The Foreclosure Mess MBS Hate Triangle Emerges: Junior Versus Senior Bondholders Versus Servicers, by Tyler Durden, Zerohedge.com


The WSJ has an article that does a great job of qualifying the impact of what the foreclosure halt will do to the traditional cash waterfall priority schedule inherent in every MBS deal. To wit: junior bondholders will rejoice as they will receive payments for the duration of the halt/moratorium (these would and should cease upon an act of foreclosure), while senior bondholders will suffer, as the deficiency money will come out of the total “reserve” in the pooling and servicing agreement set up by the servicers. As for the servicers themselves, they should be “reimbursed by funds in the trust for all costs related to litigation and extra processing of foreclosures, provided they follow standard industry practices.” In other words, it will now become “every man, sorry, banker for themselves” as each party attempts to preserve as much capital as possible given the new development: juniors will push for an indefinite foreclosure halt, seniors will seek an immediate resumption of the status quo, while the servicers stand to get stuck with billion dollar legal and deficiency fees if it is found that “standard industry practices” were not followed. Alas, it would appears that the servicers have by far the weakest case, and the impact to the banks, whose sloppy standards brought this whole situation on, will be in the tens if not billions of dollars. Oh, and suddenly both junior and senior classes will be embroiled in very vicious, painful, and extended litigation with the servicers. Lots of litigation.

More from the WSJ on the conflict between juniors and seniors:

When houses that have been packaged into a mortgage bond are liquidated at a foreclosure sale—the very end of the foreclosure process—the holders of the junior, or riskiest debt, would be the first investors to take losses. But if a foreclosure is delayed, the servicer must typically keep advancing payments that will go to all bondholders, including the junior debt holders, even though the home loan itself is producing no revenue stream.

The latest events thus set up an odd circumstance where junior bondholders—typically at the bottom of the credit structure—could actually end up better off than they expected. Senior bondholders, typically at the top, could end up worse off.

Not surprisingly, senior debt holders want banks to foreclose faster to reduce expenses. Junior bondholders are generally happy to stretch things out. What is more, it isn’t entirely clear how the costs of re-processing tens of thousands of mortgages will be allocated. Those costs could be “significant” said Andrew Sandler, a Washington, D.C., attorney who represents mortgage companies.

“This is sort of an extraordinary situation,” said Debashish Chatterjee, a vice president for Moody’s Investors Service who covers structured finance. By delaying foreclosures, “it means the subordinate bondholders don’t get written down for a much longer period of time, and they keep getting payments.”

This, however, ignores the class that will impacted the most by all this: servicers.

Typically, mortgage servicers enter into contracts called pooling and servicing agreements with bondholders that spell out the servicers’ obligations to manage the loans in the best interests of the investors. These agreements provide that the servicers be reimbursed by funds in the trust for all costs related to litigation and extra processing of foreclosures, provided they follow standard industry practices.

Servicing companies hope the reviews will be quick. At GMAC Mortgage, a unit of Ally Financial Inc., the vast majority of these affidavits will be resolved in the coming weeks and before the end of the year,” a spokeswoman for the company said. A spokesman for J.P. Morgan Chase & Co. said the company’s review process is expected to take “a few weeks.”

But the problems could be magnified if the reviews uncover a lack of proper documentation or other substantive problems rather than simple procedural errors. The furor over servicer practices is also likely to trigger additional legal challenges from borrowers facing foreclosure and more judicial scrutiny, which could further slow the process and increase foreclosure costs.

And the explanation for why one day soon the XLF will open limit down, as soon as Wall Street sellside research gets their cranium out of their gluteus:

“It’s very hard to see how the servicers can avoid reimbursing the trusts for losses caused by taking short cuts,” said David J. Grais, an attorney in New York who represents investors. Investors could press trustees to investigate servicer conduct, sue the servicers to recoup damages or replace a servicer, he said.

As we said: lots of litigation… playa.

And since Wall Street continues to refuse to touch this topic with a ten foot pole (here is the bottom line for those who may not have been paying attention: huge hits to bank EPS) Zero Hedge is in the process of quantifying just how many billions of dollars each day, week and month of halted foreclosures will bring to the juniors, and how many more billions servicers will be on the hook for unless they manage to convince each of the hundreds of judges in thousands of upcoming lawsuits that all the mortgage fraud (for lack of a better word) was “standard industry practice.”

In foreclosure controversy, problems run deeper than flawed paperwork, by Brady Dennis and Ariana Eunjung Cha, Washingtonpost.com


Sign of the times - Foreclosure

Image via Wikipedia

Millions of U.S. mortgages have been shuttled around the global financial system – sold and resold by firms – without the documents that traditionally prove who legally owns the loans.

Now, as many of these loans have fallen into default and banks have sought to seize homes, judges around the country have increasingly ruled that lenders had no right to foreclose, because they lacked clear title.

These fundamental concerns over ownership extend beyond those that surfaced over the past two weeks amid reports of fraudulent loan documents and corporate “robo-signers.”

The court decisions, should they continue to spread, could call into doubt the ownership of mortgages throughout the country, raising urgent challenges for both the real estate market and the wider financial system.

For struggling homeowners trying to avoid foreclosure, it could mean an opportunity to challenge the banks they argue have been unhelpful at best and deceptive at worst. But it also threatens to leave them in prolonged limbo, stuck in homes they still can’t afford and waiting for the foreclosure process to begin anew.

For big banks, “there’s a possible nightmare scenario here that no foreclosure is valid,” said Nancy Bush, a banking analyst from NAB Research. If millions of foreclosures past and present were invalidated because of the way the hurried securitization process muddied the chain of ownership, banks could face lawsuits from homeowners and from investors who bought stakes in the mortgage securities – an expensive and potentially crippling proposition.

For the fragile housing market, already clogged with foreclosure cases, it could mean gridlock and confusion for years. And there is concern in Washington that if the real estate market and financial institutions suffer harm, it could force the government to step in again. Attorney General Eric H. Holder Jr. said Wednesday he is looking into the allegations of improper foreclosures, and Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate banking committee, said he plans to hold hearings on the issue.

At the core of the fights over the legal standing of banks in foreclosure cases is Mortgage Electronic Registration Systems, based in Reston.

The company, known as MERS, was created more than a decade ago by the mortgage industry, including mortgage giants Fannie Mae and Freddie Mac, GMAC, and the Mortgage Bankers Association.

MERS allowed big financial firms to trade mortgages at lightning speed while largely bypassing local property laws throughout the country that required new forms and filing fees each time a loan changed hands, lawyers say.

The idea behind it was to build a centralized registry to track loans electronically as they were traded by big financial firms. Without this system, the business of creating massive securities made of thousands of mortgages would likely have never taken off. The company’s role caused few objections until millions of homes began to fall into foreclosure.

In recent years, the company has faced numerous court challenges, including separate class-action lawsuits in California and Nevada – the epicenter of the foreclosure crisis. Lawyers in other states have also challenged the company’s legal standing in court.

 

Kentucky lawyer Heather Boone McKeever has filed a state class-action suit and a federal civil racketeering class-action suit on behalf of homeowners facing foreclosure, alleging that MERS and financial firms that did business with it have tried to foreclose on homes without holding proper titles.

“They have no legal standing and no right to foreclose,” McKeever said. “If you or I did this one time, we’d be in jail.”

Judges in various states have also weighed in.

In August, the Maine Supreme Court threw out a foreclosure case because “MERS did not have a stake in the proceedings and therefore had no standing to initiate the foreclosure action.”

In May, a New York judge dismissed another case because the assignment of the loan by MERS to the bank HSBC was “defective,” he said. The plaintiff’s counsel seemed to be “operating in a parallel mortgage universe,” the judge wrote.

Also in May, a California judge said MERS could not foreclose on a home, because it was merely a representative for Citibank and did not own the loan.

On the other hand, Minnesota legislators passed a law stating that MERS explicitly has the right to bring foreclosure cases. And on its Web site and in e-mails, MERS cites numerous court decisions around the country that it says demonstrate the company’s right to act on behalf of lenders and to undertake foreclosures.

“Assertions that somehow MERS creates a defect in the mortgage or deed of trust are not supported by the facts,” a company spokeswoman said.

But that’s precisely what lawyers are arguing with more frequency throughout the country. If such an argument gains traction in the wake of recent foreclosure moratoriums, the consequences for banks could be enormous.

“It’s an issue of the whole process of foreclosure having been so muddied by the [securitization] process,” said Bush, the banking analyst. “It is no longer a straightforward legalistic process, which is what foreclosures are supposed to be.”

Janet Tavakoli, founder and president of Tavakoli Structured Finance, a Chicago-based consulting firm, said that for much of the past decade, when banks were creating mortgage-backed securities as fast as possible, there was little time to check all the documents and make sure the paperwork was in order.

But now, when judges, lawyers and elected officials are demanding proper paperwork before foreclosures can proceed, the banks’ paperwork problems have been laid bare, she said.

The result: “Banks are vulnerable to lawsuits from investors in the [securitization] trusts,” Tavakoli said.

Referring to the federal government’s $700 billion Troubled Assets Relief Program for banks, she added, “This problem could cost the banks significantly more money, which could mean TARP II.”

dennisb@washpost.com chaa@washpost.com

 

 

Thoughts on the New Mortgage Insurance Premium for FHA loans – by Jason Hillard | homeloanninjas.com


(originally posted on October 2nd, 2010)

I have had this rolling around in my head for a few weeks now, and with the change in FHA mortgage insurance monthly premiums bearing down on us in a few days, I had to share my thoughts. We’ve been doing a lot of FHA loans in Oregon & Washington, as I’m sure is the case all around the country, and this change is going to affect a lot of people. (I apologize for the low quality of the video, I have successfully screwed my phone’s camera up!)

Again, everything that’s changing about the mortgage industry is done under the auspices of avoiding another meltdown, curbing foreclosures, and making the mortgage-backed security a good investment. So, if you have an insurance policy which is designed to avert the risk of a loan in default to the lender, why would you want the premium on that insurance policy to be collected over time?

From a simple risk-assessment perspective, it would seem that the more time you are exposed to loss, the greater the likelihood that it will happen. The fear is that homeowners will default on their loan payments, so why would you push more of the premium to the monthly payment side (rather than the upfront funding fee) if the reason for the policy is to protect the investor from people who default on those payments?

It seems like the reasonable position would be to get the premium covered from day one. This reminds me of when the downpayment requirement for FHA went from 3% all the way up to a whopping 3.5 per cent. Does that extra .5% really invest the homeowner so much more that it reduces their likelihood of default? I’m not saying their should be less “skin in the game”, but if that’s going to be your approach, why not really DO IT? Make the downpayment 5%, or make some portion of the upfront mortgage insurance on an FHA home loan payable from the borrower’s own funds?

It may just be that I am making the age-old mistake of applying logic to government policy, but I am thinking that the intended purpose isn’t really what we are being told.

You can read some related posts on FHA loans and mortgage insurance:

What is mortgage insurance?

We can do FHA down to 580 FICO, but should we?

Video: mortgage terminology – mortgage insurance

If you have any questions about FHA financing, mortgage insurance, or home loans in general, feel free to send us an email or comment on this post! And if you have any thoughts on why the monthly mortgage insurance premiums for FHA mortgages are increasing while the upfront funding fee is decreasing, we’d love to hear them!

U.S. Justice Dept. probing foreclosure processes, Yahoo.com


Pelli's Wells Fargo Center, Minneapolis, Minne...

Image via Wikipedia

WASHINGTON (Reuters) – The U.S. Justice Department said on Wednesday it was probing reports the nation’s top mortgage lenders improperly evicted struggling borrowers from their homes as part of the devastating wave of foreclosures unleashed by the financial crisis.

Amid mounting political outrage over the U.S. mortgage mess, key members of U.S. congressional banking committees joined calls for probes into the foreclosure activities of banks accused of tossing homeowners out without proper review.

At least three banks have already halted eviction proceedings, and various lawmakers have called for an industry-wide moratorium on home repossessions until the problems are fixed. Attorney General Eric Holder said the Justice Department would look into media reports that loan servicers improperly have used “robo-signers” to push through thousands of foreclosure orders.

Holder’s move, and the rising chorus of fury among lawmakers, comes ahead of November congressional elections and takes aim at one of the most visible signs of the U.S. economic crisis as hundreds of thousands of families have lost their homes as unemployment surged.

The moves on foreclosures risk further slowing the U.S. economic recovery, leaving banks unsure whether they will ever claw back losses and the housing market overshadowed by a mounting inventory of homes still likely to face foreclosure in future.

U.S. House of Representatives Speaker Nancy Pelosi and fellow Democrats wrote to Holder earlier this week asking the Justice Department to look into banks’ actions after receiving reports from thousands of homeowners about their foreclosure woes.

On Wednesday, the lead Republican on the Senate Banking Committee, Senator Richard Shelby, called on federal regulators to review the foreclosure practices of JPMorgan Chase and Co (JPM.N), Bank of America Corp (BAC.N) and Ally Financial Inc, formerly known as GMAC, and said a congressional investigation should also be started.

Two senior Democratic members of the House Financial Services Committee also said it was time to examine whether the banks broke the law based on their participation in the law that governed the Troubled Asset Relief Program, the $700 billion bailout of financial firm.

“The American people helped out these companies and the least they deserve is a guarantee of due process and fairness,” Representatives Luis Gutierrez and Dennis Moore said.

Banks are expected to take over a record 1.2 million homes this year, up from about 1 million last year, according to real estate data company RealtyTrac Inc.

Federal and state officials have pushed to suspend foreclosures after reports that banks signed large numbers of foreclosure affidavits without conducting proper reviews.

Banks and loan servicers, companies that collect monthly mortgage payments, reportedly have used “robo-signers” — middle-ranking executives who signed thousands of affidavits a month claiming they were knowledgeable of the cases.

Separately on Wednesday, Wells Fargo & Co (WFC.N) agreed to pay eight states $24 million after allegations of deceptive marketing practices at its home loan unit. The firm said it would also alter its foreclosure prevention practices that could benefit struggling homeowners by more than $700 million.

Wells Fargo Home Mortgage‘s chief financial officer, Franklin Codel, told Reuters that his unit did not cut corners to speed the foreclosure process. He said he was “confident that the paperwork is being properly produced.”

STATES TAKE ACTION

The issue on improper handling of foreclosures came to the fore last month when Ally Financial said officials had signed thousands of affidavits without having personal knowledge of borrowers’ situations.

Ally suspended evictions and post-foreclosure proceedings in 23 states last month, followed by similar moves by JPMorgan Chase & Co and Bank of America.

The foreclosure issue and the battered state of the U.S. housing market have weighed on the Obama administration ahead of the November congressional elections in which the Democrats already face the possibility of big losses.

Any broader push to solve the foreclosure crisis, such as the wholesale forgiveness of principal debt of struggling homeowners, is unlikely to find support among lawmakers because of the cost and the potential for political backlash from any move seen as rewarding reckless behavior by banks or borrowers.

The focus on bank procedures has thrown a new twist into the saga.

North Carolina Attorney General Roy Cooper on Wednesday became the latest state official to ask lenders to suspend home repossessions as he probes foreclosure practices.

Democratic Senator Robert Menendez earlier this week raised the idea of a national foreclosure moratorium.

Ally Financial and its GMAC Mortgage unit also were targeted by Ohio’s attorney general, Richard Cordray, on Wednesday, who announced a lawsuit alleging fraud and violations of Ohio’s consumer law.

Cordray also said he has sought meetings with Citibank (C.N), Bank of America, JPMorgan Chase and Wells Fargo to try to ascertain whether their foreclosure processes include any of the “mass” signing of official papers that are the subject of the suit against GMAC Mortgage.

Gina Proia, a spokeswoman for Ally Financial, said there was nothing fraudulent or deceitful about GMAC Mortgage’s practices. She said the company will “vigorously defend” itself, and expects to be fully vindicated by the Ohio courts.

GMAC Mortgage said in a statement it “believes there was nothing fraudulent or deceitful about its foreclosure practices. If procedural mistakes were made in the completion of certain legal documents, GMAC Mortgage reacted proactively to the issue and immediately undertook steps to remedy the situation.”

(Writing by Corbett B. Daly and Andrew Quinn; Editing by Leslie Adler)