More Thoughts On The MBS / Foreclosure Mess
After some more thought on the Tickers I’ve written of late related to the MBS mess (including here, here, here and more), I’ve got a few thoughts on how to resolve all of this.
Let’s not forget that The Housing Mess and fraudulently-issued loans were why I started writing The Ticker more than three years ago. Indeed, it was the recognition of that scam back in the first quarter of 2007 that induced me to start chronicling this crap – not as a means to make money, but as a way to, hopefully, enlighten the people as to how they got robbed – and why it really wasn’t any different than how they got robbed in the 1990s.
Indeed, here’s the index page for April of 2007 – have a read of the first handful of Tickers, all of which date from April 1st (and yes, they really were from April 1st!)
So let’s look at the basics of Contract Law and see if we can find a way out of the box, because I think we can. It may require some courage, but it’s not impossible.
Contract Law is in the general sense very simple. You have offer, acceptance, and an act in furtherance of performance. That is, someone must offer something, the other party must accept, and then one of the parties has to do something toward what you just agreed to. That’s the basics.
But along the way lawmakers realized that there were some problems with this. Chief among them is the fact that you and I could agree verbally to something that might take five years to complete. Humans have notoriously bad memories, especially when it’s in their best interest to “forget” little things, so one of the “additions” that got tacked on is a thing called The Statute of Frauds.
That Statute doesn’t say “this is fraudulent”, as the name implies. Rather, it says that in order for certain contracts to be valid, they have to be reduced to writing and bear an actual signature.
What are those contracts?
In most States they are any agreement that:
- Contemplates performance over a period of more than one year. That is, if you wish to have a contract to clean your pool for six months, you can do that verbally. But if it’s for more than one year it has to be in writing, or it’s unenforceable.
- Deals with the sale or a security interest on real estate. That is, you can’t have a binding agreement to sell your house verbally. It has to be reduced to writing (a cocktail napkin counts though!) and carry signatures of both parties.
There are a few other sorts of contracts that fall under this Statute and it varies a bit from State to State, since this is a State Law thing. But for the most part you can expect that if you want to do something related to real estate (or the security interest associated with real estate) or contract to do a thing over more than a year’s time, it has to be reduced to writing and carry an original wet signature or it’s not enforceable.
So we have a way out of the box here.
See, the typical way these transactions worked was something like this:
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Joe “buys” a house. He executes a deed which is recorded and names him as the owner. He also executes a mortgage, which gives a security interest in the deed to the bank that funds the loan. The seller conveys the title (with a written document) and there’s a discharge of any other security interest that may exist (also with a written document bearing a signature.) So far, so good. (Incidentally, I’m aware that this is state-specific…. and is very different in some states, especially non-judicial foreclosure states!)
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Joe goes home. But the bank bundles up and “sells” that paper to a MBS trust in a securitization. Is there a paper agreement bearing an actual signature for each of these loans? Or did this all go into “MERS” and then was “traded and tracked” electronically? Note that there is no “or substitute as someone wants” in the law in virtually all states.
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Now it gets even murkier. Some of these notes were endorsed “in blank”. That’s not allowed in some states either – they do not allow trusts to hold bearer paper of any sort. On a Federal level doing so effectively creates a bearer bond, which runs afoul of TEFRA, a 1980s-era law signed by Ronald Reagan to discourage drug dealer use of these things as a way around the lack of “large” currency denominations. Bearer Bonds were not made explicitly illegal, but TEFRA requires that on creation of any bearer instrument 1% of the face value of the instrument for each year of duration is due to the IRS as a tax! Needless to say that hasn’t been happening….
If there’s a defect – especially a problem under The Statute of Frauds – these problems cannot be fixed.
The aggrieved party (that’s the MBS holder who got rooked into buying paper that was allegedly “Prime” when it really wasn’t) should have every legal right to void the agreement.
Well, what happens if he does?
No, the homeowner doesn’t (necessarily) get a free house.
But he does have a deed with a security interest. The bank that originally funded the loan however, was paid in full. They cannot enforce a security interest they no longer have.
Or do they have it?
Well, they sure do if the MBS holder sticks it back on them and demands the full face value of the paper! And it would appear that they have every right to do so, as a contract that does not comply with the legal requirements to be a contract is no contract at all!
That is, unwind the transactions from the first defect forward. This will typically force the paper back onto the bank’s balance sheets, and they will have to pay face value to the MBS trust, which (once that has happened) has nothing left and thus dissolves, having returned the funds to the buyers (since the instrument they bought no longer exists and never did as a matter of contract, they’re entitled to have their money refunded for that which never legally happened.)
The banks now have the loans and the right to foreclose, but they also have all the losses that come with it. That is, the hot potato that they tried to drop (and in many cases DID drop) on various institutional and other buyers lands right back in their lap.
If this kills them, so be it.
I’m well-aware that this suggestion will raise howls of protest.
It is also the only just way to deal with it.
Put back the paper that violates The Statute of Frauds, and at the same time put back paper where there was a material false statement made with regards to reps and warranties.
I’m willing to bet that’s most of the non-agency mortgages and perhaps a good percentage of the agency ones as well.
Let the losses fall on those who made the loans, knowingly selling paper into trusts without compliance with the reps and warranties, or, in some cases, who effected a contractual sale without meeting the requirements of a contract in the first place.
If state law requires an unbroken chain of assignments we still have one at that point. The homeowner doesn’t wind up with a “free house”, but the bank that originally funded the loan (whether directly or via a warehouse line they were providing the money for) gets stuck with whatever loss might accrue as a consequence of the foreclosure, instead of trying to foist it off on the taxpayer.
And that, my friends, is exactly as it should be!
Source: The Market Ticker
~
This is just the tip of the iceberg. If a bank sells bad, fraudulent paper, they have to buy the notes back. This is fair. The banks will tell you that they had no idea that the loans were “no good”. My position is that the banks knew, or they ought to have known. Someone at the banks have to be doing due diligence. What went wrong? The holders of MBS and CDOs will be demanding that the banks buy back all the bad loans.
This will add more losses to the banks’ balance sheets.
Looking at all the maps on homes in foreclosure makes me think of the movie “War of the Worlds”
You know, after the aliens die off and in the daylight you see all the damages, all the destruction and chaos that was everywhere?
The Realty Trac map shows blood red coast to coast. The only green spots are national parks and wilderness areas!
Even Beverly Hills is covered with foreclosures! The whole nation looks like a war zone and we lost the war!
We have been devastated and it wasn’t some foreign nation, no terrorist of Arabia that has brought us to our knees. It’s been an inside job.
Who had offices in the WTC that lost files and papers with no backups, never to be recovered? Wasn’t it Goldman Sachs, Morgan-Stanley, and the like? at least that is what they claimed at the time. How convenient.
We were attacked and the enemy was and still is our financial system and those running it.
We’ve been screwed by our own people.
It’s long overdue to kick them out and start fresh, only this time we make the rules and they have to obey them!
I lost my home early on in the game, couldn’t understand what went wrong, why I could never get a call thru to GMAC, why they were holding my mortgage, why they agreed to allow me to catch up the payments but never sent the paperwork, no coupon book, or why after that one phone call that got thru I was given a number to call that no one ever answered back no matter how many voice mails were left. That was just the beginning of my nightmare.
I say, make them pay, make them take full responsibility for every toxic mortgage they wrote.
They don’t get anymore money from anybody they cheated, most of the homeowners had truly paid enough before the meltdown to pay off the mortgages anyway, if the payments had been applied to the principal and not the interest. The joke being that anyone who did complete paying off a mortgage in 30 years will have paid 3 times what the home cost in interest.
My thoughts about the legal system. We need to get back to making legal papers and matters in plain English again, that way everybody clearly understands what is going on.
Sue anybody who tries to foreclose on you. Consult with a qualified attorney first.
Bill, Fannie Mea has the same agreement with BNYM… interesting is that the merger with Bank NY & Mellon Financial occurred around the same time. Also let’s not overlook the impulsion of IVY Hedge Fund, an arm of Mellon Financial, that specialized in MBS , during the same time of the merger. And then there is the sweet deal that BNYM got from Paulson and Geithner to oversee as the “custodian” of the TBTF bailed out banks.
Thought maybe this would be interesting to peruse. Another one of my “Archives”:Bulletin
NUMBER: 2009-16
TO: All Freddie Mac Seller/Servicers June 30, 2009
SUBJECTS
Both selling and Servicing requirements are amended with this Single-Family Seller/Servicer
Guide (“Guide”) Bulletin.
With this Bulletin, we are announcing that beginning October 1, 2009, Freddie Mac will no longer
directly provide Note certification and custody services, and has selected The Bank of New York Mellon
Trust Company, N.A. (BNYM) to perform such services for its Mortgages as Freddie Mac’s Designated
Custodian (Designated Custodian). Among other things, this Bulletin describes the transition of
certification responsibilities and custody of Notes to BNYM. The transition period begins
October 1, 2009, and will extend to the effective date of the custodial relationship the Seller/Servicer must
establish with either the Designated Custodian or another third-party Custodian. The effective date of
either such arrangement is referred to in this Bulletin as the “Custodial Agreement Effective Date.”
The following topics related to this change are addressed in this Bulletin:
.. Seller and Servicer responsibilities related to Note delivery, certification and custody during the
transition period
.. The process and requirements with respect to contracting with the Designated Custodian or, at the
Seller/Servicer’s option, another third-party Custodian
.. The announcement of a new Form 1035DC, Designated Custodial Agreement: Single-Family
Mortgages, that must be used to establish a custodian relationship with BNYM
.. Document custody fees and charges
.. Other miscellaneous matters
As a result of this change, we are also announcing the following:
.. Sellers selling Mortgages to Freddie Mac through the Freddie Mac Selling System (Selling System)
Servicing Released Sales Process (SRSP) must establish a custodial relationship with the Designated
Custodian and deliver Notes for such Mortgages to the Designated Custodian for certification
.. Sellers must deliver the Intervening Assignments when delivering Notes for certification to the
Document Custodian, including BNYM, in its capacity as vendor/agent for Freddie Mac or as
Designated Custodian
.. In connection with Transfers of Servicing or transfers of custody, Servicers must deliver the
Intervening Assignments to the Document Custodian, including BNYM, in its capacity as
vendor/agent for Freddie Mac or as Designated Custodian
Page 1
Key Date – October 1, 2009
As noted above, the transition period begins October 1, 2009, and:
.. The Notes and related documents currently held by Freddie Mac at its Document Custodial
Operations (DCO) facility will be moved to a BNYM vault on or before this date
.. Beginning on this date, Sellers that use DCO to certify Notes and Sellers selling Mortgages under the
Selling System SRSP must deliver the Notes and Intervening Assignments for certification to DCO,
in care of BNYM at a new address. In addition, for Mortgages sold through MIDANET® Sellers must
also deliver a separate data file (see “Certification – sale of Mortgages” below for additional
information).
.. BNYM, in its capacity as vendor/agent for Freddie Mac, will perform Note certification and
custodial services for the Notes delivered or transferred to it beginning on this date and through the
Custodial Agreement Effective Date
In addition, on or before October 1, 2009, each Seller/Servicer currently using DCO must submit either
of the following:
.. Form 1035DC and related forms to BNYM to establish a relationship with BNYM, as Designated
Custodian (see “Contracting with the Designated Custodian” below for additional information); or
.. Form 1035, Custodial Agreement: Single-Family Mortgages, executed by the Seller/Servicer and
another Freddie-Mac approved third-party Custodian, to Freddie Mac requesting approval to enter
into a custodial relationship with a third-party Custodian (see “Contracting with another third-party
Custodian” below for additional information)
SELLER AND SERVICER RESPONSIBILITIES DURING THE TRANSITION PERIOD
Through September 30, 2009
For Sellers and Servicers currently using DCO, the Notes for Mortgages being sold to Freddie Mac or for
which the Servicer acquires the Servicing, should continue to be delivered to DCO in accordance with
existing Guide requirements.
Servicers should continue to deliver supplemental documents, return previously released documents to
and request release of documents from DCO in accordance with existing instructions. Because Notes may
be in transit to BNYM between the date of this announcement and early October, Servicers should
provide as much notice as possible when requesting release of Notes to enable processing in a timely
manner.
Between October 1, 2009 and the Custodial Agreement Effective Date
Between October 1, 2009 and the Custodial Agreement Effective Date, BNYM, as Freddie Mac’s
vendor/agent, will certify the Notes for Mortgages delivered to Freddie Mac (in care of BNYM) and
provide other custodial services for Notes in its custody. Seller/Servicers should direct questions related
to Note certification and other custodial matters to BNYM during this period by calling the BNYM
Document Custody Support Line at (800) 211-2677.
Sellers and Servicers are advised that there may be delays in certification, funding and other services if
documents and/or requests are not delivered in accordance with the following instructions.
Between October 1, 2009 and the Custodial Agreement Effective Date, Sellers and Servicers must use the
following address when delivering Notes for certification to DCO, delivering supplemental documents or
returning previously released documents:
Freddie Mac – Document Custodial Operations
c/o The Bank of New York Mellon Trust Company, N.A.
2220 Chemsearch Blvd., Suite 150
Irving, TX 75062
Page 2
Certification – sale of Mortgages
In connection with the delivery of Notes to Freddie Mac, beginning October 1, 2009:
.. Sellers must also deliver the Intervening Assignments to BNYM for such Mortgages, unless the
Mortgage is registered with MERS and the Seller elects to retain the assignments in its files, as
provided in Guide Section 22.14(e).
.. For Mortgages sold through the Selling System, Sellers will continue to assign the Note to DCO
(“Custodian 9999999”) for certification
For Mortgages sold through MIDANET, the Seller must also provide a separate data file containing all of
the data that must be certified for each Mortgage in the delivery. The data file must be in the form of an
Excel spreadsheet and should be sent to the Designated Custodian via secure email or by emailing the file
using a WinZip advanced encryption or 128-bit Advanced Encryption Standard (AES) with password
protection. Please contact the Designated Custodian for further information and/or assistance.
The data file must include the following data elements in the order specified below:
Freddie Mac Form 1034/1034A Term
1. Freddie Mac Loan Number FHLMC Ln #
2. Seller/Servicer Number Seller/Servicer number
3. Seller Loan Number Seller Ln #
4. Date of Note Note Date
5. Property Address Property Street
6. City Property City
7. State St
8. ZIP Zip code
9. Original Loan Amount Loan Amt
10. Original Interest Rate Interest Rate
11. Original P&I P&I Amount
12. Date of First P&I Payment 1st P&I
13. Original Maturity Date Maturity Date
14. Original P&I Payment P&I Amount
15. Borrower Name Borrower Name
16. Co Borrower Name Co-Borrower Name
17. Modification/Conversion Date Mod/Conv date
For ARMs, include the following additional data elements
18. Convertible Convrt
19. First Rate Adjust Date 1st Rate Adj
20. Index Source Index
21. Index Lookback Days Lookback
22. Note Margin Mtg Margin
23. Interest Rate Rounded % Round
24. First Rate Adjustment MAX 1st Adj Max Initial Rate
25. First Rate Adjustment MIN 1st Adj Min Initial Rate
26. Periodic Interest Rate Cap Period Cap
27. Life of Loan Max Rate Life Cap
Page 3
In addition to the above, Sellers must comply with all other Guide requirements in connection with the
delivery of Notes for certification, including:
.. For Mortgages sold through MIDANET, the delivery of Form 1034, Fixed-Rate Custodial
Certification Schedule, or Form 1034A, ARM Custodial Certification Schedule, as applicable
.. For Mortgages sold through the Selling System, the delivery of Form 1034E, Custodial Certification
Schedule, or Note Delivery Cover Sheet
Release of documents/Transfer of Servicing or transfer of custody
During the transition period, for Notes held by DCO and transferred to BNYM, Servicers must continue
to submit requests for release of documents to DCO directly, in accordance with existing requirements. In
addition, for Notes transferred to BNYM as a result of a Transfer of Servicing or transfer of custody,
Servicers must deliver the Intervening Assignments in accordance with the requirements for Transfers of
Servicing when utilizing a third-party Custodian, pursuant to Guide Sections 18.6, 18.7 and 56.9.
Contracting with the Designated Custodian
Beginning on July 17, 2009, Freddie Mac will email to Servicers currently using DCO to hold the Notes
for Mortgages they service for Freddie Mac the materials necessary to enter into an agreement with
BNYM as Designated Custodian (the Designated Custodian Registration Forms). The email will be
addressed to the Primary Freddie Mac Business Contact as indicated on the Form 16SF, Annual
Eligibility Recertification Report. The Designated Custodian Registration Forms consist of the following
documents:
.. Form 1035DC
.. Additional documents required by BNYM, including
.. Customer Verification Form (“Know Your Customer” form)
.. W-9, Request for Taxpayer Identification Number and Certification
.. Electronic Funds Transfer Authorization
.. Web Access/Release Request Authorization
.. Designated Custodian Fee Schedule
If you are an impacted Servicer and do not receive this email package by July 24, 2009, please contact
Counterparty Credit Risk Management (CCRM) by email to institutional_eligibility@freddiemac.com
or by calling the CCRM customer service line at (571) 382-3434, Opt. 2.
In addition, Sellers electing to sell Mortgages to Freddie Mac through the Selling System SRSP must
complete the Designated Custodian Registration Forms to establish a relationship with the Designated
Custodian. Such Sellers must contact CCRM directly to arrange to receive the registration forms.
As indicated, documents in the Designated Custodian Registration Forms must be completed and signed
as appropriate, and received by BNYM at the following address by October 1, 2009:
The Bank of New York Mellon Trust Company, N.A.
ATTN: New Agreement Execution
2220 Chemsearch Blvd., Suite 150
Irving, TX 75062
Any questions regarding the Designated Custodian Registration Forms should be directed to BNYM via
email at FreddiemacCustodian@bnymellon.com, or by calling the BNYM Document Custody Support
Line at (800) 211-2677.
Page 4
When review of the Designated Custodian Registration Forms is completed, Seller/Servicers will be
notified of their Custodial Agreement Effective Date.
Contracting with another third-party Custodian
A Seller/Servicer currently using DCO that elects to use a third-party Custodian other than BNYM should
follow the procedures set forth in Guide Chapter 18 with respect to contracting with a Document
Custodian and transfers of custody. These procedures include, but are not limited to, submitting Form
1035, executed by the Seller/Servicer and the Document Custodian, to Freddie Mac.
After reviewing the Form 1035 and any other required documentation and approving the request,
Freddie Mac will execute the Form 1035 and communicate the Custodial Agreement Effective Date to
each Seller/Servicer electing to establish another third-party Custodian relationship.
Any questions regarding the Form 1035 should be directed to Freddie Mac via email to
institutional_eligibility@freddiemac.com, or by calling the CCRM customer service line at
(571) 382-3434, Opt. 2.
As noted above, the option to deliver Notes to another Document Custodian is not available for
Mortgages being sold to Freddie Mac under the Selling System SRSP. These Notes must be sent to the
Designated Custodian for certification and custody.
Document custody fees and service charges
Prior to the Custodial Agreement Effective Date, Freddie Mac will continue to bill the Seller/Servicer for
document custody fees and related charges pursuant to Guide Section 18.8.
Using the Designated Custodian
Beginning with the Custodial Agreement Effective Date, BNYM, as the Designated Custodian, will bill
the Seller/Servicer directly for custodial fees associated with certification and custody services occurring
on or after that date. BNYM has agreed that it will not increase fees beyond the fee schedule set forth in
Guide Section 18.8 or impose additional charges prior to September 1, 2010, provided, however, that any
request for expedited release of files or documents will be billed to the Seller/Servicer’s courier account.
Seller/Servicers completing Designated Custodian Registration Forms and submitting them to BNYM by
October 1, 2009 will not incur on-boarding (e.g., transportation or recertification) fees due to the transfer
of Notes to the Designated Custodian.
Using a third-party Custodian
Seller/Servicers choosing to transfer custody to another Document Custodian must negotiate their fee
structure directly with that Custodian, and should consult with that Custodian as to any on-boarding,
recertification and other costs that might be associated with the transfer of custody. Seller/Servicers will
be charged release fees, will incur expenses for shipping, and must have transit insurance for any Notes
being shipped.
Compensation for custodial services
As a reminder, compensation for the custodial services is the sole responsibility of the Seller/Servicer.
Failure to remit payments to the Document Custodian as required by the Guide is a breach of the
Seller/Servicer’s agreement with Freddie Mac and may be cause for termination or other adverse action.
Timing of data in selling system, receipt of Notes, timing of certification and settlement
As always, to ensure timely funding, the Seller should submit the Notes and related data to the Document
Custodian in sufficient time to permit certification, in accordance with the instructions in Guide Section
16.8 and the Document Custody Procedures Handbook, available in AllRegs. For service standards for
the Designated Custodian, please refer to the Service Levels attached to Form 1035DC as Exhibit A.
Page 5
Sellers delivering Notes to BNYM after October 1, 2009 must provide BNYM no less than two business
days’ notice for deliveries involving more than 500 Notes in order for the Notes to be certified by the
desired funding date. It is the Seller’s responsibility to inform the Designated Custodian in advance of any
deliveries in excess of 500 Notes and to deliver such Notes to the Designated Custodian within the time
frames indicated by the Service Levels attached to Form 1035DC as Exhibit A. Seller/Servicers choosing
to use the services of another Document Custodian must negotiate their service level agreement directly
with that Custodian.
Form 16SF – Identity of Document Custodians that hold Notes on behalf of Freddie Mac
Form 16SF automatically populates with information Freddie Mac has on record. The Seller/Servicer
must verify the accuracy of the information and correct it as necessary. For Seller/Servicers currently
using DCO, until the Custodial Agreement Effective Date, the Form 16SF should indicate that
Freddie Mac holds the Notes.
Inquiries on the Form 16SF should be directed to CCRM by either email to institutional_eligibility@
freddiemac.com, or by calling the CCRM customer service line at (571) 382-3434, Opt. 2.
Special Provisions
Seller/Servicers with special provisions in their Purchase Documents related to custodial matters must
inform their new Document Custodian (either the Designated Custodian or other third-party Document
Custodian, as applicable) as to the content of those provisions. Seller/Servicers should provide the special
provision(s) to the Designated Custodian by email to FreddiemacCustodian@bnymellon.com.
Functions that will remain at Freddie Mac
Freddie Mac will continue to perform oversight of document custody program requirements and overall
management of the certification processes and requirements. As such, all Document Custodians will
continue to submit to Freddie Mac the following completed and executed forms, as applicable:
.. In connection with the sale of Mortgages to Freddie Mac through MIDANET, Forms 1034S,
Custodian Certification Schedule Summary, and 1034SM, Custodian Certification Summary for
Multiple Purchase Contracts, upon verifying the documents and performing the certifications
required in accordance with Guide Section 18.6
.. Form 1034B, Custodian Certification Schedule – Balloon Loan Modification, upon certifying the
information contained in a Balloon Loan Modification, in accordance with the requirements of Guide
Section 83.103
.. Form 1034T, Subsequent Transfer Custodial Certification Schedule, upon performing the
verifications and certifications in connection with a Transfer of Servicing/transfer of custody
DCO will continue to:
.. Process requests for assistance with Mortgage discharges, satisfactions, releases of lien or similar and
other matters related to the chain of title for Mortgages owned by Freddie Mac when we are
identified as the lien holder in the land records. Please use the Request for Assistance form found on
our web page at http://www.freddiemac.com/cim/docex.html.
.. Process MERS Transfer of Beneficial Rights and resolve issues concerning transactions affecting
Freddie Mac on the MERS residential system
Page 6
REVISIONS TO THE GUIDE
We will be updating applicable Guide chapters with a future Bulletin to reflect these changes.
CONCLUSION
If you have any questions about the matters addressed in this Bulletin, please contact your Freddie Mac
representative or call (800) FREDDIE.
Sincerely,
Patricia J. McClung
Vice President
Offerings Management
Page 7
Agree, this is the only way to rectify the situation. One never mentions all of the unsuspecting now unemployed Americans that have been and are indirectly effected by this mess. There are plenty of hard working people out there that had no skin in this game that have been greatly harmed by all of this.
Let the losses go to those who made the loans; the incompetent, irresponsible, dishonest bankers who refused personal responsibility for their poor business decisions. Strange that this is even a considered strange.
What will happen? The notes will trade for almost nothing and the buyers of the notes (this is where government might want to offer a right of first refusal to whoever is living in the place) can refi. Since the house will never fetch more than fair market value, and foreclosures cost money, genuine refi’s will actually happen. All with no government money.
Crazy idea .. it’s called capitalism.