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A Different Direction for the Foreclosure Mess?

Submitted by Bruce Krasting on 10/10/2010 23:36 -0400

I keep thinking of the mortgage foreclosure story and wondering, “Where will this go?” The problem is that this question is very hard to answer. One possible direction.

According to Realtytrac the number of actual repossessed properties in
August was 95,000. They also have reported that in the second quarter
the number of repos was 248,000. Call it a million over the last 12
months. "How many of these are now tainted" is a central question. But for me the more significant issue is, "Why were they were tainted".

From what I have read it would appear that this has been
administratively blown up due to the volume of foreclosures. No one in
the housing/mortgage story really wants to do a foreclosure. It is the
most costly outcome. Not only does the lender lose principal and
interest there is a big cost to close on a homeowner. So the lenders,
lawyers, servicers and document houses all tried to push the process
through a hole that is too small. Along the way they hired bozos to do
the work and the cut every corner they could to close a file.

That sounds bad, but it does not worry me too much. A probable outcome
would be that most of the closed deals are either properly documented or
they deal with an original borrower who was so far underwater that the
last thing he/she would want to do is restart the process with the old
IOU’s. To be sure there is going to be a percent of deals that will
result in some form of restitution to the original obligor. That will be
a loss to all of the players. But it is not going to bring down the
house.

There is a great deal of difference between a lender who is facing a
loss and cuts corners to minimize the loss and fraud that occurs when
the same tactics are used to make money. And that is what I fear has
happened. Should that be the case we are looking at a very big hole
developing in the mortgage space.

Assume there is a home that has a $250,000 mortgage and the loan is in
default. Now assume that the owner of that mortgage wants to sell it.
Assume further that the mortgage is bundled up with a bunch of other
busted mortgages and sold at a deep discount from par. Say the price of
the loan package is 40 cents on the dollar. Now finally assume that the
property can be sold at an auction level price of $175,000.

If you add up all my assumptions you get a situation where the mortgage
is purchased for $100k (250*.4) and the actual value of the assets
securing the mortgage is worth $175k. That 75k for a “flip” is big money
if there is a lot of them to be done. And as Realtytrac says it is a
million or so a year.

If you’re reeling from all those “assume this” crap I was selling
don’t be. What I describe is happening in very big numbers. Busted
whole mortgage loans are being packaged and sold to investors to the
tune of at least $10b a month. Some of the biggest players on Wall
Street are in the game of arbing the sellers. Packages are regularly
being put together and sold. Who are these sellers? A lot of the banks.
The big ones have sold large amounts, the smaller banks have sold
regional portfolios at distressed prices. But by far and away the biggest sellers that have created the “profit window” all reside in D.C. A big seller has been the FDIC. Fannie, Freddie and FHA have also been steady sellers.

I have no idea how much abuse there has been when secondary market
purchasers of mortgages push through foreclosures and auction off homes
to make a big profit. But the answer is it is not zero. What if only 10% of foreclosures were the result of some outfit or the other pushing to make some fast cash?
What if they were doing it on the cheap. Say $10k a pop. Well that
comes to a billion a year. And for that much money people will pull all
matter of strings. They will buy lawyers and document processors who
will gladly take the dough. When you have nine-figure money and a short
time window of opportunity you press it as hard and fast as you can.
That is how it works.

Two possible headlines we may see:

In an effort minimize losses Federal Agencies relied on improperly documented foreclosure procedures.

Thousands may be affected. FHFA to issue apology.

Or it could look like this:

Federal Agencies Sold Loans to Scheisters

Improper
payments made to foreclosure agents. Billions of profits at stake.
Hundreds of thousands lining up for class action suit.

Congress suspends all foreclosures and new lending at Agencies. Mortgage market seizes up.

I have been amazed to see that more than 25% of all home sales of late
have been the result of foreclosures. There are some folks who are
burning the midnight oil to get all this done. And for a portion of them
the profit motive, not a paycheck, is what is keeping them awake. I
have seen bank REO sit on the market for years. And I have watched other
parcels get priced deep in the hole and go very fast. In some of those
cases the motivated seller is not taking a bigger loss. They are taking a
fast profit.

If an investigation shows that even a small amount of foreclosures were
done with a profit motive objective and those beneficiaries had “sweetheart” (AKA “Side deals”)
with the servicers and closers to achieve their objectives there will
be hell to pay. Something like this is likely to come. There is too much
money involved. That brings abuse. Greed is in our nature. So is
bending the rules.

- advertisements -

Wed, 11/10/2010 - 06:24 | 715653 cheap uggs for sale

Mon, 10/11/2010 - 12:32 | 641020 TuesdayBen

Will the mortgage securitization process and its failings ultimately prove to be a Black Swan, a legal morass with massive, widespread, wealth-destroying/transferring impacts? Or not even a story six months out?

Mon, 10/11/2010 - 12:31 | 641017 Jake Lamotta

The American family got "rabbit punched" against the ropes. The elite are going for the TKO.

Mon, 10/11/2010 - 12:09 | 640976 mrcmmm

I think Bruce misses the point. In fact the problem is not with shoddy paperword at the foreclosure stage, but shoddy paperwork all the way back at the beginning, which cannot be corrected retroactively. Yes, there will be some secondary wheeling and dealing, but the sheer volume of what's out there will result in litigation from several directions: hundreds of thousands of homeowners standing on their right to force the foreclosing bank to prove it properly holds the note, state and union pensions suing the big banks for securities fraud because the representations in prospectuses that the loans were properly deposited in the trusts are false (and the banks knew it), state and federal tax authorities suing the trusts which it turns our are not tax exempt, payors on CDS obligations suing the big banks because they were induced to issue the CDS based on false representations. It will go on for a decade.

Mon, 10/11/2010 - 13:20 | 641108 CustomersMan

For a Securities Series 7 Rep perspective:

Relevant Rules

Rule 405 - Know your customer and his/her/their ability to assume risk.

Full Disclosure - All material facts must be disclosed. And if new facts are found there is a fiduciary responsibility to disclose them.

Prudent Rule - When dealing with investors of any type (and even more-so with ERISA customers) you must act as a prudent-man would with the same facts and situation.

Note: Funny how the word customers has the MERS at the end of it.

Mon, 10/11/2010 - 13:37 | 641134 CustomersMan

Forgot One.

Due Diligence - An honest and determined effort to discover all material facts related to the investment which may have adverse effects and disclose them prior to any offering.

Mon, 10/11/2010 - 11:42 | 640916 clagr

Isn't this more of a political 'Tempest in a Teapot'? On investigation 95% to 99% of the foreclosures were proper (i.e., on the correct properties and correct delinquent borrowers and for the proper owners of the notes.) This is so stupid and helps no one: not the delinquent borrowers, note holders, neighbors of the foreclosed properties or potential buyers of the foreclosed property.

The courts can sort kick out the few real problems by requiring the real note and title--independent to who supposedly "reviewed" the paper.

In the end, the solution to the problem going forward is to require everyone involved in originating and owning the mortgages in the future to keep a 5-10% ownership interest in the mortgages. Skin in the game will force vigilence. (Although it will eliminate, well restrict, the possibility for such a huge derivative bubble in the future.)

Mon, 10/11/2010 - 12:48 | 641042 CustomersMan

I knew a guy that owned his own real-estate company and had insiders with various banks.

He would get tipped-off on what deals still had equity. He would then be able to front-run anyone else in buying the property at foreclosure.

Somehow other bids would be excluded or not arrive in time. He always seemed to get there first and have everything in order. Then he was picked to be the "Buyer" on large +$$ "equity" foreclosures, and the contacts at the banks, were rewarded in some behind the scenes way.

Now this was back in the early eighties, I would suspect that the routine has been perfected.

This happened quite a few times, and he and the guys at the banks moved to Marco Island and bought stuff there.

Mon, 10/11/2010 - 11:49 | 640930 Bob

On investigation 95% to 99% of the foreclosures were proper (i.e., on the correct properties and correct delinquent borrowers and for the proper owners of the notes.)

Link to evidence that supports this claim, please? We wouldn't want to be tilting at windmills. On the other hand, we wouldn't want to be undermined by disinformation, either.

Mon, 10/11/2010 - 11:16 | 640847 Dr. No

"Along the way they hired bozos to do the work and the cut every corner they could to close a file" They dindn't have to look very far. THey just pulled the old payroll list from when they were selling the mortgages. All of those subprime ARM pushers laid off in 2008 where brought back to run the foreclosure process. Looks like they F'ed that up too. I bet their bonus is tied to number of notaries they can file.

Mon, 10/11/2010 - 11:14 | 640843 kaiserhoff

Barking up the wrong trees...

1 Dead paper is just dead paper. Of course, it is worth more in private hands than with Fannie or Freddie, because collection agencies will go after deficiency judgements . Trying to forget about that, aren't we? Hard for the government or big banks to do. Shitty way to make money, but no shortage of bottom feeders to do it.

2 The real impact is how it affects life going forward. This is overblown in the extreme. All of these entities were audited. The paper trail is remarkably clean given the volume and the level of hype/versus evidence, but that matters little. This adds just enough uncertainty to queer most sales for six months to a year. The Devil works in strange ways, but we might finally get back to decent living standards, if the whole thing doesn't spiral into oblivion. Brace for impact.

Mon, 10/11/2010 - 12:53 | 641049 CustomersMan

I disagree. You assume that the people foreclosed on are scum-bags and the bottom-feeders who do the foreclosure dirty work, but not the nice Government people or the big banks.

And the paperwork is clean? Somehow I doubt it.

Mon, 10/11/2010 - 13:49 | 641153 kaiserhoff

Reading and comprehension skills are wonderful things to have.

Mon, 10/11/2010 - 11:24 | 640866 chopper read

+1. however, our currency issues will continue to disrupt living standards until the collapse of fiat currency. The Fed is hellbent on re-inflating the value of MBS's on their balance sheet. in the meantime, brace for continued 'biflation'.

Mon, 10/11/2010 - 11:08 | 640828 apberusdisvet

Bank of America now has all mortgage personnel working overtime to do "mods" rather than foreclosures; obviously trying to kick extend and pretend to infinity.

Title, title, who's got the title?

Mon, 10/11/2010 - 11:03 | 640817 Coder

I used to work for a company that does the software for these systems (loan modifications etc). It's 40k and up to foreclose, which should be accounted for in your numbers.

Mon, 10/11/2010 - 08:41 | 640559 poorold

Selene Finance--it would be interesting to see the inside of their operation and how the original deals were put together...and how many pennies on the dollar they are paying for the mortgage loans they are buying up by the boatload.

Mon, 10/11/2010 - 07:47 | 640504 doggis

bruce - dude......what does FRAUD have to do with bending the rules. there was no effort to 'bend' the rule of law, it was ignored!!!!

i think the banksters have gotten to bruce and he began drinking their rule bending "oh we were just trying to speed up foreclosures bullsh*t Kool Aid. This is why there was pervasive FRAUD bruce -

"Janet Tavakoli: This is the biggest fraud in the history of the capital markets. And it’s not something that happened last week. It happened when these loans were originated, in some cases years ago. Loans have representations and warranties that have to be met. In the past, you had a certain period of time, 60 to 90 days, where you sort through these loans and, if they’re bad, you kick them back. If the documentation wasn’t correct, you’d kick it back. If you found the incomes of the buyers had been overstated, or the houses had been appraised at twice their worth, you’d kick it back. But that didn’t happen here. And it turned out there were loan files that were missing required documentation. Part of putting the deal together is that the securitization professional, and in this case that’s banks like Goldman Sachs and JP Morgan, has to watch for this stuff. It’s called perfecting the security interest, and it’s not optional."

Mon, 10/11/2010 - 11:44 | 640902 Bob

Yeah, Bruce seems to be falling for the MERS party line:

http://www.zerohedge.com/article/mers-enters-self-preservation-mode-issu...

In his defense, however, it's not easy to face the full scale of what has been done to our country and retain your faith in anything.

I hope to see Justice reasserted, painful as the fallout may be.

If not, we're gonna be reduced to our bedtime prayers kneeling at our bedsides: Now I lay me down to sleep, I pray the Lord my soul to keep, if I should die before I wake, I pray the Lord my soul to take.

Mon, 10/11/2010 - 13:04 | 641082 CustomersMan

There is also the O.J. Simpson comparison.

O.J. won the murder case. The banks got away with the initial plunder in 2008, '09, '10 including all since the original $700 Billion intimidation deposit.

O.J. is now convicted and in jail, for something much smaller,....but still in jail. And no one is crying about it.

Now, we have the bankers, back with a much bigger problem. Do you think for one fucking moment, with all the pain and suffering that has come as a result of their rape and pillage, and ultra bonuses, and self-righteous proclamations, that anything but destruction awaits them?

Not me.

Mon, 10/11/2010 - 07:19 | 640488 Careless Whisper

maybe we should go in this direction:

Wall Street CEOs still not in jail; in France criminal bankers get 3 years

http://rt.com/Top_News/2010-10-09/wall-street-economy-crisis.html

Mon, 10/11/2010 - 08:08 | 640520 SteveNYC

But we have "Freedom Fries"......

Mon, 10/11/2010 - 06:57 | 640479 lamont cranston

The offshoot of the suspension will effectively kill residential RE. Sure, what was going on was pure unadulterated fraud but when you eliminate 25% of a market with a snap of the fingers, it won't take but 30-45 days to throw out the baby with the bathwater.

DJIA 6500 by December, anyone?

Mon, 10/11/2010 - 07:47 | 640503 Widowmaker

Nope but to protect fraud a can of soda will be 6500.

Remember only fraud and lawlessness win.

Mon, 10/11/2010 - 07:38 | 640496 bigkahuna

Logic is nobody's friend in the stock market. I logically agree with you. The problem is that the market is rigged to some bankster's whim. The fed has the capability to print endless dollars and funnel the new dollars to purchase stocks. I hedge a little and otherwise just do my best to stay out of their way.

Mon, 10/11/2010 - 06:50 | 640475 Miss Expectations

Here's what happened with the house across the street from me.

Mr. and Mrs. "Smith" sold their house to Mr. and Mrs. "Brown" about 3 years ago for $280K. Mr. and Mrs. Brown move in. They arrive with a small box truck and unload some mattresses and a small amount of cheap particle board furniture. They don't even own a car. Mr. Brown is a disabled Vietnam Vet, his wife gets a job as a waitress at a fast food chicken place 2 miles away. For a couple of months she walks to work. About 3 months after they move in, they buy a new $25,000 car. We soon learn that Mr. Brown's disability is not physical, but mental. Mrs. Brown is often calling the police on him because of his outbursts. When the police won't take him away, she makes a followup call for an ambulance, hoping they'll take him away because of his "mental issues". Watching this unfold across the street, the sirens, police, ambulances gets old real fast. A For Sale sign appears on the front lawn. Asking price $329,000. No takers. About 2 years after the Browns moved in we see the foreclosure paperwork get taped to the front door. Mortgage #1 $280,000 and Mortgage #2 $20,000...$300,000 total unpaid mortgage debt. I guess they got a second mortgage and bought the car with it. The Browns move out. The yard goes untended, the pool is a mess...full of algae, yard debris, mosquitoes and frogs. The neighbors step in and mow the lawn. Now it gets even more interesting. A nice young couple with 2 kids try to buy the house. They make an offer to "the bank" for $180,000, it's accepted, they line up a mortgage but the closing date keeps changing. They can't get a closing date. This goes on for 6 months. Suddenly, out of no where a "real estate company" swoops in with a CASH offer for about $170,000 and they close on the house almost immediately. The nice couple with the kids still want the house and are contacted by the "real estate company". The house is for sale again if they still want it. Asking price $185,000. The nice couple buy the house. Someone made a quick $15,000 in a matter of months. I don't know the status of the title...it might get even stranger with that house across the street....

Mon, 10/11/2010 - 11:20 | 640858 chopper read

interesting and sad story. thanks for posting.

Mon, 10/11/2010 - 06:39 | 640471 Zerohedge fan

Bruce,

"greed is good"

http://www.youtube.com/watch?v=9KtPiECJWro

Mon, 10/11/2010 - 05:57 | 640456 Ned Zeppelin

Bruce: I doubt the MBSs created directly by the GSEs (FHA, Fannie, Freddie) are tainted by the "Foreclosure Virus." I think this is all about those private label MBSs that did the heavy lifting during the real estate bubble, 2002-2007 (remember, it wasn't that long ago that the GSE mortgages weren't that critical to the housing market). Those are the ones that were used to manufacture these multiple tranche bonds aka collateralized mortgage obligations. They were created as REMICs, fancy new vehicles set under the Internal Revenue Code as pass-through entities, with very strict rules as to their formation, transfers of collateral mortgages in, issuance of securities out, complicated pooling and servicing agreements. (and let's not forget those CDOs - when they ran out of real mortgages they created synthetic obligations based on other CMBSs as the reference securities.)

This is where the Big Lie resides: this isn't coming apart because there are too many foreclosures and the "the wheels are coming off", it's falling apart because the chain of title is defective, can't be discovered by reasonable due diligence or is hopelessly fouled up - hence the dire need to go Door No. 2: make the shit up in an effort to force through the foreclosure. Because if you can't foreclose on one mortgage out of a $2 billion CMBS, you can't foreclose on any of them! Secured transmutes into unsecured, and bang!

I do agree a big question, especially post Hank Paulson, Geithner and Bernanke, is who owns these private label mortgages? Toxic assets? In 2008, the issue with this stuff was the value based on worries as to the underlying mortgages being shaky for credit reasons. Now we find it it's credit AND defects in ability to collect, to exercise the remedies. Ouch.

Mon, 10/11/2010 - 11:26 | 640875 Bob

" . . . let's not forget those CDOs - when they ran out of real mortgages they created synthetic obligations based on other CMBSs as the reference securities.

Bingo.

Mon, 10/11/2010 - 03:40 | 640431 traderjoe

"From what I have read it would appear that this has been administratively blown up due to the volume of foreclosures."

Bruce, forgive me (since I usually like your stuff), but I stopped reading here.

They are filing false affidavits, etc., etc. because they don't otherwise have proper standing to foreclose.

Why? Because they never transferred the note/title in an appropriate fashion.

Therefore, this does not apply to just foreclosures, but ALL MORTGAGES SECURITIZED SAY FROM 2004 to 2008. ALL, ALL, ALL. Do you know where your note is?

Trillion$ is RMBS might be unsecured 'empty boxes'.

Real estate market, title insurance, RMBS, TBTF banks - Full.Stop.Collapse. (Possibly.)

Lots of good articles out on this. Yves (I've see you there). Market-ticker. Here, 4closurefraud, etc.

THIS COULD BE HUGE.

Mon, 10/11/2010 - 10:53 | 640788 Traianus Augustus

+100

Mon, 10/11/2010 - 03:40 | 640430 Florida Joe

Author - you say "No one in the housing/mortgage story really wants to do a foreclosure."

That is incorrect. A true note holder may reach that conclusion, but with servicers, the incentive of pay per foreclosure for a servicer has no corresponding cost incentive to negotiate or avoid foreclosure.

This separation or shielding has distorted what should be happening -- once hi-volume foreclosures affect pricing, any normal note holder would then negotiate with a borrower. Here, servicers are disconnected, thus few work-outs. Instead, the banks get the taxpayer to subsidize the carrying costs via the Fed's low .025% interest, yet again shielding the banks from making decisions that should be made in any capitalist system. Obviously, we do not have a capitalist system.

Mon, 10/11/2010 - 11:21 | 640862 FEDbuster

Let's not forget this banksta classic from the Indymac "deal":

http://www.youtube.com/watch?v=ssl5yb7FewA

Mon, 10/11/2010 - 01:38 | 640341 Dan The Man

Y'know...my buddy...a mortgage broker who also owned the business, told me years ago to learn how to do bankruptcies. Not nearly enough people knew how to do them properly, as they weren't done in much volume at all for nearly 20 years. Way ahead of his time, I'd say.

So could this also be a problem of staffing, due to the ultrahigh volume?

Mon, 10/11/2010 - 01:20 | 640329 IQ 145

Thanks Bruce; you make perfect sense.

Mon, 10/11/2010 - 01:10 | 640319 BobWatNorCal

Some of these foreclosures were to be set aside for "community groups".
I wonder how that relates to all of this?

Mon, 10/11/2010 - 11:31 | 640886 TheMonetaryRed

Yeah, it's gotta me government set-asides for minorities. Because, you know, the President is a black guy.

It can't just be the banks. It can't be the private sector. The private sector is only good and virtuous and all that is wrong must come from government.

Nothing to see here. Move along.

Mon, 10/11/2010 - 06:01 | 640211 williambanzai7

I think we are seeing the latest manifestation of the garbage in garbage out phenomenon.

Mon, 10/11/2010 - 11:28 | 640882 TheMonetaryRed

"I think we are seeing the latest manifestation of the garbage in garbage out phenomenon."

I think that, unfortunately, the author's post is hopelessly naive and that the above is right on the money.

The overwhelming problem from the first has been major American financial institutions knowingly dealing in fraudulent mortgages. It wasn't the CRA. It wasn't Greenspan. It wasn't Fannie or Freddie. All those things were bad, but clearly the overwhelming problem was fraud and now we see the inevitable result.

The major American financial institutions NO LONGER KNOW HOW TO CONDUCT THE MORTGAGE BUSINESS HONESTLY.

Until people understand that, they won't understand what this mess is all about.

Mon, 10/11/2010 - 12:21 | 640877 TheMonetaryRed

Ersatz Copy

Mon, 10/11/2010 - 11:14 | 640838 Millivanilli

The systemic fraud called MBS, CMBS, CDOs and CDS, an alphabet soup of scandal, is about to cause a seizure in the housing and commercial real estate sectors. The banksters were given trillions because they were Too Big Too Fail. Criminals like Mozilo, Thain, Dimon, Fuld, Lewis and many many more knowingly sold fraudulent securities on to pension funds. The rabbit is out of the hat and a growing chorus of lawsuits are gaining traction from Florida to California. Charges include 1. Inflating appraisals and pushing borrowers into risky loans and unaffordable mortgages. 2. Packaging bad loans and then pooling them as AAA for sale to unwitting investors. 3. Knowingly granting loans on ALT A, Opt ARM, etc which the borrowers would never be able to pay.

As Janet Tavakoli has stated this is "the greatest fraud in the history of capital markets." JPM, GS, BOFA, ML, Bear Stearns, Wells Fargo, Washington Mutal, and many others were involved in this outrageous scam. The notary issue is but a small aspect of the systemic fraud that was perpetrated on the people of this country. If justice is not served and Too Big Too Fail is deemed Too Big To JAIL, then we have gone from a supposed Republic to a Lawless Plutocracy.

Mon, 10/11/2010 - 11:43 | 640918 99er

MBS, CMBS, CDOs and CDS

Mostly Bull Shit; Comercially Manufactured Bull Shit; Con Dumb Oxen; and Con Dumb Suckers.

Jump you fuckers.

A Different Direction for the Foreclosure Mess?

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