Foreclosure Mess Needs a Dose of Common Sense

We are guessing all the conspiracy theorists are really enjoying the wake created by yesterdays’ ruling by the Massachusetts Supreme Judicial Court in connection with the “adequacy” of the documentation process associated with at least 2 mortgage foreclosures in the Commonwealth.

Late day trading in US Financials had investors trading away from several bank names, in particular Wells Fargo and US Bank.  What continues to get buried in the fine print in all this excitement is the role that these banks played in these cases.  Neither Wells Fargo nor US Bank were the lender involved.  Neither was directly involved in the foreclosure process either, as the mortgage servicer (in one case, American Home Mortgage) was the forecloser (is that even a word? we don’t want to accused of inventing another industry buzzword!).  Wells and USB were the bond trustee for the respective bond issues to which the property cash flows had been pledged.  This does not mean that Wells and USB could not have problems within their own mortgage operations.  Let’s just get our facts right in this case, shall we.

The Massachusetts Court may actually gotten it right from a technically legal perspective but where’s the common sense?  Oh, you can hear all those academic legal experts howling about the “broken chain of title” and the self-acclaimed economists shouting that the sky is falling for the banks if all these loans are put back!

Pardon us, but please give us all a break……..

* On the topic of chain of title: What were the circumstances leading up to foreclosure on the home?  Can we suppose that the borrower was not making their payments?  We think you can.  Did the borrower and any of several other parties involved in the original underwriting process (e.g. lawyers, title co’s, county clerks, etc.) have any doubt who owned the property and who would occupy the premises with an obligation to pay?  Do any of the parties (both principals and agents thereof) have any doubt that the property was ultimately transferred to the mortgage-backed trust?  So, when those payments stopped, the lenders right to foreclose was just one of several options.  Seems like common sense, right?  Oh no, they say.  If you don’t have the physical documentation, we will ignore all other evidence and “common sense” and put the homeowner back in the house.  Does that mean that the homeowner’s obligations on the mortgage note are null and void? Hardly likely.  Does it mean that the value of the property goes to zero or that a proper accounting and allocation of the remaining value would not be distributed to the rightful owners?  Again, we think that is highly unlikely.  Perhaps too simple a prognostication but we suspect that all this legal jousting will do is compel the parties to go back for a do-over on the foreclosure process, if not in all then in many cases.

* On the topic of the potentially catastrophic impact on the banks:  We have seen projections for residential mortgage foreclosures in the US reaching 13 million by 2012.  So, let’s analyze this quickly.  Let’s assume for a second that the lender (or MBS issuer, as the case may be) winds up forfeiting 100% of the value of the property due to a poorly documented foreclosure process and has to pay both damages to the homeowner and replenish the mortgage-backed investors with ‘in-kind’ value for the forfeited collateral.  Now, step back for a second and think about that……. It just doesn’t make sense.  We believe that anything close to a 100% scenario is beyond the most wild imagination.  It is significantly more likely that a very small percentage of combined numbers of mortgages and “un-recovered value” for those mortgages will be the result.  Could we be wrong?  Sure, but we suspect we are much, much closer to the answer then the high-side alarmists would have you believe.

We are sure that there are teams of lawyers and expert witnesses who would love nothing better than to have these cases proceed on a state-by-state basis over the  next several years because it would undoubtedly continue to ring their cash registers.  Our alternative reality would include the parties involved in the Massachusetts case continuing to appeal and for either US Federal regulators or Congress, if necessary, to put the whole mess to rest by acknowledging that the efficiencies afforded the mortgage and securities markets from a technological utility, such as MERS, are both admirable and necessary.  Just common sense!

About markferraris
Managing Principal Orchard Street Partners LLC

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