Whose Mortgage is This?

Tuesday, October 27, 2009 , , , , 0 Comments

The problem here is that the real loan came from someone - or rather something - that will not show its face for fear that it may be accused of predatory lending outside of the parameters of whatever charter said loan shark may have.

And this is but the beginning.


One surprising smackdown occurred on Oct. 9 in federal bankruptcy court in the Southern District of New York. Ruling that a lender, PHH Mortgage, hadn’t proved its claim to a delinquent borrower’s home in White Plains, Judge Robert D. Drain wiped out a $461,263 mortgage debt on the property. That’s right: the mortgage debt disappeared, via a court order.

So the ruling may put a new dynamic in play in the foreclosure mess: If the lender can’t come forward with proof of ownership, and judges don’t look kindly on that, then borrowers may have a stronger hand to play in court and, apparently, may even be able to stay in their homes mortgage-free.

The reason that notes have gone missing is the huge mass of mortgage securitizations that occurred during the housing boom. Securitizations allowed for large pools of bank loans to be bundled and sold to legions of investors, but some of the nuts and bolts of the mortgage game — notes, for example — were never adequately tracked or recorded during the boom. In some cases, that means nobody truly knows who owns what.

To be sure, many legal hurdles mean that the initial outcome of the White Plains case may not be repeated elsewhere. Nevertheless, the ruling — by a federal judge, no less — is bound to bring a smile to anyone who has been subjected to rough treatment by a lender. Methinks a few of those people still exist.

More important, the case is an alert to lenders that dubious proof-of-ownership tactics may no longer be accepted practice. They may even be viewed as a fraud on the court.

The United States Trustee, a division of the Justice Department charged with monitoring the nation’s bankruptcy courts, has also taken an interest in the White Plains case. Its representative has attended hearings in the matter, and it has registered with the court as an interested party.

THE case involves a borrower, who declined to be named, living in a home with her daughter and son-in-law. According to court documents, the borrower bought the house in 2001 with a mortgage from Wells Fargo; four and a half years later she refinanced with Mortgage World Bankers Inc.

She fell behind in her payments, and David B. Shaev, a consumer bankruptcy lawyer in Manhattan, filed a Chapter 13 bankruptcy plan on her behalf in late February in an effort to save her home from foreclosure.

A proof of claim to the debt was filed in March by PHH, a company based in Mount Laurel, N.J. The $461,263 that PHH said was owed included $33,545 in arrears.

Mr. Shaev said that when he filed the case, he had simply hoped to persuade PHH to modify his client’s loan. But after months of what he described as foot-dragging by PHH and its lawyers, he asked for proof of PHH’s standing in the case.

“If you want to take someone’s house away, you’d better make sure you have the right to do it,” Mr. Shaev said in an interview last week.

In answer, Mr. Shaev received a letter stating that PHH was the servicer of the loan but that the holder of the note was U.S. Bank, as trustee of a securitization pool. But U.S. Bank was not a party to the action.

Mr. Shaev then asked for proof that U.S. Bank was indeed the holder of the note. All that was provided, however, was an affidavit from Tracy Johnson, a vice president at PHH Mortgage, saying that PHH was the servicer and U.S. Bank the holder.

Among the filings supplied to support Ms. Johnson’s assertion was a copy of the assignment of the mortgage. But this, too, was signed by Ms. Johnson, only this time she was identified as an assistant vice president of MERS, the Mortgage Electronic Registration System. This bank-owned registry eliminates the need to record changes in property ownership in local land records.

Another problem was that the document showed the note was assigned on March 26, 2009, well after the bankruptcy had been filed.

Mr. Shaev’s questions about ownership also led to an admission by PHH that, along the way, it had levied an improper $450 foreclosure fee on the borrower and had overcharged interest by an unstated amount.

John DiCaro, a lawyer representing PHH at the hearing, was in the uncomfortable position of having to explain why there was no documentation of an assignment to U.S. Bank. He did not return a phone call seeking comment last week. Ms. Johnson, who couldn’t be reached for comment, did not attend the hearing.

Walk away, America, just walk away. Look, they can't even figure out whose mortgage it is, why should it be a thorn in your ass or a blight on your credit score?

Anyone remember the days when securities were regulated and monitored by federal agencies just so this sort of thing wouldn't happen? Oh those were the days.

Oh and in case you are interested, here is a wonderful lesson on how mortgage securitization works and why we're fucked now as a result from Econbrowser. In a time when yesterday's news is already old and soggy, a piece from January of 2008 might seem ancient but it's still relevant (featuring our friends at the NY Fed none the less). We know this story all too well but now might be a good time for a reminder.

Federal Reserve Bank of New York economists Adam Ashcraft and Til Schuermann have a very interesting new paper (hat tip: CR) in which they describe this process and what went wrong. Among other contributions, the paper investigates details of the securitization of a pool of about 4,000 subprime mortgage loans whose principal value came to a little under $900 million and which were originated by New Century Financial in the second quarter of 2006, a small part of the $51.6 billion in loans that the company originated in 2006 before declaring bankruptcy in early 2007.

A striking feature of this pool of loans is the magnitude of the increase in monthly payments to which borrowers were agreeing even if there had been no change in the LIBOR rates to which the "adjustable rate" mortgages were keyed. This increase would result from the 2/28 or 3/27 "teaser rate" feature of the vast majority of these mortgage contracts, according to which the borrower would be virtually certain to need to make a huge increase in the monthly payments within two or three years. Ashcraft and Schuermann calculate that the monthly payments that the recipient of the loan is supposed to pay were scheduled to increase by 26-45% (depending on other details) within 2-1/2 years of the loan being issued, even if LIBOR rates held steady at their values at the time the loan was originated, and by which time the total principal owed would have increased substantially relative to the sum that had originally been borrowed. One has to wonder what circumstances one would be counting on to expect such payments to be made on schedule from a pool of borrowers with a history of other credit problems.

A second remarkable feature of this pool is the high credit rating assigned to all but the most junior tranches. Out of the $881 million in original mortgage loans, there were created $699 million (or 79% of the total) in "senior-tranche" mortgage-backed securities that received the highest possible credit rating (AAA from Standard & Poor's or Aaa from Moody's). Only $58 million (or 6-1/2% of the total) received a rating as low as BBB or Baa. There is no reason to believe this is unrepresentative of the nearly half trillion dollars in subprime mortgages that were securitized in the U.S. in 2006.

It's now clear to everybody that most of these loans should never have been made at the terms that they were, and that a good deal of money is going to be lost by a good number of people. As the multiple arrows in the above diagram attest, there were plenty of individuals who could (and did) make some serious mistakes in this whole process. Ashcraft and Schuermann catalog these and inquire how we might prevent these problems in the future. At the top of their list of "informational frictions" that contributed to the subprime debacle is the one that so far has received the most attention from the media and legislators, namely that between the originator and the borrower. To the extent that the originators just resold the loans before the problems came home to roost, the originator had an incentive to misrepresent overly complex instruments to financially unsophisticated borrowers. The authors' proposed resolution of this problem is "federal, state, and local laws prohibiting certain lending practices, as well as the recent regulatory guidance on subprime lending".

Second on their list of the most important frictions is one we have long been emphasizing here, namely that between the investor and the fund manager. To the extent that fund managers are evaluated on the basis of recent performance subject only to ratings guidelines, there is an incentive for managers to invest the funds in the riskiest vehicles that somehow manage to get a AAA rating. Ashcraft and Schuermann recommend that the investment mandates of any managed funds be rewritten to note the distinction between the ratings on corporate debt and those on artificially structured securities.

Ashford and Schuermann discuss a great many other informational frictions in the whole process that have also been widely discussed elsewhere, including inadequate equity stakes on the part of the originator and arranger, and need for different guidelines and procedures for the rating process. The authors nevertheless note:

We suggest some improvements to the existing process, though it is not clear that any additional regulation is warranted as the market is already taking remedial steps in the right direction.

Still, it's useful to have Ashcraft and Schuermann's careful summary of exactly what wrong, perhaps not so much in order to tell us to close the barn door as to understand just how all those cows got of the barn.

Or how about we just have a BBQ instead?

Naked Capitalism also covered this sordid tale, check it out.

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.