Sunday, November 21, 2010

Mortgage-gate - Recent Developments

Anyone watching the financials around 3:45 (EST) on 11/16 noticed a big spike (and subsequent sell off right before the closing bell) on the news of an imminent deal between those involved in robo signing and the 50 attorneys general. The media put a quick spin as did a few "uninformed" blog sites about how all was well, time to go long the banks.
It's important to understand all aspects of the mortgage problems right now and the various fronts being fought. There are a few key issues that this big issue can be broken into:
Issue 1: Robo signing
Plain and simple, this was fraud committed by those appearing before a judge stating their paperwork was all in order and followed necessary legal process. Under deposition these "robo signers" stated they used false titles such as VP of MERS when in fact they never received a paycheck from MERS, didn't even know anything about the company. The best of all deposed quotes has to be from the person saying "I know nothing about mortgages, my country does not have mortgages."
The news that broke yesterday about a settlement, which did not include terms of a settlement and the fund that would be created would address this issue.
HR3808, a bill stealthily passed and later pocket vetoed by President Obama is back for vote today. If passed, the presidential veto would be overridden and states would have to accept another state's notary.
Issue 2: Representations and Warranties
Did sellers of MBS knowing sell investors securities that failed to meet basic requirements such as LTV, income, credit quality and more. Under deposition a Citi executive stated they knowing did such. One of the top due diligence firms in the country was hired by Citi and others to evaluate the quality of credits to be purchased. The analysis clearly showed the poor credit quality which Citi and others used to negotiate from the seller a price below par. Citi and others then did not disclose the finding of Clayton in selling at par to investors of MBS.
Equally if not more damaging is the question of put backs. Securities were sold to investors yet never conveyed to the MBS. Data has surfaced lately showing two years after the demise of Countrywide or Lehman for example that the transfer of note/mortgage was made from such non existent entities. For investors to begin a put back process they need break the 25% threshold of investors of such securities before the issue can be investigated. A few reports have surfaced stating that such thresholds have been reached.
This is the worst case scenario for banks which have no where near reserved for such losses. Nor have they reserved for the hundreds of billions in second liens that have far less value than currently booked.
Issue 3: Foreclosing moving forward
Rumors have surfaced of another bill being attached during the lame duck session of congress (attached to a larger bill) to basically acknowledge the legitimacy of MERS. Federal law would override years of State law and would allow MERS (retroactively and moving forward) to not be required to assign mortgage transfer at the state level. California is suing for billions to recoup lost fees associated with MERS bypassing the system. Right now when a servicer (hired by the trust on behalf of the investors to service the MBS) goes to court for foreclosure proceeding the question being raised is do they have the legal authority to do this. MERS holds the mortgage (the security lien, the right to the asset) yet the servicer holds the note (which could be questioned as stated above) and therefore has a default trigger but does not have a security lien and therefore no recourse.
So those are three totally different issues, all requiring fights on different fronts. So yesterday's news of a deal, if true address one of the three but not all. And then there is a little detail of home prices double dipping and rising foreclosures all in the face of rising unemployment. Not a pretty picture for the banking industry right now.


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