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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.

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