The Devil's in the Details

What appeared at first to be an isolated problem with home mortgage foreclosures at GMAC has morphed into a serious conundrum for just about everyone involved in the residential home market: homeowners, banks, mortgage servicers, investors, and even the US government. The problem goes beyond finding which lender has legal title to a home, and therefore the right to foreclose on a defaulted mortgage. The problem has become how to prepare for a possible behavioral change among homeowners, if more than a small percentage of them decide to stop paying on their mortgage.

Strategic Defaults are Already On the Rise

What would motivate a homeowner to stop paying their mortgage principal and interest? So far, severe financial problems, combined with a drastic fall in house prices, have been the main causes of most mortgage defaults by homeowners. When the value of the house falls below the mortgage balance due, homeowners are even more liable to default on their loan, and the greater this difference (referred to as the homeowner being ”œunderwater”), the more likely it is that a strategic default will take place. This is an industry term for defaults that occur even though the borrower has the financial means to continue paying down the mortgage.

Strategic defaults are a rational decision by the homeowner, who believes the value of the home is so far below the mortgage balance that it would take years for market values to catch up. Why pay off a loan on a depreciating asset, especially if the homeowner can rent the same size home for much less than their mortgage payment? Depending on the location, strategic defaults represent from 10% – 20% of all defaults. There is also more of a tendency for owners of expensive homes to strategically default than owners of average size homes, so strategic defaults are of serious concern to the banking industry.

The initial reaction of banks to the rising level of mortgage defaults was to foreclose and dispose of the property as soon as possible. When home values were in a free-fall up to the summer of 2009, the banking industry frenetically processed tens of thousands of foreclosures each month, evicting homeowners in every metropolitan area across the US. This process slowed down last year for two reasons. First, the federal government imposed a moratorium on foreclosures, and second, the banks were achieving less and less on foreclosed homes. In previous recessions, banks could recover around 40% of the value of the outstanding mortgage from a foreclosure and bank sale of the property. Today the recovery rate has fallen to an unprecedented low of 5% of the loan value, which is hardly worth the expense, time, and trouble of foreclosing on the property.

You would think, therefore, that banks would be eager to work out a deal with the homeowner, lowering their mortgage balance to some level that meets the financial capabilities of the borrower. This isn’t happening either. To do this, the bank would still have to declare a loss on its books, and even the biggest banks don’t have enough capital to do this on a wholesale scale. Another factor is that the banks may only own a small portion of the mortgage, the rest being sold off to investors in a mortgage-backed security deal. These investors would have to consent to taking a loss as well, and this is almost impossible to arrange.

Where is the Title to the Home?

Now comes a third problem. The GMAC revelations showed that this mortgage company has been foreclosing on thousands of properties each month, filing incomplete or possibly fraudulent documents with the court approving the foreclosures. The process of foreclosing on a home mortgage is complex and governed by both federal and state laws, but in any event the process requires that someone working for the foreclosing bank assert in writing that they are personally familiar with all the documents submitted, and that these documents are accurate. GMAC has not been meeting this standard. A middle level executive has been signing over 10,000 foreclosure documents for GMAC each month and could not possibly have ”œpersonal knowledge” of the details of each foreclosure.

It gets worse. GMAC has been asserting that it is in possession of the lien representing the mortgage, and much more importantly ”“ it is also in possession of the title to the home. It is the title which is of far more importance here, because without clear title a bank has no foreclosure rights. GMAC has been going in front of courts all over the US claiming it holds title to the property in question, when in fact the person making this claim has no personal knowledge of the documents, and GMAC cannot in many cases produce the title.

Who has the title? GMAC may have lost it within its own files, or may have passed the title on to a mortgage servicer when the mortgage was sold off to investors. The mortgage servicer may have sold the title to another servicer, or to a clearing house that supposedly was protecting the legal rights of the lenders and investors in mortgage securities. As the mortgage market became frenzied at the height of the bubble, the financial industry became very sloppy about documentation and is now having serious trouble producing the necessary documents to proceed with a foreclosure.

Quite a few real estate lawyers believe that what GMAC did, whether through sloppiness or deliberately, constitutes a fraud upon the court, which is subject to criminal penalties. GMAC has halted all foreclosures until it straightens out the document mess, but there is increasing suspicion in the mortgage market that these problems are not going to be solved in just a month or two, if at all. JP Morgan Chase has admitted that it too has a middle level executive who was submitting personal attestations to the foreclosure courts, when she could not possibly have known the facts behind each mortgage. Chase is probably in very good company with Citigroup, Bank of America, and Wells Fargo, all of which are likely to have similar processing problems.

It seems, therefore, that millions of foreclosures that have occurred in the past two years may be invalid. Investors who were part of the $8,000 tax credit program may not have valid mortgages and may not legally have the right to live in their home. Title insurance companies have stopped accepting mortgage titles from GMAC and other financial firms implicated in this situation.

Foreclosure Market is Coming to a Halt

The foreclosure market in the US is slowly grinding to a halt, with all this uncertainty about past and future mortgage rights, and with banks now recovering only 5% of the mortgage value in a forced sale. Professionals in the market are now speculating that the federal government may be forced to outlaw all home foreclosures, since there is so much doubt on whether banks have any legal right to foreclose on residential property. If this were to happen, the market mechanism essential to clearing defaulted properties from the market would cease to exist. Lost too would be the process known as price discovery, wherein neighboring properties can be appraised, making it much harder for any homeowner wishing to sell to do so. Not only is the foreclosure market subject to a freeze, but the entire home resale market could be crippled as well.

In fact, there may be yet another incentive for homeowners to strategically default, if theoretically the defaulter could live in the home free of charge should the party holding the mortgage be unable to produce the title. Already there are thousands of homeowners in the US who are living ”œrent free”, so to speak, while they wait for the bank to foreclose or for the courts to honor a bank’s foreclosure claim. These people are socking away tens of thousands of dollars in savings, or spending it for that matter, while the disposition of their property is in limbo. Even when the bank is finally able to proceed with the foreclosure, they are not suing the homeowner for back principal and interest due, in part because the delay may have been caused by the bank itself, and in part because some states do not allow banks to go after other homeowner assets once a default occurs.

As the months go by, the difference between a homeowner living rent free in their home, and de facto owning the home free and clear through a form of squatters rights, is becoming very gray. This is not going to sit well with the people who continue to pay down their mortgage even if they are underwater, nor will it sit well with those who paid off their mortgage. Good financial stewardship, a virtue in the past, is looking more and more like foolhardiness. There is both a legal and social breakdown that is occurring here, upending over a century of contract law and prudent behavior that underlay the housing market.

If strategic defaults spread in part because of this new uncertainty over foreclosure and who has the title to the home, the banks and the mortgage backed securities market would be put in a dreadful position. The day in and day out cash flow expected from millions of mortgage principal and interest payments would be impacted far more than it is already, with the banks unable to access their collateral to stanch the bleeding. Insolvencies among the banks and the investors holding mortgage securities would certainly rise.

The Federal Government is Ultimately Going to Own this Problem

How bad this could get is anyone’s guess, but continued deterioration will inevitably drag in the US government, which owns both Fannie Mae and Freddie Mac, by far the biggest issuers and guarantors of mortgage backed securities. The federal government also has an ownership stake in Citigroup and is sitting on billions of dollars of mortgage securities bought from all the big banks and from failing institutions like Bear Stearns. If the largest US banks are pushed into technical insolvency because of this problem, the federal government would inevitably own them too.

What is currently a legal problem could turn into a behavioral problem affecting the entire mortgage market, which in turn creates a massive political problem for the federal government. It is the behavioral problem which has to be of most concern for the government, because if people who could pay their mortgage decide it is uneconomic or unfair for them to do so, the relationship between borrower and lender is broken. Currently it is slightly fractured, and the government as well as industry leaders will do everything possible to downplay this situation, characterizing it as a technical matter that will be easily and quickly cleared up.

So far, though, the courts aren’t buying the quick fixes being proposed by the industry. The foreclosure laws that have arisen over the past 100 years are designed to protect the homeowner from hasty and incomplete processes, and as well from fraudulent foreclosures. The courts are saying that the banking industry not only was hasty and reckless in its mortgage securitization process, but that homeowner rights are being trampled upon, and the courts themselves are being defrauded along with the homeowners. More and more judges across the country are coming to this conclusion, and if they believe the rule of law has been seriously undermined in the mortgage market, why should any homeowner feel a moral or legal compulsion to continue to pay down their mortgage?

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Numerian is a devoted author and poster on The Agonist, specializing in business, finance, the global economy, and politics. In real life he goes by the non-nom de plume of Garrett Glass and hides out in Oak Park, IL, where he spends time writing novels on early Christianity (and an occasional tract on God and religion). You can follow his writing career on his website,

28 CommentsLeave a comment

  • As of today, it is impossible to get Title Insurance on foreclosed homes.

    This is exactly the kind of thing that our laws were designed to keep from happening. No one can do business in the country with this kind of thing going on.

    How do you determine the value of a house? Any house? When we know that huge amounts of inventory are withheld from the market? What about houses already illegally foreclosed and sold or even sold more than once since the foreclosure?

    Everything has been so out of control and this is the result. The entire economic system is corrupted and now we see what eventually happens.

  • the current offering at The Automatic Earth, which concerns, broadly, the role of trust in modern societies:

    Our trust in the system is slipping away, quickly.

    The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread.
    Anatole France

  • For years these monstrous octopi like corporate bank shells and MERS (in which anyone can be a VP) have been abusing the land title system in the US. Like in MN they will say they are transferring a property for less than $500 or something, and thus not have to file the more proper papers for mortgage processing &tc.

    We did a video on mortgage abuse and resistance in Minneapolis-

    which led to the forcible eviction strategically timed for Sept 11 2009:

    What an amazing freeze – I want to know what really prompts it to happen now, perhaps a kind of market-sea change like the crash of Carbon Futures schemez a few weeks ago?

  • I understand the lien on the property does not have the legal standing of the title. The bank cannot proceed to a sale of the property without taking title to the home, though obviously it also needs the mortgage/note evidencing its right to take the title in its own name. It also needs evidence of a default, and proof that the bank had met in person with the borrower to work in good faith on a solution that would avoid foreclosure. This last stipulation is usually not met – everything seems to be done by phone or mail these days.

    I will nonetheless check my sources just to make sure this is a correct interpretation.

  • As of today, it is impossible to get Title Insurance on foreclosed homes.

    To buy a house with a mortgage (loan) requires title insurance, and without title insurance the lender will not fund the loan. REO homes (foreclosed hoomes) are selling briskly, loans are being funded, escrows are closing and people are thus buying homes.

    Where’s the proof of you assertion about title insurance? It’s not supported by facts in this area.

  • Palm Beach Post, By Kimberly Miller, October 1

    Foreclosures nationwide are coming to a standstill as Bank of America, the country’s largest home loan servicer, said Friday it is delaying court proceedings in 23 states, including Florida.

    The announcement by the Charlotte, N.C.-based bank, which has more than $2 trillion in home loans, followed similar moves by Ally Financial Inc. and JPMorgan Chase.

    Bank of America spokesman Dan Frahm said the company has been reviewing its foreclosure processes, which include a common industry practice of having employees sign off on thousands of foreclosure documents without verifying their accuracy.

    “To be certain affidavits have followed the correct procedures, Bank of America will delay the process in order to amend all affidavits in foreclosure cases that have not yet gone to judgment in 23 states where the courts have jurisdiction over foreclosure,” Frahm said.

    Guy Cecala, publisher of trade newsletter Inside Mortgage Finance, said Bank of America’s announcement is a “much bigger deal” than that of Ally, formerly GMAC, or Chase because of the sheer volume of loans it handles.

    Bank of America freezes evictions in 23 states

    Los Angeles Times, By E. Scott Reckard, October 2

    Citing concerns over whether its foreclosure paperwork was handled properly, Bank of America Corp. on Friday put evictions on hold in 23 states — joining two rivals that have taken similar steps.

    The freeze is taking place in states where courts have jurisdiction over foreclosures, Bank of America said. It will not apply to California and 26 other states where foreclosures usually take place without a court order, but the action could put added pressure on banks to ease back on foreclosures more broadly amid high unemployment and continued turmoil in the housing market.

    State Assemblyman Ted Lieu, a Torrance Democrat who has written a series of mortgage-related bills, said a moratorium on foreclosures might be appropriate even though California doesn’t require court orders before homes are seized.

    “I’ve been thinking perhaps we should start calling for [a moratorium] in California,” said Lieu, co-author of SB 1137, the 2008 law requiring lenders to attempt to contact borrowers and to document that they tried before foreclosing. “My suspicion is that the same folks who are doing false signings in other states are likely doing the same thing here with regard to SB 1137’s requirements,” he said.

    One owes respect to the living. To the dead, one owes only the truth.

  • From ZH

    the news of the day comes from the NYT that Old Republic National Title has stopped insuring title to Ally-foreclosed properties “until further notice.”

    It was just the start

  • As the months go by, the difference between a homeowner living rent free in their home, and de facto owning the home free and clear through a form of squatters rights, is becoming very gray. This is not going to sit well with the people who continue to pay down their mortgage even if they are underwater, nor will it sit well with those who paid off their mortgage.

    There will be tremendous resentment.

    I remember when this movement started in Ohio. Rep. Marci Kaptur (D, OH): Rep. Marci Kaptur says show me the paper! Video

  • “Title is everything,” said Susan Wachter, a real estate professor at the University of Pennsylvania’s Wharton School in Philadelphia. “There’s no collateral without possession, and that is title.”

    This is from a Bloomberg article on toxic titles.

    There may be a nomenclature use that is confusing things. In some reports, experts refer to “title” as the whole collection of documents that banks submit in foreclosure, evidencing the mortgage and lien, attesting to a default, and establishing the bank’s right to the title so as to sell the collateral.

  • It does not see the need to stop foreclosures because it says it has strict standards for its employees, and it audits the process regularly. If it finds any errors, it promises it will make adjustments for the courts. Citigroup is saying the same thing.

    Lawyers who have been working on this issue from the defense side don’t agree. Here is one opinion expressed in a Bloomberg article:

    “All the banks are the same, GMAC is the only one who’s gotten caught,” said Patricia Parker, an attorney at Jacksonville, Florida-based law firm, Parker & DuFresne. “This could be huge.”

  • You need the title, assigned in your explicit name, whether you’re a homeowner or corporation, to assert anything before a court. Lawyers for homeowners have been completely derailing court proceedings by asking for the bank to produce the title. The thing is, when you securitize a mortgage, which is a completely different piece of paper, someone somewhere has to have title. Unless you can produce the title, you have NO STANDING to bring any suit or court action of any sort. That’s why people sell title insurance–to insure that proper title is maintained, and if it isn’t, to protect yourself after spending thirty years of paying a mortgage. What if the title is imperfect, someone has a claim on the house from fifty years ago? Title insurance! When you kill, or MORT a mortgage, you’re supposed to have title transferred to your name and registered with your local town tax authority.

  • it is now impossible to get title insurance or it very quickly will be so. He’s absolutely correct too, there is no way to determine who owned the title or if the previous owner was foreclosed due to fraudulent documentation (they could return to claw back the title.)

    There is a very simple solution to this problem: heap the damage on the banks, let their shareholders and bondholders zero out, distribute the assets amongst the depositors and kick in the FDIC for the rest. We failed to save the banking system by funding the banks, why keep going with this charade? It would be very painful, but less so than hanging on while the financial world circles the drain IMHO.

  • “Title”, “Produce the Note”, and “Title Defect”, “Secured and unsecured debt”, and Quiet Title actions.

    Title – ownership, possibly hypothecated in a Trust Deed state (Non judicial foreclosure state).

    “Produce the note” – A demand to the loan servicer, for the original note, correctly recorded assignments, and not severed from the trust deed. If the note is severed from the trust deed the note is unsecured by the property, and is now an unsecured loan, as are credit cards, and cannot be used to foreclose. However, THE DEBT IS STILL VALID, and the lender can proceed against the signer of the note.

    MERS processes are considered flawed because MERS is named as a beneficiary of the trust deed, and is not, a beneficiary as it has no financial interest in the note or trust deed. This may sever the relationship between the trust deed and the note. However, there is a lengthy record of litigation, and the status is not clear.

    Clear Title, unblemished title, no defects on title.

    Defective title is resolved with Quiet Title Action in a state court. Quiet becuase it’s a declaratory judgment with no plaintiff and defendant, so it is not an adversarial proceeding.

  • Wouldn’t MERS be the logical depository for all these titles, deeds, and trust deeds? You would think the industry would have no problem finding the legal documents if MERS operated properly.

    Second, there seems to be significant doubt that MERS has legal standing to act on its own in court, even if the banks did make it their clearing house of choice in the securitization process. Since the banking industry is now extremely concentrated – we’re talking about Citi, BOA, Wells, and Chase here – wouldn’t the big guys have understood that there was major legal risk here?

    Third, was there a recognized backlog problem for documentation back in 2007 and earlier? The derivatives business definitely had this problem in CDOs and the Fed was all over the industry to straighten out the paperwork. I don’t recall reading about similar problems in the mortgage industry.

    Whatever the answer to these questions – and maybe it is something simple like nobody bothered with documentation because everyone knew housing values couldn’t go down – the banks have to take primary responsibility for the mess they are in. If the behavioral problem does arise, and millions of homeowners deliberately default because it looks like they will get free money since no one can foreclose on them, the breakdown of the creditor-debtor relationship of trust cannot be put on their shoulders. It started with the banks. They are the ones who took what had been a time-tested approach to foreclosure processes and made it into a travesty. In fact, I am baffled we haven’t heard of one attorney in any of the banks who wrote a memo to management challenging the legality of the MERS operation. For that matter, where were the attorneys when the robo-signers were signing tens of thousands of affidavits, and sleazy law firms were forging documents submitted to the courts? It’s not as if the banks were lacking in legal expertise when it came to mortgages and foreclosure – or maybe they were what with all the mergers and downsizing. This is such a major, major failing in the banking industry that, in normal times, the CEOs involved would be let go.

  • According to the Wall Street Journal, Bend is the most overpriced housing market in the U.S. Here is our experience trying to buy a house in Bend during the last 15 months.
    1) one out of every 20 homes on the market is owned by a Real Estate agent who is the selling agent and works for the lister. Many real estate agents own 4 or 5 homes and some are being foreclosed on.
    2) just this year, on three occasions, my wife and I were told that multiple bids were coming in “tonight” so we had better bid the highest we are willing
    a) The first, we did not bid, but the house was kept on the market another year
    b) The second house, we did not bid, had open houses for the next three months before it was sold
    c) The third house, on which we bid full price, was a short sale and we were told that there were 3 other bids one for cash; the cash offer was supposedly passed onto the bank; the house is no longer listed but it still has a for sale sign six weeks later.
    3) Many of the homes in our target neighborhoods are bought from the bank by LLCs (public information).
    4) Our first try at getting pre-approved for our loan was interesting. We gave all our personal information to the woman at the loan company and the next day she, and 24 others were arrested by the FBI. Part of the largest real estate fraud in Oregon history.
    5) A 1031 exchange, run by a local character, went bankrupt and one person I know lost $50k while the person running it had given himself and members of his family and friends loans and built himself 10,000 sq ft house. This person was not arrested or charged with any crime
    6) We asked an agent to give us some idea what our current home was worth and got a completely low ball estimate. Instead of comping two homes on our street that had just sold she used two other homes from five miles away; we later learned she had a buyer lined up for our place (it is after all a small town)
    7) We discovered that some real estate agents listing homes own LLC’s that own homes (this is public record)
    8) We looked at a home and it appears that the listing agent had some of her friends show up during our appointment to pretend like they were looking at it too.
    In general I would say the process of buying and selling a home lacks integrity from the financial part of it and everything else right down to home inspections. Therefore, the real estate industry is ripe for unethical and illegal behavior. The lack of integrity in this industry, just like the financial industry will prevent a recovery because who in their right mind would participate in it?

  • Agents colluding with each other to manipulate prices, hiring stooges to act as possible buyers, delivering false valuations, owning multiple properties through dummy corporations that compete with their customers – this does indeed go beyond unethical behavior. Somehow these agents never go out of business or lose their license, despite having their own properties go into foreclosure.

  • The California Civil Code requires the assignment of the Note to be recorded by the country recorder.

    MERS was established as the beneficiary of the note (which courts have ruled it is not, because it has no financial interest in the note, or payment on the note) and nominee of the bank (which is undefined).

    Now note have been assigned (under MERTS) which does keep good records, but MERS is not the legal owner of the note, and cannot supplant the country recorders as the keepers of public records.

    The title companies and banks believed they had established a “nominee” as the “beneficiary” of the note with MERS. Unfortunately for them they did not have good law (established court cases) on which to rely.

    MERS keeps electronic records, and originals are discarded. Unfortunately for MERS the law requires original copies of documents and recording of assignments with the country recorders.

  • The election for Governor will have a major impact on how the current crisis is handled in California. You couldn’t have two more different approaches than Brown and Whitman (who is incredibly unattractive as a candidate, imho). The Cooley – Harris race is also critical. It sounds close.

    California is the Golden Goose and the DC crew is killing it from Enron through the remainder of Bush. At $0.78 returned for every dollar sent to Washington, it’s a raw deal.

  • Back when Enron robbed California and the Federal government let them get away with it, my wife and I realized that the U.S. was literally breaking down. Corruption had reached a tipping point and civil unrest even civil war would ultimately result. We decided to live on a farm in the most sustainable way practical.

    For the last 10 years I’ve played out the end-game of what will happen ultimately in my head and the only end-game I come up with that makes any sense is secession starting with states like Texas and the West Coast. Texas, as I understand it, is the only state with its own integrated grid and will go first. Things would have to get worse for Calif to secede because the Federal gov has it’s finger on the light switch so secessionists would have to attack the grid there and in other West Coast states to make it a meaningless lever. Will it get that desperate that people will do such a thing? Unfortunately, I think so for a bunch of reasons that are probably worth a diary entry.

    The safest thing to do right now is for the United States to unilaterally disarm its nuclear weapons because otherwise some of that nuclear crap is going to end up in the wrong hands making a wider civil war extremely dangerous.

    There is a way out but the Federal Govt. will never do it.

  • From the other posts. We like living in Bend, the farm is nearby, all set up ready to go but my son needs a good school and the rural schools here are really bad so it’s a combination of city life and country life.

  • Not to disagree, but as I understand it, the note is proof of indebtedness, it is the mortgage. Title is distinct–it is a legal document assigning legal ownership to a person or other legal entity. The legal problem for MERS is twofold– 1. MERS does not have legal standing because it is not the real actual holder of the note. The holder of the note is amorphous because the note is part of a tranche including other notes, the tranche being owned in turn by possibly dozens of other entities. Furthermore, no one knows where “the note” is in any given mortgage, and an electronic copy is not valid in a court of law. 2. The title is the real actual legal document showing no foolin’ incontrovertible actual ownership as recognized by the state, and none of the titles are signed over to MERS specifically. When you get a mortgage the old title is ripped up and the new title assigns the house to the holder of your mortgage note; the name on the title is usually some sort of vague legal entity for the purpose of making it financially fungible; “liquid,” transferrable and trade-able on an exchange.

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