Principal Reduction Unavoidable: Get Over it

“Reducing the loan’s principal balance is more valuable because it lowers monthly payments and restores equity. Various studies show that having equity also reduces the likelihood of redefault on a modified loan.

It’s not just the moral thing to do. It also would help avoid the spillover effects of the next expected round of defaults. Coupled with high unemployment, a coming surge in foreclosures is likely to further depress house prices. That would hurt an already fragile recovery and, in a worst case, could provoke a double-dip recession.

It would take 100,000 successful modifications a month, starting now, to significantly counter the threat that so many foreclosures would pose to the economy, according to estimates by Moody’s”

January 23, 2010
Editorial New York Times

Here’s How to Help

President Obama promised this week to reconnect to the concerns and needs of Americans who are suffering from the recession. One important way to do that is to help hard-pressed families hang on to their homes.

It’s not just the moral thing to do. It also would help avoid the spillover effects of the next expected round of defaults. Coupled with high unemployment, a coming surge in foreclosures is likely to further depress house prices. That would hurt an already fragile recovery and, in a worst case, could provoke a double-dip recession.

Unfortunately, advance word of coming changes to the antiforeclosure effort are not encouraging.

When the effort was announced nearly a year ago, the administration said it would help as many as nine million at-risk families keep their homes by the end of 2012 — by lower payments through loan modifications, mainly lower interest rates, or by refinancing loans for borrowers who have little or no equity.

Yet recent tallies show that through 2009, only 66,465 loans had been successfully modified, and through last November, 155,700 loans had been refinanced. That’s abysmal. An estimated 2.4 million borrowers are expected to lose their homes this year alone because of joblessness, negative equity and, in many cases, unaffordability as teaser rates expire on adjustable mortgages.

It would take 100,000 successful modifications a month, starting now, to significantly counter the threat that so many foreclosures would pose to the economy, according to estimates by Moody’s

As early as next week, the administration is expected to ease up on the paperwork requirements for a loan modification and to announce temporary assistance — probably low-cost loans or grants — to help unemployed people pay their mortgages. A loan would likely be tacked on to the mortgage, for repayment over time.

Those changes, however, would not correct the program’s biggest flaw: the current preferred way to modify a loan — reducing the interest rate — is of limited use to millions of so-called underwater borrowers, those who owe more than their homes are worth. Reducing the loan’s principal balance is more valuable because it lowers monthly payments and restores equity. Various studies show that having equity also reduces the likelihood of redefault on a modified loan.

Administration officials, however, have been unwilling or unable to persuade lenders to reduce the principal on underwater loans. [Editor’s Note: That is because they refuse to state the obvious. The servicers and nominees and other intermediaries are not creditors, lenders or decision-makers.] One obstacle is that many troubled borrowers have two loans on their home, and conflicts exist between the first and second mortgage holders over who gets how much out of a loan whose principal has been cut. Several months ago, the Treasury Department detailed a plan aimed at resolving the conflicts, but lenders have yet to cooperate.

It is less clear why the refinancing arm of the antiforeclosure program has flopped. But for many borrowers, refinancing may not be worth the cost unless mortgage rates drop and stay low, which is not likely.

Treasury officials say that they continually review the antiforeclosure effort and consider changes. It’s hard to see what they need to convince them that it’s time to restore some equity to drowning borrowers.

18 Responses

  1. Has anyone heard of the omnibus motion to dismiss having any luck in courts? Its kind of pricey @600 buckaroos…

    Is there a case law, opinion, dismissal, anything?

  2. Anonymous, stop apologizing. We’ll read with GLEE anything you put up.

  3. Sorry for my lengthy posts.

    The “true sale” concept was the focus of FASB 166 and 167. Once the market crisis hit, intervention to support the SPVs rendered any “true sale” negated because there can be no intervention under a true sale.

    Also, Mike H. is right regarding REMICs and ninety-day rule. A REMIC is a static fund and no mortgages can be added after 90 days (very limited exception). Many assignments are long after the 90 days and some are not even effectuated to the cutoff date (or 90 day rule) of the REMIC. Even if effectuated, and due to the dissolution of REMIC (violation of “true sale” by intervention), assignments are not valid. The problem is that if the loan is in default, it is no longer a pass-through security held by any trust. It has been removed.

    As a result, assignments presented by foreclosure attorneys in court is probably not the LAST assignment. As discussed, collection rights are sold after the swap is paid.

    Although courts view assignment and sale as the same thing for collection rights. It is not the same thing. In the process of securitization the mortgage loans are SOLD to security underwriters (we never see this sale in the chain), and the cash flows passed-through are assigned. The security underwriter still has the loan on their books (even if concealed by off-balance sheet conduit). Once in default, the loan is charged-off, and is no longer an asset, and the assignment of cash flows is also extinguished..

    Again, the Federal Reserve, in Interim Opinion for TILA Amendment, has emphasized that the creditor is the one who must account for the loan on their balance sheet. It is not investors that have beneficial interests in REMICS, Pass-throughs, or any other security. Question is – who now is accounting for collection rights on it’s balance sheet. Who was accounting for rights at time of foreclosure initiation. How much did they pay for those rights??

    There seems to be much confusion regarding the word “investor.” For beneficial interest in securities one may be called an “investor”. But this investor does not account for mortgage loan on its books. In terms of mortgage loan ownership, “investor” may also be used instead of “creditor.” But this investor accounts for mortgage loan (or collection rights) on its books – that is the investor you want to know.

    Any last assignment recorded is likely NOT the actual last assignment executed. Foreclosure attorneys ignore this because they reason that the default derivatives attach the current owner/investor to the original trust. This is false – as derivatives are not certificates and not securities – and not part of the trust. The default loan is gone from the trust – gone from banks books – and in the hands of some “investor” who saw profit potential in the collection rights to the default loan. This what the government not only concealed, but also promoted to help the banks “clear” their off/on balance sheets of “toxic assets.”

    Finally, Neil is right about sentiment in courts. Going in and asking for a “free house” will harm you. Sentiment in country in not on our side due to media propaganda. I have a long time friend in a prestigious private equity firm. Sentiment is that if anyone gets a principal reduction it is unfair because everyone should then get a principal reduction. People not affected by foreclosure fraud just do not get it. It is always all about “me” – even if they have not been harmed. I do not know how we are going to change this thinking – but if we do not – we will continue to get no help from government and lose in courts. Need a big case, with a judge that grants and enforces full discovery, in order to change the sentiment.

  4. Anonymous,
    Great info–and good to see you back here.

  5. Thanks, Mike. That brings us back to the argument that regulatory “authorities” are not “regulating”.

  6. Dear Used Car Guy,
    An internet buddy bought it and let me take a look at it. It contains alot of ideas I have never seen anywhere else. It is not well written from a writers
    point of view and difficult for a laymen to understand
    but the central premise is that “securitization” rendered the mortgage unenforceable because it
    changed the terms of the Note and mortgage without
    the permission of the mortgagor. The original Note
    is modifiable by the parties by mutual assent. Once
    the Note gets securitized, it is no longer modifiable
    by the parties. By removing this possibility from the
    Note, the contract is materially changed without the
    permission of the borrower which renders the Note
    void and unenforceable.
    He also goes into the “true sale” issue and how
    violation of this requirement could result in a loss
    of the tax exempt status of the REMIC resulting in
    double taxation of the cash flows into the REMIC.
    As stated in my article, it appears that many of
    the REMICs violated section 860 of the IRS code
    and therefore owe the government oodles of tax money.


  8. Usedkarguy,

    Yes, I do believe the government is in on the scam too. I say prove to me that they’re not.


  9. Mikey, did you buy that “Omnibus Motion”?

  10. The “true sale” aspect of the transfer of the asset (loan) yields to “surrender of control”, determining whether or not it was a “secured borrowing (liability)” versus “true sale” leading to “gain on sale” (carry value of the retained interest). I read FASB 140-3 5 times, and suddenly remembered why I dropped accounting. The only reason I’m sounding smart is because Maher taught me this.
    Anonymous, the mortgage must be recorded in the land records for it to follow the note and be tied to security (trust). Again, ’33-’34 Act violations, PSA violations. The foreclosure action initiated in the name of the security by the trustee all happens at the direction of the SERVICER (and Originator, in my case Wells Fargo), even though they are able to be held harmless by “holder in due course” law.

  11. Dave, I am not a lawyer, but from research I agree with your position, they can not modify a loan when it is not owner by the servicer or bank, and it is floated in to a MBS pool as many recent court rulings have indicated.

    What makes this so creepy is that all of the heads in Washington who have law degree’s, including BO & Geithner had to have known this when they sold the Mortgage Modification program to the American people, correct? That or the lunatics are running the asylum.

    It was one thing when the sub-prime bubble burst and uneducated homeowners had or did little to defend themselves, but now that the majority of defaults are coming from prime borrowers that are either under employed or out of work totally 2010 will be a whole new ball of wax. Educated and angry middle America, the hardest hit by all of this, has woken up and will fight to keep their homes.

    Class action’s will be the name of the game in 2010. Just my opinion.

  12. […] This post was mentioned on Twitter by Mary Sanders, Michael Reiser, Debbie Woodall, Foreclosure Fraud, CW and others. CW said: Principal Reduction Unavoidable: Get Over it « Livinglies’s Weblog: via @addthis […]

  13. Mike H and anonymous: you are confirming that the FDIC, Treasury Dept., et al are in on he scam. These transactions are conducted illegally without recourse from any of the regulators. Securities and Exchange Commission together with the FDIC should be all over this. The Department of Justice is the last chance for anything to come of this.

    And Maher, for those of us stomped on in the local court, where else is there to go? File a Federal Action naming everybody in the securitization and hope the Judge doesn’t call it frivolous or res judicata? Proving that the loan is extinguished (FASB140-3) requires a judge that is at least open to the thought of something illegal having happened.

    The securities laws we speak of here are supposed to be enforced by who? The agencies in charge are in on the scam. Are these REMIC statutes enforced at all?

    UCC- Can’t assign a note in default, right? We know all this is happening after the fact.


  14. According to Kessler’s “Omnibus Motion to Dismiss” , In order for the Trust to qualify as a REMIC,
    all steps in the “contribution” and transfer process (of the Notes) must be true and complete sales between the parties and within the three month time limit from the Start up Day.
    Therefore every transfer of the Notes must be a true purchase and sale, and, consequently the Note must be endosed from one entity to another and deposited in the Trust within 3 months. He cites
    Section 860 of the Internal Revenue Code to support this contention.
    In most of the cases I’ve looked at, this never happened. Either there is no endorsement at all, or
    the endorsement is blank. This must mean that
    no true sale ever occurred and the original correspondent lender still owns the Note! If I’m wrong,
    someone please correct me.
    If the above is true, what DID get assigned to the
    Trust? My answer would be, the income from the Note,
    not the Note itself.
    Example, warehouse lender Wachovia (on $140,000 appraisal) lends 96%= $134,400 to correspondent lender (Amnet) at 5%($6720).
    Amnet lends 80%=$112,000 at 6%($6720).
    The income from this transaction is assigned to
    the trust, ie (the $6720). Amnet took a Yield Spread
    Premium of the difference $22,400 and paid 10% of it to the broker as a backend commision ($2,240). None of this was disclosed on the closing documents
    (except for the $2,240 commission to the broker).
    Amnet was 20% owned by Wachovia so theoreticly
    $4,480 got kicked back to Wachovia (ie 20% of the YSP). This shows why the big warehouse lenders
    used correspondent lenders to actually make the loans to the consumers, instead of making the loans
    directly. (ie the kickback of part of the YSP).
    It also shows why the Trusts can not come up with
    Note, namely, there never was a “true sale” of the
    Note, only an assignment of the income from the Note. The original Note remains the property of the
    correspondent lender, which in many case went out
    of business completely and may have never had a
    license to make mortgage loans in the first place.
    The original Note would be evidence of this violation
    of the law, which would render the Note unenforceable
    under the “clean hands doctrine” of equity. Also, the
    original TRUE Note, was the one between the warehouse lender and the correspondent lender, so there must have been “two Notes”. One legal, and the
    other illegal.
    But the bottom line is that the Trust has no standing
    to file a foreclosure action because there never was a
    true sale of the CONSUMER NOTE and the Trust does not own THIS NOTE, only the income stream from the Note.

  15. Dear Mr. Garfield:

    I have watched your tapes (Assignment & Assumption Agreements), and although you are a lot more eloquent and smarter than me, I have been studying the issues you discuss for some time. Over this time, I have read many Securities and Exchange Commission documents and spoken with the SEC. There are several issues that I feel need to be looked into in more detail. If I am wrong, please let me know.

    1) You mention that the “certificates” were not passed on to the “investors.” In almost every SPV – the certificates are sold to the stated security underwriters – with the exception of some mezzanine tranches and the equity tranche. If the certificates are sold to security underwriters, as stated, and a “trustee” (understand this party may change) goes into court as “XYZ Company, as trustee for certificate holders of ABC asset-backed trust” – then isn’t the certificate holder the security underwriter themselves – at least for the named trust even if subsequent CDOs and squared CDOs were written against the original SPV trust conduit. And, are not these the very same off-balance sheet conduits which will be brought back onto the security underwriters balance sheet when compliance with FASB 166 and 167 is completed?? That is, isn’t the Wall Street bank (security owner/certificate holder) the actual lender whose name has been concealed in litigation across the country by the “pretend” lender?

    2) According to the SEC, only current receivables qualify as mortgage backed securities. Thus, defaults/foreclosures are not securities and these loans are removed from “asset” (again, only current assets can be securitized) backed trusts with collection rights “swapped” to default swap holders. Thus, it appears to me that the actual lender is the security underwriter while the loan is current, but at default the loan ceases to exist as a current asset and collection rights are sold/assigned to the default swap holder. In this process, the actual certificate and subsequent security never change hands. The default swap holders do not acquire the note or lien that supported the securitization of the current asset (MBS are derivative securities – derived from the actual asset and subsequent investors only acquire a beneficial interest in a pool of securities supported by the current loan assets). Since the current asset no longer exists, it must be removed from off-balance sheet (or on balance sheet) accounting, and therefore, cannot be transferred or sold or assigned. In effect, the asset loan ceases to exist. But what can be transferred is the right to collection. The party with the right to collection is never identified. Further, the swap holder may assign or sell it’s right to collection to a distressed debt buyer – who will also never be identified. Bottom line, it appears, is that XYZ Company, as trustee for certificate holders (security underwriters) of ABC asset-backed trust, has nothing to do with the loan – or its potential collection- by the time a foreclosure is initiated.

    3) and this may be important to Dave Krieger – Once the distressed debt buyer acquires the “collection rights”, via collection right sale by the default swap holder, the loan has likely been written-down to a value far below the existing loan amount the home owner believes is owed. A loan stated at $200,000 is now likely worth $100,000 or less. This is a problem for loan modifications because if a loan modification is negotiated with a principal reduction, say to $!00,000, and without credit consequence as they are supposed to be doing, a home owner may be able to subsequently refinance the home for an even better interest rate than the modification provides. In this case, the debt buyer would only be paid $100,000 by the finance – and makes no profit on its loan “collection right” purchase. The debt buyer wants the loan at $200,000 – to insure that he makes a $100,000 profit. In addition, a refinance would force identification of chain of title and force the debt buyers identify in order for the refinance to be valid. Since distressed debt buyers are providing some relief to the large banks (security underwriters) they are providing a service that Congress does not want to divulge or stop. This is why loan modifications are few and far between and only temporary in nature – they do not want home owners to escape the obligation of paying the original loan amount or to refinance out of any permanent home modification. Greenspan, after 9/11, emphasized the importance of distressed debt buyers. Problem is – no one regulates them.

    Conclusion, we must not only force the identity of the actual creditor – to whom loan payments were owed when the loan was current – but also force the identity of the current distressed debt buyer who has likely purchased “collection rights.”

    One last point. Securitization is actually an accounting gimick that simply converts whole loans into off-balance sheet securities. Mortgages, according to SEC docs, are not sold to the SPV trust – only mortgage loans are sold. The mortgage liens may be transferred as collateral to be held by the SPV trust – but they not sold to the trust. I understand the legal concept that the mortgage follows the note, but by the time the SPV is set up the note has been converted to a security, again, with certificates sold to the security underwriters. So, does the mortgage also follow the security – since the note was converted to a security? Finally, credit default swaps are not securities but are contracts. So, does the mortgage follow the default swap (contract) from the security which was converted, by accounting, from the note??

    Thanks for all your help.

  16. Quiet Title and Treble damages should be unavoidable.

  17. The pooling and servicing agreement usually prohibits modification. The fact that these guys are all in violation of the recording statutes and UCC law (not to mention the fraudulent originations and over-appraisals of collateral) and the courts allowing them to take the property via foreclosure without proving any ownership interest shows that money and power are winning over civil law and justice being served. The promise “to refinance later” is irrelevant to the original loan.

  18. From my preliminary studies of this article, I wonder whether the pretender lender actually has the legal authority to modify the loan. Once the loan has been sold and securitized, is it not locked in with those terms and conditions?

    I have a case in Kansas City I’m helping an attorney work on. The client is suing Chase Bank NA for predatory lending and violations of FDCPA (Section 807) and FCRA (Section 623). Even though the original lender promised the clients no-cost refinancing prior to re-adjustment of their ARM, when Chase acquired their note they told the clients that wasn’t possible. I believe it is because Chase does not legally own that loan. It was assigned to them.
    You can’t modify something you don’t really own! Isn’t that the point we’ve been trying to drive home here?

    Please comment. I need a legal consensus on this!
    Thanks. Dave

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