Thursday, December 2, 2010

Mortgage Crisis Explained (Again)

From CNBC this simplified explanation of how the mortgage mess is impacting the housing market. In the rush to judgement the popular line is to blame mortgage holders, ordinary people, for defaulting on their loans. Here the explanation is that banks have broken the law. Yet judges are reluctant to call banks to account. Our status as peasants is always being reinforced. Tomorrow I'll have a more nuanced explanation of this Bank fiasco.

The latest is this: Countrywide Financial, now owned by Bank of America, appears not to have properly transferred necessary mortgage documents when it sold loans to other banks, which then in turn created residential mortgage backed securities (RMBS) from the loans.

The documents Countrywide failed to provide are critical to the owners of the RMBS because without them homeowners can question the legal right of banks to foreclose on their homes.

What's new here? Based upon testimony delivered in a New Jersey bankruptcy court, this may have been a matter of policy at Countrywide—not just a case of a one-off error.

Based on Bank of America's current ownership of Countrywide Financial, it is possible that the largest bank in America, when ranked by deposits, may potentially be held liable for the problem.

Perhaps the biggest challenge in grasping the nature of the problem is that the details can overwhelm our ability to see the forest for the trees, so let's walk through it one step at a time.

To begin at the beginning: Mortgage documentation typically requires two critical documents : The deed of trust and the promissory note. The deed of trust describes facts about the lender, the borrower, the terms of the loan and payment, and assigns a legal title to the property—which is traditionally described as the 'bundle of rights' the owner of the property holds. The second document, the promissory note, obligates the owner to make payments on the loan, for which the deed of trust serves as collateral. In the event of a foreclosure, certain jurisdictions require a bank to 'produce the note' if the homeowner demands that the bank do so.

My description, of course, is a high-level summary of a very complex legal construct with roots dating back to the Magna Carta. But what it lacks in nuance it compensates for in simplicity: And it sometimes seems this story hasn't received the focus it deserves—because writer and reader are both washed over by tidal wave of legal terminology.

Over the weekend, Gretchen Morgenson at the New York Times incisively reported on the current state of the mortgage documentation mess. Among other points, she picks up on a bankruptcy case in New Jersey, from which the documentation was released just last week.

The legal issues in the case appear to be fairly straightforward: The homeowner went to bankruptcy court in an attempt to settle up back payments on a mortgage—to "cure arrearages" in the language of the filing—under Chapter 13 of the Bankruptcy Code, which allows individuals to pay their debts over time without losing their property.

What is perhaps most interesting is testimony from a Bank of America executive named Linda DeMartini, "a supervisor and operational team leader for the Litigation Management Department," with responsibilities for home loans. She testified, in reference to the creation of the mortgage backed securities, "…that to her knowledge, the original note never left the possession of Countrywide, and that the original note appears to have been transferred to Countrywide's foreclosure unit, as evidenced by internal FedEx tracking numbers."

But here's what is perhaps most extraordinary: "She testified further that it was customary for Countrywide to maintain possession of the original note and related loan documents."

Morgenson points out: "Countrywide did this even though the pooling and servicing agreement governing the mortgage pool that supposedly held the note required that it be delivered to the trustee, the court document shows."

Morgenson continues, in rather measured tones, considering the apparent ramifications of the statement:

"If Countrywide’s practice was to hold onto the note, then investors in this pool and others may question whether the security was constructed properly and legally and may be able to require Bank of America to buy back their securities."

It may be a fair bet to expect this story to appear throughout the news cycle with increased frequency—and magnitude—as the week continues and the implications sink in.


Danette said...

Did you hear? Congress has finally announced the Mortgage Crisis might be worse than they had wanted to admit? Go figure!

Don't know if you saw Frank Rich's piece on Sunday but the title says it all anyway even if you don't read the article "Still the Best Congress Money Can Buy"

Jennie Blackburn said...

Boy, I'd hate to be Linda DeMartini. Hers will be the first head to roll. Today she is a supervisor and operational team leader for the Litigation Management Department. Tomorrow she'll be Linda DeMartini, FORMER supervisor and operational team leader for the Litigation Management Department, currently unemployed. BoA/Countrywide throws homeowners under the bus and they wouldn't hesitate to throw a few employees there, too.

Conchscooter said...

Danette- they keep downplaying and still we slide. You'd think they'd try to catch up.
Jennie- She is a brave woman I'd like to think she had some exit plan, but times like these don't bring out the best in most people so is a rare one indeed.