Magnetar Echoes Livinglies call for Alignment of Investors, Servicers and Borrowers

see Magnetar%20Mortage%20Recovery%20Backstop%20Whitepaper%20Jun09.pdf

Magnetar Mortage Recovery Backstop Whitepaper Jun09

Two things jump out at me with this paper from June, 2009.

First it is obvious that the “real money” investors are defined as those seeking low risk and willing to take lower yield. The fact that they are called “Real Money Investors” underscores my point about the identity of the creditor. Those “traditional” investors are no longer available to buy the mortgage backed securities or any other resecuritized derivative package based upon mortgage backed securities. Legal restrictions requiring the securities to be investment grade would prevent them from jumping back in even if they wanted to do so, which they obviously don’t.

Thus the inevitable conclusion drawn almost a year ago and borne out by history, is that the fair market value of the securities, trading as pennies on the dollar, is reflective of a lack of demand for mortgage backed securities no matter how high the yield (i.e., no matter how low the price).

Second there is a growing realization that the interests of the investor and the borrowers are actually aligned in many ways and that the solution to mortgage modification, principal reduction, and other aspects of the mortgage mess and the foreclosure crisis lies in recognizing certain realities and then dealing with them in an equitable manner. The properties were never worth the amount of the appraisal in most instances and now they are worth even less than they were when the loan deals were closed. The securities were also “appraised” far too high thus creating a giant yield spread premium for the investment bank-created seller of mortgage backed securities.

In my opinion, based upon a sampling of the data available, it is entirely possible that the “true” fair market value of those securities in the best of circumstances is probably less than 40% of the initial offering price. It is this well-hidden analysis that is not getting the attention of the Obama administration and which completely explains why servicers are obstructing modifications under instruction from investment banking intermediaries like the “Trustee”.

Leaving the servicers and other parties as the middlemen “in the middle” to sort this out is another license to steal creating another mark-up applied against both borrowers and investors as the “real money” parties. The status quo is what is causing the stagnation in lieu of recovery. Until everyone accepts basic notions of “real party in interest” and eliminates those who don’t fit that description, the moral hazards will remain and escalate.

As concluded in this paper, either judicial or executive intervention is required to kick the middlemen out of the way and let the light in. When investors and borrowers are able to compare notes and work with each other the figures for both will be enhanced, foreclosures will decline, losses will be taken, and yes it is highly probable that the number of investor lawsuits will proliferate against those who defrauded them.

The lender is identified as the investor in this paper (indirectly) and the party who defrauded them is not some greedy borrower with stars in his eyes, it was the usual suspect — a financial wizard making a sales pitch that was so complex, the buyer basically was forced to rely upon the integrity of the investment banking house for appropriate pricing. That is where the system fell apart. Moral hazard escalated to moral mess.

4 Responses

  1. to: “Fighting Hard:”

    “Names not used for privacy?” Whose ‘privacy?” XYZ Trust 2005-12? Bank of blah blah? Come on!

    No need to be circumspect when you are confronting pond scum.

  2. Just had to add this bit of data from a 10K filing of that darling of GSE servicers, the last paragraph is revealing indeed…. can anyone smell the ommission of fraud here….looks perhaps that they , the rating agencies and all involved perpetrated fraud… but yet are backed by the GSE tax payer entities… perhaps in fact the TARP funds went to pay out claims to the more astute investor…

    Mortgage Servicing Trends

    The historically low mortgage interest rates experienced during 2009 resulted in a significant increase in refinance activity in our Mortgage Servicing segment. Although we experienced a significant increase in loan payoffs during 2009, we were able to increase our loan servicing portfolio by capturing the opportunity for refinance activity in our Mortgage Production segment. In addition to the significant increase in refinance activity, the declining housing market and general economic conditions, including elevated unemployment rates, have continued to negatively impact our Mortgage Servicing segment. Industry-wide mortgage loan delinquency rates have increased and we expect they will continue to increase over 2009 levels in correlation with unemployment rates. We expect foreclosure costs to remain elevated during 2010 due to an increase in borrower delinquencies and declining home prices.

    During 2009, we experienced increases in actual and projected repurchases, indemnifications and related loss severity associated with the representations and warranties that we provide to purchasers and insurers of our sold loans, which we expect may continue in 2010, primarily due to increased delinquency rates and a decline in housing prices in 2009 compared to 2008.

  3. Exactly right!

    “Leaving the servicer and other parties as the middlemen “in the middle” to sort this out is another license to steal creating another mark-up applied against both borrowers and investors as the “real money” parties. The status quo is what is causing the stagnation in lieu of recovery. Until everyone accepts basic notions of “real party in interest” and eliminates those who don’t fit that description, the moral hazards will remain and escalate.”

    Servicer’s have a motivation to default , since any fee they generate is kept by them under “servicing the loan”.

    As well any sane individual in a monetary transaction understands that negotiating directly between parties ends in better results for all. Servicer’s have already gouged the American Taxpayer by receiving billions in TARP funds to implement “modifications”… in simple terms they took the money fraudulently, knowing full well that they had no way or means to modify loan’s.

    So where did that money go exactly? It did not benefit the borrower, did not benefit the real party of interest, so just who did it benefit? Did it go to LPS, MERS, LOGS and any of the other fraudulent documents mills , including law firms to ramp up data and electronic systems to expedite foreclosures.

    It is a known fact that loan servicer’s are not only understaffed but “mitigation departments” are either off shore or staffed with unqualified individuals that are instructed to read from “script”, as in we have not received your documents, even if a homeowner has faxed it in 12 times to their number as instructed.

    Paradoxically in a recent April 2010 “investor call” a darling of the select GSE Loan Servicer’s pledged to investors that they will cut operating cost’s by $100 million over the next 2 years… rather frightening when one considers that their sole and only purpose is to “service loans” backed by the American Tax Payer owned Fannie and Freddie.

    This is yet another prime example of a class action to be brought on by the American Tax Payer…. while the POTUS points fingers and gives hollow reprimand to “servicers”, including GSE servicers, they are bailed out without full accounting or review of how the peoples money has been used to address the crisis at hand.

    Just where did all that money go?

  4. AWE- The good ole fraud attorney foreclosure mill firm in south florida did it again(you know the one) Due diligence pays off. (names not used for privacy)

    1) Fraudster Law Firm Forclosure Mill Filed an assignment of mortgage 3 months after the forclosure filing stating that the orginal lender; ABC lender assigned the mortgage to XYZ Trust 2005-12 on May 18, 2006

    2) I sent QWR’s to the orginal ABC lender. ABC lender said they transfered the loan July 5, 2006 to Bank of BlahBlah. (which is 2 months after the Fruadsters fraudlent assignment of mortgage)

    AWEEEEE. Another fradulent filing by South Florida Fruadster Fooreclosure mill. How can ABC lender say they transferred the loan in July and the Fradster firm state the loan was trasneferred three months earlier…you can’t.

    I am going to sue all parties to enable to get discovovery on this to prove my case with the Trust.

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