Looks like my night to post finance humor while I wait for the snow to fall.

[randomness]

I wasn't going to post anything else about Ibanez, but then I came across this bit of fictional dialogue from John Carney of CNBC, on Why It Could Be Very Hard for Banks to Avoid Ibanez Mortgage Catastrophes:

Let’s say you are US Bancorp and you find yourself with a mortgage whose chain of title is incomplete. You took the mortgage from a now bankrupt subsidiary of the now bankrupt Lehman Brothers. Getting someone at Lehman to go through the process of executing the assignment is going to be very difficult. It’s not even clear if anyone at Lehman Brothers has the legal authority to execute an assignment now, while Lehman is bankrupt.

In any case, getting the assignment from Lehman wouldn’t really help you. You’d still have a gap in the chain from Option One to Lehman. It’s probably best to skip over Lehman all together and go directly to Option One to ask for the assignment.

But you have a bit of a problem. You didn’t buy the mortgage from Option One. They aren’t under any contractual obligation to you to execute any documents. So when you call, here’s how the conversation goes.

US Bank dude: “Hey, can I speak to whoever it is who is handling the Ibanez mortgage?”

Option One guy (after some delay): “No one handles that mortgage. We sold it five years ago to Lehman and closed the file.”

US Bank: “Right. Okay. Well, I need you to find someone who will execute an assignment of the mortgage to me.”

Option One: “First of all, no one who handled that mortgage still works here. You might have heard about the mortgage meltdown, right? Second, we sold it to Lehman, according to the file.”

US Bank: “Right. But I bought it from Lehman.”

Option One: “So get the assignment from Lehman.”

US Bank: “They’re an empty company that is in bankruptcy.”

Option One: “I’ve heard about that. Thanks for the news.”

US Bank: “So I need you to execute the assignment.”

Option One: “First of all, you’re going to have to show me that you bought the loan from Lehman. Second, I need to talk to legal to make sure I can assign a mortgage to someone we never dealt with. Third, how much are you willing to pay me to do all this?”

US Bank: “Pay you? I already own the mortgage.”

Option One: “The mortgage we sold to Lehman. If Lehman asks for the assignment, we’ll do it as part of that deal. But, as far as I can tell, I don’t owe you anything. If you want an assignment, you’re going to at least be paying the legal bills for the legal opinion that says it’s okay for us to do this.”

US Bank: "You don't have to be an [expletive deleted] about this."

Option One: "I also don't have to give you an assignment."

Carney goes on to say:

By the way, if you do get Option One to assign it to Lehman, you might find yourself trapped. In that case, the mortgage arguably becomes part of the estate of Lehman—subject to the jurisdiction of the bankruptcy court. Sure, eventually, you may be able to prove that you are entitled to the assignment from Lehman. But you’ll be fighting the other creditors, who will argue that you are just one more unsecured creditor in a long line of people who say that Lehman owes them something.

While this example might be specific to loans that went through Lehman, these kind of problems are not likely to be confined to the sizable part of the mortgage market that went through Lehman at one time or another. A great many of the companies involved have entered bankruptcy or changed ownership. When these companies appear in the ownership chain, “re-documenting” the assignments may be all but impossible.

At the 4closurefraud blog, ForensicMortgageExaminers points out:

One small problem with this guy’s article… Option One has gone bye-bye. They were sold to AHMSI. Of course, AHMSI will probably be willing to play ball with US Bank since they are just about as corrupt as anyone can imagine! They’ll charge a price, but, hey, crime has to pay, right?

rational, commenting at Zero Hedge observes that US Bank even managed to do this, but the problem was that it failed to do so before it foreclosed:

The irony of this example is that just this kind of assignment was successfully achieved in Ibanez. The trustee obtained a "confirmatory assignment" from the holder of record, bypassing the intermediate chain of title. The SJC affirmed this is acceptable, what was NOT acceptable was that this assignment was obtained months AFTER the foreclosure. The irony is that after all the heavy breathing about Lehman in the example, the assignment came not from Option One, which is DEFUNCT - but from American Home Mortgage, Option One's successor in interest. Now while these facts (all documented in the SJC decision) would seem to put the FUBAR scenario to rest, it is noteworthy that the confirmatory assignment was produced so late in the game. But we don't know when the trustee asked for it, so its hard to tell how easily AHM produced it.

At activerain, Synergy observes

The issues are much more complex than you make them out to be. The Lehman MBS that was sold was actually repackaged several times into CLOs, held by hedge funds, investors and securities dealers. To strip the one loan out of the bundle and track it through time is only one part of the nightmare.

The recent Supreme Judicial Court's ruling which upheld the Land Court's reversal of the non-judicial foreclosure has monumental impact on the marketability of these homes. Lenders will not finance without clean title and the title insurers will not lend with possible clouds caused by lack of proper registration of the note during the foreclosure process.

For those who already own a foreclosed home; what are the chances that the asset manager who bought the property at auction and then sold it to an investor who flipped it to a new homeowner - did not have legal title to sell the property because the non-judicial foreclosure was not followed to the letter of the law. Not only are you exposed to the original owner staking a claim of redemption - but what about all the improvements that you made when the original owner brings his moving truck into the driveway to take the home back?

And what about the "representations" of many real estate agents who put their clients into these foreclosed homes? Our E&O company issued new requirements and upped premiums today.

And at Business Insider, black swan asks

What title company will put its neck on the chopping block to insure these mortgages with their broken chains of title? What buyers will take a chance on buying the homes collateralizing these robo-signed mortgages, if there is no title insurance? If banks couldn't afford to hire enough workers to properly execute the transfer of these mortgages in the first place, where will these banks get enough money to hire enough skilled people to fix this mess? Ultimately, mortgage bondholders are in for some serious haircuts. These MBS make junk bonds look like AAA+.

(Links for information on some of the above alphabet soup: SJC, AHM, AHMSI, MBS, CDO, E&O.)

Comments

[nathanjw]

what about all the improvements that you made when the original owner brings his moving truck into the driveway to take the home back?

I was pretty sure, from what I've been reading around the financial/econ blogs, that this never happens. Even if the foreclosure was illegitimate, the owner who was foreclosed upon can make a claim for loss and damages against the bank, but the foreclosure sale itself is considered final.

(And I'm hoping that none of this causes the entire home-sale industry in Massachusetts to seize up, at least not until I close....)

[r-ness.livejournal.com]

The lawyer for the Mark and Tammy LaRace says they moved back in after the Land Court ruling:

Russell said the LaRaces moved back to their home after the 2009 ruling, while Collier said Ibanez has not. "U.S. Bancorp will have to compensate him in exchange for the deed, or will have to walk away," Collier said.

Perhaps the LaRaces' house was still empty but Ibanez's wasn't? I don't know enough about the details.

(From the Reuters article http://mobile.reuters.com/article/topNews/idUSTRE7063M620110107?ca=rdt)

I'm hoping that none of this causes the entire home-sale industry in Massachusetts to seize up, at least not until I close....

Yes, good luck!

[cerebralpaladin.livejournal.com]

It may matter whether the foreclosed home was REO (real estate owned, i.e. the property of the foreclosing bank) or sold to a distinct party. In foreclosure sales, it is very common for the bank to be the only bidder (traditionally, the bank would bid the value of its outstanding mortgage plus fees, but that can sometimes create problems). If everything goes right, the bank then can sell a piece of property that it owns through the regular existing home sale market (i.e. listing it with a realtor or whatever).

If the bank hasn't resold the house, then once the foreclosure turns out to be invalid, the original owner has a clear right superior to the bank's and can move back in.

If the bank has sold to a good faith purchaser for value, then the question becomes (a) what the title rules for the state provide about who is entitled to possession and (b) what the recourse is. Almost certainly, the bank has breached its warranties of sale, especially because it probably sold with a warranty deed, and is liable to the purchaser for the consequences of its error, but there are at least two different scenarios: (1) the new purchaser has the right of possession, but the bank is liable to the old owners for money damages, or (2) the old owners have a right of possession, but the bank is liable to the new purchaser for damages. The new purchasers will then generally have title insurance, so the title insurance company is liable to them for (1) the legal costs involved and (2) to pay more or less upfront any damages they suffer, then stepping into their shoes in holding the bank liable.

Also, note that negotiation is going to be an important part of this--for example, the Ibanezes might have a right to possess, but be willing to sell that right to the new purchasers (really to the title insurance company on behalf of the new purchasers) for a cash payment, which the title insurance company would then try to collect from the bank. Or the bank might be able to cut a deal with the old owners to avoid the liability, although the emotions involved will surely make that more difficult.

Standard disclaimers apply: I'm not your lawyer, this is not legal advice, while I am a property law professor, I am not an expert in issues of title, foreclosure, and sales transactions.

[r-ness.livejournal.com]

I was hoping you or one of the others on my flist with professional expertise would come in on this. Thanks for commenting!

[digitalemur.livejournal.com]

I'm just glad I bought my house before it was in foreclosure. The seller had gotten a subprime mortgage from some outfit associated with Lehman, though whether it was a subsidiary or some other sort of association I don't know, but the paperwork on my purchase looks pretty clean, and I sure _hope_ if they didn't pay their lender back properly it shouldn't involve me. They made enough on the sale to have paid the lender back and then some, but she also had a small business so God knows what she actually did if she had higher interest revolving debt.

Good luck with your closing-- hopefully you'll get it done, and not have to worry!

[achinhibitor.livejournal.com]

What makes the whole thing hilarious is that it's not like the legal requirements haven't been known for decades. The banks hire lawyers, the lawyers should have told them the correct procedure. But then again, the investment banks hire "risk managers" to warn them not to become vulnerable to market meltdowns, and the banks didn't listen to them, either.