Love him or hate him, here are two points to keep in mind when it comes to Alan Grayson:
- He’s an attorney.
- He “gets it” when it comes to the root causes of Foreclosuregate. It took him a while (too long, in my opinion, even though I’ve been hammering his office since he was elected and his staff indicated a willingness to listen), but he finally connected the dots.
A letter he sent out yesterday is linked in full at the bottom of this Ticker. Here are the salient points for you to ponder, from my perspective:
So far, banks are claiming that the many forged documents uncovered by courts and attorneys represent a simple “technical problem” with foreclosure processes. This is not true. What is happening is fraud to cover up fraud.
Yep. As Grayson goes on to cite, The FBI noted an “epidemic” of mortgage fraud earlier in the decade. Nothing was done about it. These lenders were engaged not in making mortgage loans but rather in an elaborate asset-stripping scheme where the key point was to force the homeowner back into the lender’s office in a couple of years so they could grab another few thousand dollars in fees.
Repayment didn’t factor into their decisions and was immaterial to their thought process.
The banks didn’t keep good records, and there is good reason to believe in many if not virtually all cases during this period, failed to transfer the notes, which is the borrower IOUs in accordance with the requirements of their own pooling and servicing agreements. As a result the notes may be put out of elegibility for the trust under New York law, which governs these securitizations. Potential cures for the note may, according to certain legal experts, be contrary to IRS rules governing REMICs. As a result, loan servicers and trusts simply lack standing to foreclose. The remedy has been foreclosure fraud, including the widespread fabrication of documents.
It has been my contention for more than three years that these notes were never intended to be repaid – they were intended to be prepaid out of the trusts by what amounted to forced-refinances where the borrower could be asset-stripped once more. In such a circumstance not only is the proper chain of documents immaterial it is actually harmful as the original documents provide the trustee and servicer the ability to audit compliance with the representations and warranties. No documents, no audit – you can’t audit what you don’t have!
But when the housing market crashed these asset-stripping schemes fell apart, as the owner now had negative equity and did not qualify even on the most-generous of claimed terms for a refinance. Therefore the notes couldn’t prepay and instead defaulted. Lenders started to go under, and servicers and trustees now had a bad hand – one that they were sold by the banks and either knew was bad or didn’t bother to verify.
The result is the same – the “trusts” never were conveyed what was supposed to be there, and what’s worse, what they do have (and in those cases where they do have it) they are out of compliance anyway, as the REMIC rules require that no more than 10% of a trust’s assets be comprised of notes that either (1) are delinquent (even by as little as 30 days) or (2) are reasonably foreseeable as likely to default. The former means that any “first payment default” notes are obviously trouble and the second means that any that violate reasonable lending constraints or in which the only real security against default is a rising asset price are in violation.
We now have as sworn testimony before the FCIC that the banks knew these loans didn’t meet credit quality standards – that anywhere from 1/3rd to as much as 90% of them were in violation. Many of these loans went into the securities anyway, despite knowledge of these deficiencies.
In addition, we know from the FCIC hearings that Fannie and Freddie do not have the loan files that were allegedly “conveyed.” The GSE regulator has said that they have found it impossible in many cases to obtain these original files – the originators are either “slow-walking” their requests or flatly refusing to turn them over. I also have a report from an attorney on the west coast who is suing one of the major originators as a class action that they intentionally shipped the files to India, which (I would presume) is an effort to frustrate a subpoena to compel production of those documents.
The liability here for the major banks is potentially enormous, and can lead to a systemic risk. Fortunately, the Dodd-Frank financial reform legislation includes a resolution process for these banks.
The immediate action that must be taken is to force all payments into court escrow – that is, a court-held suspense account – until it is sorted out who actually owns what.
Freezing foreclosures doesn’t fix it – if you’re not paying, then you’re not paying. But at the same time if the trust doesn’t actually own the paper they have no right to the money! The solution to these problems is known and already available under the law – it’s a court-ordered suspense account held by the clerk for all payments and trustee sales until the courts figure out who owns what.
The proper remedy under the law for institutions that tendered assets into a trust that they knew or had reason to know did not meet the qualifications for that trust is for the transaction to be unwound – for the bank to be forced to refund the full face value of the mortgage and repurchase it. For those assets that were never conveyed the solution is likewise for the bank that was supposed to convey it to repurchase the asset.
This resolves the problems with chain of title at the same time it resolves the problems with the REMICs.
But, at the same time, it sticks the banks that performed the securitizations (all big financial institutions) with these non-performing loans – that is, the financial liability for their actions.
Once the above is sorted out let those who have actual ownership of these notes and can prove it come to the court and prove up their ownership under strict standards of proof, claiming their funds.
Then those who wish to foreclose, forebear or renegotiate are free to do so as they wish – and they are also required to recognize the losses that came from the bad lending practices.
With more than $1 trillion in outstanding non-agency REMICs of this sort, and another $5 trillion or so at Fannie and Freddie, if half – a reasonable estimate of those that might be compromised – are forcibly unwound and the bad loans are recognized at their recovery or renegotiated value then we’re going to need that Dodd-Frank resolution authority- for all the major banks.
This, incidentally, is exactly what Institutional Risk Analytics was basically saying the other day.
We have to force these resolutions folks. These REMICs must go through all their paper and prove up its provenance in each and every case. If they are either holding empty boxes or bad notes that did not meet the claimed credit quality they must be forced back onto the issuers, because it is both manifestly unjust to allow the major financial institutions to get away with screwing your pension funds, insurance companies (e.g. annuities, etc) and similar, and we must resolve the title issues that are now being exposed as massive and pervasive across the country.
Private property rights have as their highest expression the ownership of real estate. It is for this reason that states have historically taken very seriously the recordation of titles, assignments and a proper chain of ownership proof in these matters. What the banks have done – intentionally – is severely damage that sacred trust and personal property ownership right, and they must not be allowed to get away with it. This same scam was run during the 1920s with the Florida “swampland” fiascos and it took YEARS to sort it out. We must start now.
Those who are invested – either in the bonds or common stock – of the big banks at this point in time are essentially betting that the consequences of these acts either will not be of financial consequence or that the government will find some way to keep them from being recognized and “eaten” by these institutions.
I wouldn’t take that bet.