EDITOR’S COMMENT: Here is our problem writ large. The commentary written by Shedlock (see below) is basically on the side of punishing the banks for their wrongdoing, but not giving any relief to borrowers. The logic behind the position is that anyone who does not pay their mortgage should expect to lose their home. On its face, it would seem that nobody could reasonably argue to the contrary. The problem we face is the assumption behind that sentiment. The presumption is that the payments were due, that the creditor was not getting paid, and that the homeowner should lose the house for which they paid a “stupid price” — a slam at homeowners who accepted the lender’s appraisal of the property.
My premise goes deeper than the shallow waters of Shedlock’s position, who clearly represents the feeling of a majority of people who just take a quick glance at the problem. My premise is that anyone who has a debt that is due has the responsibility to pay it to the party to whom it is due, less any legally meritorious defenses for bad behavior on the part of those who induced him into the transaction.
So if you enter into a transaction where you get funded for $100,000, you have agreed to repay that $100,000. If you have a claim against the party who wants to enforce the obligation, then you should repay the net amount due after computation of damages for both sides. And if the amount due from the “enforcer” (pretender) is more than the amount claimed by the enforcer, there is no debt to pay from the borrower’s perspective. The borrower in that scenario is owed money which is an unsecured debt. I don’t think anyone could reasonably argue with that position either.
The first issue, though is whether the debt is due, and to whom. The debt might not be due at all if the creditor has received, directly or indirectly, payment or settlement from bailouts, insurance, credit default swaps, guarantees, etc. Shedlock’s mistake is the same as most people — assuming that because the homeowner stopped paying, there must be a default. In ordinary times with ordinary mortgage lending practices that would be true. In the context of the illusion of securitization and following the actual money trail, it is not true.
At the time of the declaration of default, the servicer is probably continuing to make the payments to the creditor, which means that from the creditor’s perspective, the obligation is NOT in default. Because the securitization scheme involves multiple obligors on the obligation, only one of which is the homeowner, it is not possible to determine a default unless one gets an accounting from all levels of the securitization chain. If the servicer is making the payments, then the original obligation to the creditor is NOT in default, but the servicer MIGHT have a claim for restitution against the homeowner for making his payment — but that claim is not secured and not liquidated unless and until the servicer proves the actual money trial. So my premise is based upon making decisions based upon the actual facts rather than a set of incorrect presumptions.
The most serious defect in Shedlock’s position is that taken at face value, it would allow anyone to take the house away regardless of whether or not they are the creditor. Assuming the creditor is the investor-lender. Just because the actual lender refuses to enforce the obligation, and the obligation is “perceived” as due, does not give a license to ANYONE with some knowledge to make the claim in lieu of the real creditor. That is insane. If that were the law, then our marketplace would be filled with uncertainty inasmuch as it would virtually guarantee multiple claims on the same debt by multiple parties. In a race to the courthouse the first one to initiate proceedings to enforce the obligation would arguably be the winner — even though they never loaned any money and never purchased the obligation — and even though the obligation has potentially been paid in full or is being paid current by the servicer. Nobody can reasonably argue with this point either.
The last major point I would make is that Shedlock presumes the original transaction was properly documented and recorded in the form and content required by law. This is not the case in virtually all securitized loans. The documentation shows that homeowner-borrower (HB) was funded by originating lender (OL). In truth OL was merely acting as stand-in for undisclosed parties contrary to federal and state laws. The money trail clearly shows that the investor-lender (IL) was the source of the funds and was the intended beneficiary of the transaction.
So the documentation shows a transaction (HB-OL) that never existed since OL did not lend or otherwise even handle the money involved in the funding of the loan, most of which work was done by the closing or escrow agent. The documentation should have identified IL as the lender but didn’t. In fact, there is no documentation in which both IL and HB appear as parties, neither one actually knowing about the other nor the terms of the transaction by which IL advanced money and HB received the benefit of money.
And here is the rub: the investors don’t want any part of the predatory lending practices and faulty underwriting that was custom and practice in the industry during this mortgage mess, so they seek no remedy from the homeowner. IL does not want to limit itself and collect from HB because IL knows that the investment banker who sold the mortgage bonds didn’t use all the money for funding mortgages. Instead they used the money to claim fees and profits part of which funded bets against the very loans that they said they were selling to the IL but in fact never transferred from OL.
If Shedlock’s premise were accepted, then the pretender lenders score a great victory for themselves at the expense of the IL whose money they used to fund the scheme and the HB whose obligation has been partially or entirely extinguished by trillions of dollars in payments received by the securitized parties on behalf of the IL but which was neither reported nor paid to IL. IL therefore has chosen to sue not the homeowner, where the damages would be reduced to near zero, but rather to sue the investment bank, where the damages are 100% of the money they advanced. If they went for the HB, they would end up with at best a home worth a small fraction of fraudulent appraisal OL used to get HB’s signature. Both the loan amount and the security for the loan would already be substantially lower than the money advanced by IL. So given that they are looking at 20 cents on the dollar if they go after the HB, less offset for predatory lending claims, they have chosen to sue the investment banker for 100 cents on the dollar.
The void created by the choice of IL not to enforce against HB has been filled with pretender lenders who see an opportunity to gain a free house. It is the banks who have created the choice of a free house (or HB relief for the borrower) or a free house for the pretender lenders. Given the equities and the fact that all of the fees and profits of the securitizers and pretenders are ill-gotten based upon fraudulent statements it hardly seems right to say that the collateral benefit from all this should flow to the banks rather than homeowners who were duped into the transaction to begin with.
from Mish Shedlock, http://globaleconomicanalysis.blogspot.com
Foreclosure-Gate Screw Tightens: Banks Face $17 Billion in Suits Over Foreclosures; Common Sense Says $5 Billion is Very Generous
State attorneys general are not happy with a $5 billion offer by major banks to settle lawsuits regarding robo-foreclosures and other alleged grievances. Some officials want as much as $20 billion. The compromise threat is on the high end.
Please consider Banks Face $17 Billion in Suits Over Foreclosures
State attorneys general told five of the nation’s largest banks on Tuesday they face a potential liability of at least $17 billion in civil lawsuits if a settlement isn’t reached to address improper foreclosure practices, according to people familiar with the matter.
The figure doesn’t cover additional billions of dollars in potential claims from federal agencies such as the Department of Housing and Urban Development and the Justice Department. State and federal officials haven’t proposed a specific comprehensive settlement figure, but Tuesday’s discussions represented the first effort to formally quantify potential liability.
Banks have proposed a $5 billion settlement that would be used to compensate any borrowers previously wronged in the foreclosure process and provide transition assistance for borrowers who are ousted from their homes. Federal and state officials have dismissed that as insufficient. Some officials have pushed for a total price tag of more than $20 billion to resolve foreclosure-handling abuses that surfaced last fall.
The U.S. Trustee Program, a part of the Justice Department that oversees bankruptcy cases, has asked for an additional $500 million to $1 billion in penalties, according to people familiar with the matter. Officials of the unit have raised questions in several cases over the authenticity of foreclosure documents.
Banks have argued that their problems are largely technical and that few if any borrowers have faced wrongful foreclosures. State and federal officials have faulted mortgage companies for not hiring enough staff to provide assistance to millions of borrowers that have fallen behind on their mortgages.
The latest development comes as state and federal officials are intensifying their scrutiny of other parts of the mortgage machine. Attorneys general in California and New York have announced wide-ranging mortgage investigations.
What are the Damages?
This is what I want to know:
- How many people lost their home to foreclosure out of an error? By error I mean the wrong person, a home with no mortgage, or a major procedural error.
- How many people think they deserve a free house and clear or a principal reduction over “show me the note” nonsense or other problems including unemployment?
- How many people did banks string along for many months with promises of work-outs, where the person paid their mortgage for months, then lost their home.
Throw Category #2 in the Ash Can
I am sure category #2 is the largest. Throw those cases in the ash can where they belong.
No one want to admit they were stupid. Yet people paid stupid prices for homes. Others were unlucky. Some lost their jobs. Even then, one can ask “did you have a year’s worth of living expenses saved up in the bank, in case you lost your job?” Regardless of the answer, banks should not be on the hook for people losing their jobs or having medical problems.
Here’s the cold simple truth: If you do not pay your mortgage, it is reasonable to expect to lose your home. There is no other realistic way of looking at it. Robo-signing may not be right, but it is irrelevant.
Category #1 the Real Problem
I have deep sympathy for those in cases where banks foreclosed on the wrong home, the wrong address, or on homes with no mortgage at all. Those people deserve their home paid free and clear and some huge penalty on top of it.
I suspect the number of such cases is minuscule. They receive enormous publicity but is the number 10,000? 5,000? 500? or 50? I suspect the number is far closer to the lower end than the higher end. 50 might easily be on the high side.
Whatever the number is, banks should pay mightily and punitively for it. The money should go to those wronged, not to the states. Even with massive penalties I doubt the total would come close to $200 million.
Category 3 is Where the Uncertainty Is
I do not know how big the “strung along” category is, but the only ones in this category who were genuinely harmed to any significant degree are those who continued to make mortgage payments, strung along on a promise, when instead they could have and should have walked away.
How many is that? You tell me. However, the harm is easy to quantify. The harm is extra payments people made (if any), while the banks engaged in deceptive practices or were simply understaffed.
Assume banks engaged in deceptive practices and people made extra payments instead of walking away. Would those extra payments amount to as much as $1 billion? I rather doubt it.
$5 Billion is Very Generous
What is a valid penalty? $4 billion seems like a lot of money to me. That would be a 400% penalty if the total wrong-doing amounted to $1 billion which I doubt.
The sad truth of the matter is we have a full scale witch-hunt over robo-signing and other alleged grievances even though there was little actual damage caused by banks.
If you disagree then total up the damages. However, I insist you start from two essential points.
- If you do not pay your mortgage, it is reasonable to expect to lose your home.
- Robo-signing may not be right, but it is irrelevant as per point #1.
So total up the damages, add a huge penalty, and let me know what you come up with.
No doubt, many will accuse me of siding with banks. The reality is I am siding with common sense. No one fought against bank bailouts harder than I did. Banks should have been allowed to go under.
Unfortunately they were bailed out. However, two wrongs do not make a right.
I am all for punishing banks provided the punishment is based on damages rather than the widespread belief “we need to stick it to the banks”.