RSS Feed by Calculated Risk on 10/18/2009 09:23:00 PM
Sunday, October 18, 2009
Weekend Summary
Some long posts earlier, so here is a summary:
... Almost 51 million square feet of office space in Los Angeles County, Orange County and the Inland Empire is now empty -- more than 17% of the total.
[T]he Financial Services Authority ... plans to tighten up regulation and crack down on risky lending ...
The FSA's Mortgage Market Review, published tomorrow, will focus on the third of the market considered "higher risk". ... Among the report's proposals, the financial regulator is expected to call for an end to self-certification mortgages and rule that responsibility for income verification be transferred from mortgage brokers to lenders.
This will be another busy week with two key housing reports: Housing starts on Tuesday, and Existing home sales on Friday. I expect single family starts to be about the same as last month (the number to watch), and existing home sales to be higher than last month (based on regional reports).
U.S. Bank v. Ibanez: More fun with foreclosures
by Calculated Risk on 10/18/2009 04:34:00 PM
CR Note: This is a guest post from albrt.
Another interesting foreclosure decision came down this week – U.S. Bank v. Ibanez by Massachusetts Land Court Judge Keith Long. The case is about securitized subprime mortgages that were foreclosed in mid 2007. The originating banks had assigned the notes and mortgages “in blank,” and the documents were then given to a custodian who kept them safely filed away while the securitization machine went to work. The mortgages were assigned to pools, and the pool trustees eventually sought to foreclose on these particular mortgages.
The pool trustees used a non-judicial process called a “power of sale.” In states that allow non-judicial foreclosures, banks can legally take back a house and sell it with little or no oversight if they follow the steps of the statute carefully. The Massachusetts statute required the banks to give notice of who held the mortgage. The pool trustees in Ibanez named the wrong party on the notices because they had not updated the assignment stamps on the documents at the time they advertised the sale.
The pool trustees were not able to get title insurance for the properties after the sales, so they filed complaints with the land court asking to have their titles validated. Judge Long held that the foreclosure sales were void. The pool trustees asked the court to reconsider, and filed a lot of paperwork explaining the securitization process. Judge Long held that the foreclosure sales were still void, and also made some interesting comments along the way about the representations in the securitization documents.
Ibanez is a trial court decision, but it is apparently expected to have significant influence in Massachusetts because of the special nature of the court. The Massachusetts Land Court has the job of examining titles and conclusively certifying who owns land. This is different from most states, where private parties record title documents with a local official, but the local official usually has very limited power to decide whether the document is any good. In most states, courts will look at the records and quiet title as between the parties who are in court, but the courts will not necessarily preclude another party from coming in later and challenging the title on a different basis. I don’t practice in Massachusetts, but I would expect that because the Massachusetts Land Court is specialized and its judgments are conclusive, the judges probably try not to differ too much in their interpretation of the law. I would expect the basic points of Judge Long’s decision in Ibanez to be followed by other land court judges unless the case is overturned on appeal.
Please note that Judge Long invalidated the foreclosures, not the mortgages. In all likelihood, the holders of the mortgages will be able to go back and foreclose eventually, but they will spend some additional time and money doing it. This gentleman has been following the case and has provided some local commentary, and has also graciously posted a copy of the Ibanez decision .
There were a few points in the case that I thought were worth discussing further:
Non-judicial foreclosure. The foreclosure in this case was done using an abbreviated process without much oversight from a judge. The Massachusetts statute on powers of sale allows the bank to enter the property, publish notices, and then sell the property on a specified date at least thirty days later. If the bank is not able to use the accelerated process, it takes three years for the bank to get clear title in Massachusetts. Any time during the three year period the former borrower has a right of redemption, which means the borrower can come back, pay the bank whatever is due on the mortgage, and get the property back.
More than half the states have accelerated foreclosure processes that have little or no involvement by the court, including states that allow “deeds of trust” instead of mortgages. Banks generally like non-judicial foreclosures because they are faster and cheaper. But if the bank screws up a non-judicial foreclosure, the sale may be invalid and the bank may be liable for problems caused by the invalid sale. Many states allow either judicial or non-judicial foreclosures. If there is something wrong with the transaction, for example questionable assignments as in the Ibanez case, the bank may want to consider a judicial foreclosure. If there is a judge handling the case, the judge will usually have the power to consider evidence and decide whether the foreclosing bank really is the owner of the mortgage. Once the judge decides who owns the mortgage, the foreclosure should be able to go forward. Situations where the mortgage completely disappears and the borrower gets to keep the house without paying should be rare.
On the other hand, this gentleman has an interesting if somewhat speculative point:
The true holder of the Note was insured by AIG so they are covered. AIG and the banks were bailed out by taxpayers. So, unless the American tax payer can produce a “blue-ink” original Note, no one has standing to foreclose.The process of figuring out whether an insurance company should be able to collect from somebody else after the insurance company pays a claim is called “subrogation.” When the word subrogation appears in a legal pleading, well, let’s just say it tends to complicate the case a little bit. It seems to me this gives the average borrower something to talk about when explaining to a judge why he or she wants to see the original note. I have not seen a case where a borrower could show that the holder of the note had been bailed out by AIG or the taxpayers, but it must have happened. In fact, I would say it seems to have happened a lot.
Representations and warranties. Judge Long mentioned several times that he was shocked to discover the security offering documents represented to investors that the mortgages had been validly assigned, when in fact the mortgages had not been validly assigned. There is a lot of law here, but Judge Long’s discussion is pretty clear on most points so I won’t try to rehash it. This certainly gives us something to think about when we are wondering why the Fed and the Treasury and all the other wholly-owned subsidiaries of Goldman Sachs are so motivated to overpay for mortgage securities. If the government ends up buying all the bonds at some large fraction of face value, then the government is probably the only party that can sue the securitizers for making misrepresentations like this.
MERS. This case also demonstrates that recorded title documents can get plenty screwed up without any help from a third party like MERS. As Tanta explained, banks have been using third-party custodians to hold original documents for a long time, and the proper assignments didn’t always get made in a timely fashion. In fact, Judge Long seemed to suggest in two footnotes that the banks would have had an easier time in this case if they had used MERS.
Title Insurance. The Ibanez banks brought these cases because they couldn’t get title insurance. For anyone who wants to avoid complications like this, title insurance is the key. Title insurance doesn’t guarantee that you’ll never have any problems – like any insurance company, sometimes title insurers will deny claims and leave you hanging. But for the most part it is the title insurer’s job to figure out if there are problems with your title, and then provide insurance to cover your legal expenses and your losses if any problems come up. The way you get title insurance is different in different states, but the policies are generally standardized in something called “ALTA” format. ALTA stands for “American Land Title Association.”
If you want to buy a house from a bank and the title insurance company thinks the foreclosure sale was no good, the title company most likely won’t insure the title at all. You should not buy a property that a title company won’t insure unless you can afford a good lawyer and are looking for adventure.
It is also possible that the title company will insure the title subject to “Exceptions.” When you get a title policy commitment before the sale, Schedule A will show your proposed coverage, Schedule B will show the Exceptions, and there will also be a list of “Requirements” that need to be completed before the title company will actually issue the policy. Requirements that aren’t completed before closing will generally migrate over to the Exceptions page.
It is very important to understand the Exceptions in you title policy. Sometimes, after careful consideration, you can decide to disregard the Exceptions. For example, my title policy has an Exception for water rights. I live in the city and have city water, so I am not going to spend a lot of time worrying about whether I have a right to drill a well. Maybe I will regret my decision in the Hard Times ahead, but basic plumbing is not one of the technologies I expect to disappear in the Hard Times, so I’m willing to take my chances. The title company also made an Exception for the racial covenants that were placed on my neighborhood in the 1920s. The U.S. Supreme Court has decided those are clearly not enforceable, and the title company doesn’t want to pay for anyone to try to relitigate either side of that question.
If a title company were trying to offer you a policy without covering a bad foreclosure, the exception might look something like this:
Any loss, claim or damage by virtue of the failure of the public records to disclose an assignment of interest from the instrument recorded in Book 107 of Deeds, page 49 to the instrument recorded in Book 109 of Deeds, page 377.This is hard to understand out of context because it is basically a big nominal phrase without a real subject or a verb or an object. The subject and the verb and the object are “We will not provide coverage for __________.” If there are any Exceptions in your title policy that you don’t completely understand, you should probably consult a lawyer.
There is plenty more to talk about, but this is already almost as long as the MERS post, so I’ll stop here. Ibanez appeared several times in the comments this week, but CR was the first person I heard about it from so no hat tips, except to Tanta for having all this figured out a few years ago.
CR Note: This is a guest post from albrt.
Inventory Restocking and Q3 GDP
by Calculated Risk on 10/18/2009 02:43:00 PM
Professors Hamilton and Krugman have mentioned that Q3 GDP will probably be reasonably strong, see Hamilton's No L and Krugman's A smidgen of optimism. I agree.
But I don't think growth in Q3, or even in Q4, are the question. The key question is what happens in early 2010.
The following graph shows the contributions to GDP from changes in private inventories for several recessions. The blue shaded area is the last two quarters of each recession, and the light area is the first four quarters of each recovery.
Click on graph for larger image in new window.
The Red line is the median of the last 5 recessions - and indicates about a 2% contribution to GDP from changes in inventories, for each of the first two quarters coming out of a recession. But this boost is always transitory.
Following the 1969 recession, changes in inventory added 6.2% to GDP in the first quarter of recovery - and GDP increased at an 11.5% (SAAR) that quarter. No one is predicting a quarter like that. But a 1% to 2% contribution from changes in inventories is possible.
And Personal Consumption Expenditures (PCE) will be strong too.
The following graph shows real PCE through August (2005 dollars). Note that the y-axis doesn't start at zero to better show the change.
The quarterly change in PCE is based on the change from the average in one quarter, compared to the average of the preceding quarter.
The colored rectangles show the quarters, and the blue bars are the real monthly PCE.
The July and August numbers suggest PCE will grow at about a 3.6% (annualized rate) in Q3, however retail sales suggest less growth in September (July and August were boosted by cash-for-clunkers). So maybe we will see 3% PCE growth in Q3, and that would mean a contribution to GDP of about 2%.
Add in positive contributions from net exports, an increase in residential investment (for the first time since Q4 2005), some increase in equipment and software investment - and Q3 should look pretty healthy. Yes, investment in non-residential structures will be ugly, but overall private investment will be positive (first time since Q3 2007).
However, I expect early 2010 to be a different story.
Although I expect solid GDP growth in Q3 (and probably OK in Q4), I think GDP growth in 2010 will be sluggish, with downside risks.
McClatchy: "How Moody's sold its ratings"
by Calculated Risk on 10/18/2009 12:21:00 PM
Kevin Hall at McClatchy Newspapers writes: How Moody's sold its ratings -- and sold out investors (ht Atrios)
A McClatchy investigation has found that Moody's punished executives who questioned why the company was risking its reputation by putting its profits ahead of providing trustworthy ratings for investment offerings.How can securities be rated AAA one day, and junk the next?
Instead, Moody's promoted executives who headed its "structured finance" division, which assisted Wall Street in packaging loans into securities for sale to investors. It also stacked its compliance department with the people who awarded the highest ratings to pools of mortgages that soon were downgraded to junk.
The rating agencies pocketed the fees, and investors (including the Fed) still use their ratings. As Atrios jokes: "Not sure there have been negative consequence for them, so call it a win!"
Offices: See-Through Buildings in LA
by Calculated Risk on 10/18/2009 09:38:00 AM
From Roger Vincent at the LA Times: Southern California's vast desolation indoors
... Almost 51 million square feet of office space in Los Angeles County, Orange County and the Inland Empire is now empty -- more than 17% of the total. ... "These vacancies are a direct reflection on unemployment," said Joe Vargas, an executive vice president at Cushman & Wakefield. "Companies continue to reduce their workforce, or they are not hiring."Usually the unemployment rate and the office vacancy rate tend to peak around the same time. So, as the unemployment rate continues to rise into 2010, the office vacancy rate will probably increase too.
...
Real estate rentals are a lagging indicator of the economy, so the shrinking-space trend is expected to persist well into next year even if the nation's financial outlook continues to improve.
...
Cushman & Wakefield's Vargas predicts Southern California will remain a tenant's market through mid-2010 and perhaps longer if employment doesn't start picking up.
"This is certainly the worst downturn we've seen," Vargas said. "We're not going to see real improvement until job growth occurs."
On a national basis, Reis' forecast is for the office vacancy rate to peak at 18.2 percent in 2010 (currently 16.5%), and for rents to continue to decline through 2011.
Saturday, October 17, 2009
U.K.: FSA to Tighten up Mortgage Regulation, Ban Stated Income Loans
by Calculated Risk on 10/17/2009 10:12:00 PM
From the Telegraph: Era of cheap mortgages is over, British homeowners warned
[T]he Financial Services Authority ... plans to tighten up regulation and crack down on risky lending ...The terms are different in the U.K.: "Self certification" is stated income, "second charge" is a second mortgage, and "buy-to-let" is a rental unit.
The FSA's Mortgage Market Review, published tomorrow, will focus on the third of the market considered "higher risk". ... Among the report's proposals, the financial regulator is expected to call for an end to self-certification mortgages and rule that responsibility for income verification be transferred from mortgage brokers to lenders.
...
Second charge and buy-to-let mortgages, neither of which are regulated by the FSA, are expected to be brought under its supervision. In addition, sub-prime, interest-only, and 125pc mortgages will all be subjected to closer scrutiny and higher capital requirements.
Subprime, interest only (IO) and 125 percent loan-to-value (LTV) are the same.
There is no purpose for self certification (stated income) loans and these should be banned everywhere. Self certification means "buyer underwritten" as opposed to "lender unwritten" - and that makes no sense. Tanta wrote a couple of great posts on this in 2007: Just Say No To Stated Income and What's Really Wrong With Stated Income .
About time ...
HUD Inspector General's Report on FHA Lender Approval Process
by Calculated Risk on 10/17/2009 06:35:00 PM
Just a follow-up to the previous post - here is the HUD Inspector General's report on the FHA single-family lender approval process (ht MrM)
Click on graph for larger image in new window.
This graph from the Inspector General's report shows the number of approved FHA lenders by year. In 2008 there were 3,297 lender applications approved by the FHA, more than triple the number in 2007.
And 2009 is on pace for a similar number of approvals as 2008 (another 3,000+ lenders).
From the report:
Congressional concerns brought about in part by media coverage has raised concerns that former subprime lenders and brokers are obtaining approval to participate in the FHA program and that they will be responsible for FHA insurance of loans to people unlikely to make their payments.And from the results:
Our audit objective was to determine whether the application process for Title II provided effective controls to ensure approval of only those lenders that complied with FHA requirements ...
Finding 1: FHA's Lender Approval Process Did Not Ensure That Only Eligible Applicants Were Approved
FHA's lender application process was not adequate to ensure that all of its lender approval requirements were met. This condition occurred because FHA control procedures had been enhanced and automated to handle the recent large increase in the number of lenders applying for the FHA program.
Inspector General Report: FHA Lacks Resources to Ensure Lenders Meet Requirements
by Calculated Risk on 10/17/2009 03:35:00 PM
From the WaPo: FHA Set to Hire Freddie Mac Official
On Friday, the Inspector General of the Department of Housing and Urban Development, which includes FHA, said the agency lacks the ability to ensure that lenders meet its requirements.The AP has more on the report. (I haven't seen the report yet).
The report also said that FHA did not obtain or consider negative information on lenders from other HUD offices, follow up on whether the required fees or documentation were collected, or properly dispose of lender application files containing personally identifiable information.
No wonder so many FHA lenders have off-the-chart default rates (see: FHA Lenders with High Default Rates).
Florida Unemployment Rate Hits Series High 11%
by Calculated Risk on 10/17/2009 01:17:00 PM
From the Miami Herald: Florida's jobless rate hits 11 percent as public toll worsens
Florida's overall jobless rate hit 11 percent in September, up two-tenths of a percentage point from the previous month, according to figures released by the state labor department on Friday. That's the highest since 1975, and represents more than a million Floridians out of work.The BLS will report all the state data this week, and just like in California and Nevada, unemployment in Florida is at an all time high for the state series (started in 1975).
emphasis added
A couple other high unemployment states ...
In Illinois, from the Chicago Tribune: Ill. jobless rate hits 10.5 percent in September
The jobless rate in Illinois increased to 10.5 percent in September after falling to 10 percent in August.That is almost 700 thousand people unemployed in Illinois.
And the "good news" from the Detroit Free Press: State's jobless rate is showing stability
Michigan's unemployment rate inched slightly higher during September, rising one-tenth of a percentage point to 15.3%.That is the good news. The recall of some auto workers kept the unemployment rate "largely unchanged".
...
"Michigan's unemployment rate was largely unchanged in September, as a modest recall of auto workers from temporary layoff was countered by job losses in the service sector," said Rick Waclawek, director of [Michigan Department of Energy, Labor & Economic Growth]'s Bureau of Labor Market Information and Strategic Initiatives. "The state jobless rate, which rose sharply by five percentage points from December 2008 to June 2009, has stabilized somewhat since June."
My guess is the overall unemployment rate will hit 10% this month or in November.
LA Area Port Traffic in September
by Calculated Risk on 10/17/2009 09:30:00 AM
Note: this is not seasonally adjusted. There is a very distinct seasonal pattern for imports, but not for exports.
Sometimes port traffic gives us an early hint of changes in the trade deficit. The following graph shows the loaded inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container). Although containers tell us nothing about value, container traffic does give us an idea of the volume of goods being exported and imported.
Click on graph for larger image in new window.
Inbound traffic was 17.4% below September 2008.
Outbound traffic was 8.6% below September 2008.
Even with the decline in September, there has been a clear recovery in U.S. exports. And export traffic at the LA area ports is at the September 2006 level.
However, for imports, traffic is about at the September 2003 level, and 2009 will probably be the weakest year for import traffic since 2002.
Note: Imports usually peak in the August through October period (as retailers import goods for the holidays) and then decline in November.
And some color from the LA Times: Imports dive at ports of Los Angeles and Long Beach
As dismal as those figures are for the two ports, which rank first and second in the U.S. in container volume and together rank fifth in the world, a greater worry goes beyond the immediate and substantial loss of local trade-related jobs: Some of the ports' most important tenants were so poorly positioned for the downturn that they might sink completely in a sea of billions of dollars of red ink, experts say.
"Without a doubt, the Southern California ports should be worried," said Neil Dekker, an analyst at Drewry Shipping Consultants in London who produces container industry forecasts. "Companies will go bust; freight rates may take years to recover."
