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WhaleMu – JP Morgan’s Next Surprise?
Cross-posted from nakedcapitalism.
In an admittedly strange twist of timing JP Morgan
, the same JP Morgan that just announced a surprise $2 billion loss caused by the “London Whale,” became the first and only of 26 banks disclosing subprime investor data to flip me the digital bird, refusing access to the public loan-level performance data for their Washington Mutual loans. WaMu, one of the most reckless subprime lenders, was swallowed whole by JPM and they’re having serious indigestion.
Nelson D. Schwartz and Jessica Silver-Greenberg of the New York Times verify that the purpose of the Chief Investment Office — the London Whale — is to offset risk caused by the Washington Mutual loans:
Under Mr. Dimon’s leadership, the chief investment office — which was responsible for the outsize credit bet — was retooled to make larger bets with the bank’s money, a former employee said. Bank executives said the chief investment office expanded after JPMorgan Chase’s 2008 acquisition of Washington Mutual, which added riskier securities to the company’s portfolio. The idea behind the strategy was to offset that risk.
It isn’t hard to figure out why JP Morgan doesn’t want anybody looking into and through their garbage. I have not been able to ascertain whether these reports are required under disclosure requirement Regulation AB (the law itself seems to say yes, but the experts I spoke to gave divergent readings). Whether they are or aren’t, JPM’s refusal — when everybody else cooperated speaks for itself.
As those loans sour, and they continue to rot like a dead skunk on a hot July day, the bets needed to offset the losses are increasing. It looks like the bank, peering into that portfolio they refuse to share, is becoming more than a little bit desperate. Like a compulsive gambler after a multi-day bender resulting in crippling losses they decided to double down rather than walk away, leading to their current whale of a surprise and likely a mirror-image follow-up for the WaMu losses this was supposed to offset.
For anybody who believes that JPM’s position is normal .. it isn’t. Twenty-six other banks quickly popped open the doors to their repositories, as they’re required to do. Perennial bad-boy Aurora Loan Services is the only other one that’s ignored my requests, though since it looks like they’ve sold their servicing operations the jury’s out whether their silence is purposeful or whether there’s nobody home on the other side of those requests.
Like I said, I’m not sure whether these disclosures are exempt. There are certainly many marked private, but they seem to be overwhelmingly CDOs and similar more exotic or clearly closely held instruments. I’ve never seen an entire series of MBS from an issuer that is exempt: even a few stray WaMu deals that ended up in other repositories are open to the public.
JP Morgan’s insistence that “[t]he site is maintained for JPMorgan Chase RMBS clients,” only, demanding that I include my JP Morgan Chase contact, may be legal but it is unprecedented. In context of their recent trading losses, the knowledge that those losses were to hedge against the WaMu losses, Dimon’s prior comments downplaying both losses, and strong analysis that the WaMu loans are some of the most impaired MBS it’s fair to conclude that JPM is hiding something in the basin of their loan outhouse.
I’ve spent the past couple months holed away downloading MBS data in bulk to enable investors, analysts, academics, government agencies, or whoever else wants to inspect performance information and project losses for every subprime loan trust. When finished, this week hopefully, I’ll have a veritable ABS MRI machine that can peer into the true health of the housing and housing finance market. It’s harder than it sounds: one of those projects where software engineers emerge from their digital caves after months, bleary eyed and long past due for a haircut but holding game-changing technology.
My database, which includes everything except WaMu loans thanks to Jamie, is finally almost finished. But even in preliminary form it is clear that the AAA-rated senior tranches — the ones that really were never supposed to take losses — are toast that’s burning worse by the day. Servicers, trustees, government officials have been doing anything to delay the inevitable losses but when people don’t pay their mortgages, and housing has declined by over 50% in many of their markets, there’s only so much accounting chicanery they can do: the money just isn’t there.
My suspicious are more grounded than tin-hat delusions we’ve been hearing from the housing is hot again crowd. R&R Consulting, a well-regarded structured valuation expert I work closely with conducted a portfolio-wide analysis of undisclosed (“limbo”) losses on RMBS. In a special in-depth report dated February 2012, long before JPM told me piss-off when asking for access to the more granular WaMu loan-level data, they reported that WAMU had the highest limbo loss level–about $810 million—in just one transaction. Repeat: experienced analysts dug this out even without loan level data. It sounds likely that it won’t be long until Dimon reports another ten-figure surprise that I’m sure he’ll apologetically pawn off on the US taxpayer.
For anybody asking “um — isn’t this over — didn’t all this fall apart back in 2008?” the answer is not really. That mega-meltdown was really a mini tremor caused by the lower and smaller tiers of these securities; last time junior visited to stir things up but this time papa’s walking down the street carrying a mean look and a big stick. That’s because the mezzanine level tranches of most bubble-era MBA are either gone or guaranteed to be gone — finally eaten up by current or pending losses — leaving the lower AAA tranches to take their place as the bearer of losses. This was never supposed to happen. Everybody knew that CDOs created from the lower tranches were risky, even if the ratings agencies said otherwise, but nobody thought the meltdown would last this long that the actual top tranches would be nicked. But the data couldn’t be clearer: those bottom level A-class tranches of yesterday are the new bottom level M-class tranches of yesterday.
All this is surprising because these same MBS tranches have been on fire lately. Hedge funds bought them for very little when nobody wanted them — setting their own price — and now they’re selling them back at steep gains because housing is peachy again, never mind the enormous amount of shadow inventory. Hopefully the buyers of these same securities aren’t being set up, again, because nobody would be stupid enough to fall for that same trick, again. Hopefully.
It is these lower tranches and other derivative products, which are by definition exponentially smaller than the more senior securities like the ones JPM is hiding (well, before the banks multiplied them several times over using credit default swaps) that blew up the world economy in 2008.
I’m guessing that it is the inevitable meltdown of what remains of the AAAs (the amount outstanding has been reduced considerably by refis) that has been at the impetus for the housing cheerleaders. By refusing to move their foreclosures forward, then refusing to take title, then refusing to REO those homes, the trusts don’t have to recognize the losses because, ya’ know, the abandoned and dilapidated properties will magically double in value as long as we hold our breath and wish.
My mountain of data that shows loss severity in excess of 100-percent is not uncommon. When we look at the loans, compare similar loans from those who report them more honestly, multiply the average severity by pending reported and, um, overlooked foreclosures, then it becomes clear that the lowest rated AAA’s are toast. This reaffirms the report by R&R Consulting report that $175 billion of loan level losses had not been allocated to the trusts. Whoops!
Jamie Dimon admitted his $2 billion loss “plays right into the hands of a bunch of pundits out there” on his conference call explaining his stinky. Dimon went on to call the losses “egregious” and “self-inflicted.” In light of the London Whale it is clear that when it comes to sky-high risk, like JPM’s WaMu exposure, the bank has adopted an advanced risk management strategy: telling researchers to piss off then hiding.
Woody Guthrie: The Jolly Banker
Not nearly enough time to write lately thanks to my ongoing enormous data project but came across this Woody Guthrie song I thought I’d share.
Since it’s almost Passover/Easter it’s worth pointing out the ancient Israelite’s found themselves jammed-up due to a government that “didn’t remember.” So, whereas the new material is always interesting it’s always good to take the opportunity to remember that we’ve been here before.
I don’t know if Woody’s copyright is still there. If so maybe they’ll ask me to take it down, but something tells me Woody would jump out of his grave and start singing it himself if he could.
Click here to hear Woody singing the song.
The Jolly Banker
My name is Tom Cranker and I’m a jolly banker,
I’m a jolly banker, jolly banker am I.
I safeguard the farmers and widows and orphans,
Singin’ I’m a jolly banker, jolly banker am I.
When dust storms are sailing, and crops they are failing,
I’m a jolly banker, jolly banker am I.
I check up your shortage and bring down your mortgage,
Singin’ I’m a jolly banker, jolly banker am I.
When money you’re needing, and mouths you are feeding,
I’m a jolly banker, jolly banker am I.
I’ll plaster your home with a furniture loan,
Singin’ I’m a jolly banker, jolly banker am I.
If you show me you need it, I’ll let you have credit,
I’m a jolly banker, jolly banker am I.
Just bring me back two for the one I lend you,
Singin’ I’m jolly banker, jolly banker am I.
When your car you’re losin’, and sadly your cruisin’,
I’m a jolly banker, jolly banker am I.
I’ll come and forclose, get your car and your clothes,
Singin’ I’m jolly banker, jolly banker am I.
When the bugs get your cotton, the times they are rotten,
I’m jolly banker, jolly banker am I.
I’ll come down and help you, I’ll rake you and scalp you,
Singin’ I’m jolly banker, jolly banker am I.
When the landlords abuse you, or sadly misuse you,
I’m jolly banker, jolly banker am I.
I’ll send down the police chief to keep you from mischief,
Singin’ I’m jolly banker, jolly banker am I.
Fannie & Freddie Signal Congress By Spending $600K at the MBA Convention
Oops, they did it again.
Mortgage Daily News reports Fannie and Freddie spent $600K in Oct., 2011 at the MBA’s annual convention. In 2010 they spent $640K on the same conference and Congress went ballistic. Apparently Fannie, Freddie, and the FHFA thought the outrage of our elected officials warranted a change, so they responded by reducing spending by a whole 6.25%.
I shouldn’t be writing. I’m backed up with arguably the most complicated and important data aggregation project I’ve ever been involved in. When finished I’ll be pushing out chart’s that make CR’s chart fascination look benign.
But I can’t help but to take a few minutes and digitally ink a few words about this.
Fannie Mae and Freddie Mac just stuck up the middle-finger to you, Congress, and to the American’s that you’re supposed to represent. Will you finally do something meaningful about it?
Unlike many I don’t think that Ed DeMarco is evil incarnate. I think that he’s doing his best given the constraints of HERA but he’s dealing with two unruly, entitled, dishonest beasts who hold themselves above the law, who have shown that they can’t be regulated, and who need to be unwound.
Let’s finally change HERA, the law that funds these monsters. Let’s admit we can’t mend it, and finally end it.
It’s time for Congress members to stand, Reagan-style, in front of their headquarters and scream “Fellow members of Congress, tear down these organizations.”
This isn’t a Democrat nor Republican problem: Fannie and Freddie have become the vision of an equal-opportunity contemptuous monster. They’re like the child of parents who bitterly divorced and who later realizes he can play them off one another, listening to neither, while repeatedly spending wildly on their credit-cards then sneering when called out.
Speaking of children, my own son is in a public charter-school math and science program where three years of honors high-school math are required before starting high-school. His class is the first where Hon. Algebra II wasn’t offered in summer-school because of budget cuts, so they took the class online. Teachers confirm that the whole group has struggled substantially more in pre-calc and now calc classes than their predecessors who had a real teacher for what is, for eighth graders, a tough class.
Congress, why don’t we have enough money to fund honors math classes for our brightest kids — the one’s who have proven by working their asses off that they’re the future one-percent types that pay all those taxes — but we do have $180 billion to fund these reckless, worthless, market-destroying organizations.
Here’s a blueprint to burn down Fannie Mae and Freddie Mac:
1. Over 3-6 months auction the portfolio, the loans they own, at whatever the private market is willing to pay. Allow people to “buy” their houses out of the pool at auction value plus a small administrative fee, and the rest go to private investors. Leave the guarantees intact since they’re contractual obligations. If people scream this is “illegal,” that it’s some type of taking, then just stop funding them, call Fannie and Freddie’s own loans when they miss a payment, and allow a bankruptcy judge to do what the Constitution contemplates should be done to bankrupt organizations. Since Fannie and Freddie executives advocate for fast foreclosures I’m sure they’ll be enthusiastic at their own organizations quick liquidation; they can quickly pack and leave, with no severance.
2. Create a new organization to continue the guarantees, albeit on a ramp-down period of 5-8 years until the private market can find it’s footing. That is, for the first 48 months the guarantee program will continue as-is, though with first-loss provisions for originators, then over the next 36 months the maximum volume of guarantees would be reduced by 1/36th of the volume from the first 48 months. Then .. they’re gone; nothing but a bad memory of failed social experiment that caused immeasurable suffering.
That’s it. Loans will be held by private organizations who have shown they have a substantially lower 12-month re-default rate, who are willing to write down principal when they realize it is in their bests interests, and who — while they’re far from perfect — are a lot better than the GSE’s.
Don’t leave them around to “create standards” for new technical infrastructure, their latest gambit. That’s best left to a consortia of private businesses. Plenty of people, myself included, would love to compete for this work by creating private businesses that will do this more competently and even more transparently than the GSE’s, since we’re not exempt from disclosure laws and have to answer to market forces.
With this latest move the GSE’s have set the stage for their own well-deserved execution. Now the question is whether our legislators will have the backbone to do what’s needed. Any legislator, from either party, that won’t cooperate deserves to lose their jobs this fall.
State of the American Economy: RepoGames, by Spike TV
Like many middle-aged men working on financial analysis I woke up in the middle of the night last night with heartburn. While waiting for a Tums or three to work their magic I turned on the TV and discovered a television reality show that could be as defining to our times as “Linda Green” was to foreclosure fraud, RepoGames by Spike TV.
Summarizing, a repo-man shows up with his tow-truck driver to repossess cars. Debtors are called out and asked if they’d rather play a game; answer three out of five questions correctly and the show pays off the car loan. Answer incorrectly and the human gorilla, who goes by the name Tom DeTone, screams at the tow-truck driver to take the car away. For each correct or incorrect answer they raise or lower the car on the tow truck.
Even though I work with a lot of reporters, including those who work in television, I’ll admit that I don’t normally watch TV. But it’s impossible for RepoGames to not catch one’s attention.
RepoGames is easy: the tow-truck driver and a bunch of people with video cameras show up to repossess a car. The thug in charge makes it clear this is a “legal” repossession. Ignoring that he’s ignoring a sizable portion of the Fair Debt Collection Practices Act, he explains to debtors he will take their car or they can try to answer three of five questions; answer three correctly and the show will pay off the car.
It’s not clear if “pay off” means pay the alleged arrears or the entire loan but at this point nobody, including your humble author, really cares; debtors always go for the game show.
Questions are mind-numbingly easy, to the point I wish I had a car loan so that I could try to qualify to default and have this show pay it off. Remember the show “Let’s make a deal?” where the top prize, which almost nobody won, was a car? Well, at 2-3AM, on this show, lots of people win cars. But more than a few lose them too — the family jalopy — with lots of cameras filming.
After each wrong answer the primary thug screams to the tow-truck driver “raise it up,” and he obliges by raising the to-be repossessed car. One has to wonder why they don’t know the answers to these questions, if if that might be the reason the repo-man is there.
I didn’t watch for long but RepoGames is one of those TV shows where a little bit is enough. One man, trying to save what looked like an old beater, pulled out a stack of $100 dollar bills and offered to repay whatever he owed. ”Here’s $5,000; leave me be.” Wearing sunglasses, at night, he answered “a little bit of this and a little bit of that .. whatever” when asked what he did for a living.
As the repo-man faced the camera and sais “that’s one shady character,” I’ll admit I agreed, especially since it looked like his stack of money was more than enough to buy a car just like the one being repossessed. In any event, the shady character, with the help of his girlfriend (understatement – she answered every question), “won” back his car. Who’d have thought being able to answer the question “What happens in ____, stays in _____” would win a free car?
The mother of seven children, who had to take them out of the van being repossessed, wasn’t so lucky. She missed two questions then went on streak by answering “Banks are closed on Dec. 25th in honor of who’s birthday?” correctly. But when she blew the fifth question off went her car, leaving her to question how she’s transport her children and me to wonder if we wouldn’t better off doing like the European’s and broadcasting soft porn, or nothing, in the middle of the night.
Any heartburn I had from whatever I’d eaten went away replaced by a different form, questioning how the world’s most prosperous country could have so quickly devolved into this type of dreck. Worse, even though I’m an outspoken consumer advocate focused on reforming predatory lending, I found it a little bit fun.
Like most in the collection industry, at least until they find their own job outsourced to India, “DeTome” is self-righteous about his work. He never stops to question whether the repossession might be the result of a double-digit interest rate, predatory lending, or stupidity by entering into auto finance loans with terms that used to be considered usurious until we all but eliminated usury laws (thanks, South Dakota).
DeTome follows the meme there’s nothing unusual about the economy and writes on Spike’s website:
God, we’re bad, as Americans. If you don’t make your payments, you have to expect that we’re going to come to your door and repossess your car. People need to live within their means. But we’re Americans, and we don’t do that. We want nicer things, and we live outside our means. People don’t really realize how badly they’re going to damage their credit rating for the next five to seven years. In high school, we need to learn about finance and not cooking or weightlifting. – Tom DeTone
Yep .. we’re bad. For treating one another like cattle and chattel, while sacrificing our humanity for cheap thrills.
Congratulations To My Close Friend Lynn Szymoniak, Toughest Anti-Fraud Attorney In the US
http://www.reuters.com/article/2012/03/12/us-usa-housing-settlement-idUSBRE82B1A020120312
As part of the foreclosure fraud settlement reached with the fifty state attorney general’s one name stands out, mainly because it’s a woman I’ve stood with for years working on these issues, my close and dear friend Lynn Szymoniak who will receive a well deserved $18 million as a lead whistle-blower.
I know the settlement has taken its lumps but now that it’s out there’s one point especially that needs to be highlighted.
First, a link to the settlement. Each of the Big Four banks has the same verbiage, but I’m focusing on Bank of America. The language is the same but they’ve been the worst, plus it gives me a chance to make fun of Brian Moynihan’s “hand-to-hand” combat comment. [Note to Brian: next time you decide to pick a fight in a rowdy bar think twice about how it might end up.]
Besides the long (long, long, long) list of exclusions this one stands out the most:
“For avoidance of doubt, this Release shall not preclude a claim by any private individual or entity for harm to that private individual or entity, except for a claim asserted by a private individual or entity under 31 U.S.C. § 3730(b) that is subject to this Release and not excluded by Paragraph 11.” Appendix F – Pg. 40.
So, what does that mean exactly? It means that except for whistle-blower claims already settled servicers remain fair game .. for everybody. Securities fraud claims? They’re still there. Criminal liability? Still on the table. Clouded titles? Who knows if they’ll win but anybody who wants to win the next $18 million has the right to try.
I know the settlement terms have been described as “broad,” and they look broad at first blush, but nobody pointed out that the exclusion list looks just as broad. This settlement is about government entities settling on very specific terms, terms so narrow when the exclusions are factored in that it’s not clear whether banks signed this as a release, or whether they signed it as a promise to basically move on and start behaving.
I still haven’t hard Moynihan retract the hand-to-hand combat phase and finally say “OK – that was ill advised and didn’t work out so well,” then admit that his bank has behaved recklessly, irresponsibly, and shamefully, then express a genuine desire to grow up followed through with action.
There’s some I know are hopeless. Infamous crook David J. Stern still has a license in good standing to practice law in FL thanks to the FL Bar; might be time for a ballot initiative to strip them of their disciplinary authority. Palm Beach County Judge Meenu Sasser, who pushed the disgraceful rocket-docket while proclaiming “I don’t see any widespread problem” documents (oh yeah, and while sitting on an enormous amount of bank stock) can now see how respectable judges react to the cesspool Stern and his ilk filled her courtroom with. FL Rep. Kathleen Passidomo — who tried to fast-track the fraud through the court system — is unlikely to say she was wrong (the same Rep. Passidomo who suggested an 11 year-old asked to be gang-raped because she was dressed like a “prostitute”).
But maybe there’s hope the banks themselves will realize it’s in their own best interest to start working in good faith.
Bankers are tired. Investors want the private MBS market to come to life again, and there’s no reason that it shouldn’t except for uncertainty on the part of other investors that they won’t be defrauded .. again. But now it’s been made clear there is a path to accountability; the settlement left no ambiguity that investor lawsuits are wide open.
Responsible banks run by responsible bankers should welcome this settlement, but also those lawsuits, because they provide a path to a return of confidence that the rule of law, and the fundamentals of the free market, rule the US. In much the same way that the first step to fixing an abandoned home is to rid it of rodents smart, responsible, respectable bankers have to realize ridding the system of human rodents is good for the banking system, good for the economy, and ultimately great for them.
I can’t stress enough how much I am not “anti-bank,” but I am anti-fraud. Real business people can’t compete with fraudsters because it’s impossible to beat Madoff’s returns. They should use this settlement as an excuse to step out of the woodwork and start to scream as loud or louder than Lynn has been over these past years.
For the sake of the economy, the banking system, and the families — and no, when you’ve done this for a few years it becomes impossible to forget the families, even when mired in financial and legal data — let’s hope banks take the opportunity they’ve been given to change their ways and clean up their mess.
Common Financial Crisis Myths, Part I
Myth: The financial crisis was caused by irresponsible borrowers lying to banks.
Fact: On stated income loans, those without documents, banks either knew when borrowers were lying to them — and sometimes outright prodding them to do so — or could have easily found out with minimal due diligence. Loan originators did not want to find out though, because they planned to quickly flip the loan to somebody else in much the same way condo-flippers flipped condo. That is, originators — those who create loans — wanted to close them as much or more than borrowers. In any event, many bubble-era loans were full documentation loans.
Myth: Borrowers made out much better than banks when the bubble was rising.
Fact: Banks used the notes, the loans, as collateral for trading leverage. For every dollar a person borrowed a bank could borrow up to $40 for trading activities. This is called leverage, and excessive leverage by banks is the root cause of the financial crisis. Leverage tore down Bear-Stearns within weeks, went on to destroy Lehman, finished Merrill Lynch .. just like a family that borrows 40 times their annual earnings excessive leverage toppled banks.
Myth: Foreclosures are the result of free market forces.
Fact: But-for the bailouts people’s loans, every loan of every type, would have been sold for pennies on the dollar to new banks willing to renegotiate at steep discounts. Mortgages would have been purchased for 3-9 cents on the dollar, performing credit-card debt for a penny or two on the dollar, sub-prime dreck for virtually nothing. If a banker buys a $500K mortgage for $50K they can renegotiate it to $100K and make a mint of money. Everybody wins .. except for the bank that voluntarily and knowingly agreed to fund the loan, and who suffered the genuine free market repercussion of insolvency as a predictable result.
Maybe Myth: Without TARP we would have faced another Great Depression.
Fact: This isn’t clear, though it’s difficult to criticize those unwilling to gamble the world economy on theory. During the Great Depression there was no FDIC so when a bank failed people lost their money. This loss of middle-class money is what caused the Depression, because the middle-class had no money to spend on goods and services. But that was then; now middle-class accounts are protected by the FDIC. If debt was reduced through fire-sale auctions many big business would have failed, which would have been bad for India and China, where they outsourced jobs to at a frantic pace, but maybe not so much for the US, where small business has created most jobs. Much lower overall debt, thanks to the fire-sale auctions, combined with less competition from now-bankrupt large competitors may actually have been good for the economy. We’ll never know.
Myth: The majority of people foreclosed on are deadbeats, with sub-prime loans, who bought more home than they could afford.
Fact: The majority in default, by dollar volume, is by far prime loans, not sub-prime loans. These are largely people who fell on hard times, saw the value of their houses drop, saw their incomes drop, but did not see the cost of their loans drop due to non-market forces. There were (and remain) some condo-flippers, people using liar-loans to buy palaces, and other malarkey. There were also a great many dishonest mortgage brokers and crooked appraisers.
Myth: Foreclosures increase home prices.
Fact: I’ve debunked this more times than I can count. More inventory does not increase house prices. Recent house price gains are the result of less inventory, sometimes because of foreclosure pipelines slowed by Robogate, sometimes voluntarily on the part of the banks, but in any event fewer foreclosures means stable or higher home prices. That doesn’t mean we don’t have to find a floor for the housing market — we do — but we don’t have to view foreclosure as the only option available to make that happen.
Myth: People cheat; banks don’t.
Fact: Banks regularly cheat. When a person cheats a bank they go to prison; when a bank cheats a person the banker gets a bonus.
Myth: It’s a good idea to pay your second mortgage but default on your first if you cannot afford to pay both.
Fact: This is absolutely untrue. Your bank may say so but don’t listen (see the prior point about banks cheating). Except for first loans for a house you live in any loan above the value of a house can be discharged in bankruptcy, including second loans. Banks know that, and this gives borrowers much more leverage to renegotiate than banks will ever admit. Repeating: never, ever pay a second lien loan before paying your first.
Myth: Fight hard enough, buy a book, hire a non-lawyer “modification specialist,” and you’ll get a free house.
Fact: No, you’ll get kicked to the curb. Hire a high-quality, ethical foreclosure defense lawyer and they might win a modification, but free houses are extremely rare. Even when awarded, which is virtually never, banks can still often come back and demand some money for them. Your odds of ending up with a free house are probably better if you use your house payment to buy lottery tickets than arguing many of the theories I’ve heard (the lottery ticket quip is sarcasm: don’t try that either). Hire a licensed, ethical, and competent lawyer if you can’t afford your mortgage payment. Trying to negotiate with the bank yourself is usually an awful idea; call center workers tend to be sociopath like liars. Unless you’re a lawyer, and even then except in unusual circumstances, it’s usually best left to other lawyers.
Myth: The US is doomed; we’ll never dig out of this mess.
Fact: I know it seems awful but we’re not doomed. We’ll be OK, but it will take an honest dialog, hard work by public policy makers and bankers, and time. Right now time is the only one of those that seems to be substantively happening.
Four Year Old Foreclosure .. Oops, Wrong Bank
“Equity imperatively demands of suitors in its courts fair dealing and righteous conduct with reference to the matters concerning which they seek relief. He who has acted in bad faith, resorted to trickery and deception, or been guilty of fraud, injustice, or unfairness will appeal in vain to a court of conscience, even though in his wrongdoing he may have kept himself strictly ‘within the law.’” Epstein v. Epstein, 915 So.2d 1272 (FL 4DCA, 2005), emphasis added.
I’ve written several times about my own foreclosure. I purchased a house with a girlfriend, the idea being it would appreciate then she would refinance and pay me back the $75K I brought to closing.
First, let me say to readers, friends .. this is an awful idea. I’d say don’t try it at home, but it’s more accurate to say don’t try it on a home. :)
Predictably, we quickly split up and I eventually purchased my own house, that I’ve since paid for.
My ex-girlfriend still lives in the other and soon after we split I asked the “bank” — knowing then virtually nothing about the mortgage industry — what to do. ”Stop paying for three months then you can short sell it,” they answered. ”This is a full-doc loan with a substantial down-payment, no second, in an area with rapidly decreasing value; a short sale should be easy.”
I followed their advice, even going so far to paint, improve landscaping, and pretend I really was selling a house rather than mitigating a breach. That worked well because I received two short-sale offers, both above generally acceptable values. One was for cash and the other a 50% down-payment on a pre-approved loan.
Both legally binding offers had clear, unambiguous deadlines, and I was asking the bank for no concessions other than to close the deal. That is, I was attempting to mitigate a breach in good faith. This wasn’t a strategic default, though I do not see anything wrong with strategic defaults; this was “owning” a house with an ex-girlfriend and reasonably desiring not to.
My “bank,” perennial bad-boy Aurora Loan Services — who had “purchased the loan” from the originating “bank,” GMAC not long before — accepted the offers months later, after they’d expired and after the value of the house plunged. Needless to say, those buyers were long gone.
While Aurora was extremely slow to mitigate the breach they’d induced they were extremely fast to hire fraudster David J. Stern to file a foreclosure.
I honestly find many foreclosure stories boring, and a little sad, so I’ll cut to the end: the latest law firm — the formerly venerable Broad & Cassel — filed their third amended complaint, and an umpteenth copy of the note; that is, the loan. It is clearly and unambiguously endorsed to Deutsche Bank, who is named nowhere in the lawsuit.
Deutsche Bank, the owner of the loan, appears nowhere in the foreclosure except on the note itself. Assuming Stern didn’t forge the note — which, for Stern, is admittedly a big assumption — I’ve been sued by the wrong bank.
At this point, I’m ready to write my own foreclosure.
This should have been a short-sale years ago, with little or no loss to investors. Instead it’s turned into a fiasco: years of protracted litigation and junk fees as Aurora continues to slog along. No doubt the loss severity will reach some threshold — 100% give or take a little — where they’ll magically figure out how to either prosecute their foreclosure or reappear and offer to close this never-ending saga.
Every month investor losses needlessly mount. Every month my credit sits in the tank. Oh yeah, and every month Aurora continues to collect higher servicing fees.
If Aurora had fulfilled their obligation to investors and to me to mitigate this breach, and closed that short sale, they would have collected nothing for the past couple years. Zero is much higher than the net amount I suspect they’ll end up with on this loan after the inevitable lawsuit against them by investors and/or the mortgage insurer.
Aurora can forget a statute of limitations defense: every month this continues they reset the clock for the inevitable fraud claims.
Forget the “living for free,” nonsense: if I amortize the amount I put down for that house, the payments I made, and the time I lived there I could have purchased it for cash at its current value. My ex-girlfriend has been living for free for years (no comment on my current longtime girlfriend’s feelings about that), but she is not me.
At least one law firm that worked on this fiasco, Stern — who Broad & Cassel has plead deserves to be paid for his malpractice — has disappeared in a fabulous and famous explosion of fraud after my data proved he was a sociopathic liar. Boom.
The second law firm, outfit run by Elizabeth Wellborn, quickly vanished after I wrote to Lizzie that I looked forward to finding out who her “friends at the courthouse” that will “speed your eviction” are, a statement she’d posted on her website. Ciao.
I have no idea what’s happened to Aurora’s OCC loan reviewer, Allonhill, after I found the company was founded and run by the same woman who’d run a prior company, Murrayhill, that created and audited Aurora’s default practices. I suspect it’s see ya’ Susie.
At some point I hope to find out which trust actually owns this loan — even with my large data sets my own loan has disappeared — so I can work with the investors and the mortgage insurer to bring about some justice to Aurora Loan Services. They deserve to join the ranks of the incompetent vendors they’ve hired.
Something is seriously wrong when a borrower spends years trying to bring a foreclosure to fruition only to be frustrated by vendors of the servicer — who, thanks to Lehman’s bankruptcy, may not even have paid for servicing rights — at the expense of bond investors and the mortgage insurer.
Foreclosure is what lawyers call an “equitable remedy.” Any party with “unclean hands” is theoretically unable to receive “equitable relief,” in courts operating under equity, mainly foreclosure and family court. The rule is easy and ancient: if you lie you lose.
Dismissal for unclean hands seldom happens though strict enforcement would be better for everybody that matters. Investors and mortgage insurers could sue servicers and their lawyers for the losses as the cases are dismissed. Judges would clear their dockets and, thanks to malpractice insurance, investors would get paid. Investors would still be able to force borrowers to pay something under a doctrine where you can’t get free houses, but that something would likely be something affordable.
Hopefully I’ll get the chance to work with the genuine parties who lent me money to rip back the money Aurora meant to make for month after month of delay, for this loan and every loan like it.
MBA & Florida Foreclosure Mill Lawyers: MBS Bond Investors Aren’t “Frustrated”
Housing Wire published an article, Nightmare continues for Florida foreclosure system, that meant to blame foreclosure defense lawyers for slow foreclosure processing times. However, the article inadvertently highlighted a different but more genuine cause for the slowdown in the swamp.
Two lawyers are cited, David Rodstein of the Rodstein Law Group, and Jane Bond of McCalla Raymer. McCalla Raymer is large foreclosure filer in other states, though they’re a relatively recent entrant to Florida. The Rodstein Law Group is definitely a new firm, as I’ll explain later.
“It’s not as bad as it seems,” the article quotes Rodstein, speaking about the backlog of Florida foreclosures. ”It’s much, much worse.”
Rodstein explains his reasoning: “Borrowers can hire these (foreclosure defense) attorneys for a small monthly payment — much less than the mortgage — and the attorney can come in and easily delay the case for a year plus.”
Bond notes the problem escalated after the firm run by disgraced lawyer David J. Stern blew up. One bank went from having six lawyers in FL to 26, she adds.
Since I don’t know which servicer she is referring to I can’t check my database to see who these new firms might be. I strongly suspect two of these new firms include McCalla Raymer and the Rodstein Law Group.
“The judges are frustrated,” Bond notes. “The attorneys are frustrated. The servicers are frustrated. Everyone is frustrated.”
I’m frustrated too because, you see, Rodstein worked for disgraced and shuttered law firm Ben-Ezra Katz, and whined about the pace that his former employer was forced to turn over files to government-owned Fannie Mae. It was this slow, disorganized turnover — and the reckless lawyering that led to it — which sent our court system reeling and have caused massively higher loss severities to MBS investors.
“I really wish there was more time to do this in a more orderly manner,” said then Ben-Ezra & Katz attorney David Rodstein to the Palm Beach Post on Feb. 25, 2011, Fannie Mae wants files back from fired firm.
Let’s repeat that: the Mortgage Bankers Association asked a lawyer who worked for a firm that was shuttered based on ethical issues — and who then worked to delay handing files back to banks — to chair a committee and lie that it is foreclosure defense lawyers who slowed down foreclosures.
After almost exactly one year Rodstein apparently forgot that he actively worked to slow the transfer of files back to Fannie Mae, which as the Housing Wire article correctly notes, ground the entire FL foreclosure system to a halt. Now a lawyer directly responsible for that slowdown blames the dysfunction on foreclosure defense lawyers rather than accepting any form of personal responsibility.
As for Bond she surely knows that the General Counsel of her new employer is former Fannie Mae lawyer Susan Reid, who had something to do with attorney supervision in Florida. I’d like to be more specific on Reid’s responsibilities but the FHFA, the government agency overseeing Reid’s former employer Fannie Mae, refuses to answer Freedom Of Information Act requests. Fannie argues that they’re a “private” company, albeit one who’s soaked up $180 billion in taxpayer dollars along with cousin company Freddie Mac, and not subject to FOIA disclosure.
I’m sure readers will be shocked — shocked! — to learn that Reid left Fannie Mae after just under 19 years there, in Sept., 2010, right after Stern’s firm was exposed as a fraud-factory and exploded Death Star style. Reid worked for Fannie when they blew off a report from Nye Lavelle that decisively proved Stern was a crook.
It’s telling that these are the two lawyers the MBA chooses to chair a panel on the subject about why foreclosures linger in Florida. But it’s even more insightful that neither Rodstein nor Bond told reporter Jon Prior about the role they or their firms played in the meltdown.
Bond is right about judges being frustrated. Just today I heard a judge literally screaming at a foreclosure lawyer about her inability to “responsibly” handle these cases as she argued to delay a case. As for the other two “frustrated” groups, foreclosure lawyers and servicers, they can find the source of their frustration in any mirror.
There are two groups notably missing in Rodstein and Bond’s list: investors, who actually funded the loans, and borrowers trying to bring their cases to resolution. I realize that to Rodstein and Bond borrowers and lenders exist just to feed them fees but you’d think they’d throw them a crumb of sympathy, especially investors who’s losses continue to climb.
Bond investors, the organizations that wrote the checks, are entirely missing in their narrative.
Maybe Bond, Rodstein, and the MBA reason that both borrowers and lenders were dumb enough to trust servicers, so Rodstein, Bond, and the misnamed MBA — which doesn’t seem to hold any regard for bond investors whatsoever — believe neither has any rights. Bond holders and borrowers, in their world, are supposed to pay endless fees to the irresponsible, dishonest, and reckless agents and their attorneys that have mangled the borrower-lender relationship beyond recognition.
Rodstein’s former employer has slowed down more foreclosure cases than any Florida foreclosure defense lawyer, and maybe more than all of them put together. If Reid was overseeing FL attorney compliance during her time with Fannie Mae then the GC of Bond’s firm is responsible for slowing down even more cases than Rodstein. Except for Stern and Ben-Ezra themselves it is difficult to think of a worse choice of mouthpieces to whine about the pathetic pace of Florida foreclosures than these two liars lawyers.
“Fool me once, shame on you; fool me twice, shame on me,” is an ancient saying. By hiring the same people who caused the mess, rearranged at new law firms, who refuse to take any responsibility for the mess they caused, servicers are setting the system up for another meltdown.
I’d be happy to use my database to pull the Bar ID’s of any lawyer involved in the “old” system and deliver a list of lawyers — let’s call it a reputational background check .. OK, or maybe a blacklist — to investors who can and should insist servicers ban them from working on new cases. Pursuant to 2008 HERA’s mandate to minimize taxpayer losses the FHFA is obligated to ban the GSE’s from hiring these reckless, irresponsible, and dishonest attorneys and any firm that would hire them.
The Florida Bar has obviously decided not to take any disciplinary measures against these lawyers. Indeed, Stern himself still has a license in good standing to practice law; there has been no disciplinary action taken against him. The FL Bar even threw out an ethics referral from an appellate court.
However, self-regulation can and should deliver a simple solution: fire foreclosures lawyers that had anything to do with creating the current mess, as well as any firm that hired them. That alone will send a message for new firms, with new lawyers, to responsibly and respectfully respond to the judges frustration, a feeling which — despite being non-existent to mill lawyers — I can attest is shared by bond bond investors and borrowers.
Debunking the “Housing Has Bottomed” Meme
Cross posted from nakedcapitalism.com.
The normally astute Bill McBride of Calculated Risk has joined the chorus of cheerleaders to argue that an alleged decrease in housing inventory means that house prices are near their ethereal bottom.
Living in W. Palm Beach, FL, the epicenter of the foreclosure crisis, it seems more likely that analytical ethics related to housing finance is the only element nearing a bottom, and only then because the home price pundits on which people like McBride rely can’t go much lower.
McBride uses data from the National Association of Realtors (NAR), analysis by Goldman Sachs, trends in completed foreclosures, and traditional seasonal housing patterns to make his case.
My first inclination was to cross-reference whether the NAR data McBride relies on is before or after the NAR’s massive adjustment late December, when the real estate group admitted to overstating home sales by over one million in some years.
However, when I went to do preliminary research I found the NAR revised their post revision December sales estimate from +.5 percent to -.5 percent. I could almost hear them playing “Oops, we did it again,” as they wrote the press release. This group is so devoid of credibility nobody should use their estimates except maybe scholars writing about business ethics.
I’m one of the very few borrower-friendly analysts who somewhat admires Goldman Sachs, though in the same way I also admire a Bengal Tiger: they’re somewhat ruthless. But GS staffers, when faced with public policy versus morality issues, are like the characters in the movie Idiocracy who find the only thing they have in common is that they all “like money.” Their analyst may be correct, or they may be working — to quote prior internal email — on pumping another “shitty deal” like exploding CDO Timberwolf, structured-to-fail Abacus, or the financial destruction of Greece. Their reputation is better than the NAR, though their motives are not always clear.
Then there are those completed foreclosure figures. Yes .. they’re down. But only because the foreclosure processing packing-house came to a virtual stop, especially in high-volume states, thanks to a fraud-fest unlike any ever seen in US history.
Finally there is the argument that seasonal trends show a slight decrease in January inventory, which will nudge inventories higher (as in the some of the fall in inventories in January may be due to factors like sellers taking homes off the market, which means some of the reported improvement may not reflect fundamentals). I agree with this point: banks tend to ratchet down evictions during the holiday season and buyers tend to avoid moving in the middle of winter. But this seasonal adjustment will just make inventories higher. As the snow begins to melt away, and the unofficial foreclosure moratoriums end due to the AG settlement, if the banks open the floodgates inventory stands to spike.
I don’t want house values to fall through the floor. I own a house in Florida and expect the value to take a massive hit if the rocket-docket judges resume their reckless quest to throw fellow Floridians to the street. I stand to personally benefit on the tiny chance this relentless drive to deceive people into buying homes in an unstable market succeeds and stabilizes prices. But I’m neither delusional nor dishonest: there is not a single credible data point I’ve seen that home prices will increase anytime soon. They may stabilize if banks control inventory, but by definition that means buyers can wait to see what actually happens rather than what’s predicted to happen.
Cheerleaders should bet with their own money rather than just encouraging others to do so. There are many beautiful Florida houses for sale or in foreclosure within walking distance from my own home. If Jamie Dimon genuinely believes it’s a great time to buy a home then JPM should fund these loans, and retain the loans on their own books. If Bill McBride believes the same, he should come buy one.
Only government-owned Fannie Mae and Freddie Mac, the GSEs, are funding home loans, and they’re charging steep market risk premiums regardless of personal credit. Every borrower pays a quarter-point “Adverse Market Delivery Charge” regardless of his risk profile. Borrowers with, say, a FICO score of 810 and a loan-to-value ratio of 65% are going to pay an extra quarter-point in interest just because the GSEs say they cannot predict a market bottom, even if Bill McBride can.
Besides the GSEs there is the private secondary loan market. I’d argue it doesn’t exist but I searched EDGAR and it does: I found one publicly registered private MBS last year. That’s not a typo: Sequoia Mortgage Trust 2011-1 bundled 303 loans, the only apparent new publicly listed MBS. In comparison Countrywide had some months during the bubble where they’d create an MBS each month, usually for thousands of loans.
It’s noteworthy that the second densest population in Sequoia’s MBS is New York, NY, which has, by far, the longest foreclosure period anywhere in the country. So much for the theory that prolonged foreclosures, as opposed to anticipated housing gluts and uncertain markets, alienate investors.
As long as the private secondary market remains effectively dead and the gavels continue to slam on the foreclosures home prices will sway like a Banyan tree in a hurricane. Like that tree prices may go up a little, or down a little, but the real question is whether that tree, and the price of the house next to it, will be planted in the ground or floating in the Atlantic when the storm passes.
Alpha housing analyst Laurie Goodman of Amherst Securities estimates shadow inventory is about ten times higher than does housing data provider CoreLogic. Having worked through my own study of shadow inventory, comparing state-by-state delinquency rates cross-referenced to housing stock volume I concluded Goodman’s analysis makes more sense. However, there’s almost no point arguing because the fact that they are so far apart is a strong indicator that nobody has a good grasp on these vital metrics needed to call a market floor.
Warren Buffet noted in his 2011 roundup letter that last year he predicted “a housing recovery will probably begin within a year or so.” He goes on to note “I was dead wrong,” showing a level of self-confidence seldom seen in this field. Buffet predicts “housing will come back,” and he goes on to illustrate some positive trends, but declines to call out a specific timeframe.
As I’ve written in my own shadow inventory analysis the OCC reports there are about 52.25 million US homes with a first mortgage. But the 2010 US Census reports there are 74.8 million owner-occupied homes and that that 50.34 million of those have a mortgage. There are 131.8 million “housing units” to shelter about 313 million people. These housing figures simply cannot be reconciled except to the conclude that a) the US has an enormous number of post-bubble houses, b) many of those were mortgaged during an enormous housing bubble, and c) far too many American’s remain overleveraged with housing debt, and d) young people who could and should be forming houses are buying are saddled with too much student loan debt to do so.
For buyers who want a home, not a house — that is, if your primary purpose is to shelter your family rather than your money — and you don’t want to rent because you plan to make improvements, don’t plan to move for a decade or longer, and can purchase with cash, it may not be a bad time to buy.
But for all other buyers, which includes virtually everybody, heed the hindsight of those who purchased homes at every other phantom market bottom and who are now underwater. Wait until you see price appreciation, in the region you want to purchase, for a quarter or two. Your house may cost a few thousand dollars more in the short-term than at the genuine bottom but, in the long run, it’s a safer bet than losing tens of thousands of dollars in an unstable market.
