Posted by kevin on October 22, 2012 under Foreclosure Blog | 
In February, 2012, 5 Too Big to Fail banks, the federal government and 49 of the States announced a $25B settlement of the “robo-signing” investigation. From this settlement, States recently received $2.5 billion from the major banks for foreclosure prevention and related help for homeowners. But much of that is not being used for those purposes.
So what is supposed to happen to that money?
The answer to that should be found in the Consent Judgment, the document signed by all 49 states, the federal government and the banks, AND by the federal judge approving the settlement. Actually there are five consent judgments, one for each of the banks, but all containing identical language for our purposes. This language says:
“To the extent practicable, such funds shall be used for purposes intended to avoid preventable foreclosures, to ameliorate the effects of the foreclosure crisis, to enhance law enforcement efforts to prevent and prosecute financial fraud, or unfair or deceptive acts or practices and to compensate the States for costs resulting from the alleged unlawful conduct of the Defendants. Such permissible purposes for allocation of the funds include, but are not limited to, supplementing the amounts paid to state homeowners under the Borrower Payment Fund, funding for housing counselors, state and local foreclosure assistance hotlines, state and local foreclosure mediation programs, legal assistance, housing remediation and anti-blight projects, funding for training and staffing of financial fraud or consumer protection enforcement efforts, and civil penalties.”
(See pp. B-2 and B-3 of Exhibit B of the Consent Judgment.)
But the money is not being used for these purposes in many states, according to two different sources.
A report by Enterprise Community Partners called $2.5 Billion: Understanding How States are Spending their Share of the National Mortgage Settlement says that “despite the language contained in the settlement, a number of states have diverted the settlement funds away from housing and foreclosure prevention activities.”
A more recent article by ProPublica, the independent investigative organization, is titled “Billion Dollar Bait & Switch: States Divert Foreclosure Deal Funds.” Its analysis concludes that “[s]tates have diverted $974 million from this year’s landmark mortgage settlement to pay down budget deficits or fund programs unrelated to the foreclosure crisis… . That’s nearly forty percent of the $2.5 billion in penalties paid to the states under the agreement.” This interactive map and table shows each state’s use of the funds.
How can this happen? Easy. No one has the public’s back on this. Why? Because one must conclude cynically that the real purpose of the settlement was not to help the people but to help the big banks. It was the big bank’s that bought off a huge potential liability for a few pennies on the dollar. Now that the States have some of that money in their hands, who is there to protect the borrowers that need help to save their homes? You would think, their elected officials. However, it appears, that for the most part, this may not be the case.
Posted by kevin on October 12, 2012 under Foreclosure Blog |
RealtyTrac reported that foreclosure activity around the country dropped to the lowest point since July, 2007. True or false? Good news or not good news?
When you delve deeper into the numbers, you see that the biggest decreases were in so-called “non-judicial” states. In those states, the lender is not required to file a lawsuit to obtain a foreclosure judgment. What happens is the borrower, at closing, signs a Deed of Trust. Under the terms of that document, upon default, the trustee is allowed to foreclose after proper notice. The process is very quick and certainly not owner/borrower friendly.
In states requiring judicial foreclosure, foreclosures are actually up. For example, Florida shows a 24% increase in foreclosures. RealtyTrac says that you could expect an increase in the judicial foreclosure states especially where the courts temporarily halted foreclosures during the robo-signing controversy.
Well, New Jersey is a judicial foreclosure state and foreclosures were put on a hold for about a year beginning in late December, 2010 because of the robo-signing scandal. Inventory of mortgages in default increased. Then, lenders put a hold on foreclosures pending the Supreme Court decision in Guillaume. That happened in late February. At that time, the talk among the foreclosure bar (that means attorneys active in foreclosure practice) estimated that New Jersey was backed up over 75,000 foreclosures. You can rest assured that the lenders are not going to walk away from these properties.
So, why do we not see a deluge of foreclosure activity in New Jersey. Well, my opinion is that the lenders realize that the real estate market is weak. If they flood the market with thousands of foreclosed homes, the market will only get weaker. Better to sit on properties and spread out the process so that the lender can get a better price on each foreclosed home.
Sorry to be the bearer of not so good news.
Posted by kevin on October 10, 2012 under Foreclosure Blog |
Yesterday, the feds filed suit in Manhattan against Wells Fargo for bilking the Federal Housing Administration out of hundreds of millions of dollars. The complaint alleges misconduct going back to 2001 whereby WF recklessly issued mortgages and made false certifications about their condition to FHA which then insured the loans. Many of these loans went bad and FHA was left “holding the bag”.
I love the quote from Preet Bharara, the US attorney who said.”Yet another major bank has engaged in a longstanding and reckless trifecta of deficient training, deficient underwriting and deficient disclosure, all while relying on the convenient backstop of government insurance”.
Banks need a license from the State or federal government to do business. That license comes with strings attached. The bank has to follow the law, including the directives of its regulators. One for the fundamental regulations involving mortage loans is that the lender is required to make a mortgage loan based primarily on the ability of the borrower to repay the loan and not on the value of the collateral. Deficient underwriting (or no underwriting standards) leads to making loans that people cannot afford to repay. This not only hurts the borrower, but his or her community, the people who bought the loans and the government which insured those loans.
So what the government is alleging is that WF hired a lot of incompetent people who ignored the basic tenets of mortgage lending, lent money to people who could not afford to pay it back (definition of a predatory loan), and lied to the FHA about it. Frankly, it appears that the US attorney is giving WF the benefit of the doubt in his statement by inferring that WF was just negligent or reckless. Many believe that WF and the other ‘too big to fail banks’ knew exactly what they were doing – they were making lots of money and passing the bad paper on to investors and the government (= taxpayers= you and me) who got stuck with the loses.
We are seeing a slew of activity by prosecutors on the eve of the Presidential election. One must wonder why it took so long. I hope that when the election is over and the dust has cleared, these lawsuits do not evaporate.
Posted by kevin on October 8, 2012 under Foreclosure Blog |
In its editorial page, the Wall Street Journal took a shot at NY AG, Eric Schneiderman, for filing a suit against JP Morgan Chase for misrepresentations made by Bear Stearns (later bought by JPM at request of feds) to investors of mortgage backed securities. Somehow, WSJ thinks that 1) BS (how appropriate) was “sloppy” in bundling loans into securitized trusts rather than knowingly or recklessly putting loans into the trusts and screwing investors; 2) the fact that BS bounced loans back to loan originators but did not pass the savings along to duped investors was OK because it was somehow allowed by the trust documents, and 3) it was unfair to JPM to help the government out and then get sued.
Let’s deal with those arguments. First, BS was just sloppy. I guess the WSJ would want you to believe that originators and mortgage brokers were making loans, and then afterwards BS got the bright idea to package those loans. So, BS went out and bought loans for a given securitized trust. Unfortunately, BS got hoodwinked and got stuck with lots of bad loans. Don’t think it happened that way. BS put together hundreds of trusts which contained thousands of loans. Given the time constraints of marketing securitized trusts, the issuer cannot willy nilly buy loans for a trust. BS made deals upfront with originators and brokers to fund mortgages, and to buy them if they met with BS’s underwriting guidelines. So, BS was telling the originators and brokers exactly what type of loans it would buy. I just settled a case with JPM involving BS trusts. The loan originator, in a sworn deposition, testified that BS told him what had to be in the loan documents and what the borrower had to produce to get the loan. According to the broker, without following BS’s underwriting guidelines, BS would not buy the loans. So, BS not only knew what it was getting but got exactly what it asked for.
Second, trusts require insurance including credit default swaps, to protect investors against the bad loans within the trust. One of those was Ambac which sued BS and JPM because BS was bouncing loans back to originators (and getting a refund) while it made a claim against the insurance. So, BS was getting paid twice. Of course, those loans fell out of the trust. Say 10% fell out of the trust. That means that if BS did not pass the savings along to investors, the investors were being short changed by 10% of the proceeds used to fund that trust. WSJ praises BS for it slickness in drafting documents which did require a pass thru to investors. So, in reality, BS either beat the insurer or the investor or both. Very slick.
Finally, JPM purchased BS at an incredible discount. Why? Because JPM knew that it was buying a lot of crappy paper, and paid accordingly for the assets of BS. So, JPM had to know that there would be fallout from the BS purchase. I recently settled a case with JPM over predatory loans made based on BS underwriting criteria. Got a fair amount of money from JPM. I am sure that JPM was not taken by surprise when they first say my lawsuit.
I like the WSJ and read it everyday. However, I do not buy everything it tries to sell.
Posted by kevin on October 2, 2012 under Foreclosure Blog |
Eric Schneiderman, the New York AG appointed by Obama to co-chair the federal/state probe into the 2008 mortgage meltdown (called, I believe, the Residential Mortgage Backed Securities Working Group), filed suit against JP Morgan Chase alleging widespread fraud by the company’s Bear Stearns unit in the sale of mortgaged backed securities.
You may recall that Schneidermann was a real carnivore who threatened to go after not only the big banks but the securitized trusts. Together with AG Biden in Delaware and the tough women AG’s in California, Massachusetts, Illinois and Arizona, Schneiderman was standing up to the big banks on improper/illegal servicing practices. Then, the President appointed Schneiderman to the chair of the Working Group, the $25 Billion settlement went through, the servicer/banks are still conning the public into thinking that they are effecting meaningful loan modifications, and nothing much happened on the litigation front until yesterday. Forgive me if I appear cynical, but isn’t there an election in about a month.
Cynicism aside, this appears to be a positive event. It is alleged that Bear Stearns, which was bought by JP Morgan, defrauded investors by packaging and selling mortgages that they knew had a high likelihood of defaulting. Damages to investors are in the billions of dollars. Schneiderman is seeking unspecified damages. If Schneiderman aggressively litigates this matter, a substantial recovery could be in the cards. More importantly, a positive result can lead to more actions be AG’s and investors. One can only hope. On the other hand, if we see a settlement for pennies on the dollar, similar to the $25 Billion settlement, we can conclude that the government just wants to sweep this continuing mess under the carpet. Time will tell.
The federal statute of limitations is 5 years, and most state statutes of limitations for these types of offenses is six years. So time is running out. Let’s hope that the Working Group and the various AG’s “man up” and go after the banksters.
Posted by kevin on October 1, 2012 under Foreclosure Blog |
Predatory lending is sort of a catch all phrase dealing with lender impropriety. Last week, I was speaking with a judge whom I have known for years. He was assigned a mortgage foreclosure case because of the overflow calendar in his county. He said that the borrower’s attorney was claiming that the loan was predatory but the rationale for that conclusion was lacking in the judge’s opinion. I was asked how I would define a predatory loan. My response was that it could entail false advertising, a bait and switch, taking advantage of unsophisticated borrowers, equity stripping and the like. However, the definition which makes the most sense, and is consistently mentioned in OCC Advisory Letters is that a predatory loan is a mortgage loan that is based primarily on the value of the collateral and not primarily on the ability of the borrower to repay the loan.
Now, using that definition, we see that the vast majority of predatory loans happen with no-doc loans or stated income loans. No doc is self explanatory- the lender does not even require the borrower to list an income on the application. A stated income loan (sometimes called a liar loan) has an income stated in the application but the lender does nothing to verify the amount of income. In other words, the lender abdicates its due diligence role and then blames the mortgage broker and/or borrower when things go bad. However, the lender is the licensed entity and it is bound by bank regulations to check things like income and the ability to repay.
The judge then asked a pertinent question. Assuming that the loan is predatory, how do you assess damages? I told the judge that is the $64 dollar question. In thinking about that simple but compelling question, I think that I have come up with a simple, and hopefully, compelling argument. If the basis for lending is to put the borrower in a loan that he or she can afford, the appropriate damage is to give the borrower a loan that he or she could afford based on his current income or based on his actual income at the time of the loan. In other words, compel a modification that is affordable. That is what the loan was supposed to look like from the beginning according to OCC guidelines. Of course, lenders will say that such a remedy is too harsh. In selling that theory, the fundamental question to the court should be, why should the lender be obtaining a benefit by its violation of the law.
