This is what the total lack of oversight can do for the world economy.
Beyond sloppy documents, the foreclosure debacle has exposed one of Wall Street’s little-known practices: For more than a decade, big lenders sold millions of mortgages around the globe at lightning speed without properly transferring the physical documents that prove who legally owned the loans.
Now, some of the pension systems, hedge funds and other investors that took big losses on the loans are seeking to use this flaw to force banks to compensate them or even invalidate the mortgage trades themselves.
Their collective actions, if successful, could blow a hole through the balance sheets of big banks and raise fundamental questions about the financial system, financial analysts and a lawmaker said.
If judges rule in favor of such lawsuits, “it could be 2008 all over again,” said Josh Rosner, managing director at Graham Fisher & Co., referring to the Wall Street meltdown that occurred after Lehman Brothers collapsed.
How do you fix this? I have a bad feeling that you don’t. But, probably you need Congress to come up with some patchwork retroactive fix. Basically, you have a bunch of people who can’t pay their mortgages. But no one can prove that they have a right to their mortgage payment and, therefore, the right to foreclose on the home. Technically, there are millions of people who have the right to keep their home without paying for it because the real owners didn’t follow the law.
So, what do you do?
Well, you DON’T do what almost certainly WILL be done, which is bail out the banks once again.
Basically, the banks sold what they cannot prove they own. That is fraud.
What should happen is this time, the system must be allowed to procede without interference. Lawsuits and civil actions should be allowed to continue.
If the banks cannot prove they own these buildings then they DO NOT own them. Bail them out and what you will get in the future (the near future) is them foreclosing on homes that have never even taken out a loan.
After all, what would stop them once you have let them take something they cannot prove they own? The next logical step would be them taking what ever they want.
nalbar
Maybe they belong to the residents. Wouldn’t that be some kind of stimulus?
if they can’t afford to pay the mortages then dont have the right over the houses.
seahorseguy28
Who do they pay? That’s the issue.
yes. but also, can they can away with not paying on a technicality? The Rule of Law says yes. The calamitous downfield effects of everyone doing that says no.
With no owner of record, I think the houses are treated as abandoned property. The occupants then have more rights than the alleged morgagors who can’t prove ownership.
So the home goes to…?
This might be a good start:
Iceland to Present Bill to Wipe Out Personal Debt, Minister Jonasson Says
Here’s to hoping that the new resolution authority works?
If there is no proof of ownership, there are no obligations. The properties should be taken over by the government as abandoned.
There is kind of a proof of ownership. At least in most cases. The problem is that the letter of the law was not followed so that the mortgage holder can say that no one has the right to payment. They can successfully, I think, challenge the legitimacy of the title.
I think what would happen normally is that a series of transactions would be invalidated until we got back to a properly validated title, and then the homeowner would pay them.
But you can’t unwind this.
I’ve wondered about this for years, now. Everybody knew that the packages (aka scams) that the banksters put together did not include proof of ownership. There were stories all over the place about mortgagees not being able to pay because nobody knew who they were supposed to pay to, and yet getting foreclosed. Nobody seemed much interested in this blatant contradiction.
Apparently the shit has finally hit the fan. As nalbar said, let the law take its course. If ya don’t own it, ya can’t collect, just like anybody else. Let the government take them over and auction them off with special consideration for the occupants.
Hey Dave, your comment came in last night less than 14 minutes before mine (i.e. while I was busy hammering out my own comment) and I didn’t notice it at the time, but I think you’ve basically answered my question: “If ya don’t own it, you can’t collect.” That applies to the would-be foreclosers (as nalbar used it), but it also applies to the investors, who are neither mortgage owners nor mortgage holders. All they owned were securities, and those kinds of securities are still legal.
Although I don’t claim to have much of a grasp of this, I would ask, are the 2 situations really parallel?: investing in derivative securities and borrowing money on a home? I don’t think so. The investors are not investing in real property, but in securities abstractly derived from mortgages to real property. Who actually owns the mortgages is a separate issue. Whatever the system was based on, that was what it was based on and on that basis some won and some lost, as in any other kind of crap shoot.
So the argument is technically true, but the relevance to derivatives speculation is fairly trivial.
The mortgagees were dealing with real property, usually their own dwellings, where it is established law since time immemorial that the record of title transfer must be coherent, and I am sure in many cases it cannot be proven that the would-be forecloser really has title. The players are not equal like investors; one is a mortgager and the other is a mortgagee.
The two kinds of contract involve different chains of causality and different factors. One is purely financial, and is simply buying and selling, often very short term; the other is a financial matter but also involves long-term borrowing (trust) enjoyment of real property, and a great difference between lending agency and seller.
This is my “right-brain” take on it, but I’d be very interested to hear how others can either knock it down or sharpen it up.
What do you do?
It’s not an impossible situation to unwind. It takes the political will to do it, something that has been dramatically lacking for two generations.
I’m pretty confident none of those things will happen. 2, 4, 7, and 8 are certainly not happening so long as Geithner draws breath.
You might be right on 2, 7, and 8. But Geithner does not control what state attorneys general do. And it is Holder, not Geithner, who controls what DOJ does.
And maybe after HAMP, Geithner might want a more positive record in the history books. One never knows.
And anything requiring Congressional action depends on the outcome November 2. Even for the lame duck session. Having Kirk, O’Donnell, Raese, and DioGuardi seated immediately after the November election would make a hash of the lame duck session.
Yes, that’s what I meant. Godspeed to state AGs, the DOJ is unlikely to get involved now.
Also, hasn’t the administration said pretty clearly they’re not doing a moratorium?
I missed that one. So far, 29 states are doing a moratorium, and those states are the ones that have the most foreclosures. Florida, I believe, is the big exception because Bill McCollum is a jerk.
Of particular interest here is your point No. 5, because I think that is most directly relevant to the present post. (No. 4 is also, in another way.) Of course I agree with you, but what is the rationale for it? That’s what I was trying to address in my comment just a little up thread. Much obliged if you’d take a look at it.
One rationale for point No. 5 is that it’s up to the derivative owners of mortgages to defend their own contract rights.
Well yes, that is strictly correct. And so far they are making noises to do that, they haven’t asked for a bailout. But where would they ultimately defend their contract rights? In court. And what case would they make? Well, let us assume they would use the argument floated in the WP article. Basically, the same argument that the foreclosed mortgagers are using. So we are back to my question: Does that argument apply to investors in mortgage-derivatives as it does to mortgagers? I don’t believe it does.
Point #5 goes directly to the way the MERS database was being used to avoid leaving a trail of local public records in county registers or deeds (or other offices that record mortgage agreements). The MERS system was set up so that transactions could be done rapidly without the cost of having to file in an out-of-state courthouse. Most likely the transactions were handled in a way that split the ownership of the mortgage from the party servicing the mortgage, which means that the owner is under the impression that the mortgage servicer is the mortgage owner. And most likely all of this was done without notifying the owner.
This method seeks to bypass public checks and balances, hides the true parties, and makes it harder for the courts to determine ownership. The mortgage originators and owners should take the hit for creating a failed system that misleads the mortgagee. The mortgagee should not have to pay lawyers and title search firms out of pocket to prove that the mortgage holder does not in fact own the mortgage.
All correct — and all highly relevant to the validity of a foreclosure order. But is it relevant to the validity of derivative sales, swaps, etc.? Because that is what the WP article was about.
I think what’s confusing is the line from the article: “the pension systems, hedge funds and other investors that took big losses on the loans … ” Correct me if I’m wrong — this stuff is very complicated — but my understanding is that the investors did not literally lose money on the loans, they weren’t the ones who made the loans — they lost money on securities derived in highly abstract ways from the loans, and others made money on them. Derivatives are not mortgages, they are securities derived from mortgages. These investors did not know anything about the individual mortgages, nor did they ask or expect to know, except as they existed as classes of probability of default that had been tranched and bundled into securities and on that basis rated by rating agencies.
Basically the investors were dealing in a realm of pure quantity, in which the actual mortgages and real property was minimally relevant, only as the basis, according to some complicated formulae, of abstract mathematical entities whose behavior over time was wagerable. They might as well have been widgets or veeblefetzers.
Imagine a betting pool where people bet on the number of car purchases that will be financed in the state of Nebraska in the year 2008. Two years later it is revealed that 75% of those financing agreements were not processed according to due legal form. That would certainly be an issue for the finance agencies, car dealers, car owners; but how is it an issue for the wagerers? Although the financing arrangements might not have been shipshape, still they were regarded by all betting parties as agreements at the time of the wagers, and whatever they were or later turned out to be, that’s what they all laid their bets on. Whether there were deliberate frauds on investors is yet another question.
There are a number of ways that pension systems, hedge funds, and other investors could have investments. They could have bought bundles of mortgages being serviced by a particular entity. The could have bought hedges on bundles of mortgages. They could have bought hedges on mortgages that they did not own. Or hedges on investors doing hedging. It’s a real hall of mirrors.
Pension systems should go to the servicing entity and ensure that all of the documentation is in order and identify the actual extent of nonperforming loans in their portfolio. They are acting a fiduciaries. If it comes to it, only pension funds should be bailed out in this environment. Hedge funds and investors expect to take greater risks than pension funds. If you are betting on a number and have no material stake in the asset, tough luck.
In your example, it is only of interest to the car dealer if it affects current and future sales of cars from his lot. And like the naked credit default swaps on bundles of mortgages, the gambling on the number of car purchases is just that. Hedging has its purpose in creating a counter-transaction to reduce certain risks of the transaction. If you are not a party to the transaction, you deserve to lose your shirt.
NOT lack of oversight. NOT sloppy documents. FRAUD. This is provable; the evidence is everywhere. Also witnesses.
The media pundits are trying to spin this away, as always. Remember who they work for: They are accomplices in the crimes.
It is just icing on the cake that banks have foreclosed on several properties that were owned free and clear with no mortgage on them.
Keep in mind: If you or I pulled stunts like these we would get an express ride to the slammer.
Your bad feelings are correct.
From there you can work out what will happen.
Note: The real reason foreclosures have been suspended is because title insurers are refusing to insure titles–all of which are now dubious–for which they would be liable. This in turn means that despite putting up their money no one can get a guarantee of ownership. Not many will buy under conditions like that.
There are two roads–steal from the people or stiff the banks. Which do you think the Government will take?
“NOT lack of oversight. NOT sloppy documents. FRAUD. This is provable; the evidence is everywhere. Also witnesses.”
Yup.
Booman needs to read the depositions from the mortgage fraud cases.
It’s a bit ridiculous looking back and arguing who was right, but having said that, I’m going to go there anyway. You’ve argued a few times recently that those who argued against drastic measures like temporarily nationalizing the banks when this began had been vindicated, as banks were able to pay back most of what they owed, and nationalization would have been expensive. But the argument given for these measures was always that as long as we tried to paper over the problem, giving the banks enough to get by and hoping a rising economy would eventually solve everything, without actually taking a hard look at these dubious assets and figuring what they were really worth, that uncertainty would drag down the economy. It’s now looking like people like Krugman and Atrios who made this sort of argument were horrifyingly correct. What’s the good of having been able to bail out the banks at now great cost of year later, we discover we are back where we started or perhaps even worse?
Nationalizing the banks doesn’t solve the problem of the titles to the property and validity of the mortgages. I refinanced my place at a lower mortgage rate during the spree (Krugman’s advice in one column on how to retain one’s property in the storm that was brewing) and was horrified to find it all could be done by fax and telephone with no verification of any signatures as far as I recall. I insisted on doing it in person anyway – which involved complicated travel and lots of time I didn’t really have – but they kept trying to convince me to just do it over the telephone and it would just take a few minutes. When I went to the title place to sign it was like I was bothering everyone.
Nationalizing the number of large banks that are in trouble is a practical problem. When you nationalize a bank, you have to take control of it at all of its locations. That means that there must be teams of federal bank examiners available to go to every facility of the bank. Consider what that would mean for banks like Bank of America that have thousands of branches. And the difficulty of nationalizing investment banks, for which there are not yet trained examiners.
The necessity to hire tens of thousands of trained people quickly and do it without court challenge is why nationalization is not a practical idea. The banking industry in the US is much larger, much much larger, than the banking industry in Sweden, the current model of successful nationalization (of essential one bank).
Which is a great argument for breaking up the banks, instead of consolidating them further(like what’s been going on).
Exactly. Teddy Roosevelt called it trust busting. And not just the banks. All holding companies. Especially those that are transnational.
Smaller institutions have smaller executive salaries and in aggregate employ more people. And likely in aggregate cost less and are more efficient.
And the dynamics go from the bureaucratic operations of corporations to the market dynamics of smaller companies actually competing.
Do you have a model to actually break these banks up? What’s your metric?
I’ve yet to read a plausible way to “break the banks up.”
There are a number of plausible models.
The first is to break them up by state of operation and set up regulated corresponding relationships, such as existed in the 1950s before concentration.
The second is to break them up by product line — securities, commercial banking, insurance, credit cards, and so forth.
The third is to require the integration of all units into a single legal entity instead of having the legal shelter of holding companies. And then to break up that legal entity by one or more of the models above.
The fourth is to limit the number of layers of management in the organization. That would force the spinoff beyond real span of control of a single manager. And have the effect of reducing the salaries at the top.
And then there’s specific lawsuits a la Roosevelt:
The likely targets for those suits would be Bank of America, Wells Fargo, Goldman Sachs, JPMorganChase, Citibank, and so on. And the model of breakup would be different for these different institutions.
Given the realities of current American capitalism, you could probably accomplish many of the same things simply by tax policy. Limit the deduction for compensation to 2 or 3 hundred thousand, for example. Go back to pre-Reagan tax brackets. Initiate corporate tax brackets based of corporate size, market share, or a similar metric. That kind of thing.
It actually doesn’t vindicate them at all. The solution that is being attempted is twofold. Let the banks return to profitability so that they can offset the losses on their books and keep credit flowing so that the economy can grow, and hope that over time those bad assets become somewhat less toxic.
The papertrail issue threatens to kill the strategy if the banks are suddenly forced to sell back their toxic assets. I think that’s your point. But my point has always been that we can’t afford to have a sudden accounting because the magnitude of the hole they created is so big that it would sink the world economy along with the banks. That was true in September 2008 and it’s true now. Their balance sheets are greatly improved, but they are in no condition to eat their crap all at once.
A separate issue is how we regulate things so that we don’t have a repeat of the problem. Also separate is who should get prosecuted. But this impulse to tear down the financial industry is reckless, even if it is based in ideals of fairness and justice. It’s a bit like calling artillery down on your own head because the enemy is so near. Sometimes things get so dire that that makes sense. But you don’t do it unless you have no other choice.
What is continually missed about the banks’ toxic assets is that they are toxic because the banks have taken a short-term view of their profitability and acted sometimes pre-emptively to start foreclosure proceeding that makes a self-fulfilling prophecy of their assertion that the asset is toxic.
“Extend and pretend” doesn’t work because banks are unwilling to “extend and pretend” with regard to the payments on the mortgages they actually hold.
Banks are creating the toxicity that they are trying to resolve.
In the longer term we don’t have any other choice. Your favored solutions do zero to fix the root of the problem and keep it from being a permanent condition.