Foreclosures, Manipulation, QE and Other Links, Oh My

Hi Edward, I’ve noticed people saying the MBS note foreclosure issue is restricted to a period something like a 2004 to 2008.

I’m aware Yves has argued this is a period where it accelerated (been busy reading other stuff). However, there’s a finer view of this. I try to regularly read IRA and the personal tale Chris Whalen described recently suggests a different picture to this.

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Excerpts from: Institutional Risk Analysts – “Refinancing, Not Foreclosures, is the Issue; Richard Alford on Bill Dudley and QEII” – October 6, 2010

“… A few years back, a young analyst from the FRBNY named Chris Whalen went to work at the London branch of Bear, Stearns & Co. During the morning we sold German bunds and the other debt issued by what are now the EU member nations. In the afternoon we sold mortgage-backed securities. Terms like CMO and convexity were soon heard on the trading floor as we vigorously stuffed large quantities of these very early private label RMBS into every open orifice on the European continent, including a number of large Japanese banks and insurance companies. Thus was coined the term “yield to commission.” / … … /

“…The Fed’s Washington staff was particularly infuriated by Todd’s writings regarding the amendments to the Federal Reserve Act contained in the FDICIA legislation in 1991.” / … … /

“…One of the topics we discussed at length with Todd in the mid-1980s was the way in which Wall Street firms underwriting of residential mortgage backed securities or “RMBS” failed to perfect the collateral lien of the securities against the home or other real estate.” / … … /

“…Now let’s walk through the process of creating an RMBS to illustrate the problem facing many home owners, lenders and investors. We’ll use the actual example of IRA cofounder Christopher Whalen. Back in 1998, Chris and his wife bought a home in Westchester County NY. The primary mortgage was originated by and independent broker and placed with Roslyn Savings Bank, which retained the paper for its own portfolio. In 2001, Chris refinanced with the Bank of New York Mellon (BK) (Q2 2010 Stress Rating: “A”), which immediately sold the “Alt-A” loan to the firm formerly known as Lehman Brothers. But that was only the start of this mortgage’s journey.

The loan was then resold by Lehman Brothers to a special purpose vehicle (SPV) and then sold again to a Delaware trust created to securitize the mortgage into an ABS. Lehman controlled the trust, but the vehicle was administered as though it were in fact separate. Servicing was provided by Aurora Loan Servicing, a wholly owned subsidiary of Lehman, which is now being liquidated. When the time came to sell bonds to investors, the trustee for the Delaware vehicle issuing the securities repeated the process performed thousands of times before and merely took the documentation describing the mortgages into a file folder and went on to the next deal.

Here’s the problem. If you go down to the Courthouse in White Plains, New York, and pull up the title record for the property purchased a decade ago by the Whalens, the only indication of any encumbrance over the collateral that is supposed to back up the securitization sold to investors by Lehman Brothers is the original assignment to Roslyn Savings and later to the Bank of New York. There is no change in recordation of the collateral lien on the property to Lehman Brothers much less the SPV or the Delaware trust that acted as the securitization vehicle in the ABS.”

-IRA

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So even from as long ago as 1998 Chris Whalen has found the imperfect securitization was prosaic and possibly widespread. And even as far back as 1991 there are indications it was already becoming (unwillingly) recognized at the Fed as a potential fly in the ointment of mortgage securitization.

Like you said, “it goes much, much deeper.”

This indicates either contempt on the part of FED as regulators, or a degree of ineptness, irresponsibility, hubris and lack of due process that is simply improvident.

So it’s more than the past 4 to 5 years, where the practice surely did accelerate (with accelerated flipping) that resulted in greater dodgy MBS overall.

But I think it probably just scaled-up with the bubble-ramp of flipping that which was already common. That does not necessarily mean it actually became more prevalent per volume of mortgages bundled after 2004. It seems to me it may have already been ‘normalized’ though, long before this.

How can anyone credibly work out which are compromised without checking all? And who’s going to pay for that? I bet it won’t be the collapsing Banks or idiot Ratings Agencies.

So if this accelerated more recently merely due to volume, this doesn’t undo the need to re-examine the earlier records, if people want clear title, once the last mortgage installment is paid. There is no particular cutoff date as far as I can see.

People will want to know before they pay for another ten years to possibly end up with nothing.

The other thing is, why so people presume it basically stopped since 2008, or even 2009 or 2010? What makes people think this wasn’t still happening last month? Did the banks or their agents suddenly get all civic-minded, and the regulators suddenly start doing their job?

Ha-ha-ha! … er … no.

It seems to me there’s at a minimum of 15 years since 1995 in which MBS and foreclosure debt-collectors may have had no legal-standing to pursue foreclosure on defaulted mortgages nor to resell houses.

Did they really even have the right to sell ANY MBS in that case?

Was that selling of mortgages actually legal at all?

If I sold you a mortgage, Edward, and it defaulted, and the asset is not yours to claim and resell, then you’d want your money back from me – right? Yes?

Even of you bought a house, for cash, during the past 15 years you’re still exposed to the risk that the seller did not actually have legal-standing to sell you that house, so it isn’t yours. You’d want your money back, right, yes?

SO ITS NOT EVEN ABOUT MORTGAGES PER-SEC, ITS ULTIMATELY ALL ABOUT TITLE AND WHO CAN SUSTAIN A CLAIM FOR IT.

This is ‘TITLE-GATE’ not merely a foreclosure fraud crisis.

And if refinancing and consumer credit comes from securitization and this mechanism is seriously discredited (sorry), then welcome to the new credit ice-age, and to negative GDP growth.

I’m going to watch the graphs within CMI’s ‘Retail Page’ as this unfolds, as it seems the RE-FI and Auto index have already stalled and reversed since TITLE-GATE popped-up like an inconvenient corpse on a metaphorical Amity Island Beach one Summer morning.

https://consumermetricsinstitute.com/retail.html

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And the international legal blowback has not even begun. EU banks plus several Japanese banks are loaded with this muck and they will not just sit on their hands as it blows up.

Plus how much of this toxic-puss was sold to Australian Financials? Last week the RBA didn’t raise rates, yet the Big-Banks made it clear they still intend to raise rates anyway. This made little sense as they had just been loudly and clearly warned ,in advance, that a failure to stick and scale with RBA actions would invite Govt regulation to force the issue.

But the Banks still insisted it was necessary to raise rates rather than wait until the RBA moved in a mere month or two. So what’s the hurry guys? Why the sudden rush to get some altitude?

We have 4.5% rates and the threat of creeping secular inflation (for years to come) so higher rates are surely coming soon. And it’s a heavily indebted residential sector where defaults are slowly rising, yet the Banks still want to risk pushing people towards default?

Would you do that Edward?

I’d be taking a very long serious look to find out what is making them prefer to cut their own throat instead.