PIMCO On The Robosigning Scandal And Its Consequences

Tyler Durden's picture

PIMCO, which was one of the firms spearheading the putback push against BofA, has put together a useful and rather objective analysis though Executive Vice President, Global Structured Finance Specialist, Rod Dubitsky, titled "Foreclosure Flaws Trigger New Round of Uncertainty." While not surprisingly the baseline case presented by PIMCO is a moderate one, as the asset manager claims the most likely impact is "moderate" it does acknowledge that there is a possibility for substantial complications (although Fannie's recent bail out of BofA pretty much takes cares of that). The two main adverse consequences are "corrupted title" -  a topic beaten to death previously, and, more importantly, "Tax issues relating to RMBS issuance entities" on which PIMCO says "Some have argued that assigning the note for the
mortgage loan so long after closing would run afoul of REMIC rules,
which could subject RMBS deals to adverse tax consequences." Of course, as an escalation of these developments would bring the entire $8 trillion RMBS structured finance industry to a halt, we are fairly confident that as more and more settlements are instituted, that the whole fraudclosure issue will be very soon completely forgotten.

Foreclosure Flaws Trigger New Round of Uncertainty

Rod S. Dubitsky

In early October a contested foreclosure action on a tiny house in
rural Maine lit the fuse of a blast that has reverberated throughout
the markets, spreading renewed fear of a second downturn in the housing
market and potential gridlock in the mortgage market. Specifically, the
contested foreclosure action led to a deposition of an employee of GMAC
Mortgage (a subsidiary of Ally Bank, fka GMAC Bank), which appeared to
reveal that GMAC was cutting corners while executing the foreclosure
process. The deposition led GMAC to freeze the foreclosure process, and
other servicers quickly followed GMAC into the servicer confessional
and likewise froze foreclosures. Further, the 50 state attorneys
general launched an investigation. 

Though many servicers are in the
process of fixing the flawed procedures, and the long-term market
impact of these revelations is uncertain, in our base case scenario we
see moderate risks to housing prices and to residential mortgage-backed
securities (RMBS) investments. Though the story is months old and
several issues have been clarified since the story initially emerged,
much uncertainty remains and many additional challenges have been
raised with the foreclosure process as well as with the securitization
process in general.

A Brief History of “Robogate”

Though there are several complicated threads to
the story, the primary flawed processes employed by mortgage servicers
can be easily summarized: 1) employees of the servicers were attesting
to facts in affidavits that in fact they often didn’t have explicit
knowledge of and 2) contrary to requirements, the affidavits in many
cases weren’t signed in front of a notary. (We note that this should
not imply there are no other broken servicer processes.) As an
affidavit is a sworn statement of fact that needs to be witnessed,
these two shortcuts rendered the affidavits defective. No witness and
no real knowledge of the facts being attested means an affidavit is not
acceptable to the foreclosure court. The media dubbed this trend of
rapid, automated signing of affidavits “robo-signing” and the ensuing
uproar “robogate.”

The secondary thread of the story that seems to
be growing in importance is potential flaws associated with the
mortgage documents and the process of transferring the documents during
the securitization process. The upshot of the latest stories is that
flaws in the transfer of mortgage documents associated with the
securitization could increase the complexity of the foreclosure process
and, in the extreme scenario, jeopardize the economic interest of the
trust in the associated mortgage. Though the document flaws (as
distinct from the affidavit flaws) currently appear to be limited, we
are watching this thread closely to see if the issues are more
pervasive.

Though some of the earlier moratoria have been
lifted, it’s not entirely clear that the servicers’ processes have
improved enough to satisfy the attorneys general and foreclosure
judges. Further, for some servicers who have not imposed a moratorium
and have indicated that their procedures were correct, in some cases
evidence has emerged that calls into question the procedures of even
these “compliant” servicers.

The attorneys general, who have yet to conclude
their review, are rightly concerned over the possibility that
streamlined foreclosure processes either 1) resulted in some
foreclosures that shouldn’t have occurred (though we expect this is
rare) or 2) didn’t give borrowers an adequate chance to resolve their
mortgage payment difficulties (e.g., via a loan modification or other
resolution). However, we don’t believe the attorneys general want to
see permanent
gridlock in the
REO (Real Estate Owned – i.e., foreclosed homes) housing market; after
all, many voters buy foreclosed homes and most voters don’t like seeing
empty homes blighting their neighborhoods and failing to contribute
property taxes.

Most Likely Overall Impact Is Moderate

At this point it doesn’t appear the legal right
to foreclose will be severely impaired across a large number of
mortgages, nor will the ability to foreclose likely be subject to
massive or terminal delays. Rather, thus far it appears that servicers
will ultimately be able to execute foreclosures on the overwhelming
majority of mortgages. Most of the problems and flawed procedures, in
short, appear to be fixable, and in our base case scenario we see the
long-term impact on housing prices and RMBS as likely to be moderate.

That said, robogate and its fallout do have
several implications for investors. First, the servicers will be
affected by 1) higher costs (in both the short term, as the backlog is
cleared, and the long term, as staffing needs to be stepped up) and 2)
potential legal liability, as the various infractions may result in
legal action on the part of borrowers or the attorneys general. Second,
potential gridlock in the housing market and further delays in
resolving the housing overhang do pose the risk of an adverse impact on
home prices in the longer term, though the short-term effect could be
positive as distressed supply is pulled from and kept off the market.
Third, RMBS investors will likely be affected as delayed liquidations
result in longer duration and higher losses (due to greater costs,
resulting from the longer timelines). On the other hand, credit IO RMBS
will likely benefit, as the IO (interest only) period will last longer,
thereby increasing the value of the interest component of their cash
flows (a credit IO is a bond that is impaired to the degree that no
principal is expected to be received and the only value is remaining
interest payments). Fourth, we note the foreclosure delay’s impact will
depend on the bond structure, since structural nuances vary across and
within deals.

The final implication for investors is very
difficult to quantify: If borrowers know they have a reasonable basis
to legally contest the foreclosure, the recent revelations may embolden
many more borrowers to do so. Even borrowers who know they can’t afford
the home may choose to contest foreclosure if it increases the free
rent period or if they have hope of improving their financial situation
during the prolonged delay. Borrowers may cite an array of reasons to
contest foreclosure: affidavit irregularities, lost notes, improper
standing to foreclose, misapplied payments, incorrect ARM calculations,
excessive delinquency-related expenses (late fees, inspections, force
placed insurance), failure to offer a loan modification (which is
required in some jurisdictions), or problems associated with the
origination of the loan. In most cases, we believe delay will be the
worst outcome from an investor’s perspective. We believe most
title/note mortgage assignment issues appear to be fixable (at some
time and expense), and more to the point, while some borrowers will
challenge and successfully avoid foreclosure, most borrowers who
challenge are likely only delaying the inevitable (as most such
borrowers simply can’t afford the home). Nevertheless, it’s another
area of uncertainty.

And on a positive note, we have no doubt that
some borrowers were rushed to foreclosure when in fact they may have
had a legitimate ability to pay, and to the extent the foreclosure
timeout can save additional borrowers, that is clearly a good thing.

In PIMCO Advisory, we’re accounting for the
impact of foreclosure freezes on RMBS prices by running delays ranging
from three to 12 months across base case and stress scenarios; the
values of the bonds generally don’t change more than a few points in
the more extreme scenarios. In addition to longer foreclosure
timelines, we are assuming higher loss severity because servicers will
need to advance more delinquent interest while the foreclosure is
pending. One element that is difficult to quantify is whether servicers
will incur substantially more fees that may in turn be passed along to
RMBS investors, thereby adding to loss severity. Though some expenses
will likely be borne by investors, at this point we’re not assuming
much additional loss severity other than that strictly from the
extended timelines.

Further, it’s not clear at this point whether the
delay should only be applied to current foreclosures or whether
foreclosure timelines will become permanently longer as servicers and
courthouses now take longer to process each foreclosure. We are
currently applying our lags to the existing foreclosure and REO
pipeline, while leaving our process for current loans unchanged.
Assuming servicers increase staff to clear the backlog and adequately
fix their procedures, we believe it’s reasonable to assume that
foreclosure timelines will revert to pre-robogate levels (which already
reflected lengthened timelines).

Less Likely but More Dire Consequences Are Possible

Following the foreclosure moratorium, market
participants raised two issues that would theoretically have far more
dire consequences for RMBS investors in particular and the mortgage
market in general. Thus far, the likelihood of either of these
worst-case scenarios appears remote, but they are worth considering.

  1. Corrupted title:
    Some have speculated that the legal transfer of the mortgages to the
    trust has been so flawed that investors in RMBS face the risk that they
    don’t even have good title (i.e., ownership) of the mortgages. As a
    result, servicers potentially would have no legal standing to
    foreclose. A mortgage that doesn’t allow the holder to foreclose and
    take title to the property and doesn’t permit the lender to enforce the
    borrower’s obligation to pay is worth no more than kindlin’ wood, as
    the saying goes. Thus far – despite a couple of sensational stories –
    we don’t believe “kindlin’ wood” mortgages are widespread. Yes, there
    was the story of the eight-year foreclosure and the foreclosure on the
    homeowner who didn’t have a mortgage, but stories don’t equal
    statistics. Not that we should dismiss all these stories just yet,
    either; after all, mortgage origination horror stories turned out to be
    the rule rather than the exception. If new information reveals far more
    severe impairment in the note (obligation to pay) or the mortgage (the
    lien on the property), things could get a whole lot worse for RMBS
    investors (as well as other mortgage holders and guarantors, such as
    Fannie and Freddie), but at this point the more extreme outcomes don’t
    appear to be in the cards. However, the situation is fluid and we
    continue to consult with attorneys and are actively evaluating the risk
    of material impairment in the ownership of mortgages.

    Relatedly,
    some have questioned the role of MERS (Mortgage Electronic Registration
    Systems), an electronic registry in whose name more than half of all
    mortgages are registered. MERS was established to streamline the
    process of mortgage assignments by having the mortgage assigned in
    MERS’ name so that any time an ownership interest was transferred,
    sellers could avoid the costly county recording process. Some are
    arguing that MERS doesn’t have standing to foreclose (and indeed some
    states have ruled thusly) and therefore foreclosures in its name are
    invalid. Though this may pose a risk, our understanding is that the
    cure for the MERS problem is simply to assign the mortgage to an entity
    that does have legal standing to foreclose (e.g., the RMBS trustee).
    Therefore, we believe that the MERS issue may result in further delays
    to the foreclosure process, but not permanent foreclosure freezes or
    impairments.

  2. Tax issues relating to RMBS issuance entities:
    RMBS are generally issued by an entity called a Real Estate Mortgage
    Investment Conduit (REMIC) that is exempt from federal taxes at the
    entity level provided it satisfies certain requirements. Broadly
    speaking, REMIC rules provide that a REMIC has three months to acquire
    its initial assets and two years to substitute a new mortgage loan for
    a defective one. Some have argued that assigning the note for the
    mortgage loan so long after closing would run afoul of REMIC rules,
    which could subject RMBS deals to adverse tax consequences. However,
    nothing that we have seen so far would validate this concern, and
    opinions published by securitization attorneys recently give very
    little credence to the REMIC tax risks. (For example, see SNR Denton’s
    “Commentary on Transfers of Mortgage Loans to RMBS Securitization
    Trusts,” October 18, 2010, www.snrdenton.com.) 

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centerline's picture

The banks clearly own the legal and political systems.  Nothing, absolutely nothing, that relies on such channels will impair any of the TBTF banks to any serious degree.  PimPco just beating around the bush here - but saying the same thing IMO.

Oracle of Kypseli's picture

I am still convinced that GS will end up buying a major bank on the cheap. If one gets into enough trouble and the stock goes to $1, GS will buy it and unload the bad stuff on Ben.

Go ahead GS make my day. I am short BoA heavily, after that phoney upside on negative news.

That is your playbook isn't it? You can make it happen. Think of all the branches and the cash coming in when everyone will know that the new bank is super-clean of all radioactive decaying fecal matter.

Work your magic. Do god's work. and don't forget... give me a hint on when. I'll be in St. Bart next month. See you there. Marine VHF channel 16

Dr. Sandi's picture

I am still convinced that GS will end up buying a major bank on the cheap. If one gets into enough trouble and the stock goes to $1, GS will buy it and unload the bad stuff on Ben.

Yeah Alex, I'll take "New York Corporate HQ Buildings" for $100.

Thomas's picture

This is very old news (at least most of it). The latest news as that still nobody has gone to jail. Go figure. I am royally pissed off.

rocker's picture

Go to Jail:  Neel Kashkari would be a great place to start.  A real puppet who sucked at GS, the treasury and now PIMCO. He was Hank Paulson's assistant at the treasury to engineer the bailouts for the TBTF Banks and AIG. The same AIG who funneled the dough to GS and all the foreign banks who belong to the Banking Cartel. Round Up Time ?  Please

centerline's picture

The fact that nobody has gone to jail says everything I need to know about this whole mess - and is confirmation that another disaster is inescapable (aside from the obvious stuff like math, LOL).

Hephasteus's picture

Ya. The people who built all the jails and jailed all the people won't go there. I'm schocked. Maybe they know how bad it is? LOL

gwar5's picture

Lawlessness and FUBAR.

The banks will get out of this either through rigged legal wrangling to avoid the political pushback, or they will just blatantly fallback on an executive order to go around the fraud and facilitate the robo-notaries.

Why? A: William Daley, a JPM Corporate Responsibility executive, as Chief of staff.  

MarketTruth's picture

PIMPco bought this junk KNOWING FULL WELL it was crap and then hoping for a putback or some other 'advantage' to make money. i say fuck them (yes i typed that) as they knew what they were buying for pennies on the dollar was junk and their motive was to force banks to cough up.

Thomas's picture

You are absolutely correct. It is even worse: they bought this crap while helping construct the bailout that would result in the Fed buying this crap. Gross is one of the most credible frauds in the game. He gets the Warren Buffett Award for biggest hoser.

AUD's picture

Got to wonder how Fannie can bailout Bank of America & gold is down 30 odd $ in the last 2 days. Maybe Robot is right......or maybe the pot bubbles ever hotter under the lid, like a pressure cooker with its valve blocked.

Rainman's picture

Pimco is up to it's eyeballs in agency MBS with " implied " guarantees. I'd be shakin' the bushes around, too, cause the Supremes could eventually fukkup this implication party real good.  

Logans_Run's picture

Are the Supremes reuniting? Is that even possible since Diana is the only one alive? Oh you meant those other Supremes!

Rainman's picture

yes......the group that doesn't give 2 shits about bondholder rights. The one recently packed up with Obama disciples.....that Supremes.

max2205's picture

Sorry, forget what.

sangell's picture

Suppose you bought a car from the finance arm of the big manufacturers. You made your last payment and, instead of the title to the car, you are given an affidavit prepared by a car repo law firm saying Ford or Toyota doesn't know where the title is, if it was sold or sent to someone else, or what the hell happened to it but you can use this affidavit instead to show you really own the care. Come on, no one would accept that. Yet that is exactly what the banks are doing in hundreds of thousands of cases to seize peoples homes. Why is no one curious as to what happened to all those promissory notes that have gone missing?

max2205's picture

Btw how in the fuck does a defunct agency bailout anyone. For Christ sake!!

Milestones's picture

Gawd Bless Merica, The land of Thiefs and the home of Idiots. Man if this thing lasts til May 2011 I will be amazed.     Milestones

Logans_Run's picture

This guy is a kool aid drinker! It isn't called "cutting corners" it is called "Fraud" and you can't fix "Fraud" you can only prosecute it or ignore it. Flawed procedures my ass? Procedures involve systems for doing things, not fucking decisions to hide the truth! That is called immoral, unethical and fraudulent!

Chappaquiddick's picture

You kinda hope the fucking lot comes crashing in just so they get their utterly deserved comeupence.  They might take the rest of us down too, but it would be worth it - I wan't to see those bastards suffer.

Cdad's picture

More than wanting them to suffer, we NEED THEM TO SUFFER.  There is no confidence in the system.  A bank is a trust...it cannot function without the confidence of depositors and home buyers [mortgage end users].

It has been said a thousand times, and it needs to continue to be said...we cannot recover as long as the same crooks are in charge of the financial system.  Just as Average Joe left stocks in the dust, so too will he leave the banking system during the next leg down, especially when he sees the federal government's liquidity disappearing into the black hole of broken and bankrupt states [he will lose faith in FDIC...and so on]

In all of this, it isn't just a point of law or a point of vengenace.  It is the system...which is currently broken.  Capital will not form in a corrupt and broken financial system.  WE LEARNED ALL OF THIS ALREADY DURING THE GREAT DEPRESSION!  For fucks sake, this isn't breaking news.

rocker's picture

New Rules: 'it cannot function without the confidence of depositors and home buyers' .

Yes they can:  they just need 'the Bernanke'.   He is now: "The Monetizer"

Cdad's picture

For now...yes.  But you know as well as I do, the system will require proper capital formation.  The Banana republic eventually fails, and so my point remains...but I hear ya and probably feel exactly as you do.

Lapri's picture

How do you fix a corrupted title? Bank sold mortage to the REMIC without transfering note or mortgage/deed of trust, the REMIC issued MBS which in fact was not backed by mortgages. As far as I know, that has been the rule, not the exception. How come FRAUD is something "fixable"? Servicers don't have the standing, neither do the REMICs/investors.

Buck Johnson's picture

It's because the banks and the fraudsters got sloppy and arrogant in what they where doing and didn't even think about the little things like this.  When you are allowed to steal and have a license to steal essentially, you tend to think that the rules don't matter.  Why dot the eye's and cross the t's when your robbing someone or conning someone?

Oh I forgot, what in god's name is PIMCO doing.  They have to know being insiders that you can't say things or do things that will upset the apple cart.  The only reason I can come up with is they are trying to set up an alibi for themselves and the company.  Gross of PIMCO knows that what the fed is doing is just delying the inevitable, and he wants to get out front so when the whole thing implodes and people go nuts he can say I wasn't part of this.

Things that go bump's picture

That is not going to do him any good if the mob catches him.  They'll stick his head on a pike and march around with it like they did with de Launay.

Dr. Porkchop's picture

"Show me the note, motherfucker!"

rocker's picture

This has to be the most responsible post by ZH today.  Thanks ZH.  Meanwhile, we learn that the new Congress will stop spending. LOL

bania's picture

any chance we can roll this back to the "last known good configuration"? say, 1911?

JR's picture
The first quarter of 2011 is expected to be a see an avalanche of home foreclosures because of the delays and confusions in mortgage processes, primarily attributed to robo-signing.  The public reaction to this massive fraud is still to come as lawsuits, title disputes and all manner of corrupt revelations take place.

 Jim Willie, CB, on October 27 this past year in Imminent Big Bank Death Spiral Means Gold Price Will Sky Rocket, reasoned: “One might wonder if any potential criminal fraud was avoided in the mortgage industry during the last decade that saved a few bucks and added to bank profit.

Continued Willie: “The mortgage & foreclosure scandal runs so deep that ordinary observers can conclude the US financial foundation is laced with a cancer detectable by ordinary people. The metastasis is visible from the distribution of mortgage bonds into the commercial paper market, money market funds, the bank balance sheets, pension funds under management, foreign central banks, and countless financial funds across the globe. Some primary features of the cancerous tissue material are mortgage bond fraud, major securities violations, absent linkage to property title, income tax evasion, forged foreclosure documents, duplicate property linkage to single mortgage bonds, NINJA (no income, no job or assets) loans to unqualified buyers, and more. In fact, more is revealed it seems each passing week toward additional facie to high level and systemic fraud. The world is watching. The growing international reaction will be amplified demand for Gold, from recognition that the USDollar & USEconomy have RICO racketeering components extending to Wall Street banks and Fannie Mae mortgage repositories.

“The centerpiece question, when the US bond fraud is coupled with European sovereign debt distress, comes down to WHAT IS MONEY? The answer is Gold & Silver and not much of anything else…”

http://www.gold-eagle.com/research/williendx.html

Lest we forget…

Drag Racer's picture

I could not read past the second section. What a complete lack of accountability calling fraud a flaw.

Atomizer's picture

Bill was on CNBS today. Erin asks, stocks or gold. Bill replies, stocks.

Then Assclown Cramer pipes in to inform Erin, he cannot talk about gold, it's another revenue stream for Bill. Conflict of interest indeed.

The media circus is out of control.

 

blindman's picture

states budget collapse to coincide with states rights

and fed conflict over robosigning.  hmm. 

"..  whole fraudclosure issue will be very soon completely forgotten."

what was the problem? 

Jake3463's picture

PIMCO will get a payment on PAR for assets worth 0 from the Federal Reserve and told good boys and BAC will reach new all time highs in stock as everyone realizes there isn't a bad behavior that Barack Obama won't reward.

 

Next up, every teenage girl who gets knocked up by a homeless person gets $100,000 

huckman's picture

Holder-in-due-course protections-  an't it a bitch.