UncleNasty
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quote:
ORIGINAL: Amaros
quote:
ORIGINAL: SilverMark
Well, with all due respect, an "activist Government" does follow the traditional Keynesian response to a LARGE economic downturn. Although Obama's response may be a bit overwhelming it is not without precedent, and is prescribed by a number of economic analysts. I am not sure that the 600,000 jobs thing might not be an over statement it might very well come to that. To sit and do nothing is not an option when you see the growing unemployment and a general malaise in almost all business activity.Not all the ills can be cured by government as we have discussed before but, to watch as the populace becomes more and more reticent to spend, and the unemployment grows is no time for inactivity. The government cannot be the cure all but, can indeed prompt action by others. I do not think that another round of stimulus checks is the answer, nor do we need more corporate bailouts but, the people in the trenches that work for a living need help, less taxes, an opportunity to support themselves and their families and this is how the present administration hopes to remedy the sick economy.
Owner is correct that the previous administration has left this huge mess and it is Obama's to fix but, without a crystal ball we are all just guessing to a degree. It is his to actually come up with something to help spur the economy back into some growth. I hope with all of my heart his cure fits the illness!
True, the fact that Paulson and Company have twisted the banks arms to get them to renegotiate mortgages and solidfy their value rather than buying mortgages outright reflects in large part the fact that that the personnel with the experience to sort out these complicated transactions on the taxpayers behalf simply don't exist - the entire regulatory arm of the government has been gutted - we've lots of new homeland security staff and border guards, but few people who understand the complexities of modern economics - our glorious leader expounding the depth of his grasp on economics:
“There’s no question about it. Wall Street got drunk — that’s one of the reasons I asked you to turn off the TV cameras — it got drunk and now it’s got a hangover. The question is how long will it sober up and not try to do all these fancy financial instruments.”
– George W. Bush, speaking at a private fundraiser, Houston, Texas, July 18, 2008
Other people do his thinking for him, he's busy.
It is important to know and understand that banks (in the vast majority of cases) no longer own the promissory notes, nor hold the mortgages. Thus they are not empowered to renegotiate the terms of either instrument - the P-note is the debt instrument and the mortgage is the security instrument.
"Renegotiate" is a term that could be thought of as synonomous with "loan modification," and this is becoming the real buzz word in the mortgage mess and industry.
Banks are rarely lenders of mortgages. Instead they serve as "originators" and as "loan servicers." Loan servicing is more or less collecting payments from borrowers and then forwarding the proceeds onto the actual owners and holders of the instruments. Those owners and holders are the investors in the Mortgage Backed Security pool (MBS).
A typical morgate transaction happens in this way.
1) A broker "sells" a "product" (loan) to a borrower. The broker is acting on behalf of an originating lender (who isn't really lending their own assets), which may or may not be a typical bank.
2) The originating lender frequently does not fund the loan but rather utilizes a financing "sponsor." Think of the sponsor as a "monetary warehouse" that has piles of money the originator is able to gain access to on a temporary basis.
3) The originator never intended to maintain possession of either instrument and typically they are sold to another intermediary immediately. At this point the money the originator "borrowed" is returned to the sponors warehouse with the originator taking a cut of the profits. The sponsor also gets a cut of the profits.
4) This intermediary is used as a transfer agent for a trust, or an MBS, and is frequently identifed as the "depsoitor" in documents of the trust itself.
5) The physical instruments are now held by a custodian on behalf of the trust.
6) The trust is managed by a trustee. Typically a trustee (such as Deutsche Bank) can also be an owner/investor, but is not an owner by virtue of being the trustee.
Originators typically maintain the rights to service the loans. In many cases it appears the originator is still the owner and holder - but such is rarely the case. The profit in servicing loans is rather small. Loan servicers are able to increase their profits by assessing/attaching fees onto the accounts of the borrowers. This is how and where the term "mortgage servicing fraud" has developed as many of these fees are bogus and fraudulent. They are also intentional and are used to push borrowers into default first, and then foreclosure. The truth is there is money to be made by servicers on defaults foreclosures. Otherwise they wouldn't be operating these schemes. Who in their right mind continues operating in ways that is costing them money instead of making them money?
Investors don't really care how the loans are being serviced or what is happening to the borrowers as long as the payments keep coming in.
Now, who are the investors? Not usually individuals. More common is pension funds, school boards and districts, city and county governments, foreign governments, unions, insurance companies (more on that in a minute), etc. To buy in requires a fair amount of capital.
Ultimately each investor owns a small slice of each and every note and mortgage, as opposed to owning any single note and mortgage outright. This is complicated further by the ratings of the instruments, the percentage of each level instrument in each of numerous different tranches, etc. I'm trying to keep on the simple side for easier understanding so I'll blow past this part of the story.
The document that codifies the contractual agreement between the parties with a continuing involvement and relationship, the trust (investors) and the loan servicer is known as the Pooling and Servicing Agreement (PSA) and can be located through the SEC Registration Statement the trust is required to file (available online). These documents are typically 2000 - 2500 pages long and every contingency is dealt with and codified.
Now I get to my overall point.
Loan modifications are being worked out between originators/loan servicers and borrowers. This usually involves adding arrearages to the tail end of the payment schedule, reductions in interest rates, converting ARMs to fixed rate mortgages, reductions in principle amounts, extending the loan period, etc.
Cut out of this loop of negotiations are the investors - the very parties who have been promised regular payments and profits, and the very parties that are in fact the owners and holders of the instruments.
Loan servicers are bound to deliver regular payments and profits to the investors, again as codifed in the PSA. When they "modify" loans and mortgages they are reducing the amount of the payments and profits from the borrower - a loss - and are passing these losses on to the investors in the MBS. They don't have the power or authority to do this.
Also codified in the PSA are terms by which the originator is to handle and deal with a non-performing loan. The originators made promises to the investors that the loans that had been pooled together, thus "securitizing" the pool, were all of regulatory conformance, had been made to qualified applicants, etc. In other words originators said "Yep, these are all good loans and we guarantee them."
When a loan becomes a non-performing loan originators are required, by the PSA, to either 1) purchase the loan back from the MBS, or 2) substitute a non-performing loan with a performing loan. In either case the originator ends up taking back the "toxic paper" and must either use its own money, or sell it to another investor.
Stated clearly again, neither the originator nor the loan servicer has the authority to modify loans. Only the investor has that authority.
In a case in spring of 2008 fifteen State Attorney Generals filed suit against Bank of America. BoA made an offer to the AG's to modify $8.4 billion of loans. The deal was cut, the suits dropped, the loans modified. Seemed the best deal all around. Until the investors caught wind of it all.
Now the investors in the MBS are suing BoA for breech, etc., etc. They are in essence saying "Hey, you can't do this and merely pass the losses on to us. You want to modify these loans then you need to buy them back and do it on your own as owner and holder."
The problem originators have is that they don't have the capital needed to do this. We're talking in the hundreds of billions of dollars for many of these originators, and for some in the trillions of dollars. They never set themselves up to be the owners. They never intended to be more than a pass through, and to reap some fees for originating and then in ongoing servicing fees.
In the sub-prime and Alt-A markets the vast majority of the loans originated by these, er, um, originators are so far out of regulatory compliance that they are both rescindable and voidable. Material misrepresentation and fraud in origination according to Truth in Lending Act, Home Owners Equity Protection Act, etc.
They are in one helluva pickle. And so are we as our economy has essentially been built around this house of cards for the past decade.
It also becomes more complicated when the foreclosure mess is brought in to the picture. Because P-notes and mortgages are being moved, bought and sold, transferred so often and so quickly the required paperwork is rarely tended to. This creates cloud and/or slander of title. It also makes it very difficult to perfect a claim on the instruments. A perfected claim is required in order to legally enforce an instrument. Foreclosure is an example of such enforcement.
Chain of custody for both the P-notes and the mortgages, if done as required by law, is really a simple matter.
In the case of P-notes it is handled by endoresement and delivery. There will be several parts of the transactions that are memorialized: ledger entries on the part of both parties describing the consideration tendered and accepted, receipts and signatures for the overnight and/or express mail deliveries, the actual endoresements whether "Pay to the Order of ____" or done by "Endorsement in Blank."
Promoissory notes are considered "negotiable instruments" and governing laws can be found in Article 3 of the Uniform Commercial Code. Every state, or nearly every state has adopted the UCC and it can be found in the statutes, or revised statutes, of each state. In Kentucky it is found in KRS Section 355.
Mortgages are transferred through "assignments of mortgage." These transactions are also memorialized and when done according to law are also easily tracked.
What is frequently occurring in the "world of mortgages" is that the notes and mortgages are traveling different paths and are being "severed." The P-notes are the debt, or financial, instruments and as such they have the value. A mortgage is nothing but a security instrument for a P-note. The mortgage itself is the document that allows the note to be enforced.
So the P-notes are sold, transferred, moved, etc., and typically the mortgage follows another path altogether. At each transfer of the P-note someone is making money. And they typically don't care about the security instrument as there is no profit in that for them.
What is important is that neither document by itself is enforcable. Without a security instrument attached to a note there is no way to collect on it (this is true in the case of "mortgage loan" transactions and instruments though it may differ for other types of promissory notes and negotiable instruments). Without a debt or financial instrument attached to a mortgage there is nothing to collect on.
So the issues of chain of custody, perfection of claim, and severence are vital to enforcing a P-note through the process of foreclosure.
When a claim is unperfected and proper chain of custody cannot be demonstrated through multiple transactions multiple parties have equal claim - thus no party has a perfected claim.
The short of this is that many foreclosures are based on unperfected claims and are thus unlawful and illegal. This is also gonna hit the courts in the coming months and countless suits will be brought against foreclosing parties in the name of borrowers saying "Hey, you didn't have a right to take my stuff. Now give it back." The borrowers will be within their rights to bring suit and demand such and many of them will win. What a mess that will be for the courts, the foreclosing party, the new buyer os the property, etc.
I've been saying for going on 2 years now that most of this mess could have been avoided if the courts had simply paid attention and ruled according to the law. I saw it coming and recognized it when it arrived. I didn't see the depth and breadth of the ripples it is causing (the overall economic meltdown), just this "genesis" aspect in the form of the housing and lending industries.
I promised more info on insurance companies. I promise I'll be brief on this.
Insurance companies make more profits on their investments than they do on policy payments and sales. They have a fair amount of money to throw around in the "markets."
Mortgages are, in almost all cases, insured against losses by the owners and holders. If a loan becomes non-performing and forclosure is required the owners of the loans submit claims against their policies and recoup on those losses.
Insurance companies that insure against loan and mortgage losses have been investing in (I hope you're sitting down) Mortgage Backed Security pools.
So when mortgage losses occur the insurance companies have also lost and are thus unable to pay out the claims. This is one of the things that bit AIG.
OK, enough.
Uncle Nasty
PS Be prepared for economic and monetary collapse to keep gathering momentum. There is a lot to it that has yet to unfold.
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