Got this in my email, nice and scary must read!! Especially for people who's houses are in foreclosure and for the people who are heavily invested in financial stocks. Credits to original writer(don't now his name, but Jim Sinclair warned earlier about this) for the easy understandable read.
Worthwhile 10 minute read on mortgage mess. Comment ex a hedge fund manager
Homeowners can only be foreclosed and evicted from their homes by the
person or institution who actually has the loan paper-only the
note-holder has legal standing to ask a court to foreclose and evict.
Not the mortgage, the note, which is the actual IOU that people sign,
promising to pay back the mortgage loan
Before mortgage-backed securities, most mortgage loans were issued by
the local savings & loan. So the note usually didn't go anywhere: it
stayed in the offices of the S&L down the street.
But once mortgage loan securitization happened, things got sloppy-they
got sloppy by the very nature of mortgage-backed securities.
The whole purpose of MBSs was for different investors to have their
different risk appetites satiated with different bonds. Some bond
customers wanted super-safe bonds with low returns, some others wanted
riskier bonds with correspondingly higher rates of return.
Therefore, as everyone knows, the loans were "bundled" into REMIC's
(Real-Estate Mortgage Investment Conduits, a special vehicle designed
to hold the loans for tax purposes), and then "sliced & diced"-split
up and put into tranches, according to their likelihood of default,
their interest rates, and other characteristics.
This slicing and dicing created "senior tranches," where the loans
would likely be paid in full, if the past history of mortgage loan
statistics was to be believed. And it also created "junior tranches,"
where the loans might well default, again according to past history
and statistics. (A whole range of tranches was created, of course, but
for the purposes of this discussion we can ignore all those countless
other variations.)
These various tranches were sold to different investors, according to
their risk appetite. That's why some of the MBS bonds were rated as
safe as Treasury bonds, and others were rated by the ratings agencies
as risky as junk bonds.
But here's the key issue: When an MBS was first created, all the
mortgages were pristine-none had defaulted yet, because they were all
brand-new loans. Statistically, some would default and some others
would be paid back in full-but which ones specifically would default?
No one knew, of course. If I toss a coin 1,000 times, statistically,
500 tosses the coin will land heads-but what will the result be of,
say, the 723rd toss? No one knows.
Same with mortgages.
So in fact, it wasn't that the riskier loans were in junior tranches
and the safer ones were in senior tranches: rather, all the loans were
in the REMIC, and if and when a mortgage in a given bundle of
mortgages defaulted, the junior tranche holders would take the losses
first, and the senior tranche holder last.
But who were the owners of the junior-tranche bond and the
senior-tranche bonds? Two different people. Therefore, the mortgage
note was not actually signed over to the bond holder. In fact, it
couldn't be signed over. Because, again, since no one knew which
mortgage would default first, it was impossible to assign a specific
mortgage to a specific bond.
Therefore, how to make sure the safe mortgage loan stayed with the
safe MBS tranche, and the risky and/or defaulting mortgage went to the
riskier tranche?
Enter stage right the famed MERS-the Mortgage Electronic Registration
System.
MERS was the repository of these digitized mortgage notes that the
banks originated from the actual mortgage loans signed by homebuyers.
MERS was jointly owned by Fannie Mae and Freddie Mac (yes, those two
again -I know, I know: like the chlamydia and the gonorrhea of the
financial world-you cure 'em, but they just keep coming back).
The purpose of MERS was to help in the securitization process.
Basically, MERS directed defaulting mortgages to the appropriate
tranches of mortgage bonds. MERS was essentially where the digitized
mortgage notes were sliced and diced and rearranged so as to create
the mortgage-backed securities. Think of MERS as Dr. Frankenstein's
operating table, where the beast got put together.
However, legally-and this is the important part-MERS didn't hold any
mortgage notes: the true owner of the mortgage notes should have been
the REMICs.
But the REMICs didn't own the notes either, because of a fluke of the
ratings agencies: the REMICs had to be "bankruptcy remote," in order
to get the precious ratings needed to peddle mortgage-backed
Securities to institutional investors.
So somewhere between the REMICs and MERS, the chain of title was broken.
Now, what does "broken chain of title" mean? Simple: when a homebuyer
signs a mortgage, the key document is the note. As I said before, it's
the actual IOU. In order for the mortgage note to be sold or
transferred to someone else (and therefore turned into a
mortgage-backed security), this document has to be physically endorsed
to the next person. All of these signatures on the note are called the
"chain of title."
You can endorse the note as many times as you please-but you have to
have a clear chain of title right on the actual note: I sold the note
to Moe, who sold it to Larry, who sold it to Curly, and all our
notarized signatures are actually, physically, on the note, one after
the other.
If for whatever reason any of these signatures is skipped, then the
chain of title is said to be broken. Therefore, legally, the mortgage
note is no longer valid. That is, the person who took out the mortgage
loan to pay for the house no longer owes the loan, because he no
longer knows whom to pay.
To repeat: if the chain of title of the note is broken, then the
borrower no longer owes any money on the loan.
Read that last sentence again, please. Don't worry, I'll wait.
You read it again? Good: Now you see the can of worms that's opening up.
The broken chain of title might not have been an issue if there hadn't
been an unusual number of foreclosures. Before the housing bubble
collapse, the people who defaulted on their mortgages wouldn't have
bothered to check to see that the paperwork was in order.
But as everyone knows, following the housing collapse of
2007-'10-and-counting, there has been a boatload of foreclosures-and
foreclosures on a lot of people who weren't sloppy bums who skipped
out on their mortgage payments, but smart and cautious people who got
squeezed by circumstances.
These people started contesting their foreclosures and evictions, and
so started looking into the chain-of-title issue, and that's when the
paperwork became important. So the chain of title became crucial and
the botched paperwork became a nontrivial issue.
Now, the banks had hired "foreclosure mills"-law firms that
specialized in foreclosures-in order to handle the massive volume of
foreclosures and evictions that occurred because of the housing
crisis. The foreclosure mills, as one would expect, were the first to
spot the broken chain of titles.
Well, what do you know, it turns out that these foreclosure mills
might have faked and falsified documentation, so as to fraudulently
repair the chain-of-title issue, thereby "proving" that the banks had
judicial standing to foreclose on delinquent mortgages. These
foreclosure mills might have even forged the loan note itself-
Wait, why am I hedging? The foreclosure mills did actually,
deliberately, and categorically fake and falsify documents, in order
to expedite these foreclosures and evictions. Yves Smith at Naked
Capitalism, who has been all over this story, put up a price list for
this "service" from a company called DocX-yes, a price list for forged
documents. Talk about your one-stop shopping!
So in other words, a massive fraud was carried out, with the
inevitable innocent bystanders getting caught up in the fraud: the guy
who got foreclosed and evicted from his home in Florida, even though
he didn't actually have a mortgage, and in fact owned his house free
-and clear. The family that was foreclosed and evicted, even though
they had a perfect mortgage payment record. Et cetera, depressing et
cetera.
Now, the reason this all came to light is not because too many people
were getting screwed by the banks or the government or someone with
some power saw what was going on and decided to put a stop to it-that
would have been nice, to see a shining knight in armor, riding on a
white horse.
But that's not how America works nowadays.
No, alarm bells started going off when the title insurance companies
started to refuse to insure the titles.
In every sale, a title insurance company insures that the title is
free -and clear -that the prospective buyer is in fact buying a
properly vetted house, with its title issues all in order. Title
insurance companies stopped providing their service because-of
course-they didn't want to expose themselves to the risk that the
chain -of title had been broken, and that the bank had illegally
foreclosed on the previous owner.
That's when things started getting interesting: that's when the
attorneys general of various states started snooping around and making
noises (elections are coming up, after all).
The fact that Ally Financial (formerly GMAC), JP Morgan Chase, and now
Bank of America have suspended foreclosures signals that this is a
serious problem-obviously. Banks that size, with that much exposure to
foreclosed properties, don't suspend foreclosures just because they're
good corporate citizens who want to do the right thing, and who have
all their paperwork in strict order-they're halting their foreclosures
for a reason.
The move by the United States Congress last week, to sneak by the
Interstate Recognition of Notarizations Act? That was all the banking
lobby. They wanted to shove down that law, so that their foreclosure
mills' forged and fraudulent documents would not be scrutinized by
out-of-state judges. (The spineless cowards in the Senate carried out
their master's will by a voice vote-so that there would be no registry
of who had voted for it, and therefore no accountability.)
And President Obama's pocket veto of the measure? He had to veto it-if
he'd signed it, there would have been political hell to pay, plus it
would have been challenged almost immediately, and likely overturned
as unconstitutional in short order. (But he didn't have the gumption
to come right out and veto it-he pocket vetoed it.)
As soon as the White House announced the pocket veto-the very next
day!-Bank of America halted all foreclosures, nationwide.
Why do you think that happened? Because the banks are in
trouble-again. Over the same thing as last time-the damned
mortgage-backed securities!
The reason the banks are in the tank again is, if they've been
foreclosing on people they didn't have the legal right to foreclose
on, then those people have the right to get their houses back. And the
people who bought those foreclosed houses from the bank might not
actually own the houses they paid for.
And it won't matter if a particular case-or even most cases-were on
the up -and up: It won't matter if most of the foreclosures and
evictions were truly due to the homeowner failing to pay his mortgage.
The fraud committed by the foreclosure mills casts enough doubt that,
now, all foreclosures come into question. Not only that, all mortgages
come into question.
People still haven't figured out what all this means. But I'll tell
you: if enough mortgage-paying homeowners realize that they may be
able to get out of their mortgage loans and keep their houses,
scott-free? That's basically a license to halt payments right now,
thank you. That's basically a license to tell the banks to take a
hike.
What are the banks going to do-try to foreclose and then evict you?
Show me the paper, Mr. Banker, will be all you need to say.
This is a major, major crisis. The Lehman bankruptcy could be a spring
rain compared to this hurricane. And if this isn't handled right-and
handled right quick, in the next couple of weeks at the outside-this
crisis could also spell the end of the mortgage business altogether.
Of banking altogether. Hell, of civil society. What do you think
happens in a country when the citizens realize they don't need to pay
their debts?
Worthwhile 10 minute read on mortgage mess. Comment ex a hedge fund manager
Homeowners can only be foreclosed and evicted from their homes by the
person or institution who actually has the loan paper-only the
note-holder has legal standing to ask a court to foreclose and evict.
Not the mortgage, the note, which is the actual IOU that people sign,
promising to pay back the mortgage loan
Before mortgage-backed securities, most mortgage loans were issued by
the local savings & loan. So the note usually didn't go anywhere: it
stayed in the offices of the S&L down the street.
But once mortgage loan securitization happened, things got sloppy-they
got sloppy by the very nature of mortgage-backed securities.
The whole purpose of MBSs was for different investors to have their
different risk appetites satiated with different bonds. Some bond
customers wanted super-safe bonds with low returns, some others wanted
riskier bonds with correspondingly higher rates of return.
Therefore, as everyone knows, the loans were "bundled" into REMIC's
(Real-Estate Mortgage Investment Conduits, a special vehicle designed
to hold the loans for tax purposes), and then "sliced & diced"-split
up and put into tranches, according to their likelihood of default,
their interest rates, and other characteristics.
This slicing and dicing created "senior tranches," where the loans
would likely be paid in full, if the past history of mortgage loan
statistics was to be believed. And it also created "junior tranches,"
where the loans might well default, again according to past history
and statistics. (A whole range of tranches was created, of course, but
for the purposes of this discussion we can ignore all those countless
other variations.)
These various tranches were sold to different investors, according to
their risk appetite. That's why some of the MBS bonds were rated as
safe as Treasury bonds, and others were rated by the ratings agencies
as risky as junk bonds.
But here's the key issue: When an MBS was first created, all the
mortgages were pristine-none had defaulted yet, because they were all
brand-new loans. Statistically, some would default and some others
would be paid back in full-but which ones specifically would default?
No one knew, of course. If I toss a coin 1,000 times, statistically,
500 tosses the coin will land heads-but what will the result be of,
say, the 723rd toss? No one knows.
Same with mortgages.
So in fact, it wasn't that the riskier loans were in junior tranches
and the safer ones were in senior tranches: rather, all the loans were
in the REMIC, and if and when a mortgage in a given bundle of
mortgages defaulted, the junior tranche holders would take the losses
first, and the senior tranche holder last.
But who were the owners of the junior-tranche bond and the
senior-tranche bonds? Two different people. Therefore, the mortgage
note was not actually signed over to the bond holder. In fact, it
couldn't be signed over. Because, again, since no one knew which
mortgage would default first, it was impossible to assign a specific
mortgage to a specific bond.
Therefore, how to make sure the safe mortgage loan stayed with the
safe MBS tranche, and the risky and/or defaulting mortgage went to the
riskier tranche?
Enter stage right the famed MERS-the Mortgage Electronic Registration
System.
MERS was the repository of these digitized mortgage notes that the
banks originated from the actual mortgage loans signed by homebuyers.
MERS was jointly owned by Fannie Mae and Freddie Mac (yes, those two
again -I know, I know: like the chlamydia and the gonorrhea of the
financial world-you cure 'em, but they just keep coming back).
The purpose of MERS was to help in the securitization process.
Basically, MERS directed defaulting mortgages to the appropriate
tranches of mortgage bonds. MERS was essentially where the digitized
mortgage notes were sliced and diced and rearranged so as to create
the mortgage-backed securities. Think of MERS as Dr. Frankenstein's
operating table, where the beast got put together.
However, legally-and this is the important part-MERS didn't hold any
mortgage notes: the true owner of the mortgage notes should have been
the REMICs.
But the REMICs didn't own the notes either, because of a fluke of the
ratings agencies: the REMICs had to be "bankruptcy remote," in order
to get the precious ratings needed to peddle mortgage-backed
Securities to institutional investors.
So somewhere between the REMICs and MERS, the chain of title was broken.
Now, what does "broken chain of title" mean? Simple: when a homebuyer
signs a mortgage, the key document is the note. As I said before, it's
the actual IOU. In order for the mortgage note to be sold or
transferred to someone else (and therefore turned into a
mortgage-backed security), this document has to be physically endorsed
to the next person. All of these signatures on the note are called the
"chain of title."
You can endorse the note as many times as you please-but you have to
have a clear chain of title right on the actual note: I sold the note
to Moe, who sold it to Larry, who sold it to Curly, and all our
notarized signatures are actually, physically, on the note, one after
the other.
If for whatever reason any of these signatures is skipped, then the
chain of title is said to be broken. Therefore, legally, the mortgage
note is no longer valid. That is, the person who took out the mortgage
loan to pay for the house no longer owes the loan, because he no
longer knows whom to pay.
To repeat: if the chain of title of the note is broken, then the
borrower no longer owes any money on the loan.
Read that last sentence again, please. Don't worry, I'll wait.
You read it again? Good: Now you see the can of worms that's opening up.
The broken chain of title might not have been an issue if there hadn't
been an unusual number of foreclosures. Before the housing bubble
collapse, the people who defaulted on their mortgages wouldn't have
bothered to check to see that the paperwork was in order.
But as everyone knows, following the housing collapse of
2007-'10-and-counting, there has been a boatload of foreclosures-and
foreclosures on a lot of people who weren't sloppy bums who skipped
out on their mortgage payments, but smart and cautious people who got
squeezed by circumstances.
These people started contesting their foreclosures and evictions, and
so started looking into the chain-of-title issue, and that's when the
paperwork became important. So the chain of title became crucial and
the botched paperwork became a nontrivial issue.
Now, the banks had hired "foreclosure mills"-law firms that
specialized in foreclosures-in order to handle the massive volume of
foreclosures and evictions that occurred because of the housing
crisis. The foreclosure mills, as one would expect, were the first to
spot the broken chain of titles.
Well, what do you know, it turns out that these foreclosure mills
might have faked and falsified documentation, so as to fraudulently
repair the chain-of-title issue, thereby "proving" that the banks had
judicial standing to foreclose on delinquent mortgages. These
foreclosure mills might have even forged the loan note itself-
Wait, why am I hedging? The foreclosure mills did actually,
deliberately, and categorically fake and falsify documents, in order
to expedite these foreclosures and evictions. Yves Smith at Naked
Capitalism, who has been all over this story, put up a price list for
this "service" from a company called DocX-yes, a price list for forged
documents. Talk about your one-stop shopping!
So in other words, a massive fraud was carried out, with the
inevitable innocent bystanders getting caught up in the fraud: the guy
who got foreclosed and evicted from his home in Florida, even though
he didn't actually have a mortgage, and in fact owned his house free
-and clear. The family that was foreclosed and evicted, even though
they had a perfect mortgage payment record. Et cetera, depressing et
cetera.
Now, the reason this all came to light is not because too many people
were getting screwed by the banks or the government or someone with
some power saw what was going on and decided to put a stop to it-that
would have been nice, to see a shining knight in armor, riding on a
white horse.
But that's not how America works nowadays.
No, alarm bells started going off when the title insurance companies
started to refuse to insure the titles.
In every sale, a title insurance company insures that the title is
free -and clear -that the prospective buyer is in fact buying a
properly vetted house, with its title issues all in order. Title
insurance companies stopped providing their service because-of
course-they didn't want to expose themselves to the risk that the
chain -of title had been broken, and that the bank had illegally
foreclosed on the previous owner.
That's when things started getting interesting: that's when the
attorneys general of various states started snooping around and making
noises (elections are coming up, after all).
The fact that Ally Financial (formerly GMAC), JP Morgan Chase, and now
Bank of America have suspended foreclosures signals that this is a
serious problem-obviously. Banks that size, with that much exposure to
foreclosed properties, don't suspend foreclosures just because they're
good corporate citizens who want to do the right thing, and who have
all their paperwork in strict order-they're halting their foreclosures
for a reason.
The move by the United States Congress last week, to sneak by the
Interstate Recognition of Notarizations Act? That was all the banking
lobby. They wanted to shove down that law, so that their foreclosure
mills' forged and fraudulent documents would not be scrutinized by
out-of-state judges. (The spineless cowards in the Senate carried out
their master's will by a voice vote-so that there would be no registry
of who had voted for it, and therefore no accountability.)
And President Obama's pocket veto of the measure? He had to veto it-if
he'd signed it, there would have been political hell to pay, plus it
would have been challenged almost immediately, and likely overturned
as unconstitutional in short order. (But he didn't have the gumption
to come right out and veto it-he pocket vetoed it.)
As soon as the White House announced the pocket veto-the very next
day!-Bank of America halted all foreclosures, nationwide.
Why do you think that happened? Because the banks are in
trouble-again. Over the same thing as last time-the damned
mortgage-backed securities!
The reason the banks are in the tank again is, if they've been
foreclosing on people they didn't have the legal right to foreclose
on, then those people have the right to get their houses back. And the
people who bought those foreclosed houses from the bank might not
actually own the houses they paid for.
And it won't matter if a particular case-or even most cases-were on
the up -and up: It won't matter if most of the foreclosures and
evictions were truly due to the homeowner failing to pay his mortgage.
The fraud committed by the foreclosure mills casts enough doubt that,
now, all foreclosures come into question. Not only that, all mortgages
come into question.
People still haven't figured out what all this means. But I'll tell
you: if enough mortgage-paying homeowners realize that they may be
able to get out of their mortgage loans and keep their houses,
scott-free? That's basically a license to halt payments right now,
thank you. That's basically a license to tell the banks to take a
hike.
What are the banks going to do-try to foreclose and then evict you?
Show me the paper, Mr. Banker, will be all you need to say.
This is a major, major crisis. The Lehman bankruptcy could be a spring
rain compared to this hurricane. And if this isn't handled right-and
handled right quick, in the next couple of weeks at the outside-this
crisis could also spell the end of the mortgage business altogether.
Of banking altogether. Hell, of civil society. What do you think
happens in a country when the citizens realize they don't need to pay
their debts?
