Thursday, October 22, 2009

"Produce the note"...and a new crash?

A while back, I discussed a novel way to forestall foreclosure: During the discovery phase, ask the banker to "produce the note" -- that is, ask for proof that the bank owns the mortgage. It has been said that half (maybe more) of all mortgage documentation has been lost in the chaos of the secondary mortgage market. The nice name for that chaos is "securitization."

I first heard about this idea from Rogert Ebert, of all people, who first learned about it from Michael Moore, of all people. A little Googling revealed that this trick does buy time, although not every time.

Now we have more from Pam Martens. (Tip of the hat to lambert.) The banks have tried to speed up the foreclosure process through some maneuvers that might be considered shady:
Because of the expense, time and paperwork it would take to record each of the assignments of the thousands of mortgages in each securitization, Wall Street firms decided to just issue blank mortgage assignments all along the channel of transfers, skipping the actual physical recording of the mortgage at the county registry of deeds.

Astonishingly, representatives for the trusts have been foreclosing on homes across the country, evicting the families, then auctioning the homes, without a proper paper trail on the mortgage assignments or proof that they had legal standing. In some cases, the courts have allowed the representatives to foreclose and evict despite their admission that the original mortgage note is lost.
Some judges have allowed these shennanigans -- and some judges are standing up to the banks. Here's what Judge Long of Massachusetts wrote roughly a week ago:
To accept the plaintiffs’ arguments is to allow them to take someone’s home without any demonstrable right to do so, based upon the assumption that they ultimately will be able to show that they have that right and the further assumption that potential bidders will be undeterred by the lack of a demonstrable legal foundation for the sale and will nonetheless bid full value in the expectation that that foundation will ultimately be produced, even if it takes a year or more. The law recognizes the troubling nature of these assumptions, the harm caused if those assumptions prove erroneous, and commands otherwise.
In other words: How can the house be sold if no-one can come up with any valid paperwork demonstrating ownership? "Produce the note" is thus more than a legal maneuver to buy time. It's serious business.

Because most mortgages (perhaps including the one for the building in which you're sitting right now) have seen more flipping than you'll find in a game of reversi, some Wall Street firms have set up an entity called Mortgage Electronic Registration Systems, or MERS, which sounds very official and very imposing. Basically, MERS acts as a straw man. As you might imagine, representatives from MERS have been showing up in lots of courtrooms. In the words of a lawyer named Timothy McCandless:
…all across the country, MERS now brings foreclosure proceedings in its own name -- even though it is not the financial party in interest.
So imposing is this opaque corporate wall, that in a ‘vast’ number of foreclosures, MERS actually succeeds in foreclosing without producing the original note -- the legal sine qua non of foreclosure -- much less documentation that could support predatory lending defenses.
I can only hope that an increasing number of judges will understand that MERS is a gimmick. MERS is like the Devil, who loses power the moment you start to laugh at him. When asked to produce the note, banks should do just that. No substitutions.

Question for the readers: Martens' piece goes on to argue that the securitization bubble is going to lead to another round of ultra-panic on Wall Street -- leading, in turn, to cries for further bailouts. Another call for a trillion-buck bailout will, I think, enrage the populace to the brink of rebellion.

However, I'm having a hard time understanding what Martens is saying. If you're still kind of bleary-eyed this morning, you may want to skim rapidly over the following:
Citigroup tells us that the Financial Accounting Standards Board (FASB) has issued a new rule, SFAS No. 166, and this is going to have a significant impact on Citigroup’s Consolidated Financial Statements “as the Company will lose sales treatment for certain assets previously sold to QSPEs [Qualifying Special Purpose Entities], as well as for certain future sales, and for certain transfers of portions of assets that do not meet the definition of participating interests. Just when might we expect this new land mine to go off? “SFAS 166 is effective for fiscal years that begin after November 15, 2009.” There’s more bad news. The FASB has also issued SFAS 167 and, long story short, more of those off balance sheet assets are going to move back onto Citi’s books.

Bottom line says Citi:
“… the cumulative effect of adopting these new accounting standards as of January 1, 2010, based on financial information as of June 30, 2009, would result in an estimated aggregate after-tax charge to Retained earnings of approximately $8.3 billion, reflecting the net effect of an overall pretax charge to Retained earnings (primarily relating to the establishment of loan loss reserves and the reversal of residual interests held) of approximately $13.3 billion and the recognition of related deferred tax assets amounting to approximately $5.0 billion….” [Emphasis in original.]
I’m trying to imagine how the American taxpayer is going to be asked to put more money into Citigroup as it continues to bleed into infinity.
Yeah, that question stumps my own imagination.

I was able to look up what a Special Purpose Entity is -- basically, it's an accounting trick put to novel use by the good folks at Enron. When you play the SPE game, you put all of your iffy assets into a fake subsidiary business so that you can tell shareholders and employees that everything is hunky-dory. But, dummy that I am, I'm not sure what the phrase "lose sales treatment" means.

Here's what the sitch looks like to me: Citigroup decided to make its balance sheet look rosier by moving crappy assets to an El Fako "entity." New rules forbid that kind of shell game. So now Citigroup -- and, presumably, other Wall Street behemoths -- will be forced to present a more realistic image to the world. And that image will be very ugly. Very, very ugly.

Am I right?

On a related front:
Dakinikat informs us that the unemployment resulting from this recession is a whole lot worse than we thought. Compared to past recessions, a staggering 56% of the unemployed workforce is structural -- that is, these workers have been laid off permanently. Those jobs are gone forever. During the Reagan recession, that number was 45% at its highest point.

13 comments:

Dakinikat said...

Structural unemployment can also come from folks never having had any kind of job skill or training also. Basically, this type of unemployment calls for massive job retraining and education for people. It's the worst kind of unemployment of the 4 types (structural, frictional, cyclical, seasonal) to get rid of and it usually takes years to overcome. We've heard absolutely nothing on this front. I believe there are still funds available for workers replaced by NAFTA. My suggestion is that we beef up this program and add other countries to the list so that if you can prove some trade agreement has take your job to another country, the government owes you job training as a result.

Joseph Cannon said...

Thanks, DK. So tell me -- am I correct in how I interpret the QPSE thing? Because if I am, then we may really be as screwed as screwed can be...

Dakinikat said...

SPEs are accounting entities made to hide things on the side and off the main entity balance sheet and income statement. It's an abuse of the notion of a subsidiary, basically. They've used them also in the Financial Intermediary world, to avoid specific regulations that would not permit the parent to engage in certain activities. Unfortunately, they're not 'walled' off from the parent as tightly as they should be and can take down the main institution. There's tons of them out there just waiting to bring some companies down. A good example is all the GM financial arms. They started out as financing for dealer floor plans and then some support to non credit worthy customers and now they're into all kinds of things including DiTech and a bank. Just wait until that blows up in our faces.

Hoarseface said...

I can only disagree with your use of the word "will" near the end, as though this is an inevitability and Going To Happen. If history is any guide, the new rule will be delayed, diluted or rescinded, and in the end it won't come to a whole hell of a lot. And when "Citigroup tells us..." how godawful this is going to be for them and how much it'll cost them, look at the difference in the pre-tax and after-tax figures - 13.3 pre-tax, 8.3 after-tax. Am I really to believe they pay 40% in taxes? These sound like scare figures used for talking points arguing against the rule.

Another thing is.. "“SFAS 166 is effective for fiscal years that begin after November 15, 2009.” When do Citigroup's fiscal years begin? I'm sure this is a fairly fact to locate, but I'm lazy. Point being, if their fiscal year began Sept 1st, it sounds like the rule won't apply to them until Sept 2010. Even then, they might not have to apply the adjustments until, say, their first quarterly reporting - Jan 1st, 2011? Even if Citi's fiscal year doesn't run on this timeline, others might. As a point of illustration, I might note here that Goldman Sachs "orphaned" their December 2008 mark-downs by altering their fiscal year, which had run December-November, to the calendar year, Jan-Dec, thereby allowing them to post a quarterly report covering only January-March in 2009.

Basically, while there have been some positive rumblings lately, I have no faith in Obama's economic team, and until I see strong indications of a will within the White House for serious financial reform, I'll consider the majority of these stories as political window-dressing or "rogue" agents within the Executive who are not "on message" with WH policy - simply be default.

The "produce the note" approach to foreclosure, though... that's pure gold.

In fact, Obama could make me reconsider my opinion of him if he, himself, publicly encouraged every foreclosed-upon American to "demand the note." Wouldn't that be a great move to make, even if only from the perspective of crass, poll-calculated politics?

Anonymous said...

Now you can clearly see why "they" flew airplanes into our buildings!!! While everybody looked away (or for mythical "terrorists"), the real "terrorists" were robbing is blind using SCAMS such as MERS Inc.

beeta said...

I have a client that bought a forclosed house from Bank of America. The mortgage belonged to Country Wide originally. She has been trying to close on the house for the last 45 days and the title company keeps postponing the closing. The problem is not with my client, it seems that Bank of America can't provide the papers the title company needs.

Anonymous said...

Corporations should rehire the millions of Americans they tossed out of the labor force who are no longer counted in these stats. U.S. corporations are importing cheap labor and THEY should be the ones doing the retraining like they USED to do up until twenty years ago when this corporate welfare ride began to turn the middle class into this FEUDAL serfdom that elites here crave.

The U.S. has the finest universities in the world and millions of our best U.S. grads (young and middle aged, including readers of this blog) are deliberately being replaced - by citizens of India who come here to work for a fraction of our pay. This is due to personal political profiteering from corporate cronies who love slave labor.

Look what is really happening to U.S. jobs and ask why our wages continue to plummet: outsourcing/insourcing and labor arbitrage. Where are the articles about this?

Our jobs are being given to Indians (no problem with the people, but with the corporate practice of killing jobs for our citizens - no other country in the world does this but the U.S.) who come here on corporate sponsored visas and green cards to replace us.

This has to stop. If imported workers have talent to build product and service companies, now is the time for them to build up their own country with such talent.

Let us fix ours by getting our citizens back to work and nailing our Congress critters who enable this corporate welfare at our own expense. We do NOT have a skilled labor shortage; we have a shortage of citizens who have good paying jobs commensurate with their degrees and training.

Reps like Gabrielle Giffords are in cahoots with guess who? Bill Gates, King of the "Kick American Workers to the Curb."

http://www.computerworld.com/s/article/9139623/Bill_would_double_cap_on_H_1B_visas

Mark Pereira

Shainzona said...

Does anyone know.....

If a bankster can't produce paper for a foreclosure, what about being liable for your mortgage payments?

If the paper trail doesn't exist - it doesn't exist, for anything related to the mortgage.....so why not do a title search, and if something is missing, stop paying your mortgage?

Joseph Cannon said...

Actually, renters should do the same thing. If you are paying rent on a house, make sure that the person you are paying actually owns the house.

Yes, it happens. It happened to me once, quite a few years ago. I was paying rent dutifully -- the landlord would yell at me if I was late. Then one day the Bank of America told me to get out. The landlord I was paying didn't own the place at all!

Unknown said...

seems to me the lack of a note doesn't just affect the purchase of a foreclosed home - it must affect every home with a mortgage that is being sold.

yes?

Anonymous said...

on the addendum:

I was going to calculate this myself, but stumbled on it (see link) for the US:

quote:

Regarding employment numbers, I think there are only 5 numbers worth watching—2 of which are derived from the other numbers (from the Household Survey):

1) "Civilian Noninstitutional Population"—now 236.322 mill
2) Employed—now 138.864 million
3) the Employment-to-Civilian Noninstit. Population Ratio—now 58.8%
4) Total 'Non-Employed' persons (subtract #2 from #1)—now 97.46 million
5) Non-Employment Rate (100% - 58.8%)—now 41.2%


Thus, 41% of our potential workforce (or 97.46 million) is not employed. We have a potential labor surplus of 97.46 million. This excess supply definitely reduces workers' bargaining power, including the suppression of their wages.

end quote.

http://tinyurl.com/yhodcmv

Now of course non-employed includes happy stay-at-home moms, rich ppl who don’t need to work, drop-outs who manage OK under the radar, older children now living with parents, etc.

However a labor participation rate of 58% is historically extremely low for the US, as well 'low' for any ‘developed’ country.

The stats above are counted in persons (or jobs if one likes) but don’t take man-hours into account.

Add in that the last average work week (non farm, non manufacturing) that I looked at (last month) at the BLS was.....32 hours! Now it looks closer to 33:

http://www.bls.gov/news.release/pdf/empsit.pdf (PDF WARNING)

Were one to add in under-employment, or need/wishes for more employment, how many extra % points would be added to non-employment or the un-employed (note the desscriptive difficulty) ? If one considers that a regular working week is say 45 hours?

Typing this I wondered how ppl who work two jobs are counted - what a mess. The US used to be a model for transparent statistics, proper accounting, they set world standards, procedures, really. No more.

Ana

Anonymous said...

On the QSPEs then broadly speaking your commenter was right. If they pass the rule change then Citi and BoA are dead - so they wont.

But basically Citi and BoA are both Zombies anyway. Untill they take enough money off of Americans to cover their losses.

On the note things, damn right. The whole system is kaput and its about time people noticed. They built a securitization system which doesnt work! Greedy banksters.

Harry

wxyz said...

Citibank is playing credit card games, subjecting good and bad customers alike to onerous rates and penalties. The suggestion is that Citibank might be positioning themselves for a possible collapse of the credit markets following any exposure of their real liabilities. If it goes down that way we can expect the US government and taxpayer to experience the second wave of shirt-fronting in which the financial masters of the universe reaffirm that they are "too big too fail" and simply don't give a damn about anyone else. At what point will there be riots in the streets? I look forward to it. These bastards and their health insurance compadres have done their level best to financially rape the ordinary US worker. Roll on the barricades. It's the only way decent Americans will ever get out of this.