BLOOMBERG: Mortgage Crisis Still Unresolved, New Crisis Looming

No two financial crises are ever quite the same. The next one won’t be like the last. But history teaches lessons, and there’s no excuse for ignoring them.

Regulators have done a lot to reform the financial system since the 2008 crisis, but they still haven’t fixed the market where the trouble started: U.S. mortgages. It’s an omission they need to put right before the next crisis hits.

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David Shipley, Senior Editor for Bloomberg Views has hit the nail on the head. While there are some errors in his article, they are understandable.

He’s right when he says that the servicers lacked the necessary incentives and resources and still lack those incentives and resources. But when he talks about “delinquencies” he fails to grasp the fact that those “delinquencies” are based upon a debt that neither the servicer nor its client is authorized to administer.

This failure of perception is understandable. It is difficult to to accept the fact that the debt went up in smoke and therefore no creditor has authorized the administration or collection of the debt. It is challenging to accept the notion that the banks engineered this scheme so they could step in as if they were creditors without actually saying so.

But he gets very close when he says

Private-label mortgages (which aren’t guaranteed by the government) were packaged into securities with extremely poor mechanisms for deciding who — investors, packagers or lenders — would take responsibility for bad or fraudulent loans.

The whole idea was to make it unclear who would be injured by nonpayment of a debt. That was how the banks, as intermediaries, transformed themselves into apparent principals and how entities created the illusion of self proclaimed servicers. Or as Shipley puts it

The parties involved in securitizations became embroiled in legal battles about who owed what to whom — litigation that goes on to this day.

So even amongst the principals of the scheme coined as “securitization fail” (Adam Levitin) there is no agreement and in fact fierce court battles as to the identity of the injured party. In other words their pleadings in court constitute admissions that are inconsistent with the pleadings in foreclosure cases. If there is no identified party with injury then there is no legal standing.

What is clear now is that the money taken from investors was not used to fund REMIC trusts, that the REMIC Trusts never bought any debts and in fact never bought any of the dubious paper that was issued in connection with origination or transfer of the “loans.” Those investors were largely not becoming beneficiaries of the trust; instead they were becoming creditors of the trust.

Knowing that, investors are stuck — if they blow the whistle on the diversion of their money into a completely different “investment” than the one they thought they were buying, they are undermining their potential claim based upon the “security” offered by the mortgages. And they are undercutting the value of the certificates they bought. That is what threatens a large segment of the shadow banking market.

The fix that Shipley thinks should happen will never come to fruition because the government has been convinced that a fix would eviscerate the shadow banking market where derivatives are traded. Nobody knows what the outcome will be if that market fails.

But in the meanwhile current policy reflects a decision to let investors and borrowers take the entire brunt of the scheme that ultimately left the banks in solid control and rising profits despite small settlements compared to the amount of money siphoned out of the US economy. So the Federal reserve and American taxpayers continue the bailout by lending support to the false presumption that the RMBS derivatives are based upon mortgage loans owned by a trust.

Shipley narrowly misses the point when he says

Advancing payments to investors when loans go delinquent — a core responsibility of servicers — demands a lot of cash. It also requires ample capital to absorb possible losses on servicing rights, an asset whose value can quickly evaporate if defaults and prepayments eat into expected fees.

Think about it. Why would a company guarantee payments from a third party? Who would take that risk on loans known to be at best fragile? Where is the money coming from to make those payments? Is it really the “servicer.” And if the money is “recovered” as “servicer advances” when the property is liquidated, is the foreclosure really a disguised suit to force the recovery of servicer advances rather than a true foreclosure — contrary to the interests of the certificate holders?

And if Ocwen was actually entitled to receive and expected to receive recovery of servicer advances why would it be teetering on the edge of bankruptcy? The more likely scenario is that subservicers like Ocwen have nothing at all to do with servicer advances. They don’t make them, they don’t initiate them and they don’t collect them. The Wall Street playbook has the real puppet masters hidden behind several layers of curtains. Ocwen, like so many others, is just there to get tossed under the bus to make people happy that they extracted a pound of flesh — except there was no skin in the game.

12 Responses

  1. Roger — that is likely. Although the bulk were refinances, some were purchases immediately converted.

  2. rogerrinaldi: Yes, there is language to that effect. I’d have to specifically look at that portion and I will.

  3. And the FRAUD IN THE INDUCEMENT used to acquire my signature to issue those securities is the misuse of the personal identifying information acquired during the loan application process.

  4. ANON, if this is true, the original placement of my loan into the WFMBS 05-7 (via the EX-99 mortgage loan schedule) was subsequently extinguished and placed into the WFHET 05-2 with another origination date making it a refinance. That fits. The trailing assignments to the trust after f/c, after the first BK filing, and then another for the bankruptcy court (that’s three) are just fake, void documents. Never had a recorded mortgage transfer until 14 months after the f/c was filed.
    Frankly, I’m torn between that theory and the theory that they just created multiple loan accounts using my RES as collateral for multiple secured borrowings.
    Befuddled to say the least.

  5. And, meant — Home owner — not “homo” — Sorry.

  6. Oh — and by the way, servicer advances are separately funded. By what investors? Contract holders? Or servicer themselves?

  7. First, Derivatives are NOT securities. They are contracts which remove loans from the “trusts” – rather than attaching them, or keeping them in that trust. The government’s fear is understandable given the size of these DERIVATIVE CONTRACTS. Nevertheless, homeowners should NOT be the fall guy, or scapegoat, to absorb the fraud. And the contract holder SHOULD be disclosed.

    Second, homeowners became trapped when the crisis was finally exposed. Interest rates were escalating (already high given the “adjustable rate””), and property values plummeted. Underwater — does anyone remember that term? There was no out — forced to pay high rate on an underwater property. FORCED. Or try a “loan mod” — which, maybe (unlikely), came years later, without explanation as to how that loan mod “contract” can even be executed. TRAPPED.

    Third, contrary to media reporting, nearly all of these loans, in supposed trusts, were refinances, and not new purchases — as the author wrongly concludes. Mr. Bernanke made that clear when the crisis was exposed. Mr. Bernanke also stated that only cash flows were passed through — which is typical for a securitization (fake or not) — not the loan itself.

    Fourth, it is insulting to claim that the loans were fraudulent — as an implication that the fraud was on the borrowers end. Borrowers trusted. They provided all accurate documents. It was what happened BEFORE that refinance, and after, by the perpetrators, not the borrowers, that constituted the fraud.

    Dignity has to be returned to the homo owner victims. I trust someday – it will.

  8. very eloquently spoken: “disguised suit to force the recovery of servicer advances rather than a true foreclosure”
    Wish I could get this guy to my hearing next month…..
    It wouldn’t matter though; the judge would believe the bank lawyer who would say he doesn’t know what he’s talking about.
    Poppy, did you find any language in the prospectus that says the servicer can purchase the collateral upon a trigger event of default?
    With these Wells Fargo securitizations, it appears to be common. These are private label MBS wherein Wells was the originator/depositor/sponsor etc etc etc.
    And then we have the WEUNSCH case. Very discouraging.

  9. Wish you long life Mr Garfield

  10. Reblogged this on California freelance paralegal and commented:
    The next mortgage crisis will be much worse than the last one as the bubble has increased to epic proportions.

  11. We need change of laws to get back homes through illegal foreclosures and defective assignments even if they are sold by banks to third party with a warranty deed.

  12. “disguised suit to force the recovery of servicer advances rather than a true foreclosure” — contrary to the interests of the certificate holders?

    That is exactly what this. Looking at the mounds of paperwork I have, reading the pooling and servicing agreement, till I’m dizzy, and scouring the prospectus…it is clear, the servicers are counterfeiting all of the paperwork back to the trust. When in fact, the only thing they may be entitled to is a civil judgment and some fees, maybe? No foreclosure for the servicers…only if they can tie the debt to the faux – REMIC! 99% on this one.

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