New Geography

Tag: foreclosures

  • The MERS Mess

    In 1995, seeking to streamline mortgage processing, Fannie Mae, Freddie Mac, and a group of banks came together to create a new company to register and assign mortgages. The company, Mortgage Electronic Registration Systems, Inc. (MERS), served as a way for mortgage originators to quickly process new mortgages, centralizing files and cutting down on the need to deal with local government record keepers. With banks increasingly focused on bundling, securitizing, and selling off mortgages they had originated, MERS was designed to move mortgages more rapidly off their hands and into the booming mortgage-backed securities market. The goal of the process, as stated by MERS, was to simplify “the way mortgage ownership and servicing rights are originated, sold and tracked” while also eliminating “the need to prepare and record assignments when trading residential and commercial mortgage loans.”

    The business model proved wildly successful. According to the New York Times MERS now “claims to hold title to roughly half of all the home mortgages in the nation — an astonishing 60 million loans.” However, as the system boomed in an era of rampant mortgage speculation and securitization, criticism arose. Detractors, such as Professor Christopher L. Peterson of the University of Utah School of Law, argue that MERS is based on a “problematic legal doctrine,” and that by “adopting such a radical shift in how mortgages are recorded and foreclosed, without legislative change, the mortgage finance companies have rebuilt their industry on a legal foundation of sand.” According to Peterson,

    “The shift away from recording loans in the name of actual mortgagees and assignees represents an important policy change that erodes not only the tax base of local governments, but also the usefulness of the public land title information infrastructure. MERS did not, by itself, cause the mortgage finance crisis and its ensuing aftermath. But it was an important cog in the machine that churned out the millions of unsuitable, poorly underwritten, and incompletely documented mortgages that were destined for foreclosure.”

    As foreclosure rates have risen, so have legal challenges to the role of MERS in the process. Such cases have, among other issues, questioned the right of MERS to act as the “mortgagee of record,” and to initiate foreclosure proceedings. Results have been mixed. Judges in California, Massachusetts, and Kansas have ruled that MERS “has the authority to initiate home foreclosure proceedings.” MERS itself points to rulings in several other states that it claims show it stands on solid legal ground. However, courts in New York, Florida and Oregon have ruled otherwise, with multiple rulings in Oregon throwing a wrench into the foreclosure market in the state. MERS, in an apparent attempt to clear up issues of standing in foreclosure proceedings,recently began encouraging its members to stop making foreclosures in its name, and is now proposing new rules to curtail the practice.

    Some local governments are also exploring potential legal and legislative investigatory proceedings against MERS, upset at the banking industry’s use of MERS to avoid paying local recording fees for mortgages. Given the dire state of state and local budgets, and the unpopularity of the financial industry, it bears watching to see if more local governments follow their lead in an attempt to recoup a source of funding that was previously theirs. MERS and its financial industry backers appear to be girding themselves for coming legislative battles, launching “an aggressive campaign on Capitol Hill to bolster the legality of the way companies have turned mortgages into securities.” With housing markets already on shaky ground, and talk of a double dip in prices beginning to surface, the uncertain future of MERS and the mortgages it holds is yet more potentially bad news for areas struggling to recover from the housing bust.

  • Recessions Destroy Lives

    Thursday a man flew an airplane into the Austin, Texas, IRS Building. The Left claimed he was a “Tea bagger,” their vulgar term for Tea Partiers, apparently because he was anti-government. The Right claimed he was a whacky leftist, apparently because he was critical of Bush. A Muslim group claimed he was a terrorist, apparently because he wasn’t a Muslim.

    They all miss the point, and quite frankly, the attempt to make political points out of personal tragedy is pretty disgusting.

    Today, there is a report of a Moscow, Ohio, man who bulldozed his home before it was foreclosed. No doubt someone somewhere will try to make political hay out of this man’s misfortune. That will be as misguided as the response to the Texas man’s misfortune.

    What these events really do is highlight the human costs of recessions, costs that increase in recession severity and duration. These are the more extreme examples, but the fact is, people’s lives are ruined in recessions. Some working families will suffer a permanent decrease in income. Some of our young people will never recover from a bad start to their working lives. Some families will be destroyed because of financial stress. Some individuals will commit suicide. A few will do things like bulldoze their home or fly into a building.

    To ask how big a problem we have is to ask how many are unemployed and how long have they been unemployed. Here are the numbers as of January 2010:

    • 14.8 million Americans were out of work and looking for a job.
    • 6.3 million Americans had been out of work over six months.
    • 9.3 million Americans were underemployed
    • Over half of unemployed Americans had been out of work for over 19 weeks.
    • The unemployed American’s average unemployment duration was 30 weeks.
    • 4.5 million Americans had left the labor force.

    All of these people deserve our sympathy. They also deserve more from our society and our leaders. Most of them are in their current circumstances through no fault of their own. Even worse, our political class appears to be far more interested in election, reelection, rewarding supporters, partisanship, and political purity than they are in providing the environment for job creation. They have also failed to provide a humane safety net, one that provides at least a minimum standard of living, maintains dignity, and provides appropriate incentives.

  • The Case for Walking Away

    First American CoreLogic, a real estate research company, recently released data on negative equity mortgages for the third quarter of 2009. The situation is stark. Nearly one in four U.S. mortgages (23%) is currently underwater, with the borrower owing more than the property is currently worth. According to First American, when mortgages “near” negative equity are tallied, the total number of mortgages near or currently underwater is around 14 million- “nearly 28 percent of all residential properties with a mortgage nationwide.”

    Being underwater does not necessarily mean that a borrower is at risk of default. Although foreclosures and payment delinquencies are currently at record levels nationwide in the wake of the popped real estate bubble, most borrowers facing negative equity continue to make their mortgage payments. While being underwater “is the best predictor for loan defaults,” according to Sam Khater, economist with First American, “if you have your job and don’t encounter economic shock, you’ll most likely keep paying on your home.”

    But should you keep paying if you’re underwater? Brent White, an Associate Professor of Law at the University of Arizona has examined the situation, and argues in a recent discussion paper that homeowners “should be walking away in droves.” According to White, millions of homeowners “could save hundreds of thousands of dollars by strategically defaulting on their mortgages.”

    Such a strategic move comes with consequences for the borrower- most notably a negative impact on one’s credit score. This has a quantifiable cost, but White states that “a few years of poor credit shouldn’t cost more than few thousand dollars,” and notes that individuals can rebuild their credit rating over time, and can “plan in advance for a few years of limited credit.”

    Such costs are, argues White, “minimal compared to the financial benefit of strategic default.” White makes use of the hypothetical example of a California couple purchasing an average priced ($585,000), averaged sized home in 2006 to demonstrate the case for default:

    “Though they still owe about $560,000 on their home, it is now only worth $187,000. A similar house around the corner from Sam and Chris recently listed for $179,000, which, with a modest 5% down, would translate to a total monthly payment of less than $1200 per month – as compared to the $4300 that they currently pay. They could rent a similar house in the neighborhood for about $1000.

    Assuming they intend to stay in their home ten years, Sam and Chris would save approximately $340,000 by walking away, including a monthly savings of at least $1700 on rent verses mortgage payments… If they stay in their home on the other hand, it will take Sam and Chris over 60 years just to recover their equity”

    White argues that in such cases, borrowers are better off taking a short-term hit to their credit, and strategically defaulting to escape a long-term, crushing financial burden. By staying in the home, borrowers are taking money that could otherwise be saved for retirement or used for other purposes, and throwing it away to service a liability that is unlikely to show positive equity in their lifetime.

    Such advice seems most likely to appeal to those upside-down in particularly hard-hit areas of the country, including California, Florida, Nevada and Arizona. However, as noted, most homeowners are sticking it out, and continuing to pay their mortgages. According to White, many who might otherwise make such a decision avoid doing so due to “fear, shame, and guilt,” sentiments which are “actively cultivated” by the government and financial industry to keep homeowners from walking away.

    It remains to be seen if underwater borrowers will overcome fear of the consequences and take White’s advice to strategically default. Mortgage lenders most likely hope that his ideas remain firmly in the minority- as one mortgage executive stated in comments reacting to White’s report, the argument for strategic default is “incredibly irresponsible and misinformed,” and, if widely embraced, has the potential to “‘tear apart the very basis’ upon which mortgage lending rests”. Losing otherwise performing mortgages to strategic default, whatever the economic sense for borrowers, could be yet another blow to an already reeling industry.

  • Want to Foreclose? Show Me the Paper!

    Since October 2008 I’ve been writing here about problems in mortgage backed securities (MBS). There is more evidence surfacing in bankruptcy courts that the paperwork for the underlying mortgages wasn’t provided correctly for the new bond holders, leading to delayed or denied foreclosure proceedings.

    New York Times’ Gretchen Morgenson is reporting new successes in cases from Florida and California. A judgment on a home in Miami-Dade County (FL) was set aside on February 11 when the new mortgage holder could not produce evidence that the original mortgage lien had been assigned. In one of the California cases, the lender tried for foreclose on a mortgage that had previously been transferred to Freddie Mac!

    The earliest decision I’ve seen is from Judge Christopher A. Boyko in Cleveland. Plaintiff Deutsche Bank’s attorney argued, “Judge, you just don’t understand how things work.” In his October 31, 2007 decision to dismiss a foreclosure complaint, Boyko responded that this “argument reveals a condescending mindset and quasi-monopolistic system” established by financial institutions to the disadvantage of homeowners. The Masters of the Universe were anxious to pump out mortgages into MBS so they could continue to earn fees – making money at any cost.

    One element of the newest Homeowner Bailout program is to allow bankruptcy court judges to modify mortgage loans. If the types of cases decided in OH, FL and CA continue to spread, that may not be necessary. The first question in any foreclosure procedure will become: can you prove a lien?

    This raises further questions about those “toxic assets” that Geithner and Bernanke are so anxious to buy up at taxpayer expense. According to the Morgenson article, some MBS holders are trying to force the mortgage originator to take back the paper. However, many of the worst offenders are already defunct.