A Different Direction for the Foreclosure Mess?

Posted by: Bruce Krasting Post date: 10/10/2010 – 22:36 I have to believe this is happening. The only question is,”How much?” FORECLOSUREGATE AND OBAMA’S ‘POCKET VETO’ Posted by: ilene Post date: 10/10/2010 – 23:09 Then they got cute and produced either the actual note, a copy of the note or a forged note, or an assignment or a fabricated assignment from a party who at best had dubious rights to ownership of the loan to another party who had equally dubious rights, neither of whom parted with any cash to fund either the loan or the transfer of the obligation. . . . Navigation PollsDonate To Zero HedgeRecent posts Shopping cart View your shopping cart. User login Username: * Password: * Create new accountRequest new password Zero Hedge Reads Angry BearBearish NewsBoom Bust BlogChina Financial MarketsChris Martenson’s BlogContrary InvestorCoyote BlogCredit WritedownsDaily CapitalistDaneric’s Elliott WavesDealBookDealbreakerDr. Housing BubbleFalkenblogFibozachiFund My Mutal FundGains Pains & CapitalGlobal Economic AnalysisGonzalo LiraImplode-ExplodeInfectious GreedInvesting ContrarianJesse’s Café Américain Market FollyMax KeiserMinyanvilleMises InstituteNaked CapitalismOf Two MindsPension PulseShanky’s TechBlogThe Daily CruxThe Mad Hedge Fund TraderThe Market TickerThe Technical TakeThe Underground InvestorWall St. Cheat SheetWashington’s BlogWealth.netWhen Genius Prevailed Home Bruce Krasting's picture Submitted by Bruce Krasting on 10/10/2010 22:36 -0500

CRAPFederal Deposit Insurance CorporationMortgage LoansRealtyTrac

I keep thinking of the mortgage foreclosure story and wondering, “Where will this go?” The problem is that this question is very hard to answer. One possible direction.

According to Realtytrac the number of actual repossessed properties in August was 95,000. They also have reported that in the second quarter the number of repos was 248,000. Call it a million over the last 12 months. “How many of these are now tainted” is a central question. But for me the more significant issue is, “Why were they were tainted”.

From what I have read it would appear that this has been administratively blown up due to the volume of foreclosures. No one in the housing/mortgage story really wants to do a foreclosure. It is the most costly outcome. Not only does the lender lose principal and interest there is a big cost to close on a homeowner. So the lenders, lawyers, servicers and document houses all tried to push the process through a hole that is too small. Along the way they hired bozos to do the work and the cut every corner they could to close a file.

That sounds bad, but it does not worry me too much. A probable outcome would be that most of the closed deals are either properly documented or they deal with an original borrower who was so far underwater that the last thing he/she would want to do is restart the process with the old IOU’s. To be sure there is going to be a percent of deals that will result in some form of restitution to the original obligor. That will be a loss to all of the players. But it is not going to bring down the house.

There is a great deal of difference between a lender who is facing a loss and cuts corners to minimize the loss and fraud that occurs when the same tactics are used to make money. And that is what I fear has happened. Should that be the case we are looking at a very big hole developing in the mortgage space.

Assume there is a home that has a $250,000 mortgage and the loan is in default. Now assume that the owner of that mortgage wants to sell it. Assume further that the mortgage is bundled up with a bunch of other busted mortgages and sold at a deep discount from par. Say the price of the loan package is 40 cents on the dollar. Now finally assume that the property can be sold at an auction level price of $175,000.

If you add up all my assumptions you get a situation where the mortgage is purchased for $100k (250*.4) and the actual value of the assets securing the mortgage is worth $175k. That 75k for a “flip” is big money if there is a lot of them to be done. And as Realtytrac says it is a million or so a year.

If you’re reeling from all those “assume this” crap I was selling don’t be. What I describe is happening in very big numbers. Busted whole mortgage loans are being packaged and sold to investors to the tune of at least $10b a month. Some of the biggest players on Wall Street are in the game of arbing the sellers. Packages are regularly being put together and sold. Who are these sellers? A lot of the banks. The big ones have sold large amounts, the smaller banks have sold regional portfolios at distressed prices. But by far and away the biggest sellers that have created the “profit window” all reside in D.C. A big seller has been the FDIC. Fannie, Freddie and FHA have also been steady sellers.

I have no idea how much abuse there has been when secondary market purchasers of mortgages push through foreclosures and auction off homes to make a big profit. But the answer is it is not zero. What if only 10% of foreclosures were the result of some outfit or the other pushing to make some fast cash? What if they were doing it on the cheap. Say $10k a pop. Well that comes to a billion a year. And for that much money people will pull all matter of strings. They will buy lawyers and document processors who will gladly take the dough. When you have nine-figure money and a short time window of opportunity you press it as hard and fast as you can. That is how it works.

Two possible headlines we may see:

In an effort minimize losses Federal Agencies relied on improperly documented foreclosure procedures. Thousands may be affected. FHFA to issue apology.Or it could look like this:


Federal Agencies Sold Loans to ScheistersImproper payments made to foreclosure agents. Billions of profits at stake. Hundreds of thousands lining up for class action suit. Congress suspends all foreclosures and new lending at Agencies. Mortgage market seizes up.

I have been amazed to see that more than 25% of all home sales of late have been the result of foreclosures. There are some folks who are burning the midnight oil to get all this done. And for a portion of them the profit motive, not a paycheck, is what is keeping them awake. I have seen bank REO sit on the market for years. And I have watched other parcels get priced deep in the hole and go very fast. In some of those cases the motivated seller is not taking a bigger loss. They are taking a fast profit.

If an investigation shows that even a small amount of foreclosures were done with a profit motive objective and those beneficiaries had “sweetheart” (AKA “Side deals”) with the servicers and closers to achieve their objectives there will be hell to pay. Something like this is likely to come. There is too much money involved. That brings abuse. Greed is in our nature. So is bending the rules.

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by williambanzai7
on Mon, 10/11/2010 – 04:07



After a bad opening, there is hope for the middle game. After a bad middle game, there is hope for the endgame. But once you are in the endgame, the moment of truth has arrived.  –  Edmar Mednis (Grandmaster)

I have one central thought of where this fraudclosure fiasco could lead, and this is why everyone should watch very carefully how the various players move their pieces in the subprime middle game.

Up until now, the banks have been making sweeping statements that this all reflects a “technical” glitch in the processing.

Well, having a posse of State AGs band together to commence a joint investigation is no longer a minor glitch. Allegations of forging signatures, falsifying notarized documents,  back dating etc., if true, collectively amount to an institutional pattern of criminal behavior. Having the Justice Department announce its opening an investigation raises the stakes even higher.

Being forced to suspend all foreclosures has obvious “material” economic consequences to the CDO noteholders.

Having title companies pull out of the market because they no longer trust the veracity of bank provided documents presages claims by mortgagors who lost their properties as well as the subsequent purchasers of same. The only way to effectively cure that kind of problem is to get releases from the various claimants wherever they may be. You cannot simply say this is immaterial, sprinkle in the word MERS and hope this will go away.

The CDO note holders will have potential claims stemming from the interruption of non-performing loan processing. Think breaches of the trust servicing agreements and allegations of “gross negligence or willful misconduct”, the magic legal hurdle in these types of agreements. However, the much more troubling aspect, is the growing realization that the various pools of securitized mortgages may never have been properly assigned, transferred and recorded at inception. If this turns out to be the case, game over–the noteholders will have to be made whole (here we would be expanding into the universe of securities “underwriter” liability).

How these problems are all handled in public disclosure documents is another key area to watch. The standard for “materiality” is whether a reasonably prudent investor would consider an item of disclosure important in making an investment decision. What would you say is important?

Remember that RICO is what brought down Drexel. RICO claims can be brought by the state or by private parties. Private RICO actions have apparently already been filed concerning certain of these matters. This is a securities and white collar crime litigators wet dream.

Over and above the criminal and civil liability issues, are the regulatory and reputational risks. The damage to the reputation of a bank caught defrauding its customers is serious indeed. However, think of all the bank regulatory detonators that can be potentially triggered by all of this. 

The list goes on and on.

What this means is that Jamie Dimon and his 2Big2Fail CEO brethren can no longer pretend that this is just a minor technical hiccup.  These developments constitute material risk factors threatening the very 2Big2Fail existence of their banks. That’s not hyperbole.

They cannot pretend not to know what happened. They no longer have the luxury of taking the high road. It is now clearly their duty to find out what happened and to take whatever corrective measures are necessary.

Any fatal mistakes at this point will constitute “good cause” for termination. Moreover, as we all know and Nixon and Clinton will attest, it is often how one behaves in the post facto spin and damage control operation that can lead to ultimate ruin.

They are all spending the weekend lawyering up.

Someone is going to suggest a forensic/legal examination of the documentation, which will take months and months, particularly if they have to look at fraudclosures already processed.

Here is a new job class created under Obama, Mortgage Fraud Forensics Specialist. This is not something an accountant is trained to do. This is a legal exercise. Unemployed real estate lawyers can take heart. Work is on the way.

The end game may not be here quite yet, but it is approaching very soon, because they will all have to start thinking seriously about how to re-mark these toxic loan portfolios given the new market and legal reality.

So where is game leading?  Talk of a TARP II rescue is would lead to political torches and pitchforks.

This could very well lead to a 2Big2Fail checkmate.

Login or register to post comments by BobWatNorCal
on Mon, 10/11/2010 – 00:10

Some of these foreclosures were to be set aside for “community groups”.
I wonder how that relates to all of this?

Login or register to post comments by IQ 145
on Mon, 10/11/2010 – 00:20

 Thanks Bruce; you make perfect sense.

Login or register to post comments by Dan The Man
on Mon, 10/11/2010 – 00:38

Y’know…my buddy…a mortgage broker who also owned the business, told me years ago to learn how to do bankruptcies.  Not nearly enough people knew how to do them properly, as they weren’t done in much volume at all for nearly 20 years.  Way ahead of his time, I’d say.

So could this also be a problem of staffing, due to the ultrahigh volume?

Login or register to post comments by Florida Joe
on Mon, 10/11/2010 – 02:40

Author – you say “No one in the housing/mortgage story really wants to do a foreclosure.”


That is incorrect. A true note holder may reach that conclusion, but with servicers, the incentive of pay per foreclosure for a servicer has no corresponding cost incentive to negotiate or avoid foreclosure.


This separation or shielding has distorted what should be happening — once hi-volume foreclosures affect pricing, any normal note holder would then negotiate with a borrower. Here, servicers are disconnected, thus few work-outs. Instead, the banks get the taxpayer to subsidize the carrying costs via the Fed’s low .025% interest, yet again shielding the banks from making decisions that should be made in any capitalist system. Obviously, we do not have a capitalist system. 

Login or register to post comments by traderjoe
on Mon, 10/11/2010 – 02:40

“From what I have read it would appear that this has been administratively blown up due to the volume of foreclosures.”

Bruce, forgive me (since I usually like your stuff), but I stopped reading here. 

They are filing false affidavits, etc., etc. because they don’t otherwise have proper standing to foreclose. 

Why? Because they never transferred the note/title in an appropriate fashion. 

Therefore, this does not apply to just foreclosures, but ALL MORTGAGES SECURITIZED SAY FROM 2004 to 2008. ALL, ALL, ALL. Do you know where your note is?

Trillion$ is RMBS might be unsecured ’empty boxes’.

Real estate market, title insurance, RMBS, TBTF banks – Full.Stop.Collapse. (Possibly.) 

Lots of good articles out on this. Yves (I’ve see you there). Market-ticker. Here, 4closurefraud, etc. 


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