October 27, 2009

More Mortgage Madness

Much has been made about the Landmark ruling in KS. It needs to be remembered that all the legal maneuvering still resulted in the foreclosure of the home to satisfy the first lien. At issue was the second lien which Sovereign did not properly perfect, at least not according to the KS supreme court. The decision will likely be altered when Sovereign properly proves it's interest, but it'll be futile since I doubt the sheriff's sale of the property resulted in enough proceeds to even begin to satisfy the first lien. Still, it will straighten out the relationship between owner of the obligation (Sovereign) and their agent (MERS).

MERS is never, in my experience, a party itself in the event of foreclosure so I don't know where that's coming from (this may be more common in other states but it's not really here). Further, servicers retain the right, on behalf of security holders and acting as their agents in fact (i.e., in their capacity as servicer) to foreclose even on homes that have mortgages that were securitized. MERS usually doesn't even act as a document custodian, that's usually the servicer. MERS just tracks the physical location of the collateral package documents, the servicer on the obligation and who owns the obligation, currently. In the event the note is securitized, the owner would be Fannie Mae Trust 1998-02 with 1998-02, being the second securitizion of 1998 issued by FNMA and held in trust for the investors. The investors in 1998-02 would not have an individual interest in any of the mortgages, they would have an individual interest in FNMA Trust 1998-02. It would be the servicer, acting as agent for FNMA Trust 1998-02,
that would foreclose. And they'll have no problem doing it. They'll do it because their servicing contract requires them to keep making payments to the trust... even when those payments aren't received from the borrower. The charges people pay for late payments aren't just padding profits.

The reality, however ugly, is that until the note is satisfied people are not homeowners, they are mortgagors. Since the mortgage is a debt instrument, it does not entitle the holder to an equity interest in the property (it's not a joint equity instrument) so if someone wants to sell a home for more than the current balance due on the note, they get to keep the difference due to their interest as mortgagor. If the home sells for less than the note amount, the borrowers owe the difference to the mortgagee. They signed the contract and they bear ultimate responsibility for it. It's an installment sales contract, like a car note. Everyone is pretty comfortable with the fact that a car is worth less than you pay for it the minute you drive it off the lot. We're not used to it with housing because, on balance, housing prices usually go up. But not always.

This is going to sound nasty, but I have little sympathy for homeowners or for investors in all this. And I have real problems with the originator fraud issue as that is usually the complaint you hear in the event of foreclosure. When you dig down, you find that all documentation was executed properly and that the customer understood, per affidavit. They wanted the house and glossed over the terms of the obligation they were taking on. Worse, they were usually (on the west coast) counting on the greater fool theory. GFT states that the value of an asset is irrelevant because at some point in the future, a greater fool than you will pay you more for it. That was a HUGE part of the speculative bubble and big part of the loss mitigation problem we face now. So, no, I don't really have a lot of sympathy for the asshole who bought the McMansion on the 2/28 ARM thinking he'd sell it off for $200k more within the 2 year fixed period. He wasn't buying a house, he was going all in on red 21 at a roulette table.

As for the investors, no one did any due diligence to figure out what should have been obvious... the insurance policies (the CDS) on this shit were juicing the credit quality and no one asked if the issuer of the policy had
the wherewithal to pay in the event of a claim. Here's the simple conversation that should have taken place between the investor and the salesperson pushing the CDO...

S: Oh, it's a really good package, filled with safe home loans. You know people always pay their mortgage!
I: Actually, I don't. People can walk away from a house easily if they have little down.
S: Maybe, but it's never happened. Besides, we have the entire issue guaranteed.
I: Really? By whom?
S: I think AIG is the CDS counterparty on this one.
I: Really? How are they accounting for that one their books?

And that's where things go off the rails because AIG wasn't accounting for these transactions on their books. Which would have told anyone that the insurance being sold in combo with these securities was, you know, worthless.

This aside, I am a TRUE believer in securitization. Without it, our interest rates would be, at a minimum, 2-3% higher and we would not be able to take on some of the risks we take on in terms of borrower credit quality. I LOVE
the way what was hailed a miracle four years ago for expanding homeownership in the US is now the red-headed stepchild that is constantly bitchslapped by people like Taibbi who really only have the vaguest idea what the fuck
they're talking about.

So, in case you are wondering, you can't get your home for free if MERS appears in your docs. Just sayin'.

Posted by mcblogger at October 27, 2009 02:43 PM

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