned their heads, going back five years. Investors will not take their lumps and go quietly if they see a legal recourse.

And there most certainly is one, just as in any case of mass fraud. Attorneys general in 40 states are about to announce a big joint investigation of the entire servicing industry, the results of which could expose their systemic practices. . . . [cont’d.]:

The attorneys general of up to 40 states plan to announce soon a joint investigation into banks’ use of flawed foreclosure paperwork.

A person briefed on the investigation said Saturday night that an announcement could come as early as Tuesday. The person spoke on condition of anonymity because the investigation was not yet public.

Iowa Attorney General Tom Miller will lead the investigation. Miller already has been leading multistate reviews of questionable foreclosure documents.

A joint investigation by 40 states would further escalate pressure on banks to widen their suspensions of foreclosures. On Friday, Bank of America became the first bank to halt foreclosures in all 50 states.

In addition, you have the title insurance companies refusing to touch resales on foreclosed properties from the servicers with documentation problems. They do not want to expose themselves to massive title problems where they would potentially have to pay off. A VP at a lender quoted in the article predicted that the major underwriters would soon put together a moratorium of their own on the properties from these servicers.

On another note, I would say that the White House wouldn’t announce support for a foreclosure moratorium until they actually put in place a foreclosure moratorium. If Axelrod casually announced his support yesterday without anything in place, the result would be mass chaos. Congress is more in place to call for a national moratorium (they’re also up for re-election, which doesn’t hurt), and many Democrats are doing so. My view is, let’s wait a couple weeks while these developments cycle through the system. I think we may see things move dramatically.

By the way, Karl Denninger has some excellent ideas for how to deal with this whole mess.

CommunityThe Bullpen

De Facto Foreclosure Moratorium Could Still Occur Regardless of White House Policy

I’m on kind of hinky wireless here, so bear with me today. (Of all the coffee shops in all the cities on the Eastern seaboard, I pick the one where the WiFi’s down because they forgot to pay the bill…)

My colleagues have helpfully broadcast the Administration line on foreclosure fraud, basically against a national moratorium and toward allowing banks to evade the rule of law. I assume these people would have the same reaction to, say, planted evidence in a murder trial. “Well, the defendant looks pretty guilty, and a tainted investigation or not, he probably did something wrong, so might as well convict.” It occurs to me that David Axelrod and the head of the FHFA wouldn’t be allowed on a jury anywhere in the country.

But I hope nobody believes that the problem stops there, that courts of law all over the country will accept the argument of the banks and move on, rolling fraudulent foreclosures through the system. If this were a simple case of banks versus homeowners, I would maybe agree with that assessment. But it’s not. You have institutional investors and a major insurance sector, among others, on the opposite side of the banks on this one. The Wall Street Journal explained the investor situation this weekend, which is basically a tug-of-war between senior tranche and junior trache MBS investors, something you might term “tranche warfare”:

When houses that have been packaged into a mortgage bond are liquidated at a foreclosure sale—the very end of the foreclosure process—the holders of the junior, or riskiest debt, would be the first investors to take losses. But if a foreclosure is delayed, the servicer must typically keep advancing payments that will go to all bondholders, including the junior debt holders, even though the home loan itself is producing no revenue stream.

The latest events thus set up an odd circumstance where junior bondholders—typically at the bottom of the credit structure—could actually end up better off than they expected. Senior bondholders, typically at the top, could end up worse off.

Not surprisingly, senior debt holders want banks to foreclose faster to reduce expenses. Junior bondholders are generally happy to stretch things out. What is more, it isn’t entirely clear how the costs of re-processing tens of thousands of mortgages will be allocated. Those costs could be “significant” said Andrew Sandler, a Washington, D.C., attorney who represents mortgage companies.

“This is sort of an extraordinary situation,” said Debashish Chatterjee, a vice president for Moody’s Investors Service who covers structured finance. By delaying foreclosures, “it means the subordinate bondholders don’t get written down for a much longer period of time, and they keep getting payments.”

And the WSJ buried the lede, actually: “The Association of Mortgage Investors, a trade association, has called on trustees, who oversee loan pools on behalf of investors, to demand that loans be repurchased by their originators if required documents are missing.” This is what should have been done on a rolling basis within 90 days of the security purchases. But basically, everyone turned their heads, going back five years. Investors will not take their lumps and go quietly if they see a legal recourse.

And there most certainly is one, just as in any case of mass fraud. Attorneys general in 40 states are about to announce a big joint investigation of the entire servicing industry, the results of which could expose their systemic practices:

The attorneys general of up to 40 states plan to announce soon a joint investigation into banks’ use of flawed foreclosure paperwork.

A person briefed on the investigation said Saturday night that an announcement could come as early as Tuesday. The person spoke on condition of anonymity because the investigation was not yet public.

Iowa Attorney General Tom Miller will lead the investigation. Miller already has been leading multistate reviews of questionable foreclosure documents.

A joint investigation by 40 states would further escalate pressure on banks to widen their suspensions of foreclosures. On Friday, Bank of America became the first bank to halt foreclosures in all 50 states.

In addition, you have the title insurance companies refusing to touch resales on foreclosed properties from the servicers with documentation problems. They do not want to expose themselves to massive title problems where they would potentially have to pay off. A VP at a lender quoted in the article predicted that the major underwriters would soon put together a moratorium of their own on the properties from these servicers.

On another note, I would say that the White House wouldn’t announce support for a foreclosure moratorium until they actually put in place a foreclosure moratorium. If Axelrod casually announced his support yesterday without anything in place, the result would be mass chaos. Congress is more in place to call for a national moratorium (they’re also up for re-election, which doesn’t hurt), and many Democrats are doing so. My view is, let’s wait a couple weeks while these developments cycle through the system. I think we may see things move dramatically.

By the way, Karl Denninger has some excellent ideas for how to deal with this whole mess.

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David Dayen

David Dayen