Why Regulation is Failing the Mortgage Market

A new report from the Federal Reserve Board identifies the central issues confronting regulators — issues that regulators have avoided assiduously. The bottom line is that the FED knows that it lacks accurate information and knows that it is not confirming information given to it by banks who are now all in the background of lending.

The real information should be coming from small thinly capitalized private entities that serve as sham conduits for loans. Neither the FED nor any other regulator gets any information on those loans which now account for more than 50% of all loans. This presents important ramifications for litigating foreclosure defenses.

The practice, which they detail as starting in the early 1990’s of separating servicing rights from the loans was the beginning. Separating the rest of components through facial warehouse lending to avoid lending laws was the rest of the story and is continuing to evolve today.

Bottom line: everyone knows that the lenders are a sham and nobody wants to anything about it. The authors are raising warning flags about market liquidity as a consequence of using thinly capitalized “lenders” who can’t be held accountable for bad lending practices and whose loans are underwritten by third parties who are never mentioned in the chain of “lenders.”

But it’s what they don’t say that is really scary. Investment banks, who are now commercial banks also, have created a lending industry in which they are the principal players but nobody can or will hold them accountable for their actions.

And those same investment banks are selling off the debts of borrowers so that they too have no liability for defaults. Ultimately you end up with rogue REMICs or SPV’s and an orphan debt in which the only risk of loss is on the borrower who simply does not know that the debt has been the source of profit for everyone in the chain. No losses are sustained because investors keep selling to other investors and the government guarantees the balance.

Warehousing Lending Liquidity Crisis Federal Reserve Board

Practice Note: Government guarantees are paid AFTER all other alternatives have been exhausted. So the question always becomes whether the currently named claimant has any loss, a partial loss, or a total loss. This is especially true in most credit default swaps and similar contracts of “insurance” where the insuror explicitly waives subrogation to the claim.

So the net “loss” rather than the gross “loss” would need to be calculated in most loan foreclosures. I put “quotes” around the wor “loss” because in most cases the named claimant has suffered no loss — and the parties for whom it is serving as conduit have enjoyed a profit regardless of whether or not the borrower pays the debt.

In short if you can move the needle and get the court to accept the question of fact as to the amount of the loss, you might have a winning case despite all appearances to the contrary.

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2 Responses

  1. This is at the heart of the entire issue worthy of an entire show by Neil on this subject alone. This is probably the most confusing part of the whole mess. Good commentary by ANON.

  2. I think I had posted another draft of this article. For those who had a non bank originator, and given that the warehouse lines of credit were abruptly shut down by sudden exposure of the “financial crisis,” it is possible that the collateral was never paid to the warehouse lender by the non bank originator. This would leave the warehouse lender, the large banks, collateral holders to the property -until they dispose of it to someone else.

    Not only that, but because the warehouse lender had to be paid when the non bank supposedly sold the loan to the secondary market, it created a situation that could avoid any true sale to the secondary market – even if the loan was intended to go there. Thus, it created a situation where defaults could be manufactured, and the loan take a direction that no one will ever know. It created a means to perpetrate fraud.

    Ian — by another post, questions why many have a “debt collector” servicer. He is right to question this. And, then the question of warehouse lending becomes even more ominous. Why would there have even been warehouse lending to non banks to begin with? What was the real status of the loans these non banks originated? Why were these loans immediately assigned a debt collector servicer? .

    Thanks Neil for this. It is something I have been looking at for quite some time, and presents very serious questions our regulators have failed to disclose or address. .

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