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Tuesday, January 11, 2011

Shoddy documentation, moral hazard seen in Massachusetts foreclosure ruling

Tuesday, January 11th, 2011, 12:17 pm

The foreclosure cases brought against defaulted borrowers by U.S. Bank and Wells Fargo were undone due to careless documentation practices and little else, according to mortgage market players.

Furthermore, the analysts believe the greater impact due to the case will be limited in scope, for now, but larger issues concerning mortgage borrowers in default may bubble to the surface later.

Both mortgages were securitized and the issuers of those bonds, U.S. Bank and Wells Fargo sought foreclosure after nonpayment by the mortgagors.

"The Massachusetts ruling is largely being dismissed by the street (except by the equity markets)," said Scott Buchta, head of Investment Strategy at Braver Stern Securities. "Analysts point to sloppy record as being the focus of the decision rather than a bigger view on the securitization model," he said.

"While we feel that the immediate impact of this ruling will be minimal, we can not fully dismiss the long-term impact that this ruling may have on the markets," Buchta adds.

The case, where the Supreme Court in Massachusetts sided with defaulted borrowers, surnames Ibanez and LaRace, on foreclosure proceedings and upheld a lower court decision from 2007, has left the mortgage market scratching its head.

In the case, both U.S. Bank and Wells Fargo had the opportunity to clarify the title record on both the properties before submitting the evidence to the court. What the banks did instead, they say, was highly questionable.

"For reasons we cannot understand, U.S. Bank provided the Land Court with a private placement memo (“PPM”), which described the SASC 2006-Z transaction but of course did not identify individual mortgages," Paul Jablansky MBS, CMBS & ABS Strategy at the Royal Bank of Scotland.

In the other case, Jablansky notes that Wells Fargo provided a pooling and servicing agreement and an unexecuted copy of the mortgage loan purchase agreement, "it surprisingly did not produce an official schedule of loans with names, addresses, or loan numbers that could unambiguously identify the LaRace mortgage. "

However, there are two larger worries to consider outside the securitization spectrum. One is the potential for a deluge of similar lawsuits. Regardless of the outcome from those suits, the foreclosure sales pace with constrict further and drive prices to artificial highs.

James Frischling, president at NewOak Capital, also points to the question of moral hazard the Ibanez and LaRace cases may create.

"No doubt the process of documenting the titles of these assets was careless, and that we need a system that prevents banks from unlawfully foreclosing on homes of borrowers," he said. "What we can’t afford, is a system that protects severely delinquent borrowers to remain in their homes for free."

"The best way to increase the number of delinquent borrowers and extend the gridlock is increase the number of borrowers that believe that no longer meeting their obligations is a viable strategy as a result of careless documentation,” Frischling adds.

1 comment:

  1. But consider this: With the advent of mortgage swaps, the realality is that in a lot of cases the mortgage had been paid off - meaning that the lender has actually been compensated. The only way to insure against double payments is for the entity claiming standing provide that a balance remains due and owing to the entity either claiming standing on its behalf or on behalf of its client. We should not provide an undeserving mortgage servicer any more access to a note than provide a homeowner a path to avoid obligations of a note. Remember notes only secure a loan - the homeowner owns the home.