A Reality Check on Mortgage Modification: NY Times Gretchen Morgenson

Unfortunately, the bill would not only pay institutions handsomely for each modification they do — at $1,000 each, a bounty that could reach $10 billion — but it would also create opportunities for mortgage servicers to profit at the expense of investors who own the loans.
Gretchen Morgenson deserves Kudos for her attempts to disclose the reality of the foreclosure scam that is ongoing. She is correctly identifying the factors that have enabled the predators and thieves to get paid multiple times and now to get immunity for their misdeeds that gave rise to the problems in first place. The sad irony is that few people are paying attention to this ticking time bomb. Title to property or other interests in real estate are strictly within the jurisdiction of STATE LAW. Federal legislators and administrators are blithely ignoring this basic fact. Thus their “New Rules” and potentially new statutes amount to nothing more than rearranging the deck chairs on the Titanic — after it became universally known on board that (a) the iceberg had been hit and (b) the ship was sinking.
Eventually (the lag time is usually a few years) legislators of each state will be faced with the fact that the hidden fall-out from this mess is that nobody who received title or proceeds from securitized loans, foreclosures or modifications did so with clean hands or clear title. Title insurers are already routinely denying coverage resulting from fraud. The free flow of commerce in the real estate market will again grind to a complete halt because nobody will know what they are buying and if some investor or other party is going to show up with the real note, the real mortgage, the real loan and proof they own it. Some forward-looking legislators in various states have contacted livlinglies looking for some guidance on this very issue. On the STATE level, they understand the problem. On the Federal level, they don’t care.
The problem with these “modifications” (actually new loans with new “lenders”) is that the old loans remain unaffected. The existing cloud on title to the property, the mortgage deed (or deed of trust), the note, the obligation, the purported assignments etc. is being compounded by attempts to allow impostors to foreclose on the mortgage, collect on the note, modify the loan, or approve a short sale. The time bomb is title in all states where securitized loans were recorded, foreclosed, modified or sold. The parties (other than the borrower and possibly the Trustee on the Deed of Trust) had actual knowledge that the “lender” was not the Lender, the terms of the obligation were already changed at the time of closing, the appraisal was false, the underwriting was negligent or fraudulent, the Good Faith Estimate was BY DEFINITION rendered neither in good faith nor even close to an accurate estimate, and the list goes on and on.
As Morgenson’s article points out, the dispute not-so-mysteriously remains between investor and other intermediaries (servicers, MERS etc.) because the the investors won’t, can’t and frankly don’t dare to engage the borrowers directly. If they did, they would be assuming liability for treble damages, interest, return of all interest, fees and other costs of closing and all hidden profits that were not disclosed at closing to the borrower. This would result in the perverse consequence of the investor potentially assuming a liability of perhaps $4 for every $1 he/she/it invested. But then again, that is no more perverse than the current intention to leave millions of borrowers owing more than their house is worth because they relied, reasonably, on the representations of the “lender” who it turns out wasn’t the Lender.
Thus the ONLY party who COULD make a claim as a holder in due course (investor) refuses to make that claim. And the ONLY parties seeking foreclosures, modifications and short sales, do not possess ANY financial interest in the loan nor any authority to foreclose, collect, modify or do anything else with the “loan.” This only underscores the more erudite legal theory that this was not a loan at all but a rather a securities issuance scheme in which the issuer was tricked and deceived into signing what he/she thought was a compliant loan and the buyer (of mortgage-backed securities) was tricked into putting up real money for a non existent security interest on an unenforceable note for a dubious obligation.
April 26, 2009
Fair Game

A Reality Check on Mortgage Modification

WE are almost two years into the housing storm and foreclosure floodwaters continue to rise. A record 800,000 homes received a default or auction notice in the first quarter, an increase of 9 percent from the fourth quarter of 2008, according to RealtyTrac. And one in five mortgage loans exceeded the value of the underlying property at the end of 2008, according to data from American CoreLogic Inc.

With figures like these, it’s only natural that many in Congress want to lend a hand to troubled borrowers. And so legislators have put together the Helping Families Save Their Homes Act of 2009, a bill that aims, among other things, to prod financial companies into modifying more troubled home loans.

Mortgage modifications are, in theory, appealing. But in reality, the most popular types of modifications — where delinquent amounts are simply tacked onto the mortgage — tend to default again later with distressing regularity.

Still, pushing loan modifications is a Congressional priority. The bill, which passed the House on March 5, may soon come to a vote in the Senate.

Unfortunately, the bill would not only pay institutions handsomely for each modification they do — at $1,000 each, a bounty that could reach $10 billion — but it would also create opportunities for mortgage servicers to profit at the expense of investors who own the loans.

And who are these investors? Sure, they include big-time speculators and market sophisticates. But because so many of these securities also found their way into portfolios of mutual funds and other professionally managed accounts, individual investors could be harmed if the bill becomes law.

Mortgage securities have covenants — known as pooling and servicing agreements — that define their terms. They require loan servicers to act in the best interests of investors when they make decisions about how much forbearance to give troubled borrowers. This requirement has led some servicers to reject loan modifications. Changing the terms of the mortgages, they contend, can hurt investors by reducing interest payments. Lawsuits could follow.

To deal with this, the new Congressional bill would protect servicers from potential suits brought by mortgage investors if loans were modified. The bill also says that servicers wouldn’t be obligated to repurchase loans from a pool because of a modification.

The danger, some investors and securitization lawyers say, is that these provisions might allow some financial companies that engaged in improper lending — and also happen to be loan servicers — to escape legal punishment.

For example, if the servicer of an abusive loan was also the initial lender, the bill would take that company off the hook for any future predatory lending suits. The safe harbor, therefore, could encourage servicers to modify their most poisonous loans, even if they are not yet near default, just to reduce their legal exposures.

And allowing servicers to void buyback requirements on loans they modify would eliminate any liability for breaches in representations and warranties on the loans they made to investors who subsequently bought into the pools.

“Main Street investors need to know that banks who received their tax money through government bailouts are going to profit again from the safe-harbor loan modification provisions at the expense of their mutual funds, 401(k)’s and pension investments,” said Thomas C. Priore, chief executive of ICP Capital, an investment firm that specializes in credit markets.

Another perverse incentive that the bill would create involves the problem of conflicting interests among investors who own the first mortgage on a property and holders of the second liens. First liens of any kind take priority and are supposed to be paid off before secondary obligations are. But many of the companies servicing loans today own second liens on the same properties whose first mortgages are held by investors in securitizations.

By removing any liability associated with modifying the first mortgage, the banks that own the second liens can expose investors to losses or reduced income while keeping their own interests in the second lien intact.

There is a lot of money riding on this conflict. Of the roughly $12 trillion mortgage market, $1 trillion is in second liens. The bulk of those liens — 70 percent — are held by banks, analysts say. And while the top four servicers administered 55 percent of first liens in the fourth quarter of 2008, they also held $440 billion in second liens.

“In corporate bankruptcies, banks are enforcing their positions as senior lien holders,” Mr. Priore said. “Yet they want mortgage investors who hold first liens to take a back seat to their subordinate interests.”

In addition to these downsides, it is not even clear that a safe harbor for servicers would encourage prudent loan modifications. Mortgage pool documents don’t restrict such changes. Typically, lawyers say, these agreements allow servicers to change the terms of a mortgage loan if it is in default or in imminent danger of defaulting.

Because servicers’ actions are dictated by the best interests of the investors in the mortgage pools, loan modifications that minimize the kinds of losses typically seen in foreclosure should be an easy sell. That may be why investor suits against servicers have been so rare.

James B. Lockhart III, director of the Federal Housing Finance Agency, said that while he has not taken a position on the bill or its safe-harbor provision, servicers can and should do far more in the way of loan modifications.

“There are definitely unintended consequences” to the legislation, Mr. Lockhart said. “We would hope that the servicers use the flexibility they already have in the pooling and servicing agreements and make the modifications they can. That is the No. 1 thing.”

8 Responses

  1. Yeah, That is true but, By this do you mean title insurers do not issue coverage OR don’t honor already issued policies?

  2. Prompt Corrective Action Law, Why isn’t that being enforced? Duh, I forgot …..

  3. Thanks Allan!!

  4. Click on my name to access Bill Moyer’s interview with the author asking the very same timely question.


  5. Where Is Our Ferdinand Pecora?

    BARACK OBAMA has assigned a top priority to financial reform when the new Congress assembles today. If history is any guide, legislators can perform a signal service by moving beyond the myriad details of the rescue plans to provide a coherent account of the origins of the current crisis. The moment calls for nothing less than a sweeping inquest into the twin housing and stock market crashes to create both the intellectual context and the political constituency for change.

    For inspiration, Congress should turn to the electrifying hearings of the Senate Banking and Currency Committee, held in the waning months of the Hoover presidency and the early days of the New Deal. In historical shorthand, these hearings have taken their name from the committee counsel, Ferdinand Pecora, a former assistant district attorney from New York who, starting in January 1933, was chief counsel for the investigation. Under Pecora’s expert and often withering questioning, the Senate committee unearthed a secret financial history of the 1920s, demystifying the assorted frauds, scams and abuses that culminated in the 1929 crash.

    The riveting confrontation between Pecora and the Wall Street grandees was so theatrically apt it might have been concocted by Hollywood. The combative Pecora was the perfect foil to the posh bankers who paraded before the microphones. Born in Sicily, the son of an immigrant cobbler, Pecora had campaigned for Teddy Roosevelt and been imbued with the crusading fervor of the Progressive Era. As a prosecutor in the 1920s, he had shut down more than 100 “bucket shops” — seamy, fly-by-night brokerage houses — and this had tutored him in the shady side of Wall Street.

    With crinkly black hair and flashing eyes, Pecora was an earthy populist who appealed to Depression audiences. He was fond of playing pinochle and was often portrayed with a thick cigar clamped between his teeth. When he was hired for $255 per month by the Senate committee, Pecora was earning less money than most Wall Street mandarins disbursed weekly in pocket change.

    Pecora was meticulous in preparation and legendary in stamina, mastering reams of material and staying up half the night before interrogations, aided by John T. Flynn, an Irish-American journalist, and Max Lowenthal, a Jewish lawyer. As Flynn wrote, “I looked with astonishment at this man who, through the intricate mazes of banking, syndicates, market deals, chicanery of all sorts, and in a field new to him, never forgot a name, never made an error in a figure, and never lost his temper.”

    As Pecora relentlessly grilled the most famous names in finance, the nation relived the 1920s boom in a collective act of national remembrance. The hearings started in a modest committee room, but as the public was swept up in the drama, they shifted to a stately caucus room, illuminated by chandeliers and flashbulbs. As it gained momentum, the inquiry expanded until it shined a searchlight into every murky corner of Wall Street. Pecora exposed a stock market manipulated by speculators to the detriment of small investors who could suddenly attach names and faces to their losses.

    Bankers had been demigods in the 1920s, their doings followed avidly, their market commentary quoted with reverence. They had inhabited a clubby world of chauffeured limousines and wood-paneled rooms, insulated from ordinary Americans. Now Pecora defrocked these high priests, making them seem small and shabby.

    On Black Thursday of 1929, the nation had applauded a seemingly heroic attempt by major bankers, including Albert Wiggin of Chase and Charles Mitchell of National City, to stem the market decline. Pecora showed that Wiggin had actually shorted Chase shares during the crash, profiting from falling prices. He also revealed that Mitchell and top officers at National City had helped themselves to $2.4 million in interest-free loans from the bank’s coffers to ease them through the crash. National City, it turned out, had also palmed off bad loans to Latin American countries by packing them into securities and selling them to unsuspecting investors. By the time Pecora got through with the bankers, Senator Burton Wheeler of Montana was likening them to Al Capone and the public referred to them as “banksters,” rhyming with gangsters.

    With a public aching for retribution, Pecora was playing with combustible chemicals, and Wall Street complained that he was destroying confidence. President Franklin Roosevelt retorted that the bankers “should have thought of that when they did the things that are being exposed now.” It was hard for Wall Street to mount a legitimate defense as Pecora pilloried them daily.

    His prosecutorial methods grew questionable when he turned to the mysterious world of private banking, exemplified by the House of Morgan. In implacable style, Pecora badgered Morgan partners into admitting that they had paid no taxes for 1931 and 1932 — an incendiary revelation when the country was undertaking huge public works projects to combat unemployment. That the Morgan men had avoided taxes because of stock market losses was lost amid the hubbub.

    No less inflammatory was exposure of Morgan’s “preferred list” by which the bank’s influential friends participated in stock offerings at steeply discounted rates. The renowned names on the list, including Calvin Coolidge, the former president, and Owen J. Roberts, a Supreme Court justice, shocked the nation with its unseemly association of money and power.

    One Morgan partner, George Whitney, lamely explained that the intent was to safeguard small investors by preventing them from assuming such risk. To which Pecora responded tartly in his best-selling book, “Wall Street Under Oath,” “Many there were who would gladly have helped them share that appalling peril!”

    Such was the furor over the Morgan testimony that Senator Carter Glass of Virginia shook his head and sighed, “We are having a circus, and the only things lacking now are peanuts and colored lemonade.” Seizing on the comment, a press agent for the Ringling Brothers Circus took advantage of a pause in the hearings to pop Lya Graf, a midget in a blue satin dress, on the lap of the portly and surprised J. P. Morgan Jr. The committee chairman, Senator Duncan Fletcher of Florida, pleaded with newspapers not to print the pictures, which only made them rush to do so.

    The photo of Morgan with a circus midget planted on his lap became the signature shot of the hearings, emblematic of Wall Street’s fallen state. An embittered J. P. Morgan Jr. said Pecora had “the manners of a prosecuting attorney who is trying to convict a horse thief.”

    Whatever their failings, the Pecora hearings laid the groundwork for financial reform legislation. By the time they ended in May 1934, they had generated 12,000 printed pages of testimony, collected in several thick volumes. These documents have served generations of historians. Our national narrative of stock market mayhem in the 1920s is largely composed of characters and anecdotes gleaned from their pages.

    Pecora not only documented a litany of abuses, but also paved the way for remedial legislation. The Securities Act of 1933, the Glass-Steagall Act of 1933 and the Securities Exchange Act of 1934 — all addressed abuses exposed by Pecora. It was only poetic justice when Roosevelt tapped him as a commissioner of the newborn Securities and Exchange Commission.

    Our current stock market slump and housing bust can seem like natural calamities without identifiable culprits, creating free-floating anger in the land. A public deeply disenchanted with our financial leadership is desperately searching for answers. The new Congress has a chance to lead the nation, step by step, through all the machinations that led to the present debacle and to shape wise legislation to prevent a recurrence.


  6. “Title insurers are already routinely denying coverage resulting from fraud.”

    By this do you mean title insurers do not issue coverage OR don’t honor already issued policies?

    How can a title insurer, whose issuing agent was party to the fraud, decline a claim, when their policy states they insure the closing and any acts in bad faith taken by the issuing agent?

    One concept I still have trouble getting my head around is the following: even if the holders have been paid in full or multiple times, how does that extinguish the lien they have on the underlying security? Is this a legal or a moral question? How does Payment, Satisfaction, or Accord work here? You gave us an example of a family member paying off one’s mortgage, which transfers (but does not extinguish) our outstanding obligation of repayment from the “lender” to the family member.

    One strategy I saw here months ago is that premised on the contractual requirement for consideration. No contract, transfer, or assignment is valid without consideration.

    Is the lack of verifiable consideration fatal to these? Does it have to be more than nominal consideration?

    What about when a bank merges with another and takes over their assets?

    Are assignees or transferees required to offer consideration AND also record these new transfers or assignments? Are entities like the RTC required to pay consideration, and abide by recording statutes?

    Under what scenarios (statutes, legal concepts) do any parties (e.g. investors) face liability for TREBLE damages?

    No, I’m not from NJ! (“For somebody from New Jersey, you sure have a lot of questions!” ~ Gilda Radner on SNL)


  7. Thank you again for your insight.

    From the NY Times article by Ms. Morgenson: “… The bill also says that servicers wouldn’t be obligated to repurchase loans from a pool because of a modification.”

    – Could somebody address this supposed “obligation” on the part of servicers to “buy back” loans from MBS? This alleged provision of pooling and servicing agreements is being thrown around a lot lately to imply that if the servicers didn’t have ownership of the notes prior to foreclosure, they may very well have it soon enough. I seriously doubt ANY servicers are actually “buying back” any loans from anybody. And I also doubt that servicers even feel compelled to do so when so many have unclean hands…

    Thank you.

  8. Bravo!! Ms Morgenson: Information needs to get to the
    Courts, Governor, Attorney General and all Legislators,
    in New York State about these purported Lenders who are allowed to foreclose on Homes that they do not have standing. The information needs to be given on a daily basis, to the readers/homeowners/public, that
    there is a BIG situation here, with the Mortgage Mess, that should be settled before the economy will start to get better. The Feds are just dancing around the “inevitable”.

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