Saturday, October 9, 2010

More on the foreclosure crises

Because I have had the rare "joy" of watching up close the real estate business in USA, there are moments when I cannot totally repress the rumble of schadenfreude in the background of my thoughts on this issue.  But because so many people ARE being hurt by this mess, I will try to keep some perspective on the problem.  On the other hand, here are the relevant factoids that make me occasionally giggle.

There is a whiff of to the story of Wall Street believing that "securitizing" mortgages was a good idea.  In the Amazon example, the way to riches was to redirect the incomes of a bunch of neighborhood booksellers to the mothership with the world's most sophisticated online store.  But the idea that Wall Street should finance the consolidation of the real estate business was probably doomed to catastrophically fail.  Mostly because of one over-riding fact--the folks in real estate are not small book retailers.  Not. Even. Close.

One of the interesting features of life in Minnesota is that the boom-town real estate shysters have not totally disappeared.  And think about what they accomplished.  When the boomers showed up, Minnesota was empty grassland and forests.  The petty real estate speculators drew imaginary lines on the land and sold the parcels to credulous immigrants who then worked themselves to death to pay off the mortgage they took on to buy the land sold to them by agents of the railroad.

Being a real estate booster is not very hard work--you buy some land with a scheme to increase its value.  Then you sell the land, build a big house for yourself and hope all this has led to having a higher-grade sex partner.  Since you have a lot of free time to fill while you wait for your real estate holdings to increase in value, you occupy your time hanging out with the other city fathers making sure the contracts that allow all this to happen are air-tight.  And you scheme to increase the value of the real estate.

Now keep this in mind--a large and very self-important segment of any community consists of landlords, bankers, lawyers, real-estate agents, inspectors, assessors, etc. who owe their very existence to petty real estate speculation.  And what aligns the interests of them all is one over-riding goal--increase the value of the real estate!!!

The schemes concocted to boost real estate values range from the mildly entertaining to borderline enlightened to the spectacular.  I once lived in a small college town that annually celebrated the fact that their townspeople had once shot up the Jesse James Gang while defending their local bank.  Minneapolis has maintained its property values over the years because a particularly enlightened real estate speculator named Theodore Wirth got folks to agree that the most scenic land in the city was to become parks.  And now I live in the suburb where the Minnesota Vikings are headquartered.  The value of having a local enterprise mentioned on TVs around the world for months at a time is NOT lost on the boosters.  Part of my sales taxes go to fund the new coliseums for professional sports.  We even have a juicy sports story--aging quarterback Favre tossing a ball to returning bad-boy receiver Moss has been enough to make a grown booster swoon with pure joy.

And Wall Street was going to fuck with all of THAT??  And to betray the sacred paper trails that made all this happen is so far beyond acceptable, I imagine the outrage goes very deep.  I can almost see it now--a revolution started by the petty real estate speculators.  Nah! When the easy money was flowing during the salad days of mortgage securitization, every damn one of those boosters was on board--they all had taken LONG pulls on the Kool-Aid.  They all wanted to believe they had finally invented the way that would make them all rich.

Anyway, a link to the story of how the idea of an for real estate boomers floundered on the fact that in real estate, a lot of people make their living from executing the details of making it valuable.  Those details are there for MANY reasons.
4ClosureFraud Posts Lender Processing Services Mortgage Document Fabrication Price Sheet
A bombshell has dropped in mortgage land.
We’ve said for some time that document fabrication is widespread in foreclosures. The reason is that the note, which is the borrower IOU, is the critical instrument to establishing the right to foreclose in 45 states (in those states, the mortgage, which is the lien on the property, is a mere “accessory” to the note).
The pooling and servicing agreement, which governs the creation of mortgage backed securities, called for the note to be endorsed (wet ink signatures) through the full chain of title. That means that the originator had to sign the note over to an intermediary party (there were usually at least two), who’d then have to endorse it over to the next intermediary party, and the final intermediary would have to endorse it over to the trustee on behalf of a specified trust (the entity that holds all the notes). This had to be done by closing; there were limited exceptions up to 90 days out; after that, no tickie, no laundry.
Evidence is mounting that for cost reasons, starting in the 2004-2005 time frame, originators like Countrywide simply quit conveying the note. We are told this practice was widespread, probably endemic. The notes are apparently are still in originator warehouses. That means the trust does not have them (the legalese is it is not the real party of interest), therefore it is not in a position to foreclose on behalf of the RMBS investors. So various ruses have been used to finesse this rather large problem.
The foreclosing party often obtains the note from the originator at the time of foreclosure, but that isn’t kosher under the rules governing the mortgage backed security. First, it’s too late to assign the mortgage to the trust. Second. IRS rules forbid a REMIC (real estate mortgage investment trust) from accepting a non-performing asset, meaning a dud loan. And it’s also problematic to assign a note from the originator if it’s bankrupt (the bankruptcy trustee must approve, and from what we can discern, the note are being conveyed without approval, plus there is no employee of the bankrupt entity authorized to endorse the note properly, another wee problem).
We finally have concrete proof of how widespread document fabrication was. For some reason the ScribD embeds aren’t working correctly, you can view the entire Lender Processing Services price sheet here, and here are the germane sections. more

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