Citigroup Call On Implications On Foreclosure Crisis: "Just The Tip Of The Iceberg"

Tyler Durden's picture

Yesterday, Citigroup's homebuilding team hosted a call with investors in which the guest speaker was Adam Levitin, an associate professor of law at Georgetown University. Far from providing the "all green" call participants had desired, Levitin said that what we have recently seen and heard in the news is “just the tip of the iceberg” and that the foreclosure halt may well cause a "systemic problem", as was suggested on Zero Hedge when the news of the Florida's court involvement was first made public (here and here) a month ago. And since by now everyone knows what the key tension points in this potentially massive development are, we will cut straight to Levitin's somewhat unpleasant conclusions: "Our speaker predicted that more and more lenders are likely to stop their foreclosure processes in both judicial and non-judicial states. He also expects more states’ attorney generals to get involved. At the federal level, it is possible than banking regulators might step in as there is legal and reputational risk for the banks involved. Ultimately, if these issues do in fact escalate, the Administration may try to broker some sort of settlement. If such deal brokering does take place, Levitin believes that “some payment” will be exacted from the lenders and servicers. The Administration could bargain for more mortgage principal write downs." In other words, the endgame will likely end up being the extraction of material concession from the banking syndicate, in the form of systemic mortgage writedowns, with Obama's blessing, which will likely put the 25% of homeowners who are underwater on equal footing with the other 75%. It may turn out that this was the plan all along. And people naively wonder why banks have hundreds of billions in cash stashed on the sidelines...

As for Citi's official take on Fraudclosure here are the key issues:

Issues Concerning Affidavits

When the aforementioned paperwork is lost, an agent of the mortgage servicer can sign an affidavit swearing that he or she has personal knowledge that, although now lost, the trustee was once in possession of the necessary documents. The affidavit is considered to have the same weight as sworn testimony in a court of law.

Two problems have emerged with regards to affidavits. First, several news stories have reported that the people signing these affidavits had no knowledge of the matters in question despite the fact that there were legally testifying that they did. Many of these people have since been labeled “robo-signers” given the tremendous volumes of affidavits which they signed in relatively short periods of time. Second, the affidavits may be irrelevant because the issue is not that the mortgage documents were lost but they were never properly transferred at each step of the aforementioned securitization process.

Issues Concerning Tax and Trust Laws

Beyond the affidavit issues, our speaker highlighted potential problems concerning the trusts which hold the securitized mortgages. Most mortgage trusts were set up as REMICs (Real Estate Mortgage Investment Conduits) which are special purpose vehicles used to pool mortgages. Under the IRS code, REMIC confers a special tax status in which the cash flows to the trust are not taxed. Investors in the trust pay taxes. The tax exempt nature is important. If the trusts were in fact to be taxed, the taxes would distort the yields required by investors.

To qualify as a REMIC under the IRS code and enjoy the beneficial tax treatment, the trust (1) must be passive and (2) cannot acquire any new assets 90 days following the trust’s creation.

If, as described above, mortgage documents were never correctly passed through to the trust when it was established, then the trust may not actually own the underlying mortgages it purports to own. Although it is possible that this issue could be remedied by some legal maneuvering, doing so could violate the REMIC status since the trust would be acquiring assets long after the aforementioned 90 day period has expired. Such a violation in turn could trigger a sizeable tax burden for investors. Our speaker indicated that there are a handful of open questions on this front and that this is a legal gray area.

Issues Concerning Title Insurers

Levitin noted that all of the above issues may impact how title insurance companies act. If a scenario emerges in which title companies are unwilling to issue title insurance, in those scenarios lenders may cease lending.

When a home with a mortgage on it is sold, the mortgage must be released at closing by the current mortgage owner before a new mortgage with title insurance is issued. If it is not known with certainty who owns the mortgage in question, it cannot be released. If the title company is not satisfied that there is a good release on the old mortgage, it will refuse to insure the new mortgage.

None of these issues affect mortgages for newly constructed homes. Our speaker expects the mortgage market for new homes to continue to function without any material hindrances.

Issues Concerning MERS

MERS (Mortgage Electronic Registration Systems) functions as a centralized electronic registry of mortgages and tracks ownership of mortgages. MERS allows mortgage ownership to change hands efficiently and relatively quickly since it is electronic and allows all parties to forgo making a filing in local land records. Indeed, MERS was designed to function as a substitute for local land records.

Although MERS was designed to enhance efficiency in the mortgage assignment process, Levitin argued it may not conform with the law. “Slowly but surely” courts are issuing decisions which “cast validity on the MERS process.” Although ~60% of mortgages list MERS as the “nominee” which owns the mortgage, a handful of recent court cases have ruled that MERS has no standing in foreclosure actions either because (1) physical paperwork must be transferred when a mortgage is assigned by one party to another or (2) MERS has no true economic interest in the mortgage in question since it collects no payments from the borrowers.

Of course, all this is irrelevant without an appreciation of the endgame. And that may very well be what the Fed is pursuing all along - the elimination of trillions of private debt, however instead of Uncle Sam eating it all this time (via the GSEs), the banks would end up sharing some if not all of the pain. Of course, if this is indeed the case, it will be a very dangerous tight rope act, as many may just refuse to pay their mortgages outright going forward, and cause major additional pain for the TBTFs, and/or result in other traditionally unpredictable outcomes.

Full citi report, with thanks to Village Whisperer :


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MsCreant's picture

Just let it DIIIIIIE!

barkingbill's picture

its like watching the roman empire on life support and getting massive transfusions of poison and shock treatment to keeps its poor corrupted heart still beating...

Turd Ferguson's picture

Has anyone heard Meredith Whitney comment on all of this yet?

Turd Ferguson's picture

I certainly look forward to hearing her point of view ;)

i-dog's picture

Well, my point of view is:

Premise 1: The current state (Congress, POTUS, SCOTUS) is NOT on the side of the homeowners/mortgagors.

Premise 2: As I pointed out in another thread, under both communism and fascism, the state (ie. the controlling oligarchs) owns all property. The oligarchs live outside the borders.

Under communism the state ownership is express: One gets to "enjoy" a home ... plus (if one is a behaving party elite) "enjoy" access to the summer dascha by the sea and the winter dascha on the ski slopes ... but only so long as one is in the party's (and the oligarchs') good books, else it's off to the gulag for you.

Under fascism the state ownership is implied: One gets to "enjoy" one's bought-and-paid-for home and beach shack and ski chalet only so long as one is in the party's (and the oligarchs') good books ... else they get confiscated and you are put on the train.

Premise 3: Tracking good title back through decades for [tens of] millions of properties will likely lead to a dead end or an entangled mess.

My Conclusion: The solution to the Fractional Property Reserve System will ultimately involve the state nationalising (taking ownership of) all properties and allowing the current residents to "enjoy" some limited squatter rights.

Just one of a number of possibilities ......... hedge accordingly.

Zerohedge fan's picture

However, the only thing I miss from communism is:


Maybe, it's worth the upgrade?!?


Capitalism-system built on/around usury. Capitalism is not a free market.

Dave's picture

Nothing is free. But I agree with you about the women.

whatsinaname's picture

NO way they are using their own capital to cover for projected losses. Dont know why TD thinks that will happen...

Millivanilli's picture

Fannie, Freddie, The Federal Reserve, and Public and Private pension funds have purchased MBS/CDOs pooled under strict representations and warranties. Currently the banks are disallowing any information regarding the TRILLIONS of fraudulent mortgages pooled into MBS- ARE THEY ABOVE THE LAW? These banks are responsible for perfecting the securities- like throwing out JUNK. They didn't do that though, they passed it along to middle class America! This is NOT an issue of just notary fraud, though that is a big issue as well. They don't have the money to buy back all the fraud they sold! Too big to Fail is Too Big to Jail? Sayonara bank stocks. 


Buy physical assets like gold and silver and prepare for a possible bank holiday.

DaveyJones's picture

"are they above the law?"

Yes, and we're beneath it

sushi's picture

Fraudulent MBS is a securitization issue. Surely this is the area of expertise of the SEC? Maybe if they just changed the name to PornoWatchingComission then America would not have these problems.

StychoKiller's picture

Second, the affidavits may be irrelevant because the issue is not that the mortgage documents were lost but they were never properly transferred at each step of the aforementioned securitization process.


Can anyone here visualize these "whiz-kid" financial geniuses sparing no expense to make sure that the required paperwork was done properly?  Me Neither :((

New_Meat's picture

Life sucks, then you go to ZH, then you don't get to die.

- Ned

Mako's picture


"material concession from the banking syndicate, in the form of systemic mortgage writedowns"

Hahaha, write downs, who would want a write down on their mortgage when there is NO party that is a holder in due course able to start a foreclosure action.  Let me see, do you want a $1000 monthly payment or a $0 monthly payment?  The statutory limitation starts the after the last payment is made 

The problem is not robo-signers, nor is it missing Notes.  The problem is there is no party with proper "standing" to start a foreclosure action.  Only the holder in due course can start a foreclosure action. 

"the elimination of trillions of private debt, however instead of Uncle Sam eating it all this time (via the GSEs), the banks would end up sharing some if not all of the pain."

All are going to feel the pain this time, the banks are not going to save you.  The system will eventually just foldup.

For the homeowner, the solution stands by standing the wrongs of the loan servicer, which by default voids the foreclosure action, which subsequently moots the unlawful detainer action.

A debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt...  say like claiming it is a substitute for trustee in a judicial foreclosure action.

Boy ole boy, the fun should start as soon as the bloodsucking tick who claims to be an Attorney enters a court to start foreclosure action or collect a "debt".

"Upon our review of the record, we hold that a consumer debt collector's initiation of a lawsuit in state court seeking recovery of unpaid consumer debts is an "initial communication" within the meaning of the FDCPA"

OH shit, you mean all these lawyers are bloodsucking ticks? Sure looks like it Bob.

"This house is clean." - Pet Detective


DaveyJones's picture

assuming of course, within this dying beast, the due process clause still has more teeth than say, the fourth amendment

Mako's picture

I find there are more then one way to skin a cat.  Litigation is more like forcing your will.

If you face a foreclosure action in a BFE county court where the judges really don't know what the F they are doing, you can simple move the force of Law by quickly petitioning a BK court for an automatic stay of the foreclosure, whether the bloodsuckers will once again be in a position to have to prove "standing".   Or even a federal question in USDC as to the status of the debt collector to move in an action into USDC. 

If you do some research, you should even be able to find cases in BK litigation now that are now stopping the debt collectors by having them prove "standing".   Of course, you can always sue the Debt collectors under the FDCPA as well.

What I find most, is a bunch of incorrect information and a lot of people selling worthless crap to people.  There is remedy, you must find it.

johngaltfla's picture

<----Insert mushroom cloud here.


Once the lawsuits fly it's game over. And the CRE is up to the same bullcrap.

Popo's picture

Until I see SRS break north (and stop trending down), extend and pretend is still the name of the game...

CashCowEquity's picture

SPX to 2000 and Gold to 4000

alien-IQ's picture

and gas to $10 per gallon and bread to $7.50 per loaf. happiness for all:-(

VegasBD's picture

only unhappy if you keep your money in dollars. gas wont go up at all priced in gold/silver. either will food. soon it will be not fiscally responsible for me to go to work unless they pay me in silver. =)


like jayz/obama said:  i got 99 paychecks and a job aint one.

Slash's picture

why would the fed want to get rid of trillions in private debt? wouldn't that cause huge inflation? (or did I just answer my own question). Since all money is loaned into existence and debt repayment is deflationary while defaulting on debt is inflationary (b/c the newly loaned dollars still exist in the form of deposits in other banks, but the original lender then has to write off his loan which, if paid back, would take USD out of circulation).

jmcaule4's picture

"defaulting on debt is inflationary"


Umm. I dont think so. You might want to rethink that one.


"would take USD out of circulation"


Exactly. Therby causing deflation as there are less dollars chasing the same amount of goods.

Slash's picture

well my reasoning is X amount is loaned into existence from bank A then deposited into bank B (or A maybe), over time, X is taken out when the loan is paid off. If the loan is defaulted on and written off, X is still out in circulation b/c the equal amount of X has not been paid back and thus taken out of circulation.


socalbeach's picture

When the loan defaults, the originating bank takes a hit to its capital, so even though X amt will be in bank B, it's offset by -X in bank A. 

So defaulting loans have the same effect as loans being paid off, you're back to the initial state before the loan was made, and less money than when the loan was made.

Popo's picture

Actually it's worse: When a loan defaults the originating bank takes a reverse-leveraged hit to its capital, so even though X amount will be taken by bank B, it's offset by (-X * L) in bank A, where L is the leverage ratio.


Make no mistake, the response to this deflationary armageddon will be that our central bank TRIES to create massive inflation -- which will create misery on an epic scale. 

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved." Ludwig von Mises



StychoKiller's picture

Pay no attention to that enormous sucking sound, it's just a black hole called deflation!  What's everyone gonna do once their ISP goes belly up?  Good thing I have an old Commodore 64 to play games on! :>D

Zerohedge fan's picture

and you know, Joker is 100% silver, as well

"..this game is easy"

alien-IQ's picture

you know where else they only take gold as currency?

come see the paradise.

try to look at the bigger picture. the one where you are not the only person in the world.

tmosley's picture

That's like saying that it is bad to diet and eat right because fat people that are about to die of diabetes do that.

Using gold as currency is the first step toward recovery.  Of course, Zimbabwe has reverted to fiat currency, though they are using foreign fiats.

FreedomGuy's picture

At least Zimbabwe has U.S. dollars that are used as a reserve currency. There isn't one in the U.S.

FEDbuster's picture

Silver will be for spending, gold for wealth preservation and big transactions.

alien-IQ's picture

can you name one country in modern history that has had to resort to precious metals as the accepted currency that DIDN'T spiral into complete anarchy and chaos with immense suffering by the majority?

if we here in America ever reach the point where we must conduct all transactions with silver or will see hell on earth up close and personal. Bank on that.

technovelist's picture

can you name one country in modern history that has had to resort to precious metals as the accepted currency that DIDN'T spiral into complete anarchy and chaos with immense suffering by the majority?

Yes: Every major country in the world from 1815 to 1913.


TheJudge2012's picture

Was not the FIAT currency in Zimbabwe hyperinflated BEFORE merchants demanded payment in gold? Was not Zimbabwe war torn by a US installed puppet?

nwskii's picture

Think you meant spx 200 and gold 4000. I agree with the Gold call but how is this gonna lift the SPX if the banking sector gets crushed

bugs_'s picture

No laughing on this call i bet.

yipcarl's picture

Is this really going to happen?  Have we just found ourselves in the United States of Socialism?

What the fuck is going on?

JLee2027's picture

No. The coming reset will prevent that conversion. 

knukles's picture

Yeah, like whattabout some of us who'd paid down or paid off their mortgages, acting prudently in the best of good faith, highest moral and ethical standards, deleveraging our portfolios, fortifying our pesonal balance sheets.  We're the one's pay for all this crap.  We get a rebate? 

Moral Hazard and Disincentive Run Riot.

And as I read this article, my mind harks back to a news piece yesterday where one of our Congressmen, I believe it was, spent time introducing a Concussion Poster into a local high school because so many football players had been getting head injuries.  Yes, you read that correctly.  Introducing a "Concussion Poster".  Undoubtedly, of seminal importance.

And these folk wonder why the public is disenchanted.  Remind me, when is it we get to vote again?

minus dog's picture

"whattabout some of us who'd paid down or paid off their mortgages, acting prudently in the best of good faith"

I hate to say it, but I think the correct technical term here would be "sucker"

The general theme is is wealth - past, present, and future - leaving your pockets and entering the bankers' and politicians' through dozens of different mechanisms.  

Now they're going to do it some more, and they're going to get a bunch of people to cheer it on by framing it as a handout to those people.  I don't doubt for a minute that at least some group with connections will be getting something out of this.

mtomato2's picture

No, Knuk.  You're not a sucker (if you're the person you're talking about.)  You are one of the good guys, and only the good die young.

This site used to be relatively anonymous, but over the past year or so, it has become more like a (dis)functional family to me.  Nobody knows who the "real" me is, but everybody here knows who the "ZH" me is.  Despite all that, I'm gonna come clean with the fam.

We're in a house we built sixteen years ago with our own hands.  It's cypress log.  We're on 10 acres in the mountains somewhere.  My first kid was born in this house, and we planted a maple tree that week.  The tree is huge now.  It's his tree.  We brought two kids home with us from Colombia, S.A. about eight years ago.  This homestead was the first, of the miracle we called America, they ever saw.

One of them said the other day:  "My favorite thing is the way the house smells when we come home from a vacation..."  Sheesh.

Now, after all this time, we are maybe going to have to leave.  My wife and I have been self-employed, mostly successfully, for over twenty years.  We never got rich, but we always had enough.  Until now.

When you-all are making fun of food stamp recipients, you're making fun of us, now.  Don't feel bad.  I used to do it, too.

When you mock those who aren't making their mortgage payments, you're mocking us, now.  Don't feel bad.  I used to do it, too. 


I don't usually uncover my dirty laundry to an online community.  In fact, I've never done it before.  But the fact is, I'm deep in (ahem) Cognitive Dissonance.  I think people should pay their bills.  I think people should stay out of debt.  I think people shouldn't buy stuff they don't have ANY hope of paying for.

And here I am, shoe tightly tied on the other foot.  We're not dead beats.  We work real, real, hard.  My oldest son is an Eagle Scout.  But... this is happening to us.  We're fighting all the way, but how can I justify fighting the bank when the bank's right?

Cognitive Dissonance.  If only more people knew what that really meant.  And how bad it can hurt.

As long as I have a laptop, though, I'll still come to my ZH sanctuary.  It may not be tame, but it's very important to me none the less.

Peace out.


DocLogo's picture

keep your head up, buddy. this too shall pass

Rusty_Shackleford's picture

"only the good die young"


The problem is that most of us are morally ambiguous,...

which explains our random dieing patterns.

Cognitive Dissonance's picture

Cognitive Dissonance.  If only more people knew what that really meant.  And how bad it can hurt.

Reality is when it's happening to you.

Cognitive Dissonance is when you never thought it would and you still aren't exactly sure why it is.

My condolences on a hard fought battle that was nearly won........until it was lost.

reading's picture

I think you'd find yourself in good company...some people lash out to distract themselves from their own situation.

your situation seems to be happening so much more than I would have ever imagined.  I hope you navigate a way through this.

Best thoughts...


Pining for the Fjords's picture

Dammit, Mt2...  I am not a particularly religious man but I'm saying a heartfelt prayer for you and your family tonight.  And it makes me  deeply angry that good, hardworking people have to go through what you are going through.  Do whatever you have to.   And survive.