We are happy to present another article by Ramsey Su on the 'robo-signing' scandal and the likely consequences it will bring.

Housing finance has for all practical pusposes already been quasi-nationalized in the US. The potential legal quagmire – a veritable box of Pandora, opened by the failure of mortgage market players to properly document mortgages in securitizations and to follow proper legal procedures in processing the flood of foreclosures, threatens to destroy what little of the private label mortgage market remains. As long as the legal uncertainties are not satisfactorily sorted out, the real estate market will no longer be able to rely on private sector funding. The result is …


Total Chaos

In a recent post, I wrote about floating down the Colorado. At that time, we were in the calms but we knew with certainty that there were some Class V rapids ahead. The rapids are here now. 

I have to admit that I did not see it coming (may be that will qualify me to be the next Fed Chairman). While I opined earlier this year that the real estate market will crash, I would never have guessed that  a couple of legal foreclosure technicalities would bring it down.

All foreclosure activities in the 23 judicial foreclosure states have come to a halt. Politicians in non-judicial states like California are calling for moratoriums, mainly for the purpose of buying some votes for the upcoming elections.

The two biggest rapids are robo-signing and MERS.  MERS was created by the mortgage banking industry to streamline the mortgage process by using electronic commerce to eliminate paper. Our mission is to register every mortgage loan in the United States on the MERS® System.

Beneficiaries of MERS include mortgage originators, servicers, warehouse lenders, wholesale lenders, retail lenders, document custodians, settlement agents, title companies, insurers, investors, county recorders and consumers.

MERS acts as nominee in the county land records for the lender and servicer. Any loan registered on the MERS® System is inoculated against future assignments because MERS remains the nominal mortgagee no matter how many times servicing is traded. MERS as original mortgagee (MOM) is approved by Fannie Mae, Freddie Mac, Ginnie Mae, FHA and VA, California and Utah Housing Finance Agencies, as well as all of the major Wall Street rating agencies.

If the validity of this MERS system is successfully challenged in court, it would be a nightmare to sort out who actually owns what, for the millions of loans in question. Law makers have no idea what the consequences are, as they try to demonize this method of streamlining the secondary market. I have no opinion on MERS,  but if you are going to trim a tree, you should make sure that you are not sitting on the limb that you are about to cut. 

Ironically, if a stimulus plan is defined as "throwing money at it", this chaos is not only a great stimulus plan, it is delivering stimulus money to the middle class and most likely will not benefit the rich. The poor working class struggling with household expenses are the big beneficiaries. Stop making payments on the underwater mortgage. Take the family out for dinner and get ready for a great Christmas. Don't worry about housing expense for a while, possibly a long while. 

There is a price to pay. Tom Lawler asked a number of great questions. See:


I believe this is a retest of 'too big to fail'. Here are the biggest servicers:

Bank Total Loans Market


1 Bank of America (BAC) $2,135.30 19.9%
2 Wells Fargo (WFC)  
$1,811.97    16.9%
3 JPMorgan Chase & Co (JPM)
$1,353.60   12.6%
4 Citigroup Inc (C)
$677.81  6.3%
5 GMAC/Ally Financial $349.08  3.2%
6 US Bancorp (USB)
$189.85    1.8%
7 SunTrust Banks Inc (STI)
$175.93 1.6%
8 PHH Mortgage (PHH)   
$155.97       1.4%
9 OneWest Bank, CA (IndyMac) $155.00     1.4%
10) PNC Financial Services(PNC) $149.94    

Residential Mortgages $10,640

Take BofA as an example. They are not just the servicer of over $2 trillion worth of loans, they also wore the hat as the originator of many of these loans, the worst of which were those inherited from Countrywide [BAC was one of the biggest creditors of Countrywide and took it over shortly before the crisis became acute, ed.]. They were responsible for securitizing these loans. Then they also marketed these products, especially after the Merrill Lynch purchase. BofA is going to be named as defendant in so many angles that they will soon have more legal departments than branches. No doubt they will drag the Feds back in, who forced them to complete the Merrill purchase. The same holds true for Wells Fargo with the Wachovia and Goldwest purchases. JPM wears the most hats. It is impossible that they are adequately reserved for these potential losses.

How can they bail out the big banks this time?

Well, that is in the past, a mess that has to be sorted out and the damages apportioned. What about the present and the future?

At present, the shock wave is just starting to hit the system. Since practically all real estate lending is in the hands of FFF (Freddie, Fannie and FHA), the real estate world awaits their next move. Freddie and Fannie have asked the servicers to review their foreclosure process. I am not sure how precise those instructions are. We know every big servicer robo-signed documents. Wells Fargo claim they are clean, but I seriously doubt that.  The task [of foreclosure] is simply too overwhelmingly labor intensive.

What if FFF decides to put back all the loans in question to the originators, or sue the servicers for damages? What if completed foreclosures are set aside and the servicers somehow have to reconstruct the process? What if some borrowers successfully challenge the foreclosure and are awarded damages, who should bear the cost?

As you can see, there is no future unless these issues are addressed. Loans are being made today simply because the originators are confident that they can sell them to FFF. Investors are buying these agency MBS simply because they know they are guaranteed by the Treasury and the Fed is standing by to buy them all up if needed.  Originators are already fearful of FFF put backs, resulting in tighter underwriting standards than required and a mountain of verification documents.

If FFF are going to put back these loans to the originators/servicers due to the robo-signing issue, how can anyone like BofA originate another loan before they can quantify the risk? More importantly, how could they service these loans without adjusting for the potential cost?

What if FFF says no more foreclosures for now,  how much will they be asking Congress for next quarter? 

The biggest question of all, is there anyone working on a solution? I know the answer to that: NO.  In summary, I think we have reached a stage where the process simply continues. Ready or not, we are in the rapids. Just like the World Wars –  they was not planned. No one really prepared for them. They just happened. While fighting, no one really knew the outcome – but there will always be an outcome.

Going into battle with these massive problems, I see my team is headed by Obama, Geithner, Bernanke and all the candidates that are battling for command positions in November. I really do not like the odds.

Foreclosure Fiasco – winners and losers

The robo-signing scandal exposed the imperfections of the secondary market for mortgages. Headline grabbing politicians are using the words fraud and forgeries. Based on what I have read so far, I think it is a wide spread procedural problem with a small percentage of cases that were handled so badly that they may appear to be fraud.

Going forward, the procedural technicalities are not difficult to fix but it will be monumentally labor intensive. All the servicers have to do is to make sure each and every foreclosure filing has the necessary paper trail.  Even if there is only a small percentage of filings that are imperfect, how are the servicers going to find them without looking at every loan and treating them as individual loans rather than a pool?

Similarly, looking back, how many completed foreclosures are vulnerable to legal challenges today?  Here is kind of an interesting case for those who like to dig into the subject a little further.


It seems reasonable to expect a wave of such lawsuits.

Given this backdrop, the clear losers have to be the big banks who were the originators, securitizers, investment bankers who sold these MBS and servicers. They are going to be sued by attorney generals, defaulting borrowers, previously foreclosed borrowers and investors.

There can be no bail-out this time because the politicians cannot be attacking them and bailing them out at the same time. In addition, we now have passed new laws that supposedly eliminated 'too big to fail'. I am waiting for banking gurus to tell me if the banks are adequately reserved for this hit and able to survive.

There will be no private label MBS until these issues are settled. GSEs, which were already behind the majority of current mortgage originations will be confirmed as the only game in town. There will be no secondary market without the US government guaranteeing all losses. The GSEs are already money losers before this robo-sign scandal. With the foreclosure moratorium, every dime not collected is coming out of taxpayers' pockets, as the GSEs continue to pay investors. These losses and not recoverable, which takes us to the "winners".

The beneficiaries are the borrowers in default. I find it difficult to call them "winners" when all they gain is a few more months of housing subsidy. In the next few months, we will be able to calculate the exact gain. For the first eight months of 2010, foreclosures are at a pace of just under 100,000 per month. With the moratorium, that number can easily be cut in half. Just count the number of months this number remains low and that is the number of extra months of free housing defaulting borrowers received.

So are there any real winners? NO.

It has been two years since the GSEs were placed under conservatorship. It has been four years since the housing bubbled burst. The system has failed. Recovery is nowhere in sight.

We now have socialized housing. If you disagree, just imagine the consequences if government intervention were withdrawn. Real estate markets would collapse immediately.  The government is the market. There is no exit strategy.

In fact, I doubt that policy makers even understand the problem. Where is the SEC? Are they not supposed to be regulating these mortgage-backed securities? Where is Bernanke? Is he ready to take over, now that he supposedly has the power and authority to overcome too big to fail? Where is Geithner, busy trying to round up money for when the GSEs come for their next handout?

Wall Street is cheering for Bernanke's  'QE 2'. Looking at the charts of BAC and JPM, the market obviously believes that the robo-signing scandal is completely inconsequential to these two key players.

I think November is going to be a very exciting month.






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