Tag Archives: foreclosure crisis

Mortgage Mess Redux

The current financial morass we still endure began with the mortgage mess that came to light in 2008 at the latest.   Many of the politicians acted with great surprise that there was a problem and quickly jumped to blame “Wall Street” for the problems and the crunch on new mortgages and the construction business.  That lead to TARP and then the Government Motors bailout and the Stimulus bill soon after.  The birth of the Tea Party had its inception and inspiration from a rant by Rick Santelli on CNBC in the late winter of ’09.

His rant arose with the first of several Federal programs to protect the poor homeowners who were facing foreclosure because they couldn’t pay for the mortgages they were “tricked” into signing for homes they couldn’t afford even with they put virtually no money down at the time of closing.   They made no sacrifice to get the home in the first place.   Santelli asked then on the floor of one of the exchanges if “you” wanted to pay for your neighbor’s house when you had played by the rules and he had the big house and lots of goodies he couldn’t afford.  The roar of the crowd was overwhelming.   Helping out those who were irresponsible in the first place raised the whole spectre of moral hazard.  We were at a tipping point where there was an abandonment of personal responsibility for personal decisions and a turn toward government to fix all our problems for ourselves.  It was during that time that Santelli talked about holding a “tea party” to protest the actions of the Federal government bailing out homeowners regardless of the foolishness or even venality of their own actions.   That phrase about the tea party was picked up by those folks who believed Government intervention into every aspect of our lives and dominance of our lives was wrong then  and the wrong direction to be taking.   The Fed got into the act at that time also and in addition to the Stimulus bill of over 800bn, the Fed went on a buying binge to bolster the mortgage and credit markets with over 1 trillion of various bond purchases during ’09.

Well, a few trillion dollars later we still face the same problem.  The housing and mortgage mess got us on the downhill slide and do you think we have improved the situation with all that Federal money (and borrowing) thrown at the problem?  Now there is the added burden of the legal difficulties created by the sloppy paperwork and legal work of the big banks and the investment houses that bought those mortgages.  At the moment over 90% of all our mortgages or owned or backed by the Federal government rather than the private market.  That can’t be a good thing.  They can’t even deliver the mail on time and on budget and they are controlling trillions of dollars in mortgage obligations.   This is no defense of the banks.    In a free market system properly allowed to function we all have to bear responsibility for our decisions and failures.   Yes, failure means the person or company goes under and we move on and reset things.  But that has not happened because the politicians don’t think we are tough enough or brave enough to face the consequences of our own actions.

The banks for a few decades now had been under increasing pressure to make loans to minority groups.  They were accused of “redlining” certain areas and not providing funding and loans for new homes.  No need to repeat the legislative history, we all should know it by now.  The Federal government in its infinite wisdom decided that it was good policy to make loans to minority groups and that failure to do so should be punished.  The banking industry had all along argued that they would make loans to anyone who had the credit to service the loans.  Of course that was true.  Why would they not increase their business if they could by making such loans.  It was business and credit that determined the lending standards.  But the Feds came busting in the door and demanded that they make such loans.  After all the Feds regulated the banks and they made it clear if they did not comply with the new rules they would make life miserable for the banks and even revoke their charters.

Eventually, the banks caved into the new laws and the intense pressure of the regulators.  They did want businessmen have always done throughout history; they figured out a way to make money in the existing system whether they liked it or not.  Soon those new loans were rolling out.  We know they were “liar loans” and loans with no documentation and loans made with no money down and often even the closing costs were covered by a grant from one institution or another that existed to aid minority groups.  Then those loans were bundled up and sold to Fannie or Freddie and often after that were resold into the bond markets with those securitization packages or done so directly by the investment houses.  But like those chickens coming home to roost, the bad loans eventually revealed themselves to be just what they were from the beginning–bad loans that should have never been made.

Now the politicians scream about the bad loans  but where were the voices of the politicians and their outrage when they were being made in the first place?  These loans weren’t being made in the dark of the night in some obscure alley.  Get the Feds out of the mortgage business entirely.  Let the State legal system deal with the foreclosure process.  That is a matter of State law in any event and there are perfectly adequate protections for anyone that was truly defrauded by some bank.  Let the investment bankers and banks that bought those mortgage securities suffer whatever loss they incur for a bad decision.  Dismantle Fannie and Freddie and don’t resurrect them.  We must as a nation restore the vigorous concept of moral hazard to the marketplace and our daily lives.  Take ownership of our decisions and consequences as individuals and companies.  Yes, there will be some pain, but hell’s bells we have already suffered pain and are still doing so.  We can figure this out on our own, thank you very much if the Federal government will get out of the way.

“A man’s liberties are none the less aggressed upon because those who coerce him do so in the belief that he will be benefitted.”  H. Spencer.  www.olcranky.wordpress.com

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Mortgage Legal Miasma

Everyone by now is aware that several of the largest mortgage providers are holding up on their foreclosure proceedings because they have not offered legitimate proof that they own the mortgages and that they are in default.  We don’t get to toot our own horn very often about things but this is a situation that I discussed over a year ago when the home mortgage rescue was being pushed by the politicians in Washington.  Then there was discussion of the way the mortgages were bundled into packages and sold and re-sold several times with serious questions as to who was the real owner. 

There was concern expressed that many of the home owners were being foreclosed on wrongfully and that they had been tricked into taking the loan n the first place.  I pointed out then that anyone who thought they had been defrauded or were being foreclosed on wrongfully already had a perfectly adequate remedy by using the court system.    The lender has to have two things to proceed with a foreclosure.  They must be the owner of the mortgage itself and the debt.  The law has for centuries recognized that real estate transactions are very special and that they must be handled correctly–in writing and filed of record in the appropriate county office for land records.  The mortgage can be sold as can the debt to another person.  There is nothing inherently wrong with that transaction but it must also comply with the laws regarding real estate rights.  That means the owner of the mortgage at any point in time must be in writing and filed of record to have effect against third parties. 

Because these lenders were doing so many of these and bundling them like so many carloads of corn they got sloppy and careless with their paperwork.  I predicted that.  I predicted that many of those “lenders” would not be able to prove they were the legal owner of the mortgage they sought to foreclose on.  The current scandal is that they cannot produce definite ownership but that they in the hurry have been signing false affidavits for foreclosure proceedings.  There must be a proper chain of title to that mortgage and the signers of those affidavits obviously were not checking the records to determine the truth of the facts they were swearing to.  If the lender can’t prove a proper chain of title then they are not allowed to foreclose under the law.  The are in the eyes of the law a stranger to the original transaction and have no standing.  It is not complicated to transfer such an interest in a mortgage but it must be done correctly.  They got too fancy for their own good and were processing way too many of these transfers and now they are paying the price for their mistakes which is as it should be not only under the law but as a matter of morality.  

Also there is the issue of the debt.  A mortgage is meaningless unless there is a corresponding debt to go with it.  That is another reason it is so important that the chain of title be correct–so that the mortgagor who has been making payments is given the correct credit and that some stranger he did not deal with cannot foreclose on his property.  When the mortgage was sold to another investor the note supporting the mortgage should have been sold with it.  This would normally be done with one document and one transaction but again you have to be the owner of a debt from the homeowner to foreclose.  If you hold a mortgage against A but if fact you have no proof that A owes you any money you can’t foreclose against him which again is as it should be.   It generally is the burden  of proof on the mortgage and note holder to proof the legitimacy of their instruments, the debt and the mortgage.  The homeowner typically can just say “prove it”. 

These mortgage holders who got many of these dubious mortgages can probably in most instances correct the paperwork.  There is nothing legally wrong with a correction deed or deed of trust or mortgage.  For example if everything was correct in the original mortgage but the land description was wrong it can be corrected later and the corrected instrument filed of record.  But with the tens of thousands or hundreds of thousands of these mortgage out there in these bundles it will take a long time to go back through them one by one to verify the chain of title and then properly record them. 

Again the government jumped in where it was unnecessary.  Politicians wanted to win points.  The legal system already had the mechanism in place to deal with these issues and we would be so much further along in restoring the housing market.  Those that were defrauded would be protected and those lenders who didn’t have proper paperwork would have to correct it or lose.  I said long ago that there can’t be a mystery owner of a mortgage who gets to foreclose on you.  You are entitled to know who holds your debt and mortgage and that was true then and now.

We don’t need a federal remedy for every perceived problem.  This can be straightened out and will be.  I don’t feel sorry for those who took out loans that couldn’t afford in the first place with federally subsidized money nor do I cry tears for the lenders who gambled on those loan packages sold like a commodity on the market.

“A slack hand causes poverty, but the hand of the diligent makes rich” Proverbs 10-4.  www.olcranky.wordpress.com

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Paralysis By Analysis

I know the title is not original but then there aren’t very many things that are new under the Sun as the Good Book teaches us.  We should try to remember that more often when we peruse the day’s headlines about our economy.  One day it is housing that it topic one, then another it is GM or AIG, then it floats the Fed and what they are pondering.  With the economy as messed up as they can make it from Washington it is no wonder that the topics exceed the ability for cogent comments.

The last few days the topic as been on Fannie and Freddie again.  Woe is me, what to do, what to do.  The smartest guys in the room say we need to make changes.  But that Government, Inc. MUST have a continuing role in the housing/mortgage sector or the roof will fall.   Again it is a classic example of top down planning and manipulation of the private markets and political crony capitalism.   We need to start with the reminder that real estate law is and has always been the purview of the  individual states, not the Federal Government.  Article One, does not give the Feds the power to control the laws of real estate ownership or rental laws.  Some States are what are called Deed of Trusts states for taking a lien against real estate others are mortgage states.  The phrase “mortgage” is used loosely in the press but that it not quite accurate for numerous states.   How to sell and take good title to real estate is a state matter and likewise the perfection of a lien against real estate is a matter of state law. 

You can go back a really long way and find that under our Anglo-Saxon common law people have taken liens against real estate.  People usually didn’t have enough cash on hand to build a house or commercial building in London or Boston in 1700.  They had to borrow money to build it and then repay the loan over time.  The money came from private sources or from the early banks.  It is amazing how our country managed to survive and thrive for about 175 years after its founding without government involvement in what were private transactions.   Use any measure you like, economic growth, total wealth, jobs created, industry creation, standard of living,etc, and it is without argument that we had a remarkable run of prosperity and growth during all that time.  That even included the War Between the States and Reconstruction.   But then the Big Government gurus got power and decided to start taking over the housing sector.  They knew what was best.  It began roughly 60 or so years ago. 

All the early mortgages were private, they came from banks who would loan you the money and then collect on that loan with interest until you paid it off.  The bank had a strong interest in your ability to repay the loan. They checked you out.   That method worked wonderfully well for a very long time.  Then the social engineering started.  Fannie and Freddie along with FHA became bigger and bigger players in the mortgage game.  What if they no longer existed?  Would that mean the end of new housing, the end of selling your house, the end of finding financing to build or buy a house?  The answer is no.  There is money to be made lending for housing just as there has been for centuries.  People will find a way to make that system work.  Like the Savings and Loans of yore they will want to make money on housing loans.  In spite of the rhetoric in the newspapers today that is still a viable business.  It has its ups and downs like any business but it is a solid business. 

If Fannie and Freddie disappeared tomorrow, that void would be filled by others willing to loan for housing.   There is money to be made there even if there is no Fannie or Freddie to buy up the mortgages from the banks.  There were millions of loans made before Fannie and Freddie even existed and there would be again.   These arguments that the market for housing would collapse it balderdash. Yes, there would be some dislocation for a while as the new market grew.  But my heavens could that temporary problem be any worse than what we are already suffering?  Of course the politicians would lose lots of power because they couldn’t curry favor with one group or category for their votes.   The power of the purse would be in the hands of private enterprise.  It is laughable that Fannie and the like are called “Government Sponsored Enterprises”.  What is the government doing in private “enterprise”? 

Fannie and Freddie should be shut down over a 5 year period and there should be no government entity to replace them.  Let the banks do their own work and determine who is credit worthy for a housing loan.  Geithner, the tax cheat, says that the market would disappear but that is a lie.  There are millions of potential loans every year to be made.  If left alone private markets would move to fill that void quickly.  You may have noticed the recent article about the company that is redoing mortgage loans now for underwater or properties threatened with foreclosure.  They buy the loans from the banks at a steep discount and then work out a new deal.  They re-work most of them in a month or so.  You’ve read how those in government programs take months.  That is private enterprise in action.  That company will make a profit the homeowners have someone who will talk to them and make a new arrangement that its best for everyone.  The shame is that those loans weren’t made according to private enterprise standards in the first place.

The early Bank of New York made bunches of mortgage loans for the development of Manhattan after the Revolutionary War.  Hamilton and a few investors that the bank would help with the growth there.  He was right.  The politicians of the day were concerned about a bank that would favor merchants over the little guy.  The charter was delayed for years.  That first bank opened as a private bank.  You trusted them with your money and they trusted you to be good for the loans they gave you.  It was located on lower Wall Street.  That bank and others like it seemed to go pretty well for New York.  When it opened the population was less than 30,000.  By the time of the War Between the States it had a few hundred thousand.  http://www.olcranky.wordpress.com

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