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12th Street Capital Provides Perspective on the Foreclosure Fiasco

Posted by Larry Doyle on October 22, 2010 11:23 AM |

What the hell is truly going on within the entire mortgage foreclosure fiasco? There are seemingly more angles to this mess than there ever were choices of mortgage products themselves. Where can we turn to make some ‘sense’ of this madness? Let’s check in with the crowd on the cutting edge of this sinkhole, that is our friends at 12th Street Capital. Today they write,

Not surprisingly the ones that look to be best positioned during this mortgage foreclosure/put back fiasco are the lawyers. As reported by late yesterday, “A spokesperson for the New York law firm Quinn, Emanuel Urquhart & Sullivan confirmed to HousingWire it has been hired by the Federal Housing Finance Agency, a move some say means the government-sponsored enterprises are going after bad mortgages it bought from originators.” Guess what, the GSEs have ALWAYS pursued repurchases.

This is getting blown WAY out of proportion. Yes I would agree it is never good to have the NY Fed across the aisle in a court room. And sure Pimco and Blackrock have some very deep pockets and can probably stay in the fight a-lot longer than most plaintiffs however it seems to me that the monday morning quarterbacks here are counting on public opinion, CNBC, and the politicians to further their case much more than they are actual legal culpability.

It is clearly a very complex problem and let me start with (1) yes there were loans that were made that should have never been made….
and probably a fair amount of them. (2) the servicers can find themselves conflicted given their relationships with originators or issuers of certain securities, however remember it is the trustee that is the steward of the trust and should be pursuing repurchases not some guy in Simi Valley that probably has no idea where the loan resides (in a deal or nor, and if so in which deal) when he is looking at his servicing screen and trying to follow the maze of rules set forth not only by his company but also by the government over the past 12 months. Also remember, servicing can often be a judgement call. Is it better to execute a short sale, or not? Is it better to modify or not? Is it better to pursue a refi or not? I can see a slap on the wrist or an admonishment to do a “better” job, but I don’t see a full scale culpability due to servicing practices. Finally, (3) this whole idea that there chain of title was broken, or the loans were not legally ‘sold’ is a joke. The UCC ( has language adopted by all 50 states governing the transfer of these notes into the trusts and the idea that 30+ years of securitization can be undone by an oversight of this is a comical.

Also I was thinking about the case being made for “these loans should have never been made” argument. Sure I would agree there were a lot of loans that should not have been made, but raise your hand if you actually looked at a loan level file when you bought these bonds. Sure there were some residual buyers in subprime sector that did, but other than them I can count on 1 hand the number of guys that were doing true loan level due diligence. For crying out load the street was only doing sample due diligence on whole loan trades…..the housing market crashed, and by the way every update I get from my So Cal realtor is about a lowering of prices on homes so I’m not sure the upper end of housing has found solid ground yet. But does that mean a no doc loan was illegal? Bad idea yes but illegal definitely not. I tell my kids to not rely on the “everyone else was doing it” defense, but the truth of the matter was that market standards change and most people adapt and change over time. Other than the government that was allowing for no money down loans, tax benefits, and home buyer subsidies it seems to me that the market has adapted.

Last but not least, if you have 5 minutes, read this article, It is a little bit of balance versus the mind numbing blogs and CNBC chatter. A couple of highlights, “As for REMIC and related loan assignment issues, more than a few talking heads have gone postal in recent weeks about how every REMIC in the U.S. is a fraud, and that the U.S. banking system is similarly fraudulent. In the latest variation on the “show me the note” strategy, these would-be experts point to the fact that when a note is transferred to a trust, it is typically endorsed “in blank” — so the trust never owned the note, right? Nobody owns the note! Chaos! Anarchy! Free homes for all! (Or at least an issue for the courts to decide.)

Someone needs to inform the public about how this is really done. Namely, that notes are endorsed to the trustee or servicer only when needed to pursue a foreclosure, and not before then. Endorsing in blank is recognized in every single U.S. state, since evidence of ownership and transfer rests with the executed loan purchase agreement, and not with the assignment itself — something that has been true for well over 30 years in this country, and is just now supposed to be controversial?” and “the third real issue facing mortgage markets today, quite frankly, is that political reality is allowed to subsume actual reality. This is the outcome that sees the mortgage industry eat its own, if it comes to pass. It’s supremely ironic, for one thing, to see the White House now advocating that foreclosures proceed as quickly as possible — after spending the better part of the past two years attempting to halt foreclosures at all costs. But that doesn’t make the White House wrong now; it means our political leaders were wrong then, wrong with the HAMP program and wrong to interfere with a housing market in dire need of a functioning clearing mechanism.”

Thank you to the team at 12th Street Capital for making some ‘sense on cents’ out of what is otherwise an enormous s*&$tshow.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • fred


    I understand institutional investor’s (blackrock, pimco)concern, though it’s not likely, gov’t backing of mtg securities will be pulled in 2012; until something changes, that has to be a major concern; these securities are being valued at par with no market.

    As far as the public interest, (NY fed and all the state AGs), do you think any of this is just a delay tactic on foreclosures from taking place because of the potential loss of tax receipts? I’m not an expert on the legality of foreclosure but I was curious who, if anyone, is liable to pay the property taxes due, once a property is forclosed upon?

    If nothing else foreclosure does have an adverse impact on property tax values as prices come down from the increase in supply.

  • LD


    Good point on the tax revenues. To be perfectly frank, i am not sure who might pay the property taxes. I would imagine the bank holding the note. If there are any lawyers in the crowd who can weigh in on this point, please enlighten us.

    I still think the administration wants to get to a point where they can impose principal writedowns.

  • Ken Summers

    It doesnt require a lawyer to answer that one.

    The servicer of the loan continues paying the property taxes during the period of default on payment and/or foreclosure.

    If they did not, they would have to pay the taxes plus penalties on any foreclosed property put on the market.

    Tax revenues are not at risk.

    I think they are right that there is a lot of hysteria out there. But I think there sanguine view is not warranted. The foreclosure and releted mortgage modification processes were already paralyzed.

    So the injection of more legal problems, and everyone from homeowners to security investors taking a more serious look at litigation… that does not bode well for the industry.

    • fred


      If the servicer pays, where do they get the money from after the escrow is depleted; from the mtg originator?

      Post escrow, what is current industry practice, to continue paying through the foreclosure process or to pay tax plus penalty upon the sale of property?

      • Ken Summers

        What I am saying is that whether there is money in escrow or not- and there wont be once the forclosure process unfolds- it is in the interest of the actual investor that the taxes are paid the same as if mortgage payments were being made.

        If the investor is not the mortgage servicer, the latter is contracturally obligated to do the same. The presumption being they are repaid at some point. The current mess might change the dtails but not the basics.

        • fred


          Thanks for the info; given the potential magnitude of the situation, mtg servicers better have adequate reserves and qualified staff.

          I assume servicers would eventually be “made whole” after auction resale; investors would most likely take a hit (prepayment or writedown); the entire process possibly taking 1-2 years per property.

          Let the process begin!

  • JamesM

    I feel obliged to comment here, because the orignal column referred too and quoted from does not permit comments.

    1) “Fact one: ‘robo-signing’ is a procedural issue. Period.” NO – more often it is CRIMINAL, done with intent to expatiate or enable foreclosure.

    If you draft, or executor transmit or cause to transmit such document through the mail, or record the document in the public records you have committed a fellony in almost all jurisdictions.

    For example if an assignment of mortgage from A to Z was executed by someone without authority to do so, or in the name of a business that no longer existed, or was backdated by years to make it appear legitimate, or was signed by someone other than the printed name under the signature, or was to evidence a transfer from A to Z when the note actually went from A to B to Trust to Z.

    It may be as simple as when a notary notarizes a document that they did not see signed, or attests to the signer giving a sworn statement under oath and yet the notary did not administer such an oath the evidence is INVALID and the notary has committed a crime. Where companies like LPS setup divisions like DOCX who’s modus operanda was to fake up document and notarize them in a criminal way then the whole thing turns into a criminal racketeering enterprise.

    There are many ways to fabricate evidence needed for foreclosure, but fabrication of evidence and lying under oath are not “procedural issues”. A crime committed by the representative of the note holder, their agent, in the collection of that note becomes an affirmative defense for the party obliged under the note, and in most jurisdictions is a defense that prevents collection.

    2) “Fact two: commentators have hopelessly conflated ‘robo-signing’ with other long-standing and/or played-out mortgage issues.”

    Yes people get the facts of one crime by the note holders agents confused with the other crimes and misdeeds by the loan originator, depositor, trustee and servicing agent. All of whom either were at one time the owner or holder of the note, or were the agents for the same. So it is somewhat understandable that the issues get talked about with the same breath.

    “giving credence to long-standing claims regarding the validity of MERS as a foreclosing party, who really owns the note” Except that (a) MERS has stated in court that they DON’T OWN OR HOLD THE NOTES. (b) MERS banned it’s members in Florida from foreclosing in MERS name a long time ago, and now has issued the same rule to it’s agents nationally, because … see aforementioned (a).

    I am not going to explain capacity and standing to you. Go learn.

    As after arguing the contary he conceeded “let’s grant the critics full leverage on their criticism, and assume that MERS as a nominee is wholly insufficient to stand as a valid party to the foreclosure. What then? Does the entire system of U.S. property rights fold in on itself and expose the banana republic within? Of course not. Banks would merely take a given loan out of MERS as nominee, place it in their name since they already hold the beneficial interest in title, and then pursue the same foreclosure. In fact, this is already being done in certain jurisdictions and with certain loans. In other words: it’s a technicality, nothing more and nothing less. A costly technicality, sure, but a technicality nonetheless.”

    But not if you start the foreclosure in court, and then don’t transfer it until after you commence the action. You have to have standing at the time of commencement, you cannot gain it afterwards. This is not a technicality, it is basic fundermental law, stuff you learn in pre-law 101.

    “Someone needs to inform the public about how this is really done. Namely, that notes are endorsed to the trustee or servicer only when needed to pursue a foreclosure, and not before then.”

    Yes a note can be endorsed by the owner and holder at any time, but if you have ever looked at any of the endorsements they are not dated. Therefore nobody is arguing about the date of the endorsement, an undated endorsement in blank, and most are in blank, as per MERS rules, does not evidence a transfer at all.

    What they are arguing about is the documents that the foreclosing parties claim is evidence of purchase, namely the after the fact AOM’s that were, in many cases, fabricated to facilitate foreclosure.

    Because, in most cases, the ‘real’ note with the alleged ‘real endorsements’ does not turn up until after the forclosure process begins there is REAL doubt if the foreclosing party had ownership and possession at time the action commenced.

    OFTEN – in states with judicial foreclosure process – there is a count in the ‘verified’ complaint for re-establishment of a lost note, in which the foreclosing party swears they don’t have possession of the note and cannot find it when the action commenced.

    For example, and this is not theretical but common, the foreclosure compalint of September 2009 has a count for reestablishment of a lost note, alleging not having possession and inability to locate same after dilligent serch. Then several months later an empoyee of LPS, signing as a vice president of MERS, creates an assignment of mortgage from the loan originator directly to the foreclosing entity – even though the loan originator is long since out of business, the LPS employee is not working for the assignor but as an agent of the assignee, and the note did not travel from the originator directly to the entity attempting foreclosure – and the MERS system shows the current owner as some other entity altogether.

    Someone needs to read a PSA and the NY trust law. A trust cannot acquire by assignment a loan that is (a) already in default (b) after the closing deadlines in the trust (c) by an action not allowed in the trust agreement or PSA because under NY trust law, (under which almost all of the trusts operate) actions not allowed in the PSA or trust agreement are void. Assignments made into a trust years after the trust are void. So you forgot to do it in 2004, sorry you can’t fix that in 2011. This is not a technicality. It is the LAW. The same LAW that you hope to use for collection of the debt.

    “according to recent commentary from colleague Christopher Whalen… ‘Once the deal is closed, the trustee’s job is done.’ ” Nothing like a deferral to a mime to make it look official. NO – if you commit fraud you are not done until the statue of limitations runs out, x years after the discovery of the fraud by the injiored party.

    Also, a trustee of a trust is not done until the last payout some 30+ years from inception and the closing of the pass-through trust. Brokers of notes may have little residual liability, but trustees job lives just as long as the trust does. DUH !!

    3) “Fact three: there are real issues out there, but they are obscured by all of the current noise making.”

    R-I-G-H-T. Very right, but for all the wrong reasons. It was, from the market point of view, classic pump and dump, with a bunch of massive amounts of misrepresentation and fraud thrown in.

    The banks, as trustees, are being squashed from both ends, homeowners and bond holders, and are being left holding the bag by the architects and depositors who got paid-off when the trusts were setup.

    However this does not give them the right to operate outside the law. Their best bet is to hand over trustee ship to a court or the government and bow out as gracefully as they can.

    “massive GSE putbacks? Yes. Massive private-label putbacks? Eh, probably not so much.” ??? The The private-lable put-backs could be much more massive. All the investors have to do is crate a MERS like entity for investors, creating a voting nominee so as to collect the 25% needed to force action. If that system can be used by the banks who crated MERS, ‘as nominee’ then the same could and probably will be dreamed up by the holders of the various trenches.

    OK and ULTIMATE SMARTY PANTS: “The supreme irony in all of this is that remittance data is horribly fouled up because nobody can make heads or tails out of their obligations under HAMP and other government mandates, which is messing with the computer programs that spit out remittance data, and fouling up everyone’s precious prepayment projections in the process. (‘We’re from the government, and we’re here to help,’ indeed.)”

    This is a dog ate my homework and it’s the black mans fault excuse. The remittance date is fowled up because the remittances are fowled up, because the servicer is selling off the assets, the notes, to pay the interest. These are cracks in a ponzi scheme, but nobody on the back side wants to blow the whistle while the cash flow can be patched up.

    Like all gambles and investments, the investors take the profits when there is some and losses when there is not. In this case the investments were very very unsound and the investors should prepare for significant losses. They in turn will murder the people who sold them the junk. The longer people pretend the loans are good while the viable assets are stripped, the harder the fall at the end.

    Even so, it is not the responsibility of the home owner, who also got sold a bill of goods they did not understand, to make everyone else whole. Improper and illegal foreclosures are not a just a technicality.

    Public interest is not that we should protect massive overseas investors but the Americans who live down the street. We won’t rebound the economy by destroying neighborhoods and main-street to give wall-street ‘reassurance’.

    Unfortunately, that sort of thinking, which should have gone south the bernie madoff, seems to be the rational for accelerating the rate of foreclosures, in a depression, at a time when an astounding 20% of the homes in America are vacent.

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