Worthless: Mortgage-Backed Securities — Biggest Little Asset Class in the World

By YVES SMITH, NY Times Opinion 10-31.10
  • The trap has closed — and unless the mortgage finance industry agrees to a sensible way out of it, the entire economy will be the victim.”
  • “uncertainty in turn puts a cloud over the value of mortgage-backed securities, which are the biggest asset class in the world.
  • “the International Monetary Fund found that the persistently high unemployment in the United States is largely the result of foreclosures and underwater mortgages, rather than widely cited causes like mismatches between job requirements and worker skills.”
  • “banks who are challenged in many cases do not resume these foreclosures, indicating that their lapses go well beyond minor paperwork.”
  • “the problems in the mortgage securitization market run much wider and deeper than robo-signing,…the rush to speed up the securitization process trampled traditional property rights protections for mortgages.”
  • [LPS] “The firm even offered to create a “collateral file,” which contained all the documents needed to establish ownership of a particular real estate loan. Equipped with a collateral file, you could likely persuade a court that you were entitled to foreclose on a house even if you had never owned the loan….That there was even a market for such fabricated documents among the law firms involved in foreclosures shows just how hard it is going to be to fix the problems caused by the lapses of the mortgage boom. No one would resort to such dubious behavior if there were an easier remedy.

EDITOR’S NOTE: This article is only a sampling of dozens of articles being published all over the world. The inescapable conclusion is that money was thrown around haphazardly and that the right to receive or even handle that money was never documented. People had access to the money because the of tacit understandings rather than proper documentation. The flows of money were divided in so many complex way to so many people and entities that the identification of a creditor in any loan is hopelessly obscured. The attempt by securitization intermediaries to fill that void with fabricated, forged documents has failed. Investors who advanced some $13 trillion now find themselves with no income and no right to receive income. Loan documents with borrowers failed to fulfill their purposes on even the simplest of levels. Obligations of borrowers were lost into an abyss created by the banks. Mortgages and Deeds of Trust are worth less than the fees paid to record them.

BOTTOM LINE: The MBS bonds, synthetic securities and other exotic creatures have no value because they do not entitle anyone to receive anything. The promissory notes signed by borrowers are not, by themselves, enforceable even in courts of equity. The mortgages and deeds of trust, are not legal encumbrances on real property under any laws. The documents — bonds, notes, mortgages, deeds of trust, assignments, endorsements, allonges are all worthless.

We are left with an open-ended obligation of the borrower to an unidentified and unidentifiable creditor who MIGHT have a right to receive money from a homeowner, but only after deductions for affirmative defenses and counterclaims for predatory lending and violations of Federal and State statutes, not to exclude the common law action for intentional inflation of the appraised value of the home.

The only remaining plan of the banks is to get people into legislative office who will pass laws that not only absolve the banks of wrongdoing, but change property law, contract law and the laws governing commerce that have guided our societies through hundreds of years of the creation and changing of nations. This would be possible if nobody was watching. But now, ever watchful for signs of another fraudulent bailout, everyone is watching. If you think this isn’t important, then wait until you buy or sell your next car or house. Better to be angry now than later.

October 30, 2010

How the Banks Put the Economy Underwater

By YVES SMITH

IN Congressional hearings last week, Obama administration officials acknowledged that uncertainty over foreclosures could delay the recovery of the housing market. The implications for the economy are serious. For instance, the International Monetary Fund found that the persistently high unemployment in the United States is largely the result of foreclosures and underwater mortgages, rather than widely cited causes like mismatches between job requirements and worker skills.

This chapter of the financial crisis is a self-inflicted wound. The major banks and their agents have for years taken shortcuts with their mortgage securitization documents — and not due to a momentary lack of attention, but as part of a systematic approach to save money and increase profits. The result can be seen in the stream of reports of colossal foreclosure mistakes: multiple banks foreclosing on the same borrower; banks trying to seize the homes of people who never had a mortgage or who had already entered into a refinancing program.

Banks are claiming that these are just accidents. But suppose that while absent-mindedly paying a bill, you wrote a check from a bank account that you had already closed. No one would have much sympathy with excuses that you were in a hurry and didn’t mean to do it, and it really was just a technicality.

The most visible symptoms of cutting corners have come up in the foreclosure process, but the roots lie much deeper. As has been widely documented in recent weeks, to speed up foreclosures, some banks hired low-level workers, including hair stylists and teenagers, to sign or simply stamp documents like affidavits — a job known as being a “robo-signer.”

Such documents were improper, since the person signing an affidavit is attesting that he has personal knowledge of the matters at issue, which was clearly impossible for people simply stamping hundreds of documents a day. As a result, several major financial firms froze foreclosures in many states, and attorneys general in all 50 states started an investigation.

However, the problems in the mortgage securitization market run much wider and deeper than robo-signing, and started much earlier than the foreclosure process.

When mortgage securitization took off in the 1980s, the contracts to govern these transactions were written carefully to satisfy not just well-settled, state-based real estate law, but other state and federal considerations. These included each state’s Uniform Commercial Code, which governed “secured” transactions that involve property with loans against them, and state trust law, since the packaged loans are put into a trust to protect investors. On the federal side, these deals needed to satisfy securities agencies and the Internal Revenue Service.

This process worked well enough until roughly 2004, when the volume of transactions exploded. Fee-hungry bankers broke the origination end of the machine. One problem is well known: many lenders ceased to be concerned about the quality of the loans they were creating, since if they turned bad, someone else (the investors in the securities) would suffer.

A second, potentially more significant, failure lay in how the rush to speed up the securitization process trampled traditional property rights protections for mortgages.

The procedures stipulated for these securitizations are labor-intensive. Each loan has to be signed over several times, first by the originator, then by typically at least two other parties, before it gets to the trust, “endorsed” the same way you might endorse a check to another party. In general, this process has to be completed within 90 days after a trust is closed.

Evidence is mounting that these requirements were widely ignored. Judges are noticing: more are finding that banks cannot prove that they have the standing to foreclose on the properties that were bundled into securities. If this were a mere procedural problem, the banks could foreclose once they marshaled their evidence. But banks who are challenged in many cases do not resume these foreclosures, indicating that their lapses go well beyond minor paperwork.

Increasingly, homeowners being foreclosed on are correctly demanding that servicers prove that the trust that is trying to foreclose actually has the right to do so. Problems with the mishandling of the loans have been compounded by the Mortgage Electronic Registration System, an electronic lien-registry service that was set up by the banks. While a standardized, centralized database was a good idea in theory, MERS has been widely accused of sloppy practices and is increasingly facing legal challenges.

As a result, investors are becoming concerned that the value of their securities will suffer if it becomes difficult and costly to foreclose; this uncertainty in turn puts a cloud over the value of mortgage-backed securities, which are the biggest asset class in the world.

Other serious abuses are coming to light. Consider a company called Lender Processing Services, which acts as a middleman for mortgage servicers and says it oversees more than half the foreclosures in the United States. To assist foreclosure law firms in its network, a subsidiary of the company offered a menu of services it provided for a fee.

The list showed prices for “creating” — that is, conjuring from thin air — various documents that the trust owning the loan should already have on hand. The firm even offered to create a “collateral file,” which contained all the documents needed to establish ownership of a particular real estate loan. Equipped with a collateral file, you could likely persuade a court that you were entitled to foreclose on a house even if you had never owned the loan.

That there was even a market for such fabricated documents among the law firms involved in foreclosures shows just how hard it is going to be to fix the problems caused by the lapses of the mortgage boom. No one would resort to such dubious behavior if there were an easier remedy.

The banks and other players in the securitization industry now seem to be looking to Congress to snap its fingers to make the whole problem go away, preferably with a law that relieves them of liability for their bad behavior. But any such legislative fiat would bulldoze regions of state laws on real estate and trusts, not to mention the Uniform Commercial Code. A challenge on constitutional grounds would be inevitable.

Asking for Congress’s help would also require the banks to tacitly admit that they routinely broke their own contracts and made misrepresentations to investors in their Securities and Exchange Commission filings. Would Congress dare shield them from well-deserved litigation when the banks themselves use every minor customer deviation from incomprehensible contracts as an excuse to charge a fee?

There are alternatives. One measure that both homeowners and investors in mortgage-backed securities would probably support is a process for major principal modifications for viable borrowers; that is, to forgive a portion of their debt and lower their monthly payments. This could come about through either coordinated state action or a state-federal effort.

The large banks, no doubt, would resist; they would be forced to write down the mortgage exposures they carry on their books, which some banking experts contend would force them back into the Troubled Asset Relief Program. However, allowing significant principal modifications would stem the flood of foreclosures and reduce uncertainty about the housing market and mortgage securities, giving the authorities time to devise approaches to the messy problems of clouded titles and faulty loan conveyance.

The people who so carefully designed the mortgage securitization process unwittingly devised a costly trap for people who ran roughshod over their handiwork. The trap has closed — and unless the mortgage finance industry agrees to a sensible way out of it, the entire economy will be the victim.

Yves Smith is the author of the blog Naked Capitalism and “Econned: How Unenlightened Self-Interest Undermined Democracy and Corrupted Capitalism.”

12 Responses

  1. […] a banker. I gave mortgages to people I knew couldn’t pay me back and made billions of dollar. The mortgages were worthless and could not legally be sold. I packaged the loans into bonds. I sold some of the mortgages five […]

  2. I hold a mortgage which states that for “purposes of recording this mortgage MERS is the mortgagee of record” and the lender is BNC Mortgage Inc. A delaware corp. which exsists under the laws of Delaware Lenders Address is 1901 Main Street, Irvine, California 92614. Who the hell owns my mortgage? Could someone please answer my question. Thank You.

  3. Do not think for 1 second that the “LACK OF REAL DOCUMENTATION “is or was sloppy or cutting corners…not a chance in hell!
    This was to hide the path of $ for the pieces of shit ” investment blankers” The “sloppy corner cutting” is much like “deadbeat borrower” bullshit propaganda the bank msm spouts to hide the extent of the “FORETHOUGHT” required to cook up this ultimate rip-off .

  4. Another informative article by Market Ticker: Foreclosuregate Roundup, 10/31 .

  5. I have a friend in VA who paid off his house. I asked him recently if he got a satisfaction of mortgage doc from the bank. He searched his records and found that the bank sent him a receipt for the payoff amount, and said that the note marked paid in full would be sent at a later date. In the mean time, they told him to use the receipt as proof that he paid in full.

    That was in 2007. He had forgotten all about it until I brought it up. Now he’s in a panic. The more that average Joe 6 pax start scratching at these criminals the better. It’s every single American’s duty to stop paying and start demanding proof of everything.

    Mandatory debt validation and accounting from inception of the loan to date, coupled with proof of wet ink docs should just about do it. Remember folks, by law they are REQUIRED to respond within 60 business days to a qualified written request with an answer to a valid request or problem. They blew off two of my requests, before finally answering the third one with a statement from a law firm that my QWR was too broad. RESPA violations. They also repeatedly slammed my credit report after receiving my QWR’s….also RESPA violations. None of this behavour looks good in court.

    I had informed them, BAC, of a reccurring accounting problem that they were having, repeatedly showing my month after month payments as being late, when I have proof that they weren’t. They considered my request explaining that accounting as being too broad in nature. Believe me, that also will not bode well in court.

    If you google the banking industry and their position concerning QWR’s, you’ll see that they believe that QWR’s are being used by deadbeats to muck up their system. This will not look good in court when valid concerns are blown off repeatedly. Send them now. You can get a QWR template from HUD. If they blow off a HUD document, they’ve truly got problems.

    Death to the Wall street banks. And none too soon! I want to see that brass bull statue on Wall street pulled down just like Saddam’s statue was a few years ago.

  6. Neil, thanks for all you do… have friends that have the means and wherewithal to pay off their minimal mortgage, they are moving and stating a small business in another state, and want to give their home to their children free and clear… THEY CAN NOT GET A PAYOFF DOCUMENT from the “servicer”!!! Which say’s to us all that there is no “CLEAR TITLE” to their property!

  7. pitchfork??

    ….now that you mention it, I do. 2 of them!

    and increasingly ‘angry now’ about the everyday covering up of lies, as Neil so well pens here.

  8. Absolutely right Bill. The majority of all that ails the world would be fixed in short order once this usury is dropped. People could get back to living meaningful lives instead of constantly putting shoulder to the grindstone, all for the sake of fat cat bankers and their counterparts in D.C.

    This de-coupling won’t come without a fight. They have an awful lot to lose, and we have an awful lot to gain. I have a pitchfork, do you?

  9. How do we get people making payments to demand an accounting and that their money is not going to the wrong investor if at all

    Time to file criminal charges against Judges in CA where appropriate.

  10. Why the banks and Fed are scared to death

    If these mortgages are illegal, then the Deeds of Trust/Mortgages against our homes are Null.

    No liens, equals no interest-payments from us anymore – ever.

    ‘No more payments’, equals a wonderful new American habit that they are desperately trying to break. Now!

    Once you or I realize that our homes are ours and not anyone else’s, and we get used to living without that huge ridiculous burden of house interest payments, as many of us on this site have, then I can actually afford food and gas again and family time again.

    Whoops.

    The Feds and banks fund their massive control of their socialistic society with the incredible cash flows from these payments, and of course their yachts, huge pensions, cronyism, ‘legal’-bribes, corporate-contracts, campaigns, and empire building, with these monies. Over our lifetimes, they have falsely acquired pretender liens upon the entire world’s assets with these funds.

    Once the gig is out to the public,

    1. that the mortgages are indeed null, and families can actually survive a depression for years without house interest payments,

    2. then the Politicians’ cash-flow will drop 70 to 1.

    This is why the Banks, the White House, and even some judicial are so ruthless to everyone that fights their unlawful mortgages. If any of us are successful, the rest of America will obey these same laws we discuss on this website; and follow suit.

    The Feds, the Pretenders, and the Politicians are spending more money and bailouts, to fund lawyers and agencies against each one of us, than the entire value of our entire mortgage is worth. Why?

    The uninterrupted HABIT of those never-ending payments is crucial, as a example to others!

    The Feds and the Banks MUST have this continuous, huge, inflated payment flow from the Ponzi interest – to continue to control society. This results in both spouses working 2-3 jobs against phony inflated valuations.

    2-3 jobs causes more unnecessary spending, more wear and tear on our cars and bodies, and of course, more percentage-based transaction taxes on that additional spending to maintain that wear and tear. In 1950, one spouse worked one job to make it.

    In other words, no rest Americans!

    The Fed and states could care less how illegal, inflated, unenforceable, robo-signed, fraudulent, covered-up, kited, or null these mortgages are. They want the old HABIT of payment flows uninterrupted, regardless. Even if this habit, is now called ‘rent’ to someone else (who is again paying them their mortgage interest).

    Banks and the Fed are absolutely desperate to return to this old HABIT.

    This is why it seems we never get justice ‘with the laws’.

    There is only one hidden, overriding ‘law’, one grandiose ‘public policy’ – Make Ponzi-based payments upon Ponzi-based principle, until you die. Then, let your children automatically pick up where you left off.

    Government and mega-corps would get 70 times smaller tomorrow, if they didn’t.

    Freedom of time, stability, enterprise, and more family-time would replace them in the USA!

  11. Neil, you (& Ives) said it so well.

    “The documents — bonds, notes, mortgages, deeds of trust, assignments, endorsements, allonges are all worthless.

    Be angry now…!

  12. […] this link: Worthless: Mortgage-Backed Securities — Biggest Little Asset Class in the World […]

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