THE PROBLEM WITH PRINCIPAL “REDUCTION” VS PRINCIPAL “CORRECTION”

COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary

While Wall Street has us all thinking that this is so complicated that it can never be unraveled, the reverse is true. If the homeowner was the victim of a crime or misfeasance or malfeasance, then the homeowner has every right to restitution and redress of his grievances. If the homeowner was treated fairly and there were no material violations of the Federal and state lending laws, then there is no restitution or redress, because nothing bad happened. Anyone opposed to this plan of action is taking a position against our centuries old system of common law, statutes and procedural due process.” — Neil Garfield

The problem is that the Courts are looking at policy instead of legal precedent. The pretender lenders are doing everything they can, and doing it successfully, to make sure that the Court never considers or hears the factual question of whether the homeowner was harmed by a wrongful act committed by some or all of the people at the closing of the loan. This isn’t magic or rocket science. If the wrongful act occurred we all know that the law requires the wrongful actor to be punished and the victim is to be made as whole as possible given the reality of the circumstances.” — Neil Garfield

EDITOR’S ANALYSIS: The Washington Post editorial below hits the nail on the head as to the political and legal problems associated with principal REDUCTION. Where does it end? The current plan being discussed is too little, too late and carries political liability equivalent to a third rail. It also is probably not legal.

And THAT is why words make all the difference. Principal REDUCTION stands for the proposition that we are going to arbitrarily pick a number of people and reduce the balances due on the amount demanded, as evidenced by the promissory note. I see nothing but problems in such an approach. The principal problem is that it does not address WHY lowering the obligation from the amount stated on the promissory note is necessary or proper?

On the other hand principal CORRECTION stands for the proposition that the amount demanded is not the right amount and that we are going to correct it to  assure that it matches up with reality. There is no arbitrary or political decision necessary. The only basis for doing it would be that the amount stated on the note is wrong, or was procured by fraud, or some other long-standing legally recognized doctrine of law in which the borrower is the victim who has suffered damages that require redress.

If the Obama administration wants to propose a program of principal correction, it can do so by rule or regulation, just as the Federal Reserve can do in Reg Z. Given the fact that table-funded loans (i.e., all securitized loans for practical purposes) are improper and that the appraisals were false along with other violations of underwriting standards relied upon by homeowners and investors, they only need to state that upon proof of one or more of the violations of the consumer’s rights to disclosure and fairness, the terms of the obligation shall be adjusted to reflect terms of the transaction proposed to the borrower at the time of closing as opposed to the deal claimed by the pretender lender now.

If the mortgage is legally invalid and requires reformation or a substitute to make it valid, then the party seeking protection under the terms of the alleged mortgage must negotiate terms with the homeowner, same as any other case where such things have happened.

As in all other cases where such things have occurred before the latest mortgage foreclosure rampage, these things are self-evident if taken on a case by case basis. In some cases, the property will be foreclosed by a party who is in fact the creditor and has the right to do so. In other cases there will be adjustments to the terms of the obligation which might include a correction of principal (where the appraisal was inflated), interest rate (where the rate was not properly disclosed), term where the “reset” was not properly disclosed etc.

While Wall Street has us all thinking that this is so complicated that it can never be unraveled, the reverse is true. If the homeowner was the victim of a crime or misfeasance or malfeasance, then the homeowner has every right to restitution and redress of his grievances. If the homeowner was treated fairly and there were no material violations of the Federal and state lending laws, then there is no restitution or redress, because nothing bad happened. Anyone opposed to this plan of action is taking a position against our centuries old system of common law, statutes and procedural due process.

The problem is that the Courts are looking at policy instead of legal precedent. The pretender lenders are doing everything they can, and doing it successfully, to make sure that the Court never considers or hears the factual question of whether the homeowner was harmed by a wrongful act committed by some or all of the people at the closing of the loan. This isn’t magic or rocket science. If the wrongful act occurred we all know that the law requires the wrongful actor to be punished and the victim to be made as whole as possible given the reality of the circumstances.

LLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLL

A questionable plan to aid underwater homeowners

THE U.S. ECONOMY can’t truly recover until the housing market revives. Yet recent data indicate that prices, already off an average of 30 percent from their peak in 2006, have still not touched bottom. Lending conditions are tight, and mortgage rates are ticking up again. Nearly a quarter of mortgage borrowers are “underwater,” owing more than their houses are worth. Massive federal assistance – $1 trillion in Federal Reserve mortgage-bond purchases; dramatic expansion of Federal Housing Administration (FHA) loans; an Obama administration push to modify existing home loans – has slowed the collapse but not, apparently, ended it.

What more, if anything, should be done? The latest administration idea is to use the two government-controlled mortgage-finance firms, Fannie Mae and Freddie Mac, to help underwater borrowers. Under the plan, Fannie and Freddie, which back about half of all U.S. home loans, would identify creditworthy borrowers who are underwater but still current on their payments – and then turn their loans over to the FHA, which would refinance them in return for a write-off of at least 10 percent of the unpaid principal balance. Though the administration notes that this is no panacea, officials argue it could make a significant difference to between 500,000 and 1.5 million borrowers, reducing their debt and their risk of eventual foreclosure. Fannie and Freddie would absorb losses from the principal writedown, but proponents of the plan argue that Fannie and Freddie would be even worse off if foreclosures occur later – and the Treasury, which is covering the two entities’ losses, would be on the hook either way.

The entities and their regulator, the Federal Housing Finance Agency (FHFA), are cool to the idea. In addition to the threat to Fannie and Freddie’s already disastrous bottom lines, an obvious drawback is moral hazard: If government starts paying off some people’s debt principal, what’s to stop others from demanding the same break? Preventing moral hazard, of course, limits any plan’s impact. Previous loan-modification efforts also have attempted to target that elusive cohort of distressed-but-capable borrowers, with disappointing results. Analysts at Credit Suisse recently described the potential benefits of the administration plan as “more symbolic and psychological than fundamental.”

Republicans in Congress have started to push back as well. On Monday, the incoming chairman of the House subcommittee that oversees Fannie and Freddie, Rep. Randy Neugebauer (R-Tex.), published a letter to FHFA noting that “the program targets performing loans” and asking “why it would be in the best interest of the U.S. taxpayer for Fannie and Freddie to write down principal on these types of loans.”

Mr. Neugebauer wants a public report detailing the potential costs of the program. More transparency might be a good idea before Fannie and Freddie proceed. Given the mixed results of past loan-modification schemes, a formal public statement of the potential costs and benefits of the latest one doesn’t seem too much to ask.

18 Responses

  1. @ANONYMOUS:

    I know that to wrongs don’t make a right. I’m just saying that they (politicians who supposedly represent OUR interests) should have thought about “moral hazard” at the time of the bailout.

  2. Servicers are acting for themselves (as a debt buyer) or for other debt buyers. Debt buyers make a profit by purchasing (or by swap contracts) non-performing loans at steep discount – and then selling the related property at a profit to the purchased/swapped (steeply discounted) non-performing loans they purchased.

    Bank who own servicer division subsidiaries are covering the fraud. Other servicers who are not bank owned — just do whatever they please.

  3. Here is an example case showing a glaring lack of incentives for servicers of securitized mortgages to modify loans. In fact, such servicers have every incentive NOT to modify loans in the pool, as they would have to buy back any modified loan at its (inflated) original value.

    http://bryllaw.blogspot.com/2010/12/securitization-case-showing-financial.html

  4. Anonymous, I appreciate and agree with your steadfastness as it relates to the fraud vitiating all that went before. All this talk of modifying mortgages, principal reductions, lowering interest rates, it’s simply more scam added to the previous scam.

    And I believe we’ll see more talk of this as banksters start to see their fraud exposed more and more to the light of day. Holding on to a fraudulent agreement and reducing the payment owed by the homeowner will seem like a good deal to these alleged lenders as they’re going down in flames.

    Fraud decimates agreements. It’s like apologizing after mortaly wounding someone….the damage has been done, and the apology is disingenuous to say the least.

    My New Year’s resolution is simple….lose 10 pounds and overturn the oligopoly that has it’s boot on the heads of Americans in every state of our once great union. Should be easy.

  5. 3rdborn

    Alan is correct –principal reductions are common on commercial loans.

    What would it accomplish?? Maybe keeping foreclosure fraud victims in their homes!!!. How can foreclosure victims of fraud possibly be accountable for a inflated loan on an inflated property – procured by fraud?? And, debt buyers are making a nice profit on the now cheap loans they buy — and then sell the property. Is this fair??

    You write — “the only “good” aspect for those underwater is that they sell for 30% less, then they buy for 30% less–if they can clear their mtge to sell”
    Yeah — if they can clear their mortgage to sell — and if they still have good credit.

    All they are talking about here is a 10% principal correction for homeowners who are underwater — BUT ARE PAYING.

    We need to provide restitution to foreclosure victims. This was a bigger Ponzi scheme than Madoff’s. And, investor who withdrew from Madoff is providing billions in restitution to victims.

    Time to get banks (I agree) to provide restitution — and get profit gauging debt buyers —- out of the picture.
    .

  6. Dear Mr. Pulatie,

    I do appreciate your candor and your interest in this matter. I used to own a Mortgage, Real Estate and Closing firms in VA, MD and DC until 2005, when I sold them, with licenses in DC, VA, MD, FL, PA, MN, NY, NJ, TX, CA, and other 20 states. As a Mortgage Broker we had the Wholesale Bankers account executives siting at each of our loan officers desks telling them what the underwriter wanted to see. They were the ones coming down with the guidelines and the ways and means to push the cases through.

    All the loan applications I have since looked in both the mortgage company and the settlement company since 2001, have subtle but very powerful variations and that rendered the capacity of the borrower to fight back at the table.

    Most loans were portrayed on the loan application as being fully compliant, most disclosures present themselves as such, the L.O. and the Wholesale Lenders had total control of the transaction. In most cases the aftermarket or secondary market operators, aggregators, securitizers, investment bankers such as Lehman Bros, and outfits like countryfraud and Green pint just to make it simple, made the final requirements for funding at the table. Most of the changes and requirements were met without the knowledge and approval of the borrowers.

    The borrowers had no idea that I as a broker was getting paid a fee by Indymac for closing as many deal with them as we could, under very specific programs. Same thing happened with loans from First Magnus Financial, not even the Loan Officers knew about these commissions paid to us the brokers. Most wholesale conduits and investment bankers controlled the secondary market. None of the fees, commissions and under the table payments made it into the TILDS, and the true creditor was never disclosed to the borrowers either.

    almost 95% of all the loans that were funded under this scheme are fraudulent, non compliant and illegal from their inception, even from the moment the client called and talked to the LO for the first time, since any and all info given was misleading, incorrect and totally flawed.

    I would venture to say that it is no serendipity that over 65,000,000 American got securitized loans, that MERS is on the deeds of trust and mortgages, and that even if they did do their homework and were conservative, paid a 20% to 30% down payment, their loans are a total fraud.

    As a Mortgage broker we were also kept in the dark about a great deal of things and we were only privileged to the information that actually mattered to us at the time:

    underwriting criteria, conditions for funding and where is the check.

    The Title companies got for the most part their instructions from many different players and the closing files are a treasure trove of information.

    There is such a variety of entities, bank accounts, individuals involved that will surprise many. Sometimes the closing instructions had to be changed because from the time the loan commitment was given to the borrowers, the initial parties had already sold the loans to some other players. Some documents were required to be sent one direction and some to other players.

    The musical chair game started long before you went to the table.

    Remember, Wall Street is big at making money using other peoples’ money. They went to the investors with a prospectus, meaning a prospective investment, they got the money from the investors and they told the investors that the loans had already been made and that the notes had already been transferred,, while MERS in their rules and recommendations told the bankers to send the notes to the servicers no to the trusts. You see these banksters were from day one acting as criminals at both ends of the transaction.

    While auditing my own loan file I was able to find so many discrepancies that I am suing the people who were involved as well. The problem is that as long as we still try to play nice with the banksters, they will continue to play dirty with all of us.

    Just think about it, 85% of all mortgage loans are being collected through servicers posing as banks ( Yes, the largest are BANKS, but acting in the capacity of a collection company). So if we know that, we must also asume that 85% of all loans are or have been securitized. Our original obligation, promise, has been modified without our authorization. They did tell us at the table if they sold all the loans or not, and that they did sell the servicing rights. They never disclosed to me, that they were going to parse out my monthly payments and that my promise to pay was going to be used in a criminal enterprise.

    How can your in all fairness deal with your mortgage troubles if your obligation is tied up in so many side contracts and agreement of which you were fully unaware that now that you want help, the parties in the middle first measure how they can make money of your tragedy and then lie to you until they reap their profits.

    Our congress is sold out, our president is just completely incompetent and our courts have become whores to the highest bidder. And you expect for each one of us to sit down and take it without a fight and that we are getting a free house, non sense, they committed fraud and crime must not pay!

  7. What is the world would this ever help? Prices have gone down +/-30% (not 10%) , so how will that cure the homeowner? Everyone knows that real estate values are cyclical, so every homeowner is to be restored every time the NWO creates a recession? The Fed Gov. is BROKE, so how will this be paid for? The only “good” aspect for those underwater is that they sell for 30% less, then they buy for 30% less–if they can clear their mtge to sell.

    We MUST GO AFTER THOSE WHO CREATED AND CAUSED THIS RECESSION BY MANIPULATING THE HOUSING MARKET and charge them each with TREASON. And the penalty for TREASON is still by hanging. THEN WE HAVE JUSTICE. FOR ALL.

  8. Principal reductions are a common occurrence in commercial loans. This was brought about after the S&L crisis and is implemented usually through the bankruptcy courts via what’s called a “cramdown.”

    Last year there was legislation to allow bankruptcy courts to “cramdown” mortgages on principal residences. It was shot down.

    I do not understand why it is a “moral hazard” for a homeowner to get a principal reduction and yet Trump uses this technique all the time as a way to renegotiate his commercial real estate contracts.

    btw, owners of investment homes and second homes are allowed to use the BK cramdown on those properties. It is only the principal residences that are exempt.

    Banks and the financial world have dubbed this as a moral hazard only for struggling homeowners – all others get “cramdowns.” That’s a true outrage.

  9. This nightmare is not as complicated as Wall Street wants it to appear. It is just a form of racketeering. They (pretender/lenders) sell you protection when you don’t need any except from the sellers of “protection”. It comes around full circle until the pretender/lenders are getting paid twice or even more. This is going to keep on going until they hit a brick wall. The brick wall is the American People. http://www.challengingforeclosure.com Sirak@challengingforeclosure.com

  10. Patrick Pulatie,

    Fraud negates any contract. If you were one of those lucky enough to have not been defrauded, then you really have no say in how to provide restitution to the borrower victims.

    Gregory Bryl, Esq., — same applies to your comment. And, this is not about paying off “some debt principal” — is about providing restitution to victims by placing them back (made whole) to where they were before the fraud was perpetrated.

  11. “In addition to the threat to Fannie and Freddie’s already disastrous bottom lines, an obvious drawback is moral hazard: If government starts paying off some people’s debt principal, what’s to stop others from demanding the same break?”

    Of course, bailing out the 10 big banks and making them so big that they control 80-90% of financial assets poses no moral hazard. It’s only when mere mortals come into play that moral hazard starts to become relevant.

  12. E. Tolle,

    That is one reason I’d just as soon take money and man-power from the agencies that are failing to regulate and transfer the funds to the new consumer protection agency that the republicans are refusing to fund.

    We need a complete shake-up of the agencies or the people in charge of them. No more conflicts of interest on who is in charge or the ‘lieutenants’ to the power-players in the regulatory agencies.

    If the OCC, FDIC and various other agencies are failing to act, take their authority, responsibilities and funding and move it to an agency that can and will act.

  13. The article asks the question:

    What more, if anything, should be done?

    How’s about somebody waking up Eric Placeholder and remind him that he has a sworn duty to faithfully discharge the duties of his office? And as for all of DOJ, what about your pledge to “provide federal leadership in preventing and controlling crime; to seek just punishment for those guilty of unlawful behavior; and to ensure fair and impartial administration of justice for all Americans”. We’re waiting…..

    And then maybe somebody could walk over to the SEC and remind them that they are the overseers of securities, and that we seem to be experiencing a complete meltdown of same.

    Then someone please slap senseless the idiot republicans on the Financial Crisis Inquiry Commission and tell them that no, it’s not OK to leave out the terms “Wall Street”, “shadow banking”, “deregulation” from their final report, and that it’s near a zero percent chance that Fannie and Freddie are the major culprits in the housing debacle, considering that there are housing bubbles in the UK, Australia, Ireland, Spain, Iceland, Latvia, Canada, and a lot of Eastern Europe as well, just a wee bit removed from Fannie and Freddie’s reach.

    Then to the FDIC, and ask them WTF they’re doing in that their stated mission is to “examine and supervise financial institutions for safety and soundness and consumer protection”. Hey FDIC…is anyone in there? Hello? We need a little protection here!

    Folks there’s simply no end to what else could be done. And there’s no end to the agencies and regulators that could do it. We pay HUGE amounts of monies to fund these agencies. And they’re all just hiding under the covers, protecting the status quo in hopes that they won’t be called to task.

    The truth of the matter is, not only should the banksters be hauled off by the semi load to federal prisons, so also should the people charged with carrying out the above job descriptions….those sworn to protect us who are actually protecting Wall Street and turning a blind eye to the injustices occurring all around us.

    It’s time to get all of the potheads out of prison and replace them with thousands of suit and tie criminals. Absolutely nothing will change until this is done.

  14. Here is the problem with the government forcing principal reductions, or principal corrections.

    BTW, Garfield is trying to change the “playing field” argument by the name change.

    If a requirement to modify loans of underwater borrowers is implemented, it violates the Contracts Clause of the Constitution.

    Fannie and Freddie securitized the loans into bonds. When doing so, forcing principal reductions would result in either having to change the terms of the bonds, which is not likely to happen, or it would result in the taxpayers picking up the tab for the payment streams to continue to the bond holders. If payment streams are changed, then that would violate the Contracts Clause.

    Now, what about the privately securitized loans? Will the Fed attempt to order that? Contract Clause violation again.

    What about the homeowners not underwater? And renters? We would all end up picking up the tab for the others.

    What is “fair” about that?

  15. Neil, again we are going to fast. The homeowner needs to know who the Creditor is and if the Creditor has filed any claims against their insurance to cover for the default.

    As to the Default, the court should first determine if there is a default.

    Forensic Mortgage Audits & Foreclosure Defense and Recovery
    Quiet Title Actions
    john

  16. The old “moral hazard” issue. They have this in reverse — the real moral hazard issue is holding borrowers responsible for fraudulent loans.

  17. This looks like an attempt to come up with a ‘carrot’ to offer the potential strategic defaulters, provided their debt is with Fannie or Freddie.

    I think this shows some of the underlying fear that the administration does not want to yet admit: significant numbers of underwater borrowers may decide to ‘walk’ soon and, with coming waves of mortgage resets nearing, there will also be more forced defaults.

  18. Neil- this whole plan would,of course, require the homeowners/borrowers to verify the amt. due and owing on their “loan”. This is another type of money laundering, except here, it is the nature of the “loans” that are being laundered,rather than a pile of unreported cash. Of course, due to the trust/servicer/GSE relationship, and the fact that no one can actually see who owns what, what they paid or were paid for it, etc., due to incomplete/fraudulent assignments and other filings, maybe it IS money laundering. Just like HAMP- giving the criminals every opportunity to get rid of securitized loans. Destroying the evidence. Giving them a fresh start. Poetic.

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