+1
Frowning takes 68 muscles.
Smiling takes 6.
Pulling this trigger takes 2.
I'm lazy.
Posted on 10/15/2010 7:07:26 AM PDT by WebFocus
ust how bad is "Foreclosure-Gate" going to get? This is the million-dollar question and the answer is as frightening as its implications: Nobody knows.
For anyone who's been living under a rock for the past three weeks, let's recap. Three weeks ago, Ally Bank (formerly GMAC), dropped the bomb that it was investigating potential problems with how its foreclosure paperwork was being processed and halted foreclosure proceedings in 23 states. Within days, other big lenders like JPMorgan Chase (JPM) and Bank of America (BAC) made similar announcements. Bank of America has now stopped foreclosures in all 50 states, just yesterday 50 state attorney generals launched an investigation into basically the entire mortgage servicing industry, and it seems that the rabbit hole is deepening daily.
All this less than a month before one of the most important mid-term elections in recent memory.
The housing market, already swooning, is slowly grinding to a halt, as uncertainty spreads from transaction to transaction. The most immediate fear is that buyers of bank-owned (or REO) properties will go away, removing an essential layer of demand for battered real estate markets around the country. If lenders didn't foreclose properly, buyers could find themselves without clean title, opening a Pandora's box of risks.
That having to give back a recently purchased home would be an extraordinarily rare event isn't important; in times of great uncertainty, confidence is the only thing that matters. This is the lesson to be learned from the financial crisis of 2008-2009, where the fear of default, not necessarily the default itself, torpedoed firms like AIG (AIG), Fannie Mae, Freddie Mac, Bear Stearns, Lehman Brothers, Wachovia (WFC) and others.
If all this renewed talk of gloom and doom in housing is unnerving, it should be. If not quashed in short order, the situation could quickly spin out of control. If homebuyers en masse lose faith in the system of property ownership, title, and transfer, we'd all of a sudden arrive at a very scary place. Home prices follow sales volume, and if sales dry up in a meaningful way, especially in markets dominated by distressed sales, prices would collapse.
For an administration whose stated housing policy is to prop up prices, this is an unacceptable outcome.
Policymakers, who for months have been fighting for legislation to slow the flood of foreclosures, find themselves in the uncomfortable position of defending the economic and social value of an efficient process for repossessing homes. Foreclosure is the housing market's natural -- albeit unpleasant -- cleansing mechanism. Without it, impaired assets cannot be cleared and a sustainable floor in prices cannot be found.
There is, however, a silver lining to all this.
If you assume for a moment that the resolution for the so-called Foreclosure-Gate is not Armageddon, that cooler heads will prevail, it could end up being a massive blessing in disguise. For almost three years now, Washington has attacked the housing market Medusa by simply chopping off heads, leaving the body to regenerate more. Loan modifications have been a woeful failure while tax credits and other stimulus have proven transitory measures at best. But now faced with the specter of losing foreclosure, there's a chance policy makers will wake up to the stark reality that only through repossession, through the efficient reallocation of REO properties back into the market, can the housing truly heal.
In other words, these "lenders" holding these mortgages as part of securitized mortgage bonds may find themselves in the same position as someone who buys a property only to find that the previous owner left it with some kind of fatal flaw (e.g., soil contamination) that effectively makes it worthless. Very often, the best course of action in that case is to try to negate the original transaction.
Got it. Finding a renter, that and the rental price won’t cover the mortgage.
Here in Denver there are loads of rentals, but there are also loads of people that no longer qualify to buy and have lost their home so they need a rental. They have jobs as Denver is still doing extremely well compared to many parts of the country. In fact, outside of professions dealing with residential or commerical building, we are doing great. We have had very few layoffs.
The average rental rate here is about $1,500. $1,200 will get a small house in a rundown community while $1,900 will get a very nice and large home in a new community.
Add to what you said is that some title companies will not give a General Warrantee to a home that went through foreclosure because the risks involved with the title company having to payout in case the documents are wrong is too great. I just had a title company tell me they cannot give a warrantee on a property because it is muddled in foreclosure. Several national title companies last week joined in and said they will not give title warrantees for foreclosed properties until they can guarantee the paperwork will stand legal challenges.
I mean renting out your house while you move out of town. The rental market in my area is flooded with desperate people. Rental rates are very low, below the IRS guidelines so you get in trouble there.
Its also difficult to find renters who have good credit to put in your home.
Let's say there is a bank in your town that writes ten mortgages one week on ten different homes. Each mortgage is for exactly $200,000 and has a fixed interest rate of 6% for a 30-year term.
To raise cash, the local bank might decide to take all of those mortgages and sell them to a big investment bank. The local bank sells $2 million worth of mortgages for some cash value (I don't know exactly how they figure out the price exactly), and the big investment bank now owns these ten mortgages. The ten local homeowners continue to make mortgage payments to the local bank, but the payments are passed on through to the big investment bank. The local homeowners may not even know that their mortgages were sold off by the local bank.
Now just imagine the big investment bank doing this same process all over the country, until they own billions of dollars in mortgages on all different kinds of homes. They then create mortgage bonds that are sold off to investors who are looking to get what they think is a safe return on their money.
What is happening now is that large numbers of these homeowners are starting to default on their mortgages, and the whole financial system can't figure out who actually holds the title to the property. This wouldn't be a problem if the local banks that wrote the original mortgages never sold them -- they hold the titles on all properties until the mortgages are paid off. But in the scenario I described above the mortgage has changed hands multiple times and there is no certainty as to who even "owns" a property when the mortgage is in default. Who has the legal authority to foreclose -- The original local bank? The big investment bank that purchased the mortgage? The investors who bought the mortgage bonds created by that investment bank?
You can imagine how confusing this whole thing is now -- and it's only going to get worse.
Even in a "normal" real estate market, when rental prices won't cover the mortgage on the same house (there's actually a ratio that is used as an average since it depends on that homeowner's down payment, rate, etc) it's generally an indicator that a market is overpriced.
Wouldn’t this mean that people who got their mortgages through unaffected banks or credit unions will have a better time (even in a bad market) of it selling selling their home, or buying their home from someone with a mortgage through one of the financial institutions that didn’t participate in this fiasco now that these affected homes are basically off the market and in limbo?
“No one is threatening that yet, but watch as this thing disintegrates and we’ll see if something like that isn’t precisely what ends up on the table.”
—What do you think of the timing of this, bubbling up right before the election? The usual suspects (Paul Krugman, Ezra Klein, the NYT, and all the Soros-blogs) are pumping this nonstop, much like everybody was hyping the ‘Death of the Euro crisis’ and the ‘immediate global collapse because of the disintegration of the EU’ right around the time the FinReg bill was making its way through Congress. After all the doomsday reports, the Euro is at an 8-month high against the dollar, and recent stress tests of European banks showed that they were pretty strong all along, actually...
Not to say that the foreclosure situation isn’t a real problem, but IIRC a fair number of these homes are not occupied, and why *right* now (never let a good crisis...?)
I think default is on the table now.
I don’t know why anyone would seek this, because it is so dangerous and it will be so hard to capitalize on it politically. But I do think this is intentional, if that’s what you’re asking...
I just don’t see their endgame.
You wrote, "This wouldn't be a problem if the local banks that wrote the original mortgages never sold them -- they hold the titles on all properties until the mortgages are paid off."
Do you mean that Bank #1 who sold off the original mortgage kept the title even though they sold the mortgage? Or did the titles go along with the sold mortgages....and have gotten lost?
1. When Bank #1 sold the mortgage, it didn't necessarily "keep the title" at all. There was probably a lot of paperwork transferred in the process. But transferring paperwork and transferring the "ownership" of a title aren't necessarily the same thing. In order to legally transfer the title, the transfer of ownership to a new mortgage holder requires the mortgage/title to be re-filed in a state or county courthouse. I suspect a lot of the confusion we are seeing is related to the failure of Bank #2 (the investment bank) to do all of this paperwork. I suspect they didn't do all of this paperwork because they were dealing with such large numbers of mortgages that they didn't want to bother with it -- or maybe didn't even realize they were supposed to do it!
2. Now take this one step further . . . What happens if you are an investor who buys a mortgage bond that was created by a big investment bank under the scenario I described in my previous post -- and the investment bank had never done all of this necessary paperwork to legally gain ownership of the mortgages that are backing that mortgage bond?
You can see how complicated this can get, right?
Again, thank you.
+1
No problem at all. This site has been a great resource for me to learn a lot of things, too!
“I mean renting out your house while you move out of town.”
The problem gets worse. Who manages the upkeep on the house while you are gone? Suppose the renter calls up and complains the furnace quit working? Don’t expect renters to maintain the house, either. In fact, a lot of renters will trash a house. Why not, it isn’t theirs, so who cares? I have known a number of landlords and slumlords and will tell you that it is a gritty business dealing with renters. One guy I knew had to replace carpets and repaint every time a renter moved out. His apartment complex looked like a zoo.
Again, though, more chaos in the financial system that will eventually put several big banks on the brink.
If you ask me, I almost see financial collapse as an inevitable, but there is always the chance we pull through this if all the right pieces fall into place. This is one of them.
Assuming that the title paperwork is correct.
Unless the crown state steps in as mentioned earlier.../S
It's rather complicated. Here's what is supposed to happen:
The title to a piece of real estate is recorded in the county where the property physically exists. When ownership changes, or a mortgage is originated or sold, the change in status is recorded with the county. The county charges a significant fee for this.
In an effort to reduce the cost of selling mortgages, so that they could be bought and sold more efficiently, the lenders formed a corporation just for the purpose of circumventing this. This corporation (MERS) holds all of the titles, and keeps track of the effective ownership.
Unfortunately, there was a lot of slicing and dicing, and transferring of ownership, and the title records were handled sloppily. Now that it is becoming necessary to foreclose on many of these properties, it is being discovered that the record keeping on many is not in order.
This is causing a big problem with the foreclosure process nationwide, and the courts and lenders are just now realizing that they have a major problem to sort out. Some defaulting borrowers think that this should entitle them to a free home, but allowing this to happen would destroy our financial system, and real estate market.
It is possible that Congress will have to step in and resolve the mess. No matter what happens, this will cause big problems for millions of people.
After reading the replies and finally arriving at an understanding of what's occurred all I can say is.........what a dog's breakfast!
“When ownership changes, or a mortgage is originated or sold, the change in status is recorded with the county. The county charges a significant fee for this.”
This also raises tax evasion charges. Counties do not say that if a person desires to record ownership they register with the county, the counties require registration and a tax and a fee.
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