Oh, and while we're on the whole lost paper trail problem...

[randomness]

...the mortgage-backed securities--whose market collapse started this whole crisis--are facing another bit of a problem.

From The enormous mortgage-bond scandal:

You thought the foreclosure mess was bad? You’re right about that. But it gets so much worse once you start adding in a whole bunch of parallel messes in the world of mortgage bonds. For instance, as Tracy Alloway says, mortgage-bond documentation generally says that if more than a minuscule proportion of notes in a mortgage pool weren’t properly transferred, then the trustee for the bondholders can force the investment bank who put the deal together to repurchase the mortgages. And it’s looking very much as though none of the notes were properly transferred.

This Citibank note (pdf), via FT Alphaville goes into a bit more detail:

Most mortgage trusts were set up as REMICs (Real Estate Mortgage Investment Conduits) which are special purpose vehicles used to pool mortgages. Under the IRS code, REMIC confers a special tax status in which the cash flows to the trust are not taxed. Investors in the trust pay taxes. The tax exempt nature is important. If the trusts were in fact to be taxed, the taxes would distort the yields required by investors.

To qualify as a REMIC under the IRS code and enjoy the beneficial tax treatment, the trust (1) must be passive and (2) cannot acquire any new assets 90 days following the trust’s creation.

If … mortgage documents were never correctly passed through to the trust when it was established, then the trust may not actually own the underlying mortgages it purports to own. Although it is possible that this issue could be remedied by some legal maneuvering, doing so could violate the REMIC status since the trust would be acquiring assets long after the aforementioned 90 day period has expired. Such a violation in turn could trigger a sizeable tax burden for investors. Our speaker indicated that there are a handful of open questions on this front and that this is a legal gray area.

This may be a bigger problem for the banks than some pesky homeowners as bondholders tend to have lots of highly paid lawyers to press their cases.

Comments

[elisaana.livejournal.com]

Thanks for these updates! I'm very curious about how this plays out, but don't follow the news closely enough most of the time now.

On the plus side, it sounds like the government could be getting a huge tax windfall! While it may have to create TARP II to bail the banks out from under this tax burden that they got themselves into, it may not be that bad, since TARP I was actually hugely successful (even though demagogues treat it as a four letter word).

[outlawradio.livejournal.com]

I'm thinking this may be another REMIC modification area the IRS wants to rule on. They've done a number of these since '07, making various modifications non-dealbreakers for REMIC status. This documentation problem is getting a lot of attention -- the President didn't sign the bill last week loosening the documentation requirements for foreclosures. But I think the IRS is more likely to move on this than the President. We'll see what happens, I guess.

[3diff.livejournal.com]

I can't get very excited about this whole issue. These were all legal sales or transfers; the only question is whether the paperwork was properly done. The lawyers will figure out how to make it all work, I'm sure.

[r-ness.livejournal.com]

These were all legal sales or transfers

How do you know that?

[achinhibitor.livejournal.com]

I strongly suspect that nobody is getting foreclosed on who has actually kept up on the payments, so no injustice to the homeowners is being done. But everybody else in the food chain is going to be warring to see who can be stuck with the losses. In particular, the bondholders are currently in line to absorb huge losses when underwater mortgages are foreclosed on. But if they can force the investment bank to rebuy the mortgages, they can shift the losses onto the banks. So the bondholders have a huge incentive to force that point.

Though it's sort of amusing that somebody lent the money for the mortgage but doesn't have the security agreement to enable them to foreclose. I guess that reduces them to "general creditor", which is going to make it a lot harder to collect the money. Boo-hoo, one is responsible for keeping one's paperwork straight.

[r-ness.livejournal.com]

I strongly suspect that nobody is getting foreclosed on who has actually kept up on the payments, so no injustice to the homeowners is being done.

There are cases in which your suspicion is wrong:

http://www.sun-sentinel.com/business/fl-wrongful-foreclosure-0922-20100921,0,36776.story

When Jason Grodensky bought his modest Fort Lauderdale home in December, he paid cash. But seven months later, he was surprised to learn that Bank of America had foreclosed on the house, even though Grodensky did not have a mortgage.

Grodensky knew nothing about the foreclosure until July, when he learned that the title to his home had been transferred to a government-backed lender. "I feel like I'm hanging in the wind and I'm scared to death," said Grodensky. "How did some attorney put through a foreclosure illegally?"

http://www.presimetrics.com/blog/?p=110

My wife, deep into her third trimester of pregnancy, went out to run some errands with my mother and a family friend. It was pouring, and when they got back to the house, they saw a piece of paper stapled to a little tree at the end of our driveway. It was a notice from the Sheriff’s Department that our house was going to be auctioned off on October 1st.

Now, obviously it had to be a bad joke. After all:

1. We had only bought the house the previous year and were about two months ahead on our mortgage.
2. The plaintiff was CountryWide, which is not the company with which have a mortgage.
3. The name of the defendant from whom the home was to be foreclosed was not the legal owner of the house – that is to say, my wife or I. In fact, the name of the defendant was similar to the name of the previous owner of the home, but the spelling was definitely off.
4. From what we heard of Sheriff’s auctions, notices tend to be left on the door. Not stapled to a tiny little tree in the pouring rain.

But when my wife checked the Sheriff’s site on-line, it turns out that, indeed, our home was slated to be auctioned off on October 1st. Multiple calls to the Sheriff’s office were not returned. As to CountryWide – who exactly do you call at CountryWide? There’s no “Press 4 if you have no relationship with CountryWide but we’re trying to seize your house anyway.” Ironically, if we did have a delinquent CountryWide mortgage, getting somewhere with them might have possible as any of their call center representatives would have been able to handle taking a payment. But the situation we were in, that they put us in, isn’t one of the options that their call center seems equipped to sort out.

And a case that a lot of people in Massachusetts may have heard of: http://www.tampabay.com/news/business/realestate/bank-of-america-forecloses-on-house-that-couple-had-paid-cash-for/1072632

Charlie and Maria Cardoso are among the millions of Americans who have experienced the misery and embarrassment that come with home foreclosure.

Just one problem: The Massachusetts couple paid for their future retirement home in Spring Hill with cash in 2005, five years before agents for Bank of America seized the house, removed belongings and changed the locks on the doors, according to a lawsuit the couple have filed in federal court.

Early last month, Charlie Cardoso had to drive to Florida to get his home back, the complaint filed in Massachusetts on Jan. 20 states.

The bank had an incorrect address on foreclosure documents — the house it meant to seize is across the street and about 10 doors down — but the Cardosos and a Realtor employed by Bank of America were unable to convince the company that it had the wrong house, the suit states.

The banks are making mistakes. Obviously, mistakes happen, but the process is supposed to minimize the number of wrongful foreclosures. In the press of current events, and the haste to clear backlog, it seems that more mistakes are getting through.

[achinhibitor.livejournal.com]

I haven't heard these delightful stories. So it seems that the legal process provides little or no protection against randomly incorrect foreclosures.