Yohoo, anybody home?

One of the Times’ best reporters, Gretchen Morgenson, has a great article in last Sunday’s paper about the difficulties in finding anyone at a lender with the knowledge and authority to rework a mortgage loan. Much of what she writes of: missing documents, no records of who holds title, no idea who even still holds the loan, is also applicable to the  mess one encounters when trying to buy a house when the borrower’s in trouble.

A commentator to this blog suggested that buyers skip the services of agents and just call the work-out department of a local bank where, he promised, the caller would find any number of helpful individuals eager to do a quiet deal to get a bad loan off their books. If only.

My guess is that the commentator still clings to the vision, accurate thirty years ago, of a friendly hometown bank that loaned money to George Bailey’s pal, Ernie the taxi driver, and then held that loan while Ernie drove fares around Bedford Falls and earned enough to pay it all back. Should Ernie get drunk, wreck his taxi and default on his loan then someone who wanted to buy Ernie’s house could call up Uncle Billy who, eye visor on, sat in a back room toting up figures and calculating what price the Savings and Loan could accept while still remaining solvent.

But Mr. Potter runs Bedford Falls now, not George, and Potter grabs Ernie’s loan, bundles it together with those of all the other borrowers in town and ships the whole package off to Wall Street where wizards combine those loans with a million others, pay Moodys to declare them all safe as all get-out, then slice and dice them and sell off the slices to people all around the world. So now, when you want to buy Ernie’s house, who do you call? Mr. Potter doesn’t have the loan and is in no position to discuss the matter (as if he’d even take your call, the bastard!). The Wall Street Wizards have no idea who owns what slice of Ernie’s loan and don’t even know who Ernie is. And they sure as heck aren’t interested in acknowledging a problem because they sold it off and pocketed their profit five years ago. Forget it, Buddy.

So Ernie’s up the creek. He’s got a buyer for his house who is willing to pay enough, if not to make Ernie whole, then at least enough to pay off most of the loan and reduce Ernie’s liability, but there’s no one around to deal with the buyer or accept his money. The house sits, with a forelorn Ernie languishing inside it, drowning his sorrows with Wild Turkey until a sheriff shows up, throws Ernie over the bridge, with no Clarence to save him, and takes possession of the house for some banker in Shanghai. No maintenance is performed, the house deteriorates and, finally, is sold for pennies. No one is better off.

California’s home sales are up these past few months because so many loans have been foreclosed and title has passed to someone with authority to unload the foreclosed houses for pennies on the dollar. It would seem to make sense for lenders in the east to save time and start recouping their losses by working with buyers and sellers now, cooperating in sales that could bring in more money than a foreclosure sale, years before the actual foreclosure. But no one seems to have any reason to do that. As noted, the loans have been sold off to foreigners and other chumps, the banks are failing anyway and their staffs have all been fired. So unless something changes, I think we’ll continue to see desperate sellers cling to their houses and their prices, frustrated buyers walk away, and sales continue to stagnate. A cheery picture, all in all.

Update: More on the difficulties of finding anyone to listen to a deal proposal. “Loan services are overwhelmed”. I still think that an aggressive lender could get organized, get rid of its crap and be years ahead of its competition when the economy recovers. Maybe Dick Fuld could help, if he’s not too busy.


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23 responses to “Yohoo, anybody home?

  1. McMartin

    Trying to help property owners that were upside down and looking to do a short sale was impossible. Documents were continually lost, files were transferred to different personnel who had to be brought up to speed on the file, and the bank employees thought they were doing my clients a favor by considering the shortsale for four or five months. The employees didn’t seem to understand that they were supposed to minimize the banks losses. The bank employees clearly have no expertise, working knowledge, or clue what they are doing. After 5 or 6 months if a deal was close to being reached, the banks would at the last minute require the owner to sign an unsecured note for the amount they were giving up.

    Some believe the bundling of mortgages makes it impossible to determine who the owner is. The owner is located when payments aren’t made to commence the foreclosure. Ownership was hard to determine until the foreclosure started.

    Banks don’t need to worry anymore about reducing losses. The government will simply prop them up. The system is now broken.

  2. Pingback: Instapundit » Blog Archive » BANKS BLOWING IT ON FORECLOSED PROPERTIES? I had thought that one business opportunity would involv…

  3. figureouter

    Yes, well, you’re absolutely right of course. Which is why I stopped paying my mortgage.

    I now live in a free $400,000 home.

    Anybody who shows up wanting a mortgage payment had better be prepared to prove they own 100% of my note. I’m betting $400,000 that they can’t do that.

  4. Some Guy

    “He’s got a buyer for his house who is willing to pay enough, if not to make Ernie whole, then at least enough to pay off most of the loan and reduce Ernie’s liability, but there’s no one around to deal with the buyer or accept his money. “

    Um, or, as is the case in California, Ernie sits in his house because it’s only worth what someone is willing to pay, and no one is willing to pay anywhere what Ernie took a mortgage out for. After all, Ernie never intended to pay off his mortgage (nor did he ever have sufficient income to do so). A rational buyer who intends to live within his means and eventually pay off the mortgage amount within his lifetime would only accept a mortgage of 30% of Ernie’s.

    But, you know, I’m sure it’s that darn red tape at the banks that’s keeping people from buying.

    • christopherfountain

      Certainly a valid point, in many instances, but I assure you, the situation I describe is happening too. And if you notice, my heart-rending tale didn’t have Ernie walking off scot-free, just, maybe, with less liability on his note because the bank could sell his house for more to a willing buyer than at a foreclosure sale.

  5. Adrian

    Very funny and, unfortunately, accurrate potrayal of the current mess. Found you via Instapundit. Will have to check back more often.

  6. Dan Trimper

    What kind of title will a purchaser get if there is no one to sign off of the foreclosed premises? Someone along the chain must have responsibility to make the title good and merchantable.

  7. SR

    We went through this in the early 90s’- had some rental property, but rents dropped and property value fell through the floor. Bank failed, we filed Chapter 11 to try to renegotiate the loans with the FDIC, offered to pay 50%, but they weren’t interested; coverted to Chapter 7 and walked away, and the FDIC netted 25% at foreclosure.

    Sad to say we had to go through this again because the lending got even looser than before.

  8. Andy Freeman

    Some state is going to pass a law mandating that a borrower be able to request a copy of the mortgage from the servicer for a reasonable fee, say $25 with the penalty for “we can’t find it” with 30 days being that the loan is considered null and void, the lien eliminated. and the borrower getting a free and clear title wrt said mortgage.

  9. austin tx

    What you can try is going to the auction, and when the property isn’t purchased, ask who the attorney is who can be contacted after the auction. This attorney should have the authority to sell you the property. However, be very cautious about what you are purchasing in terms of the title.

  10. Braveheart

    I’m puzzled.

    Why can’t the title location be determined by tracing where the mortgage payments go?

    • christopherfountain

      As i understand it (and I’m not saying I do) the payments may go to a bank that serves as a “loan servicing agent” but doesn’t actually hold the mortgage. So where does that bank send its payments – who pays it? Like you, I’d think that it shouldn’t be all that difficult to figure out but as Morgenson’s article discusses, it is. The judge who tossed the Wells Fargo foreclosure suit because they couldn’t prove they actually owned the loan may just stir things up enough to get things fixed. Here’s hoping.

  11. Curly Smith

    I think you’re missing the purpose of the bailout, namely that the government will assume “toxic debt”. In the case described, Joe HomeOwner is in default but has located a buyer that will guarantee the title holder a small loss. However, if the title holder does nothing then the debt will become “toxic” and the benevolent government will assume the note. Thus, it’s in the mortgage holder’s interest to not take the small loss. Remember that bailouts reward bad behavior so you should expect more bad behavior.

  12. Right Brain

    McMartin has it right: I am four months into a short sale with WaMu and counting: the strangest thing yet is they are using a Florida office to handle a Long Island, NY short sale, they have no idea of the local market, tender ridiculous counter-offers (the first one greater than the loan, duh) and it has taken four months to do what I could do in a couple of hours if it was my own money I was trying to retrieve. Government bailouts just subsidize incompetency.

  13. Poole

    There was a time when banks would file an “Assignment Of Lien” with the County Clerk when ever a lien was re-sold.

    Since the people who handled the filing of these documents were not a “profit center”, there was never enough personnel to handle the volume of work.

    Now we have MERS – the Mortgage Electronic Registration System which acts as a clearinghouse for liens in the secondary market. Seems to me that they should have a very good database for determining who owns which liens.

  14. David Herr

    It is impossible to modify securitized mortgages, or, for that matter, to accomplish “short sales” (sales yielding less than the amount owed). To understand why, one must look carefully at what happened to mortgages during the boom.

    Step 1: a bank or loan broker or other entity makes a mortgage for a house. That is the point at which “underwriting” took place — the evaluation of the borrower’s income, credit history, and intent to occupy (vs. rent and/or flip). The party extending this mortgage is well compensated with up front fees and points.

    Step 2: the original entity sells to loan to another entity that exists, as a special purpose entity, to buy up loans and pool them in a trust. Sometimes, that trust is set up by the very bank that issued the mortgage in the first place. More fees are paid. It is critical that the trust have proper documentation of the mortgage’s assignment to the trust.

    Step 3: the trust “securitizes” the mortgages, by dividing the pool into “tranches” of risk — in other words, dividing the pool into slices of payment priority, e.g., the first 50% of payments, the next 10%, and so on. The pool then creates securities backed by those streams of income. The yields on those securities varies according to the risk level. On a 6% APR mortgage, the tranche backed by the first 50% of payments might yield 5%, while the tranche backed by the last 20% of payments might yield 7%. The trust then sells those securities, to parties who often borrowed money themselves to buy those securities (sometimes over 97% of what they were buying!).

    The key thing to know about the trust, which holds the mortgage, is that it is governed by a so-called “pooling and servicing agreement,” and those PSAs in many cases FORBID mortgage modification and forbearance of principal. There is a reason for that: in the case of a delinquent borrower who is underwater on the mortgage, the people holding the securities backed by the first-in-line tranches have an incentive to mark down the principal to protect their interests and squeeze out everyone below them in line. If they could do that willy-nilly, the securities backed by later-in-line tranches would have been impossible to sell, because they could not have been rated.

    Hence, loan modifications and short sales become impossible, because the people holding securities backed by later-in-line tranches would sue. I really see no way to get around this — government coming in later and voiding the rights of these bondholders would be constitutionally problematic, and would freeze everything for years while the cases wound their way through the courts.

    That leaves the trust, through its servicing agent (often the very bank that issued the loan in the first place!) to foreclose. At that point, the borrower can try to delay the process by making the pool prove that it is the true owner of the mortgage (i.e., that it was properly assigned). That will delay things a while. Additionally, the servicers are so overwhelmed with the volume of foreclosures that it can take a long time before the sheriff will show up to put people out; before that, one can live in the house rent-free (property taxes may be another matter, although after the foreclosure, those are the new owner’s problem).

    In my opinion, the proper solution to this problem is to allow all people who were living in their foreclosed house to rent it at fair market value, provided that that rent is no more than 3X their average income for the past 3 years. From that rent, property taxes, insurance, and MAINTENANCE SET-ASIDES would be withheld. The property would be worth a multiple of that net rental income, at which point its value is clarified and the bank can sell it. The lease would be for life, adjusted annually for CPI, with the annual maintenance reserve adjusted separately for cost increases in that sector, and any legislated property tax increases would be passed through to the tenant. Insurance would also be updated annually for replacement cost, and any increased premium would also be passed through to the tenant. The tenant would have the right of first offer to purchase the property at fair market value if the owner wanted to sell.

    This would lead to a bottom and eventual recovery in real estate markets, and avoid a surge in homelessness from foreclosures, and the destruction of neighborhoods with vacant houses. It is also the most moral thing, since many of the people being foreclosed put nothing down to begin with, so a loan modification that dropped their principal to 90% of current fair market value would give them a windfall. If they get a windfall, it should be in the form of cheap rent that will, over time, take up a progressively smaller portion of their income, allowing them to live decently while SAVING FOR THEIR OLD AGE.

    If the new owners won’t play ball with that scheme, cities should use eminent domain to get it done, since a property that stays vacant will get stripped and squatted in.

  15. Whoa. Andy Freeman? THE Andy Freeman, from Baltimore?

  16. We have a contract accepted by Citibank for cash for 85% of their original asking price, which is also 72% of the price it sold for last, in 2006.
    Despite the holidays, they moved very quickly, first to counter, and then to accept. It’s with the title people right now.
    I’m guessing the cash part makes the difference.

  17. allison

    Mr. Herr,

    I have never heard such a reasonable solution. Thank you. It’s brilliant.

  18. Jim

    See this article about Lewis Ranieri, the “father” of mortgage-backed securities, which includes a portion of a transcript from a talk he made at the Milken Institute in 2007.

    Here’s the most interesting part of it, but you should read the rest if you are interested. This is one hell of a mess.

    (Note: this is Ranieri speaking) The real dilemma for me and I think the real issue . . . will be, we’ve never had to do substantial restructurings in housing in mortgage securities.

    They were always in portfolios, and that made it very easy or at least, we didn’t have to get 409 people or we didn’t have to rent the Nassau Coliseum to have a bondholders meeting; we could do it very quickly. The vast majority of these loans, all of these theoretically, problem loans, are in securities, which have been tranched and then tranched and then re-tranched . . . [in] mortgage securities and then some tranch is put in CDOs. In a very long meeting, last Monday, where we tried to collect virtually everybody in a room, it became evident that there are a whole host of unforeseen technical problems if you try to restructure or do large amounts of restructuring within the security, some of which, we had never even heard of or thought about.

    One of the accountants – you know, it will not be unusual, in some of these pools to have to restructure a third or more of the pool and we only have four [big accounting] firms and we had three of them in the room and one of them raised his hand and said, well you can’t do that. If you restructure that many loans, you’re going to taint the Q election and FAS 140 and what he was basically saying in English for the rest of [us] poor fools, was that there is a presumption when you – when a bank sells loans, into a securitization that it sold the loans . . . And what he was saying is wait a minute, if you guys can restructure all these loans without going back to bondholder, you obviously have control and you’ve just tainted 140 and Q election.

    Boy that was a big deal and I’ll use that as a simple example of one other I’ll give you, is the ability to put everybody in a room, even if you could find them all and get their assent, is slim – I mean it’s not very practical.

    Well, wait a minute; we have to restructure the loans. The worst thing you can think of is freezing the pool and not being able to do what we need to do and I don’t know how long it would take us. I mean, you know you’ve just basically told us we now have a problem that we don’t quite exactly know how we’re going to fix – and another example of how crazy we can get is, when we restructured mortgage loans, in the past and we’ve done this many times, we actually really know what to do.

    We restructured the loans and it was always better to negotiate around the borrower, assuming there was a borrower and for purposes of this conversation, we’re talking about homeowners, not speculative buyers, flipper and all the other guys playing games; we’re talking about people who bought a home and live in it and we, historically, structured those loans. We never send out a 1099.

    We basically assume that was a renegotiation, end of story because it was in our best interest, as the lender, to do that but in a mortgage security, you don’t have that freedom because you’ve got get the outside accountants to sign off and the outside lawyers and the outside accountants and lawyers said, time out and I volunteered and said, well, wait a minute. I’ve been doing it this way all along and one of my friends [who is] now running one of the best of the combat servicing operations says, well, I’m doing that now, too and we were told, well you’re doing it wrong. You’ve got to send out a 1099.

    That’s an incredibly dopey idea. We’re restructuring a loan around a borrower; he can’t afford the loan and now we’re going to take the NPV of the change and send him a tax bill so the IRS can chase him . . .?

  19. My parents purchased a house for us to live in. Basically they sold a rental townhouse and put the money made into a rental house. I lost my job October 2007 and have been working temp accounting jobs since then. We moved out of the house 6 weeks ago into rental house at a cheaper rent. We just finished cleaning up the house and yesterday they put a for sale sign on the house. Hopefully they will be able to sell. Friends of ours have stopped paying their housepayment. Not sure what is going to happen to their house. How long can they live there before they have to move out?