by Tanta on 3/31/2008 11:11:00 AM

Forbes, via Atrios.

Thornburg, which is based in Santa Fe, N.M., has been beset by "margin calls," or lenders demanding their money back.

The company reached a deal under which its lenders would stop issuing margin calls if Thornburg raised $948 million.

A bond sale arranged to raise money at a 12 percent interest rate failed, and now the company is trying to sell $1.35 billion in bonds at an 18 percent interest rate.

by Tanta on 3/28/2008 10:19:00 AM

Which, as Dave Barry always says, would be a great name for a band.

CR posted this shocker yesterday, a memo with a Chase logo attached (which doesn't mean much in these copy & paste days), sent via e-mail to mortgage brokers in what appears to be a "package" of "training documents," that provides tips on how to "cheat" and "trick" Zippy, Chase's AUS (automated underwriting system), into approving loans it would not normally approve. (Or, possibly, allowing loans to be documented or priced in a way they would not have been had the loan been submitted properly. It's hard to say exactly.)

I am not especially interested in the debate over whether it was "official Chase policy" (undoubtedly it was not) or whether it was a "joke" started by some wag at Chase ("this is how we oughta be training the brokers, ha ha!"). My own hunch is that it did start out as a joke, but there was at least one Account Executive at Chase who either didn't "get" the joke--which is scary--or who didn't have the sense to realize that certain forms of satire shouldn't leave the building.

But that's the thing: it works for me as a "joke," of the black humor deadpan sort, because, well, it isn't that far off "official policy." "Official policy" is simply couched in ponderous language, hedged about with earnest exhortations not to "misuse" the system that everyone ignores, and mostly "functional" in the sense that it covers certain raw acres of corporate butt, not in the sense that it really communicates clearly to a worker-bee what you're actually supposed to do when certain things--cough, cough--cross your desk.

I say this with complete confidence even though I haven't read Chase policy documents for years, and I have never read internal use only Chase policy documents. I have read hundreds of documents produced by dozens of institutional lenders, wholesalers, and aggregators describing credit policy and acceptable origination practices. I have written quite a few of them, to tell the truth. For that reason I have been in plenty of arguments over the years about those documents, since I have this thing about using language people can actually understand, explaining things clearly, and making policy documents actually useful to everyday operations rather than merely having them around in a file cabinet in case the regulators show up, and entirely ignored by everyone in-house unless and until that day arrives. So I am not speaking with actual detailed knowledge of Chase policy or the likely tone or content of Chase policy documents in particular. I am generalizing based on years and years of having to wade through that crap because no one else will.

What I really got interested in was not where, exactly, this document came from, but why, precisely, it says what it says. I mean, you can see this as a Chase Account Executive (or whoever authored it) simply baldly encouraging fraudulent misrepresentation, and that of course is what it is. But you also have to see that it does appear to require some misrepresentation to get past Zippy in some respects. That much is to Chase's credit.

Also, the way these things tend to work is that the "cheats and tricks" that people come up with--and no, this isn't the only one out there by a long shot, it's just the only one I know of so far that got to a reporter--tend to focus on routine problems. Nobody writes "cheat sheets" to deal with obscure complex things that only arise on one out of 200 loan applications. People write "cheat sheets" to deal with the problems you are most likely to have. And yes, I am using this term "cheat sheet" in its commonplace sense of a "dumbed down" policy or procedure, a set of "short cuts." The term has always been ambiguous: is a "cheat sheet" directions for breaking the rules, or just directions for following them faster and more easily? "Efficiency" and "user friendliness" have always been in danger of converging on the unethical. This is not a new problem. Perhaps our apparently willful lack of attention to this problem over the last several years is what was, in fact, different this time.

Besides the "most common problems," I have often found "cheat sheets" appearing in contexts where it's not so much that the issue at hand is "common," it's that this particular lender has a "thing" about that particular issue. If you ask a bunch of industry participants who are willing to tell you the truth, I suspect you'll find a high degree of consensus on what the "preoccupations" or "hot buttons" for any given wholesaler are. "Everybody knows," the story will go, that X is touchy about gift funds and Y is the hardest to deal with on short-form appraisals and Z isn't the place to go if you want a high-rise condo loan approved. And so on.

That kind of "eccentricity" is less common than it used to be, given nearly universal securitization of loans (which tends to "homogenize" the industry and make lenders willing to write loans they wouldn't touch for their portfolio) and competitive pressures that spawn "races to the bottom" all over the place. In the early years of the boom (until 2005 or so) I used to actually keep spreadsheets in which I tracked policy of ten major correspondent/wholesalers on a couple of dozen selected issues. I did not necessarily select the "common ones"; I was precisely interested in the more offbeat. Like condos with less than four total units in the project, or the rarer forms of temporary buydowns, or non-arm's-length transactions, or foreign national borrowers. ("Foreign national" in this context does not mean undocumented immigrant. It means someone who is not only not a U.S. citizen, but also not even a U.S. resident.) In other words, "niche" stuff that was once simply not allowed at all in the "prime" world, but which increasingly crept into "expanded criteria" programs--the precursor of what you all know as "Alt-A"--and then even into so-called "prime jumbo" or "prime non-agency."

What my little spreadsheet showed was that, over time, we went from an environment in which "go to Lender X if you have a small condo project" was the way it worked, to "just about everyone does small condo projects these days, so why shouldn't we?" It also showed that certain things were "migrating" from "expanded criteria" programs into "mainstream" programs. The race was on. Back in 2005 I was arguing strenuously that it was a race to the bottom, but that was of course a minority view.

Way too many people were convinced that we had the technology that would allow us to "race to the top." The idea was that in the Days of the Dinosaurs, doing 2-flats turned into condos or non-arm's-length deals or what have you was really very risky, but not any more, because now we have all these computer models that can much more finely-tune our risk assessments. Plus there was always the supplementary argument that hey! if someone like Chase is willing to do it, that must mean it's "respectable." That last argument wasn't always stated in such an unvarnished fashion, but that was the drift.

So this brings us back to the Zippy tricks, and the specific content of the infamous memo. If you read it from a certain angle--just for the sake of analytical clarity, not in aid of "defending" what is obviously indefensible--you can see it as some evidence that Chase's system, Zippy, has been correctly programmed to weed out a couple of serious problems:

1. Unstable income. The "trick" of putting all income in "base," instead of breaking it out (as the application form is designed to get you to do) into base salary, bonus, commissions, etc., is partly about getting the AUS to "let you by" with only a paystub to verify current income, if that. This is because it has been recognized since about the end of the last Ice Age that base salaries tend to be fairly stable, but bonuses and commissions tend to be rather volatile. This "other" income is, traditionally, used to qualify borrowers only when they can verify a history of having received it regularly, typically for a minimum of two years, and prospects for continuing to receive it, typically for at least the next three years. It is difficult to verify prospects; in most cases lenders digged so deeply into the past history of the income because that was the best clue to its likely continuation. The theory, for instance, was that an employer who regularly paid bonuses for the last several years was more likely to continue to pay them in the future than an employer who only just paid its first bonus a few weeks ago. Of course, stability of income projecting into the future was important because, well, we expected loans to repay out of income, not refinance money or sale of the home.

You can, if you like, theorize that Zippy has some "rules" built into it that involve a different set of parameters or a higher degree of scrutiny or possibly even a different "rate sheet" when the loan has substantial qualifying income other than base salary. It should. So the instructions to defeat that purpose by lumping everything into "base" is not just saving some idiot some keystrokes. And it's not a trivial thing involving some fussbudget who wants the forms filled out properly for no real reason. There's a real reason here.

2. Gift funds. We have been banging on for years now about borrowers having no "skin in the game." Lenders need to know--have always required to know--what the source of the down payment money is. It isn't just that loans with gifted down payments default more often, although they do. It's also that a lot of fraudulent "straw borrower" deals require "gift funds" to work out. Zippy was programmed to require this information for very good reasons.

3. "Inching up" income. Well, that one's pretty obvious. It is, however, the point at which I for one conclude that Zippy was probably not programmed correctly.

The fact of the matter is that an AUS should simply ignore DTI or cash reserve calculations when income or assets are or can be unverified. In fact, using DTI or months of reserves in your underwriting decision will inevitably produce worse results on a "stated/stated" loan than ignoring them will. They mislead you. I have known good, experienced, savvy human underwriters to fall into this trap, in spite of themselves: they see those "nice-looking" numbers and can't stop themselves from using them as a "compensating factor" on the loan.

There are people in the industry who think that "NINAs" are "worse than" stated income/stated asset loans, but I have never been one of them. What distinguishes them is that in a NINA, you don't even state numbers. You literally leave those boxes on the application blank. The loan is qualified with a credit report and an appraisal.

Now, I'll agree that NINAs are stupid--no problem there. But they're less stupid than "stated" deals. They don't "distract" you with made-up numbers. Actually, they often result in much better analysis of the appraisal and the credit report than you get in a "stated" deal. After all, the appraisal and the credit report are all you got in a NINA: you work 'em over. In the "stated" world people--and apparently some computers--keep getting sidetracked by those unverified numbers.

So I got the impression, for what it's worth, that Zippy is a mixed bag: it seems to have some responsible programming and some stupid programming. As I remarked in the comments to yesterday's post, the fact that it doesn't flash red lights and immediately refer the loan to the fraud-detection squad when it notices that a file keeps getting "resubmitted" with "refreshed" income and asset numbers is a huge problem. If this AUS really does allow multiple resubmissions with increasing stated income each time without setting off the red fraud flags, this is a very big deal for Chase. I'm here to suggest that Chase's regulators need to look into that. As I said, given the chance that the memo is a "joke," it's possible that the thing handles re-runs better than it sounds like it does. But Chase should have to answer this question now that the memo is on the table.

The final question for me, then, is what if anything is likely to be "unique" to Chase here. My answer is "not much." This just isn't in the same class as small condo projects or foreign nationals. We're talking Underwriting 101 stuff that brokers can, apparently, defeat by just putting a number in the wrong data-field or putting a "no" in the gift funds field or getting the system to keep "recalculating" DTI or cash reserves until you have forced it to reveal to you where its cutoffs are.

We all know why people do those things. What somebody needs to explain to me is how, after all this time, it's still so easy to do it. Where are the internal plausibility checks? Where is the "behavioral" logic that notices not just the content of the datafile but the manner in which it was submitted? Where's the basic randomly-selected pre-closing QC that snatches files out of the AUS queue and matches up the data submitted to the AUS with a quick phone call to the borrower?

Where, in other words, is the "high" tech? We've had AUS since the green-screen mainframer days of the 80s, kids. Thirty years down the road and these things are as easy to fool as Barbie's My First Laptop? After all the money these lenders have spent over the years on IT? There's something else that doesn't add up here besides a borrower's paystubs.

Technology aside, where, we also have to ask, are the "real" writers of policy and procedural and training documents? My own sense is that you find "cheat sheets" in companies that don't provide "real sheets" that are usable or comprehensible or updated or easily available on the website. We are, you know, in the "cut & paste" days. It's just no longer difficult to provide your people--or your broker clients--with the "real thing." Anyone who used to prepare policy with a Selectric and an old slow photocopier has a right, I think, to ask just what we're getting out of the "information" part of the "IT revolution." We just shouldn't have to have "cheat sheets" any longer; the "search" button takes care of the difficulties of looking things up. It matters, and it matters because asking people to look at the "real" policy instead of some dumbed-down "cheat sheet" written up by an Account Executive is not too much to ask. You think you will ever control for unethical behavior when you don't even demand moderate amounts of effort?

The whole industry has some explaining to do.

by Tanta on 3/26/2008 05:14:00 PM

Some of you have wondered from time to time what all the employment casualties of the credit and housing busts are going to do next.

This ought to keep you up at night:

NEW YORK (CNNMoney.com) -- When Heidi Sadowsky quit the finance sector, she abandoned a job market on the verge of collapse for one that may be air-tight: nursing.

"I was never happy in my life in finance," said Sadowsky, 39, a former liaison for institutional investors and money managers at Citibank and Invesco. "I always felt like a square peg in a round hole. I decided I had to get out of this business. I was never cut out for this."

Inspired by the compassion of nurses who cared for her terminally ill father, Sadowsky took up training last year at New York University's College of Nursing. Since she already had an undergraduate degree, she was accepted into the nursing school's accelerated 15-month bachelors program and she expects to graduate in May. . . .

Sadowsky picked the right time to switch careers. The finance sector has shed 124,000 jobs since the beginning of 2007, according to the Department of Labor, including 22,000 jobs in the first two months of this year. Major firms like Bear Stearns (BSC, Fortune 500), Merrill Lynch (MRL) and Sadowsky's old employer Citigroup (C, Fortune 500) have been hard-hit by the subprime collapse, and analysts expect up to 30,000 more job cuts in finance by the end of the year.

Meanwhile, hospitals, clinics and nursing schools are scrambling to fill vacant positions for nurses and teaching staff. The Department of Labor estimates the number of vacancies for registered nurses will expand to 800,000 in 2020, from its 2005 tally of 125,000.

I can pretty much vouch for the fact that having an undergraduate business degree and years of experience in finance qualifies you to give other people heart attacks. But is it really the kind of experience that should let you cram nursing school into 15 months?

"Tradition holds that a guy's going to be a doctor, and the female is going to be a nurse," Neville Lewis, 40, an NYU nursing student who is married to an RN.

Like Sadowsky, Lewis abandoned finance to take up nursing. Since he already had a bachelor's, he qualified for NYU's accelerated 15-month program. Lewis said he majored in political science and mass communications at Midwestern State University in Texas, and then embarked on a 15-year career in the bond and IPO sector at the investment firms Equiserve (now Computershare) and Fidelity Investments.

"I kind of fell into finance after graduation," said Lewis, who had felt the lucrative pull of the finance sector. "You make a lot of money, but do you enjoy it? I was not happy."

After getting laid off from Equiserve in 2002, Lewis took a job at Fidelity and considered going back to school to pursue tax law. But he changed his mind, quit Fidelity in 2007, and started at NYU's nursing school in January, 2008. He expects to graduate in 2009.

"I felt like I could accomplish more by working to heal people, then by helping people fight over money," he said. And as he watched his former sector collapse, Lewis realized that altruism wasn't the only motive to get into nursing.

"Seeing what's happening now, I have no regrets in leaving finance," he said. "People are always going to be sick. We live in an aging society."

by Tanta on 3/25/2008 08:42:00 AM

Yves at naked capitalism had a good post yesterday on the infamous Bear Stearns Ten Buck Rechuck, that I think needs repeating:

According to Sorkin, the $2 price for Bear was the Fed's and Treasury's idea; JP Morgan was prepared to pay more, but they nixed the idea, saying they did not like the "optics" of the deal. The implication is that the officials overstepped their bounds. That is a pretty outrageous spin when the government is putting up taxpayer money.

Had it been an option, the Fed should have nationalized Bear. It was going to declare bankruptcy Monday if there was no deal; its shareholders would have been wiped out. Why am I so confident of this view? If bondholders, as rumored, were buying shares to make sure the JPM deal went through (and thus would take losses on their stock purchases when the deal closed), that meant that they thought their bonds were worth well under 100 cents on the dollar in a bankruptcy. Shareholders are subordinate to bondholders, so equity owners would have gotten zilch.

I can think of a host of reasons, however, why the Fed did not go the nationalization route, the biggest being that it lacked clear authority (it couldn't declare Bear to be insolvent, as it could a member bank). And letting Bear fail (and having accounts frozen) was what the Fed was trying to avoid, so letting it fail and then seizing control (even assuming it could do that) was never an option. No doubt, the central bank also did not want to assume administrative control of an entity that it had never regulated (ie, its supervisors had never kicked its tires) that dealt actively in markets in which the Fed has little expertise. Even in an orderly liquidation scenario, that it a lot to take on.

Sorkin nevertheless argues that the Fed did Bear a dirty because:

.....the night that Bear signed the original bid, the Fed opened what’s known as the discount window to companies like Goldman Sachs and Lehman Brothers — oh, yes, and to Bear, too. Except that the Fed didn’t tell Bear that it planned to open the window when it was signing its deal with JPMorgan.

This verges on being revisionist history. First and most important, the discount window was opened to keep the panic about Bear from spreading to other firms, most notably Lehman. It almost certainly would not have happened then if Bear was not on the verge of imploding. Remember, a mere week and a day ago, there was pervasive fear that the wheels were about to come off the financial system, particularly if counterparties started getting leery of dealing with Lehman.

Moreover, usage of the new discount window the first week was light due to worries about stigma. If Bear had gone and used it aggressively, it may well have reinforced rather than allayed fears about the trading firm's health. If other firms continued to refuse to deal with Bear, its collapse was assured. There was a very real possibility that even if Bear had remained independent and used the window, its bankruptcy merely would have been delayed a day or two. And it would have been well nigh impossible to put together a three party takeover deal between the close of business in New York and market opening in Asia on a weekday.

But the most appalling aspect of Sorkin's account: he acts as if Bear had the right to be informed of the Fed's plans. Sorkin seems to have forgotten the golden rule: he who has the gold makes the rules. The Fed had every right to be calling the shots. They were taking the biggest risk in this transaction. The notion that a firm about to fail is entitled to be treated as a being on an equal footing with its rescuers is absurd. And the fact that Sorkin (and presumably others on Wall Street) sympathize with this view says the industry badly needs to be leashed and collared.

This, frankly, is the reason why I am so incredibly appalled by this:

Wells Fargo CEO John Stumpf said the financial crisis is presenting the bank with more acquisition opportunities.

"I would not be averse to a Fed-assisted transaction," Stumpf said in a recent interview with the San Francisco Business Times. "Fixer-uppers don't bother us."

The San Francisco banker said any deal would have to meet the company's traditional acquisition targets and benefit the bank's acquired customers.

To even mention, in public, that one "wouldn't be averse to a Fed-assisted transaction" is to hint that the acquisition targets you are looking at are in as dire straits as Bear Stearns. What is Stumpf trying to do, start a run on an insured bank? Or, well, the other option is that Stumpf doesn't believe that Bear was such a mess--that, precisely, it is "on an equal footing with its rescuers."

Either way you slice it, the very fact that he could say such a thing in public tells you how far down the wrong road we've gone. I vote for the leash and collar, pronto.

by Tanta on 3/20/2008 09:07:00 AM

I suspect this thing in the NYT is going to get a lot of discussion.

They took out adjustable-rate mortgages at the peak of the housing bubble to buy homes they would otherwise not be able to afford. Or they refinanced existing mortgages to take cash out. And now, two or three years later, the day of reckoning is here.

These are not lower- and middle-income borrowers, but more affluent consumers with annual incomes of $100,000 or more who are increasingly being ensnared in the home mortgage crisis.

It gets worse from there. A lot worse.

The first step for distressed homeowners, said Rhonda Porter, a certified mortgage planning specialist and broker in Seattle, is to pull out their loan documents and see what they say.

First of all, I really want to know what a "certified mortgage planning specialist" is. As a certified mortgage nonsense detector, I call BS. Second, that's the entire paragraph. Besides not noticing the rather savage irony of all these rich folks who are only now getting around to seeing what the loan documents say--so it's not just those dumb poor folk who do that?--there's no indication of what is supposed to happen next. Is it just me, or is there a hint here that the first thing people should do is check to see if there's some way to sue? At the end of the article is a little story that's likely to piss off plenty of readers:

Mr. Geller said he had heard of just one loan balance reduction won by a borrower.

That borrower, a real estate consultant in California who did not want to be identified because he feared angering his lender, said he used his understanding of state law to negotiate the refinancing. He bought a condominium two years ago for $450,000 and invested another $50,000 for improvements. His ARM had a 5.5 percent initial rate that was soon resetting to 7.25 percent. But his condo is now worth only about $350,000.

His lender agreed to give him a 6 percent fixed-rate mortgage and, he said, to knock $135,000 off the principal.

The agreement came only after he stopped paying his mortgage for two months. “I am very happy and grateful to the lender because what I owe on my condo now is in line with its worth,” he said. “I’m ecstatic.”

A "real estate consultant." (Isn't anyone just a broker anymore?) But what "understanding" of what "state law" did this dude use to get this deal done? Why is the dude "afraid of angering his lender"? He already got his deal . . . ?

Then there is this:

Borrowers should determine if they live in a state with nonrecourse laws. In general, lenders in those states cannot pursue borrowers for money owed. But these laws are complex and change often, so consulting with a lawyer may be necessary, Mr. Geller said. He has compiled a list of nonrecourse states at www.mortgagerelief formula.com/recourse.

I'll go for state foreclosure laws being complex, but changing often? Really? Like, how often? My impression has been that some of our recent troubles stem from the fact that foreclosure laws haven't changed in a lot of places since the Depression. Anyway, I was interested in that list because I have been asked for one several times. The link in the NYT piece is not formatted properly; try this. What you will get is simply a list of states with non-judicial foreclosure processes. Labelled "non-recourse mortgage walkaway states." Is this Geller simply incompetent, not understanding the difference between non-judicial foreclosure and antideficiency statutes? Or is he just trying to jump on the same bandwagon of youwalkaway.com? And how did he get to be a source for an article in the NYT, giving him "credibility" and free publicity?

I suggest spending a few minutes with Mr. Geller's website:

If you can get the lender to approve your short sale, you can walk away pretty much unscathed. You can have good credit. You can even fix any negative reports they may have made about you, reports that say you were late. And you won't face any more of those huge loan payments. You'll be free and clear, baby!

But first you gotta get there. The way to make sure that the lender says yes is to give the lender *exactly* what they need to see . . .

The way to sell your house quickly is to follow the formula I call the Sell Your House in Nine Days system. It is also called the round robin. . . .

The key here is convincing them [the lender] that the short sale price is right. They rely a lot on a broker's price opinion, or BPO. And there is a whole system of ethically and honestly convincing the broker that the selling price is a fair one. If the broker reports that your short sale price is fair, the lender will probably say "yes."

Of course you don't get the "details" of how this works unless you "download the report," and I am not sure my PC is well-enough protected to do that. But after the short sale, we get to Mr. Geller's advice for what to do now that you no longer own a home:

The shocking secret of how to buy without qualifying and without getting on the hook for a loan . . .

Here's the deal you are looking for. If you are in an area with $150,000 houses, find a house where the motivated seller has a $150,000 mortgage. And then buy the property "subject to" the existing mortgage.

It really is that simple. The seller moves out. You settle at the lawyer's office. Nobody tells the lender anything. You start making the payments.

The loan is still in Mr. Seller's name. Is that a problem? No. You are the owner. You have a grant deed on file at the county courthouse in your name. No problem at all.

Anyone can sell their house to someone else as long as they are still the owner, and title will transfer. Even if there are loans still on the house. Doesn't matter.

So in this situation, Mr. Seller signed a deed over to you. You checked the loan balance (punching in Mr. Sellers' loan number into the mortgage company's automated robot phone system) and now you have the keys and you have every right and privilege as the owner that Mr. Seller did.

But look what you did. You have the mortgage interest deduction which lowers your taxes. You own the house, lock stock and barrel. But you never had to get your own loan.

Many sellers will want you to pay off the loan. Of course they will. But they are motivated, remember? So you tell them that you aren't going to do that just yet. When will you? Maybe in a year or three. Maybe in five years. A motivated seller can be convinced to sell to you because they are relieved that someone else is stepping into their shoes. It's human nature to breathe a sigh of relief and let someone else (you) deal with the mortgage.

And it's as simple as that. There are wrinkles to this and things you should know, but it really isn't that hard.

Yes, this is the bucket of scum that the reporter has given credibility to on the pages of the Grey Lady. Is there left an editor who, to paraphrase Jackson Browne, still knows how to cry?

Please do go back and take note that the anecdote of the borrower who scored the $135,000 principal reduction turns out to be a story "Mr. Geller heard of."

by Tanta on 3/07/2008 02:21:00 PM

I noted yesterday the Memorandum Opinion of U.S. Bankruptcy Judge Jeff Bohm in regards to a series of bankruptcy filings and testimony by Countrywide, its national law firm, and the local firm hired by the national firm, each of which involved a series of "negligent bungling" that rose right up to about an inch from "full-blown bad faith," if it didn't quite get there.

The Opinion is available online in two segments here and here. I very much recommend them as reading material for anyone with any connection to the mortgage business, and that would include you regulatory people. And reporters. Judge Bohm is asking the right questions, in my view, and he's done us all a public service.

The short summary of what went on:

A Countrywide-serviced borrower (the loan is actually owned by Fannie Mae) filed a Chapter 13 bankruptcy in October of 2006. A BK filing will place an automatic stay on foreclosure, which can only be lifted by the court if the lender files a motion to lift the stay. As a part of this process, the servicer is required to bring proof to the court of "pre-petition" and "post-petition" delinquency of the borrower. It is Fannie Mae's policy, to which CFC would have been expected to comply, that motions to lift stay are not filed unless the borrower is at least 60 days delinquent on the mortgage loan.

CFC submitted a "payment history" (this is a printout from a servicing system that shows all transactions on a loan, including payments, charges, fees, suspense and escrow account items, rate and payment adjustments, etc.) As CFC payment histories in general, not just in this case, are so complex and awkward as to be essentially meaningless not only to lay people but to courts and lawyers, CFC's national law firm had actually established, back in the spring of 2006, a separate corporate entity ("MR Default Services") which employs a bunch of "legal assistants" (not lawyers) to cut & paste information from the payment histories received from CFC into a more readable, simplified format; the new document is attached to the court filings. The new document is never, apparently, reviewed either by CFC or by the actual attorneys for quality-control or basic plausibility-check purposes. CFC is apparently just fine with the risk of going to court with a document that is a third-party prepared "version" of the actual official payment history. CFC's lawyers are also apparently cool with that.

In the specific case at hand, there was a series of errors: first, CFC for some reason got confused about when the borrower filed his original petition, and so included the payment made in November as a "pre-petition" payment, making it appear that the borrower had not made his first "post-petition" payment. (That's important; you are much less likely to get the stay lifted if the borrower continues to make mortgage payments after the petition.) Then, when "MR Default Services" went to "simplify" the payment history, the copy & paste process missed the first item on the top of one of the pages, and it turns out that item was a mortgage payment made way back in May. Also, this payment history was sent to the simplification factory on or around December 11, but the motion to lift stay wasn't filed with the court until December 29. The problem with that is that the borrower made a payment on December 13. Nobody requested an updated payment history from CFC, which is hard to believe: it is a simple fact of life in the business that a three-week-old payment history is "stale," especially if it was generated during the "grace period" in the beginning of a month, and in fact it appears (I'm not quite sure) that the actual payment history they used in the first place was prepared in early to mid-November.

The long and short of it was that the debtor's counsel pointed out that the payment history was simply wrong, and that (at worst) the debtor was only 30 days delinquent, not more than 60 days (and had made two payments post-petition that the motion ignored). CFC filed a motion to withdraw the motion to lift stay. The judge asked CFC's attorney (a local firm hired by the national firm, in this great game of legal "telephone") about it, and he basically lied about the reason for the motion to withdraw.

The whole thing snowballed from there into multiple lawyers from two different firms plus at least one person from CFC giving false testimony to the court about the whole thing to cover up the mistakes. If you read the entire Opinion, you have to conclude that Judge Bohm wouldn't have turned this into a high-powered series of hearings if someone originally had simply fessed up to a clerical error. Not only was the cover-up worse than the crime, but the cover-up exposed the whole wretched set of business arrangements and CFC operational practices that clearly do not function to prevent errors, and in fact seem prone to creating them.

One of the good Judge's intentions in investigating the reasons for the withdrawal of the motion to lift stay was, bless his heart, to assure that the debtor didn't get stuck with legal fees for the costs of the original motion and withdrawal motion, if this legal work was caused by CFC's or its attorney's errors. That opened up a whole can of worms about how CFC accounts for "non-recoverable" legal charges. It turns out that CFC's process is not to permanently remove non-recoverable costs (things you can't charge the debtor/borrower) from the loan records until the BK is discharged, which of course can take years and years for a Chapter 13 and which may never happen, if the Chapter 13 is dismissed rather than discharged. Whether or not the point of this idiotic practice is to let fees "lurk" in the system that can later "accidentally on purpose" be charged to the borrower some day in the future when the Court isn't looking, or whether the point is just another one of those famous "efficiencies" isn't clear. (You can easily imagine some moronic consultant telling CFC that "once through the process!" is a great slogan for the accounting department, and that it can save a lot of money by letting such things as non-recoverable fee entries pile up until the case is "done" and all work can be done once at the same time. Of course that's insane from a risk-management perspective, but I've heard consultants say even dumber stuff, myself.)

The other can of worms that got opened was the whole business of the two law firms and their relationship to CFC. It turns out that CFC--for "efficiency" reasons--wanted one and only one "official" law firm, who would parcel out filings to all the different local law firms all over the country. The contract with the national law firm explicitly stated that the local firms were not allowed to communicate directly with CFC. They could only talk to the national firm, who could only talk to CFC. Among other problems this creates, if the local firm, say, happens to notice at 4:45 p.m. that there seems to be something wrong with a payment history, that firm can't pick up the phone and call Eunice in CFC's bankruptcy servicing department to get it straightened out. The whole thing has to go through the national law firm, and as far as I can tell the best anyone ever expected was 48-hour turnaround.

And the loan in question being a Fannie Mae-owned loan, the legal work is required strictly to be on a flat-fee basis. Fannie Mae's position is that without that rule, debtors/borrowers would be facing a "running meter" of legal fees that would eat up all their equity and then some if you let it go on. However, it appears that the law firms' response to the flat-fee thing is to just not bother with following up on things like stale or incorrect payment histories, because apparently they don't think they get paid enough to do things right.

Here's Judge Bohm on the conclusions he drew in this whole ugly miserable tale of idiocy, which I think are worth quoting at length:

Over the past several years, attorney's fees and costs have risen steadily--some clients would doubtless say astronomically. Corporations in particular have reacted by demanding concessions such as flat fee pricing for each file. In the consumer bankruptcy field, many financial institutions--for example, Fannie Mae in the case at bar--have negotiated flat fee engagements with certain law firms to avoid large fees that can accrue under an hourly rate system. In theory, this arrangement seems appropriate: fixed fees minimize costs that are primarily passed on to consumer debtors. In practice, this arrangement has fostered a corrosive "assembly line" culture of practicing law.

As the case at bar shows, attorneys and legal assistants at Barrett Burke and McCalla Raymer are filing motions to lift stay without questioning the accuracy of the debt figures and other allegations in these pleadings and appearing in court without properly preparing for the hearings. These lawyers appear in court with little or no knowledge because they have been poorly trained. Indeed, the case at bar shows that the attorneys from Barrett Burke and McCalla Raymer often appear in court ill-prepared to think or effectively communicate.

This fixed-rate fee business model appears to have been an overwhelming financial success. In Allen, Bankruptcy Judge Steen noted that Barrett Burke's revenues totalled between approximately $9.7 million and $11.6 million per annum. . . . Based upon the testimony at the show cause hearings, this Court estimates that McCalla Raymer has generated revenues of approximately $28 million over the past decade from representing solely Fannie Mae. Meanwhile, the profession has suffered from the ever decreasing standards that firms like Barrett Burke and McCalla Raymer have heretofore promoted.

This demise must stop. The problems at Barrett Burke and McCalla Raymer are not limited to training lawyers; there are other aspects of these firms' culture that is disconcerting. What kind of culture condones a firm signing an engagement letter which prevents its attorneys from communicating with its client? What kind of culture condones its lawyers preparing, signing, and filing motions to lift stay without having the client review the final version for accuracy? What kind of culture condones its attorneys signing proofs of claims without even contacting the client to review and confirm the debt figures? What kind of culture condones attorneys testifying to basic facts and then, at the next hearing, recanting the testimony on the grounds that the attorney had not sufficiently prepared to testify? And above all else, what kind of culture condones its lawyers lying to the court and then retreating to the office hoping that the Court will forget about the whole matter?

Countrywide's corporate culture is no better. What kind of culture condones blockading personnel from communicating with outside counsel? What kind of culture discourages the checking of outside counsel's work? What kind of culture promotes payment histories that are so confusing to the vast majority of persons, including attorneys and judges--not to mention borrowers--that it becomes necessary for legal assistants to "simplify" them--leading to more error and confusion? . . .

With respect to Countrywide, this Court would hope that this entity would reevaluate its policies and procedures in order to improve upon the accuracy of payment histories and to ensure that its actions do not undermine the integrity of the bankruptcy system. Countrywide's business is directly tied to a quintessentially American aspiration--homeownership. If Countrywide does not properly maintain payment histories and effectively communicate with its counsel, the consequences can be very harmful. . . .

This Court trusts that Barrett Burke, McCalla Raymer and Countrywide will mend their broken practices. This Court will continue to verify that its trust is well-placed.

by Calculated Risk on 12/31/2007 03:52:00 PM

From Project Syndicate, Professor DeLong writes: Three cures for three crises

A full-scale financial crisis is triggered by a sharp fall in the prices of a large set of assets that banks and other financial institutions own, or that make up their borrowers' financial reserves. The cure depends on which of three modes define the fall in asset prices.

DeLong discusses what he sees as the three crisis modes: a liquidity crisis, a minor solvency crisis, and a major solvency crisis. DeLong notes:

At the start, the Fed assumed that it was facing a first-mode crisis -- a mere liquidity crisis -- and that the principal cure would be to ensure the liquidity of fundamentally solvent institutions.

But the Fed has shifted over the past two months toward policies aimed at a second-mode crisis -- more significant monetary loosening, despite the risks of higher inflation, extra moral hazard and unjust redistribution.

Clearly this is a solvency crisis, not just a liquidity crisis. Professor Thoma notes:

And, as if on cue, from the WSJ Economics blog:

Liquidity Threat Eases; Solvency Threat Still Looms, WSJ Economics Blog: As 2007 winds down, the much-feared year-end liquidity crisis appears to have been averted thanks to aggressive action by central banks. ... [A]s 2008 begins, it's solvency, not liquidity, that threatens the economy and the financial system. And at the root of the solvency threat is a likely decline in housing prices that will further undermine credit quality. Making banks more confident of their own ability to raise funds is not going to resolve a generalized shrinkage of lending driven by declining collateral values. ...

So now, in Dr. DeLong's view, the question is: Is this a minor solvency crisis or a major solvency crisis? Much depends on how far housing prices fall. A 30% price decline would reduce household real estate asset by about $6 trillion and cause significant losses for lender and investors. That would probably be DeLong's major solvency crisis. His solution:

The third mode is like the second: A bursting bubble or bad news about future productivity or interest rates drives the fall in asset prices. But the fall is larger. Easing monetary policy won't solve this kind of crisis, because even moderately lower interest rates cannot boost asset prices enough to restore the financial system to solvency.

When this happens, governments have two options. First, they can simply nationalize the broken financial system and have the Treasury sort things out -- and reprivatize the functioning and solvent parts as rapidly as possible. Government is not the best form of organization of a financial system in the long term, and even in the short term it is not very good. It is merely the best organization available.

The second option is simply inflation. Yes, the financial system is insolvent, but it has nominal liabilities and either it or its borrowers have some real assets. Print enough money and boost the price level enough, and the insolvency problem goes away without the risks entailed by putting the government in the investment and commercial banking business.

The inflation may be severe, implying massive unjust redistributions and at least a temporary grave degradation in the price system's capacity to guide resource allocation. But even this is almost surely better than a depression.

I don't think it's quite that bad. Even if the losses for investors and lenders reach $1 trillion (a possibility), I think the financial system can absorb those losses. Sure, some players might disappear, and others might have to sell significant assets (or dilute their shareholders), but I don't think the choice is between serious inflation and depression.

Still, I think the "Yikes" tag fits.

by Tanta on 12/22/2007 11:10:00 AM

Our friend P.J. at Housing Wire did the world a big favor last night by sorting out the details of Fitch's giant $5.3 billion heap o' RMBS downgrades yesterday. Go here for the handy list of what deals were included in that.

What jumped out at me, of course, was that $783MM WaMu deal. This little puppy (2007-HE3) was closed on May 10, 2007. That's a whopping seven months before the first downgrade. (It's too young, of course, to have noticeable realized losses, but the 60-day delinquency is up to 9.17% already, for loans originated primarily in the first quarter of this year. Wowsers.)

I haven't been paying enough attention, I confess, to recent downgrades to know if that's a record for fastest downgrade or not. Does anyone else know? It's fair-to-middlin' pointless, of course, in the grand scheme of things, but I do think that issuing the fastest-downgraded mortgage-backed security in history is an accomplishment that should be given recognition.

by Calculated Risk on 12/10/2007 01:56:00 AM

Form the WSJ: UBS Gains Two New Investors, Writes Down $10 Billion

UBS AG Monday said that two strategic foreign investors placed a total of 13 billion Swiss francs ($11.5 billion) ... as the Swiss bank announced a further $10 billion in write-downs on subprime holdings.

... Beyond the investments from these two parties, UBS plans to sell treasury shares and replace its 2007 cash dividend with a stock dividend.

Wow. $10 billion in losses, and cutting the dividend to zero (a stock dividend is worthless).

by Tanta on 12/06/2007 06:55:00 PM

From CNN:

WASHINGTON (CNN) — Harried homeowners seeking mortgage relief from a new Bush administration hotline Thursday had to contend with a bit of temporary misdirection from the president himself.

As he announced his plan to ease the mortgage crisis for consumers, President Bush accidentally gave out the wrong phone number for the new “Hope Now Hotline” set up by his administration.

Anyone who dialed 1-800-995-HOPE did not reach the mortgage hotline but instead contacted the Freedom Christian Academy — a Texas-based group that provides Christian education home schooling material.

The White House press office quickly put out a correction moments after the President’s remarks. After dialing the correct number, 1-888-995-HOPE, CNN was connected to a “counselor” within three minutes.

by Calculated Risk on 12/05/2007 09:11:00 PM

From Standard & Poor's: S&P Cuts All Adams Square Funding I Rtgs To ‘D’ On Liquidation (hat tip Brian)

Standard & Poor's Ratings Services today lowered its ratings to 'D' on the senior swap and the class A, B-1, B-2, C, D, and E notes issued by Adams Square Funding I Ltd. The downgrades follow notice from the trustee that the portfolio collateral has been liquidated and the credit default swaps for the transaction terminated.

The issuance amount of the downgraded collateralized debt obligation (CDO) notes is $487.25 million.

According to the notice from the trustee, the sale proceeds from the liquidation of the cash assets, along with the proceeds in the collateral principal collection account, super-senior reserve account, credit default swap (CDS) reserve account, and other sources, were not adequate to cover the required termination payments to the CDS counterparty. As a result, the CDO had to draw the balance from the super-senior swap counterparty. Based on the notice we received, the trustee anticipates that proceeds will not be sufficient to cover the funded portion of the super-senior swap in full and that no proceeds will be available for distribution to the class A, B, C, D, or E notes.

Today's rating actions reflect the impact of the liquidation of the collateral at depressed prices. Therefore, these rating actions are more severe than would be justified had liquidation not been ordered, in which case our rating actions would have been based on the credit deterioration of the underlying collateral. Across the cash flow assets sold and credit default swaps terminated, we estimate, based on the values reported by the trustee, that the collateral in Adams Square Funding I Ltd. yielded, on average, the equivalent of a market value of less than 25% of par value.

Bloomberg is reporting (no link) that $165 million of debt, originally rated AAA will not be repaid.

From triple AAA to nothing. That is a deep cut.

by Tanta on 12/05/2007 08:07:00 AM

And it will be interesting to see what crawls out from under this one:

NEW YORK (Reuters) - New York state prosecutors have sent subpoenas to Wall Street firms seeking information related to the packaging and selling of debt tied to high-risk mortgages, the Wall Street Journal reported, citing people familiar with the matter. . . .

The probe appears to be examining the relationships between mortgage companies, third-party due-diligence firms, securities firms and credit-rating firms as they relate to the role securities firms played in the subprime mortgage crisis, the Journal said.

Well, well, well. I'm guessing there will be all kinds of interesting stuff on those potted plant reports. Somebody's aspidistra is going to be in a sling . . .

by Calculated Risk on 12/04/2007 05:15:00 PM

From Reuters: Subprime bond losses to climb to 20 pct -analysts (hat tip Cal)

Moody's Investors Service on Tuesday raised its forecast for expected losses for U.S. mortgages known as "Alt-A" residential mortgage debt. Loss estimates for Alt-A bonds reviewed by Moody's increased by an average of 110 percent from initial expectations, with some loss estimates up by as much as 270 percent, Moody's said in a report.

Well, I'm stunned, but not surprised.

by Tanta on 12/01/2007 11:30:00 AM

Another item sure to get some attention--or maybe not, since it kind of complicates the narrative of "predatory servicers." From the Wall Street Journal:

Law firms handling thousands of foreclosure cases on behalf of mortgage lenders and servicers are drawing criticism from judges, who say roughshod filing practices are trampling borrowers' rights.

Lawyers operating so-called foreclosure mills often are paid based on the volume of cases they complete. Banks and mortgage servicers often contract with such firms to handle foreclosures; the pay in Ohio, for example, is around $1,000 a case.

Um, is the pay based on volume, or is it just $1,000 a pop regardless of how many you do? My impression here is that it's the latter, and the problem is that this is a flat fee, not depending on how complex an individual suit is or--to the current point--how much time and effort might be needed just to assemble the documents and verify the liens in the land records to produce the original filing. It therefore becomes a matter of firms relying on volume because margins are skinny, and of treating every filing as a "no brainer" from the beginning. It's annoying when regular old newspapers don't get basic business practices. It's appalling when the WSJ doesn't.

Anyway, to continue:

The firms are typically small but may handle thousands of cases a year. Using computer software, they plug in variables such as a borrower's name, address and mortgage amount to generate a suit. Firms compete for business in part based on how quickly they can foreclose.

Um, no. They compete for business based on how quickly they can begin foreclosure proceedings. That's the problem here: a sloppy filing up front gets you onto the court's docket faster, but as we've seen, it tends to drag out the process and make foreclosures longer at the end of the day. And this description of the process ignores what's wrong with just "plugging in variables": we skipped the step of doing a search of the land records to verify that the last recorded assignment puts the foreclosing entity into current first-lien-holder status. And the step of going back to the servicer or trustee or whoever requested the foreclosure in the first place and reporting that an assignment needs to be recorded before the FC complaint can be filed.

"In general, most of the firms that practice this kind of law do a very good job," said Peter Mehler, a Cleveland-area lawyer who handles foreclosures on behalf of mortgage servicers. But in the "gold rush" to get a piece of the growing business, some firms "have cut corners."

Lately, judges are faulting law firms for what has become a common practice: filing a foreclosure suit, in states that require them, without showing proof that the plaintiff actually holds the mortgage and has the right to foreclose. (Such plaintiffs are often banks that act as trustees for investors of securities backed by mortgages.) The situation occurs in part because mortgage documents and the contracts between borrowers and lenders may change hands multiple times and may not be assigned to the plaintiffs at the time the suits are filed.

What this has really got to do with loans changing hands "multiple times" isn't very clear. If a loan changed hands exactly once, and no assignment was recorded in the land records exactly once, you'd have exactly the same problem. Of course the odds of having a missing assignment or a gap in the assignment chain go up when there are multiple assignments. But in that case, the problem is often not that the plaintiff--the last party in the chain--doesn't have an assignment. It's that the party who assigned to the plaintiff didn't have an assignment from the party who assigned to it, or something like that.

Why be so obsessed with the details here? Because way too many people have taken that unfortunate phrasing of the problem to mean that securities are purchasing delinquent loans just for the purpose of foreclosing. The WSJ, intentionally or not, falls into this kind of language:

This month, a state judge in Cincinnati dismissed a foreclosure lawsuit brought by Wells Fargo Bank because the bank filed the suit before it had acquired the mortgage. In dismissing the case, the judge sent a warning letter to the bank's law firm, John D. Clunk Co. LPA, in Hudson, Ohio. Judge Steven E. Martin wrote that it was "troubling" that the plaintiff "and its counsel filed the lawsuit with no basis whatsoever" and that firm must not do so again.

The law firm didn't respond to requests for comment. Wells Fargo declined to comment.

"Before it had aquired the mortgage" makes people think that Wells filed to foreclose a loan before it ever owned that loan, as if Wells saw, say, a bad loan at Podunk National and decided to buy it just for the pleasure of foreclosing it, but somehow managed to file first and buy later.

There is exactly zero reason to believe that this is what happened. Wells "acquired" the loan (or some security acquired the loan and Wells became the master servicer or trustee or something) back when the loan was fresh and new. What someone failed to do was to record the evidence of transfer of the beneficial interest in the collateral (known as an "assignment of mortgage") in the land records before the day the FC was filed.

It is quite common practice in the industry, as I have explained before, to execute assignments in "recordable form" when a loan is sold, and for the buyer or the buyer's custodian to take physical custody of that assignment, but to refrain from actually sending it to the county recorder of deeds for recordation in the land records unless and until it becomes necessary to foreclose. I know of no judicial opinion yet that has ever implied that the failure to record a document voids the loan sale; in fact, Judge Kathleen O'Malley's Order of November 14,* one of the several dismissals for inadequate documentation (along with Boyko's and Rose's) making the rounds, explicitly states that

The Court is only concerned with the date on which the documents were executed, not the dates on which they were recorded (if recorded) with the county recorder’s office.

The trouble with valid, executed, but unrecorded assignments is that even if a foreclosure attorney ran a records search before filing, in order to verify current lienholder, the assignment would not appear in the land records. It really is incumbent on the trustee or servicer to provide the original assignment for recordation, since the trustee or servicer is the one who has custody of it (or can get it from the custodian) and therefore the only one who can reliably vouch for its existence.

There are exellent reasons to record that old assignment first, then file your FC complaint. But as far as I can tell, judges aren't even asking for recorded assignments; they're just asking for valid assignments. What seems to have happened in at least one case--the Deutsche Bank case that Boyko went ballistic over--was that plaintiff's attorney, not having the real original assignments handy, simply executed new ones, after the fact. That's pretty amazing practice for an officer of the court, and His Honor reacted exactly the way one ought to. But it does not mean that the original assignments do not exist. Absence of evidence is not evidence of absence. Forging a new assignment because you can do that in twenty minutes, while just breaking down and requesting the originals from the custodian might take several days, is bad lawyering. It is not evidence that anyone is buying deliquent loans in order to foreclose them.

What reputable banks like Wells Fargo are learning here, I think, is a painful lesson in reputation risk. Wells hired some cheap corner-cutting law firm to handle its foreclosures (as did Deutsche Bank), and as a result, its name is now all over the press in association with practices that can be made to sound exceptionally sinister. Remember Boyko's "priceless" comment? Well, I'm here to suggest that Wells Fargo's good name is worth a whole lot more to it than $1,000. Legally, plaintiff is responsible for the actions of plaintiff's counsel.

Here, by the way, is the relevant part of Judge Thomas Rose's order** involving a number of foreclosure filings by several different trustees:

To date, twenty-six (26) of the twenty-seven (27) foreclosure actions based upon diversity jurisdiction pending before this Court were filed by the same attorney. One of the twenty-six (26) foreclosure actions was filed in compliance with General Order 07-03. The remainder were not.2 Also, many of these foreclosure complaints are notated on the docket to indicate that they are not in compliance. Finally, the attorney who has filed the twenty-six (26) foreclosure complaints has informed the Court on the record that he knows and can comply with the filing requirements found in General Order 07-03.

Therefore, since the attorney who has filed twenty-six (26) of the twenty-seven (27) foreclosure actions based upon diversity jurisdiction that are currently before this Court is well aware of the requirements of General Order 07-03 and can comply with the General Order’s filing requirements, failure in the future by this attorney to comply with the filing requirements of General Order 07-03 may only be considered to be willful. Also, due to the extensive discussions and argument that has taken place, failure to comply with the requirements of the General Order beyond the filing requirements by this attorney may also be considered to be willful.

A willful failure to comply with General Order 07-03 in the future by the attorney who filed the twenty-six foreclosure actions now pending may result in immediate dismissal of the foreclosure action. Further, the attorney who filed the twenty-seventh foreclosure action is hereby put on notice that failure to comply with General Order 07-03 in the future may result in immediate dismissal of the foreclosure action.

My boldface, there: it seems clear to me that this is an admission that the assignments really do exist, and can, in fact, really be produced. But what, we ask, has relying on this attorney done for the reputation of the lienholders? The story wasn't reported as "some worthless lawyer screwed up"; it was reported as Deutsche Bank and Wells Fargo and HSBC et al. screwed up. If you don't want your name in the headlines like that, hire a better lawyer. And pay for it. Oh, wait . . .

Allow me to close by observing that Curly and Larry (if not Moe) have lent some weight to a proposal that would basically mean servicers shoving through across-the-board modifications to "freeze" interest rates. I'm not here to argue the wisdom of rate freezes in this post. I am here to point out that a modification of mortgage is a legal document that has to be recorded in the land records in which the original mortgage was filed. If the modification is being executed by a servicer or trustee on behalf of the noteholder, then any intervening assignments up to the one to the modifying party need to be recorded first, so that the recordation of the modification is valid. Also, modification agreements are complicated documents; you want to be very careful with their wording, so that you are sure you are modifying only certain specified terms of the original mortgage and note. More than a few sloppy servicers have been haunted by a bad modification agreement that inadvertently waived rights or terms that servicer needed to keep.

So it really just sounds like a fantastic idea to push through a major effort to execute modifications really fast and cheaply, doesn't it? Frankly, the whole idea gives me goosebumps.

-------------------

*UNITED STATES DISTRICT COURT, NORTHERN DISTRICT OF OHIO, EASTERN DIVISION, In Re Foreclosure Actions 1:07cv1007 et al., November 14, 2007. No, I didn't go to law school and learn how to cite court orders in proper format. So sue me if you can find a decent lawyer.

**UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT OF OHIO, WESTERN DIVISION AT DAYTON, IN RE FORECLOSURE CASES 3:07CV043 et al., November 15, 2007.

by Calculated Risk on 11/29/2007 05:35:00 PM

The asking price for this foreclosed property in Florida is below the price the home sold for new in 2002. (hat tip John)

Here are the details:

Feb 15, 2002: $122,300 (New)

Mar 15, 2006: $259,600

Oct 23, 2007: Foreclosed.

Current Asking Price: $99,900

There are probably some special circumstances with this house, but ... yikes!

According to the public tax records, the larger house on the 2nd lot away sold for $185,300 new in 2004, and for $370,000 in 2006.

This raises some interesting questions: How far have prices really fallen?

How will the neighbors react when they discover their homes are worth far less than they paid in recent years?

As OFHEO noted today:

Declines in home prices will increase the frequency with which homeowners find themselves with no equity and thus may be motivated to “walk away” from the property and the mortgage.

No kidding - this has to be depressing for the neighbors. Note: I rarely mention Florida, but this is worth noting.

by Tanta on 11/23/2007 09:39:00 AM

And innocence is lost. I wonder what would happen if we told him about PIWs.

by Calculated Risk on 11/21/2007 02:49:00 PM

See the ABX-HE-AAA- 07-2 close today.

Another day, another record low.

The CMBX indices are setting new records too.

Note: Up is down for the CMBX indices. The CMBX is quoted as spreads, whereas ABX is quoted as bond prices. When the spreads increase - chart going up - the bond prices are going down.

See the CMBX-NA-AAA-3 close today.

For some background, here is a post at the Cleveland Fed back in March:

the ABX.HE index is telling us something about credit default swaps (CDS). A CDS is like a derivative that gives you insurance. For example, a bank may wish to buy protection against default by RiskyCorp (perhaps because they’ve given RiskyCorp a loan). They do this by entering into a contract where they pay another firm (who is selling protection) a fixed amount, periodically, as long as RiskyCorp doesn’t default on its corporate bonds. (In general, the “credit event” might be something else, such as a major downgrade, missed payments, or so forth.) If RiskyCorp does default, the seller of protection makes a payment to the buyer of protection. This might be a cash payment equal to the value of the bond, it might be the bond itself, or potentially whatever the contracting parties agree to. We like to think of the “swap rate” or “swap spread” that the protection buyer must pay as an insurance premium.

Notice that the more likely RiskyCorp is to default, the higher the insurance premium, that is, the higher the swap spread, so this market can give us some idea of how risky some firms are. In a frictionless market, the swap spread should be comparable to the risk premium on one of RiskyCorp’s corporate bonds (corporate bond yield minus the comparable riskless yield). Furthermore, because the CDSs are more standardized and generally more liquid than corporate bonds, you can see why Federal Reserve Vice Chairman Donald Kohn states that “instead of looking to the bond market to measure default risk, we are increasingly turning to the market for credit default swaps” (the full text of his remarks to the Board Conference on Credit Risk and Credit Derivatives is well worth reading).

Credit default swaps eventually became based on other types of assets, such as mortgage-backed securities, whose payoff is derived from a pool of mortgages (such asset-based swaps became known as ABCDS, for obvious reasons). Likewise, there was no reason to restrict your CDS so that it protected you against default from only one firm, and although such “single-name” CDSs still make up the bulk of the market, “multiname” CDSs are growing in popularity.

Mortgage-backed securities offer several different levels of risk or tranches. Tranches are ways of slicing up the payment stream from homeowners to give different levels of risk, so roughly speaking, the tranches first in line for payments are less risky than those further down the line.

At long last: the ABX.HE is a series of five indexes that track CDSs based on tranches of mortgage-backed securities comprised of subprime mortgages and home equity loans. The tranches differ by their ratings, from AAA (best credit) to BBB-, (least good credit). See MarkiT, which produces the indexes for the real details. For an example of how indexes work, see here.

The CMBX is a CMBS (Commercial Mortgage-Backed Securities) credit default index just like the ABX - except up is down. The rising delinquencies (see previous post of Q3 data from the Fed) for commercial real estate is probably impacting the CMBX.

by Tanta on 11/19/2007 02:03:00 PM

The OC Register has an interesting story out on the problems with the foreclosure numbers that RealtyTrac reports (and that the media tend to pick up and run with). I suggest you read the whole thing. I got fascinated by this little part:

For example, last year, RealtyTrac's data showed Colorado had the nation's highest foreclosure rate. That didn't sit well with state officials, who decided to do their own count of foreclosures and came up with a figure much smaller than RealtyTrac's. . . .

RealtyTrac counted 54,747 "foreclosure actions" in Colorado last year.

That number wasn't useful because it didn't reflect how many homeowners were actually in danger of losing their homes, said Ryan McMaken, spokesman for the Colorado Division of Housing. "We couldn't really use those numbers for having serious discussions," he said.

So McMaken put an intern to work calling all of the state's 64 counties to get a count of how many homes entered the foreclosure process last year. The number he came up with: 28,435.

This summer, partly in response to criticism, RealtyTrac began sorting its numbers to compile a separate count of properties in foreclosure, in addition to total foreclosure actions. RealtyTrac's "unique property" count, published quarterly, found 19,411 properties in foreclosure in Colorado in the first half of this year. That's within a few dozen of the 19,460 counted by McMaken.

"I think they're getting a lot closer now," McMaken said, adding that "we might not have to collect our own numbers" anymore.

So Colorado had no state-wide numbers for foreclosures. It didn't feel the need to have any until RealtyTrac made it look bad. So it got an intern to get on the telephone and call up counties and make a running list (with a spreadsheet? Or a ruled legal pad?). It then demonstrated that RealtyTrac's numbers were exaggerated. And so . . . now it can quit tallying its own numbers and go back to relying on the Associated Press to tell it what's going on in its own state? Um.

by Tanta on 11/17/2007 11:47:00 AM

This is going to be a long post. It is going to attempt to answer the question stated in the post title. It is also going to function as further proof of the old axiom that you can create quite a ruckus in 150 badly-chosen words, but it takes ten times that many words (at least) to return some sanity to the discussion. “Gotcha” reporters of course know this, which is why they do what they do. Most people don’t have the time or desire to wade through the high-attention span Nerd part to evaluate the reporter’s claim. That it’s a deadly serious business for anyone who owns shares in a publicly-traded company being compared to a criminal conspiracy on the basis of a misunderstanding of accounting rules doesn’t seem to bother writers who just want a “scoop.”

The ruckus started last week. On November 9, Fannie Mae released its 10-Q for the third quarter. This is the first time in years that Fannie has gotten a timely Q out; its 10-K for 2006 was released just in August, it never filed Qs for 2006, and the Qs for the first two quarters of 2007 were also just released in November. That little detail is important to this story. I assume everyone knows the long wretched saga of why Fannie Mae has been so far behind with its SEC filings. The point is that, in catching up, they have released a flurry of reports in a short period of time, which don’t have the same numbers on them (they shouldn’t; they are for different periods), and since they never reported quarterly numbers for 2006, we don’t have the by-quarter breakout that would provide details for some of the whole-year numbers reported in the 2006 K.

On November 15, Peter Eavis of Fortune Magazine published a breathless essay accusing Fannie Mae of having changed the method it uses to calculate its credit loss ratio in the Q3 filing. It is quite obvious that the presentation of this information has changed; the Q says so (page 54-55). Eavis, moving from a change in presentation to a change in calculation with intent to mislead at the speed of light, says “Uh oh. It’s Enron all over again.” Throughout the original article, he keeps referring to “bad loans” in such a way as to give the misleading impression that the metric in question, the credit loss ratio, is about reporting on delinquent loans, not on realized losses on defaulted loans in the current period. This allows him to accuse Fannie Mae of being “misleading” by not including fair-value write-downs on delinquent but not yet defaulted (not yet realized-loss producing) loans in the credit loss ratio.

Fannie Mae stock started to tank badly, and Fannie scheduled an analyst conference call for Friday morning to address this one very specific issue in one table in the Q. Fannie Mae explained, among other things, that the item excluded from the credit loss ratio calculation is, actually, included in net charge-offs on the consolidated financial statements. However, for the purpose of this specific metric, the credit loss ratio, fair value write-downs that have not yet produced an actual loss are excluded.

You can listen to the webcast here. Several analysts pointed out, quite nonconfrontationally, that they though Fannie could have provided more information to put this matter in context. Fannie agreed, and indicated that future disclosures would include more information. What’s amusing is that in two instances, analysts ended up asking whether in fact Fannie Mae wasn’t over-reserving for certain delinquent loans! Fannie Mae’s response was that they don’t think they’re under-reserving or over-reserving; they are simply applying GAAP rules for how fair-value write downs are taken. At no time in the conference call did anyone challenge this as a misapplication of GAAP rules.

So what did Eavis do, after the conference call and some delving into the credit loss ratio suggested that perhaps he merely misunderstood the math? He wrote a follow-up article on Friday, in which he continues to insist, even after Fannie Mae’s explanation of the issue, that the amount of exclusions from the credit loss ratio (that is, the amount of the fair-value write-downs on repurchased loans that are delinquent but not yet defaulted) is inexplicably large, and that these are forced repurchases, and that this is somehow sinister. This is after a conference call in which Fannie Mae explained, for those who have been living under a rock since last summer, why it is that write-downs on repurchased loans in Q3 can be many, many times the write-downs on loans repurchased earlier in the year, even if the total number of repurchased loans hasn’t grown all that much. There was this mere matter of a giant freeze in the mortgage secondary market, and spooked investors offering mere pennies on the dollar for delinquent mortgage paper, whether it was prime or subprime or something else. Eavis has to pretend to not remember that, I suspect, because his claim of “Enron all over again” is crumbling around his ears and he needs to keep kicking sand.

It is amazing to me that in light of all the real problems we have right now, we still want to go down expensive rabbit holes over “accounting tricks.” Nobody, least of all Fannie Mae, is trying to deny that there are severe problems in the housing and mortgage market, that large losses are being taken, and that this will hurt all over the place. I am not suggesting that Fannie’s Q is as clear as it could be, and I’m glad they indicated a willingness to report more color in future disclosures to make these numbers easier to evaluate. But writing a not completely helpful Q based on GAAP isn’t a crime in this country. I know a lot of people will argue that GAAP isn’t very helpful to the non-specialist. You get no argument from me about that, either. That still doesn’t make Fannie Mae Enron, and I for one would be livid if I were a Fannie Mae shareholder, and watched my money get flushed down the toilet for two days because, frankly, some reporter can neither read nor report. (I may well be a Fannie shareholder via indexed stock funds in one of my retirement accounts. But for disclosure purposes, I own no shares of FNM that I know about.)

Eavis could have gotten the same explanation from Fannie Mae that the analysts got in the call if he had asked for it, I am sure. No one forced him to write an article that makes accusations of willful dishonesty and implications of criminal behavior based on his inability to understand Table 26. He gave himself that assignment. And instead of apologizing for it, he continues to insist that the numbers don’t make sense.

Let me cut through the accounting archana (we can discuss that in the comments if we need to) to what I think is the real issue here. Fannie Mae has always had the option to repurchase seriously delinquent loans out of its MBS at par (100% of the unpaid principal balance) plus accrued interest to the payoff date. This returns principal to the investors, so they are made whole. If Fannie Mae can work with the servicer to cure these loans, they become performing loans in Fannie Mae’s portfolio. If they cannot be cured, they are foreclosed, and Fannie Mae shows the charge-off and foreclosure expense on its portfolio’s books (these are no longer on the MBS’s books, since the loan was bought out of the MBS pool).

Now, Fannie also sometimes has the obligation to buy loans out of an MBS pool. But we are—Fannie Mae made this clear both in the footnote to Table 26 of the Q and in the conference call—talking about optional repurchases. Why would Fannie Mae buy nonperforming loans it doesn’t have to buy? Because it has agreed to workout efforts on these loans, including but not necessarily limited to pursuing a modification. Under Fannie Mae MBS rules, worked out loans have to be removed from the pools (and the MBS has to receive par for them, even if their market value is much less than that).

There is, however, a little matter of accounting rules for booking these loans. Under GAAP, known internally to Fannie Mae as its SOP 03-3, the loan is taken onto the books at the lower of cost (par, in this case) or the fair market value of the loan at the time of repurchase. When the FV is lower than par, Fannie Mae has to charge-off the difference, at the time. This is not a true realized loss: it is a reflection of a mark to a real market value of a delinquent loan. You take the FV write-down at the time, even if you think that no loss, or a very much smaller loss, will actually end up occurring. That’s the rule. Anything else would be “mark to model” or “mark to myth.”

Now, anyone who hasn’t been living under a rock knows that bids for delinquent loans were either nonexistent or atrocious in July-September of this year. Certainly Fannie Mae knew that if it exercised its option to buy loans out of MBS in order to modify them, it, not the MBS, would have to take a nasty FV write-down. I don’t know about you, but I happen to think that a lot of private investors/servicers are refusing to do modifications of securitized loans precisely because they don’t want to have to buy them out of the pools and show that nasty write-down on their own books. They claim that it’s because securitization rules won’t let them modify loans, but I’ve never really bought that argument, nor have many regulators or the SEC.

The problem is that the market right now does not distinguish between a scratch & dent loan—one with a problem that could be cured with a modification—and defaulted nuclear waste that is facing 50% or more loss severity on imminent foreclosure. Whether it should be making that distinction or not—whether this is partly irrational panic or not—is not the point here. The point is that it just isn’t doing so, and so anyone who takes a loan to portfolio right now and uses a true market value instead of a fantasy is going to show the same huge write-down for the scratch & dent as for the nuclear waste. This will continue to be true until the market decides that everything isn’t nuclear waste any more.

So nobody wants outfits like Fannie Mae to mark to model; we want them to mark to market. We also want them to work out loans that can and should be worked out. Remember, we aren’t talking about horror subprime exploding ARMs here, we’re talking about troubled loans in typical Fannie Mae MBS. We’re talking about the kind of loans that would have taken a $60 million write-down in a past quarter, but that are taking a $600 million write-down in this quarter, solely because the market price of those loans has deteriorated so badly.

We also need to remember that Fannie has no intention of ever reselling these loans. If they can be cured, they will stay in Fannie’s portfolio. So establishing a market price is not about determining a loss Fannie would take if it cured the loan and then resold it. Establishing a market price is just a requirement of the accounting rules for a situation in which the price you must pay for a loan (par) is more than the market value of the loan. After all, what Fannie is doing here is making the MBS investor whole and taking the deteriorated asset onto its own books. The FV write-down means exactly that it is not hiding a loss this way.

Fannie Mae could avoid these write-downs by failing to exercise its option to buy the loans from the MBS. That would mean Fannie Mae refusing to work out loans with borrowers. Or, to put it another way, the price of Fannie agreeing to work with troubled borrowers is an out-sized hole in the current quarter’s charge-offs, not just because of the loan quality, but because of the total melt-down in the secondary market for nonperforming loans.

Fannie says that it does not expect most of these loans to default and produce large realized losses. You may or may not find that convincing. But Fannie does, because that’s why they bought them out of the pools. If they thought the stuff would go straight to the FC department, they’d have let the servicer take the loan out of the pool and foreclose, and let the losses hit the MBS guarantee fee income.

Fannie’s story is that in normal times, these FV write-downs of repurchased loans are included in total charge-offs, and therefore are reported in the credit loss ratio. In Q3 07, because of the enormous size of the FV write down, Fannie Mae backed out of the charge-offs the ones due to an up-front write down of delinquent but not defaulted loans. It added back any part of that write down that did, actually, become a realized loss, so that readers of the Q could get a true picture of how much the total charge-offs in Q3 were affected by repurchased loans.

Eavis is saying that this is inexplicable. Of course it’s explicable. You can and some analysts did on Friday ask Fannie Mae why it didn’t supply more information about what it was doing with those loans, and what its expected cure rate would be for these workouts. Fannie Mae acknowledged that such information would have helped and promised to provide more in future disclosures. But nobody on that conference call, as far as I remember, questioned the size of the Q3 07 FV adjustments. People who have been following the credit markets all year are not surprised here. Eavis is.

For the love of all that is holy, what does anyone think Fannie Mae (and Freddie Mac) are up to these days? The enormous pressure they are under by Congress and the public to modify as many loans as can possibly be saved has been so well-documented in the press that I’m sure they heard about it on Mars. It’s possible that Fannie is too optimistic about the cure rate of these loans. It’s possible that deep inside, they realize they are going to eat huge losses on all this stuff. But they were told in no uncertain terms to buy it out of the pools, take the FV write-down like a big kid, and start working out loans. Does anyone actually expect them to write a quarterly report that says “We think all this stuff will result in 100% losses in the next 90 days, but our regulators made us buy it anyway, so we’re reporting the worst possible credit loss ratio we can calculate, just to spite them”? On no planet, at no point in time, will that ever happen. You have to be willfully ignorant to think it would.

So there is, actually, a compelling story to be teased out of a couple of footnotes to a little table on page 55 of a 107-page quarterly report. It’s a story about political and market pressures and reactions; about the bottom-line impacts of workouts to investors like Fannie Mae; about the real-world effects on profitability numbers of things we see in fairly abstract forms, like those cliff-dives on the ABX and CDS charts or the dramatic ratings downgrades we post on regularly. There is a story that ties all of this together and shows how realized losses can be small compared to market losses, and how this ties into the debates over “mark to model” and other bad industry practices. There’s even possibly a story about how in certain unusual times, the old-fashioned GAAP rules fail to really tell investors what they need to know. These are fascinating and important subjects.

Eavis blew through all of those real issues to make a big deal about how Fannie projected losses in the 4-6 bps range for the year and might, actually, be at 7.5 bps as of Q3 if you calculate the number the way Eavis thinks you should. Think about this: he’s saying that it’s possible that credit losses on mortgage paper as of Q3 07 are worse than what was predicted at the end of 2006. OMG!!! No!! Really??? NEWS FLASH!! CALL THE POLICE!!!!! THE OBVIOUS!! IT IS BLINDING ME!!!

Sorry I let myself get out of control there, but come on. Anyone who has been reading USA Today on alternate weekends since February knows that losses are getting worse, and Fannie Mae did in fact explicitly report that losses were getting worse, even with the FV write-downs that were not realized losses backed out. What we are seeing is the whole problem with the “Another Enron” mentality: confusing the meaning of numbers with “accounting tricks,” and substituting some kind of gotcha for an honest attempt to understand the market mechanisms and economic reality that is creating those numbers. This mentality claims to be keeping companies honest, but it actually has the opposite effect, in my view, of inhibiting companies from presenting more detailed numbers, since the more you give people like Eavis the more they have to play gotcha with. And Eavis himself takes credit for his original article having lead to a 17% drop in Fannie Mae’s share price. I guess he’s proud of that. The other side of the Enron myth is the Famous Reporter Who Brought Down the Corporate Giant. It is worth not allowing oneself to get sucked into that sort of grandiose mythologizing.

I have to say I hate “blog triumphalism,” too. That’s the mindset too many internet writers have that us citizen journalists in our jammies are going to single-handedly bring down the Big Corrupt Media. I firmly believe in beating the press up a little when they do egregiously bad reporting, but that’s largely because I care about understanding what the real story is. And I hate being distracted by red herrings in my personal quest for understanding. Yesterday I spent over two hours rooting through SEC disclosures and listening to a 57-minute conference call trying to independently verify Eavis’s point; today I’ve spent a couple of hours writing this post. I am willing to believe that very few people have the time and the expertise to do what I just did. I therefore feel compelled to share my point of view with the rest of the world, in the interest of a worthwhile public discussion of financial and economic matters, which is the purpose of this blog. So I didn’t start out with the goal of catching Eavis being a lousy reporter; I started out with the goal of reading about Fannie Mae in a CNN Money article. But I believe that I did discover hyped, misleading, and ignorant reporting, and I believe it is fair to say so in public.

by Tanta on 11/14/2007 12:00:00 PM

First of all, thanks to Anne and NYT Junkie and Lyndal who immediately sent me the Opinion and Order. You guys rock.

Second of all, sorry that it took a while to get this updated post written. I'm still convulsing in helpless laughter over one of the footnotes. If you don't know how to have a good time over footnotes to a court order, I can't help you. If you do, you'll love this.

If you don't know what this is about, read this post from earlier today first.

Here's what Judge Boyko (my new personal Snark Hero) had to say on October 31, 2007 regarding some Deutsche Bank FC filings:

On October 10, 2007, this Court issued an Order requiring Plaintiff-Lenders in a number of pending foreclosure cases to file a copy of the executed Assignment demonstrating Plaintiff was the holder and owner of the Note and Mortgage as of the date the Complaint was filed, or the Court would enter a dismissal. After considering the submissions, along with all the documents filed of record, the Court dismisses the captioned cases without prejudice.

Yes, the bold italic underscoring is in the original. This means that the judge wanted Deutsche Bank to show it had standing to foreclose on the day the foreclosure suit was initiated, which seems reasonable. Further, this suit was dismissed "without prejudice," meaning that DB can refile if and when it gets its ducks in a row. So right off the bat, we are not dealing with a case in which there is no hope of this foreclosure ever getting completed.

So what happened here?

In each of the above-captioned Complaints, the named Plaintiff alleges it is the holder and owner of the Note and Mortgage. However, the attached Note and Mortgage identify the mortgagee and promisee as the original lending institution — one other than the named Plaintiff. Further, the Preliminary Judicial Report attached as an exhibit to the Complaint makes no reference to the named Plaintiff in the recorded chain of title/interest. The Court’s Amended General Order No. 2006-16 requires Plaintiff to submit an affidavit along with the Complaint, which identifies Plaintiff either as the original mortgage holder, or as an assignee, trustee or successor-in interest. Once again, the affidavits submitted in all these cases recite the averment that Plaintiff is the owner of the Note and Mortgage, without any mention of an assignment or trust or successor interest. Consequently, the very filings and submissions of the Plaintiff create a conflict. In every instance, then, Plaintiff has not satisfied its burden of demonstrating standing at the time of the filing of the Complaint.

Understandably, the Court requested clarification by requiring each Plaintiff to submit a copy of the Assignment of the Note and Mortgage, executed as of the date of the Foreclosure Complaint. In the above-captioned cases, none of the Assignments show the named Plaintiff to be the owner of the rights, title and interest under the Mortgage at issue as of the date of the Foreclosure Complaint. The Assignments, in every instance, express a present intent to convey all rights, title and interest in the Mortgage and the accompanying Note to the Plaintiff named in the caption of the Foreclosure Complaint upon receipt of sufficient consideration on the date the Assignment was signed and notarized. Further, the Assignment documents are all prepared by counsel for the named Plaintiffs. These proffered documents belie Plaintiffs’ assertion they own the Note and Mortgage by means of a purchase which pre-dated the Complaint by days, months or years. . . .

Despite Plaintiffs’ counsel’s belief that “there appears to be some level of disagreement and/or misunderstanding amongst professionals, borrowers, attorneys and members of the judiciary,” the Court does not require instruction and is not operating under any misapprehension. The “real party in interest” rule, to which the Plaintiff-Lenders continually refer in their responses or motions, is clearly comprehended by the Court and is not intended to assist banks in avoiding traditional federal diversity requirements.2 Unlike Ohio State law and procedure, as Plaintiffs perceive it, the federal judicial system need not, and will not, be “forgiving in this regard.”3

Okay, before we get to footnote three, here's the plain English version: DB was ordered to produce evidence of standing, but the copies of notes and mortgages it included with its filings don't show ultimate endorsement/assignment to DB. Judge ordered DB to fix this. DB did so by having its attorneys draft after-the-fact assignments, undoubtedly because nobody could find the original assignments. This pissed Judge Boyko off, and rightly so. From His Honor's response to the oral arguments, one has the impression that somebody from DB said, basically, "hey! The dog ate our homework!" There was never really any question that the loans weren't legally sold or assigned to DB; there seems to be a question about the arrogance and audacity of a lender telling a judge to ignore its sloppy paperwork and just get on with a foreclosure.

So here's footnote three:

3 Plaintiff’s, “Judge, you just don’t understand how things work,” argument reveals a condescending mindset and quasi-monopolistic system where financial institutions have traditionally controlled, and still control, the foreclosure process. Typically, the homeowner who finds himself/herself in financial straits, fails to make the required mortgage payments and faces a foreclosure suit, is not interested in testing state or federal jurisdictional requirements, either pro se or through counsel. Their focus is either, “how do I save my home,” or “if I have to give it up, I’ll simply leave and find somewhere else to live.”

In the meantime, the financial institutions or successors/assignees rush to foreclose, obtain a default judgment and then sit on the deed, avoiding responsibility for maintaining the property while reaping the financial benefits of interest running on a judgment. The financial institutions know the law charges the one with title (still the homeowner) with maintaining the property.

There is no doubt every decision made by a financial institution in the foreclosure process is driven by money. And the legal work which flows from winning the financial institution’s favor is highly lucrative. There is nothing improper or wrong with financial institutions or law firms making a profit — to the contrary , they should be rewarded for sound business and legal practices. However, unchallenged by underfinanced opponents, the institutions worry less about jurisdictional requirements and more about maximizing returns. Unlike the focus of financial institutions, the federal courts must act as gatekeepers, assuring that only those who meet diversity and standing requirements are allowed to pass through.

Counsel for the institutions are not without legal argument to support their position, but their arguments fall woefully short of justifying their premature filings, and utterly fail to satisfy their standing and jurisdictional burdens. The institutions seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Finally put to the test, their weak legal arguments compel the Court to stop them at the gate.

The Court will illustrate in simple terms its decision: “Fluidity of the market” — “X” dollars, “contractual arrangements between institutions and counsel” — “X” dollars, “purchasing mortgages in bulk and securitizing” — “X” dollars, “rush to file, slow to record after judgment” — “X” dollars, “the jurisdictional integrity of United States District Court” —“Priceless.”

I say, Judge Boyko For President! I couldn't be any snarkier than that if you gave me a two-week head start.

To summarize: there were dollars on the table encouraging secondary market participants to get real sloppy. Judge Boyko is making them pay now for what they didn't pay then. So the big news here is not that securitized loans cannot be foreclosed. The big news here is that the true cost of doing business is belatedly showing up. I happen to think that's a more important story than was originally reported.