Holy Krap This Mess Is More Tangled Than I Realized!

[CricketOnTheHearth]

I’ve learned some more details about the mortgage market and holy crap, the mortgages are like flies deep in a web; it will by hideously difficult to extract them to do proper mods (such as principal write-down).

1) Mortgages are not “controlled by the banks” any more. Actual day-to-day management of them is in the hands of “mortgage servicers” who are separate from the actual owners or holders of the mortgages, and have every perverse incentive not to get them worked out.

2) Then, who actually owns the mortgages, or at least holds the notes, is anything but simple. Apparently, “ownership” has been sliced and diced up among so many interested parties that who knows how those little mortgage note flies can ever be extracted from the CDO tranche webbing. A gold mine of comments on Mr. Mortgage’s 7/19 post tell the tale:

Patrick Says:
July 19th, 2009 at 6:38 pm

Guys,

You are missing much.

The loan mods are being done, after the calculation of Net Present Value, regarding what brings more money for the investors, as dictated by the Pooling and Servicing Agreements. Whatever is most profitable for the investor, is what is done.

The PSA covers the guidelines for mods and eductions. Most do not even give reductions any consideration. If there is no mention in the PSA of reductions, then reductions are not an option.

Most people do not even realize the purpose for TARP money. The majority of the TARP money is going to the
Master Servicers of these bad loans. The reason is that for every missed payment by a borrower, the Master Servicer must “advance” the missed payments to the investor to keep up the income stream. The advances can only stop when it becomes a point of realization that the borrower will never be able to make up the payments, and foreclosure is the only option. Then the NOD is filed, the Master Servicer stops making advances, and once the home is foreclosed upon, the Master Servicer can sell the home and recoup the advances, leaving the Junior Tranche holders holding worthless bonds.

Patrick Pulatie
loanfraudinvestigations.com

– – –

Patrick Says:
July 20th, 2009 at 8:00 am

There is so much involved in the Securitization Process, and after a year of researching it, I only know probably have about 70% of it understood.

You nailed it on the Junior Tranches. Carrington has filed suit against AHL for just that reason. I am actually in the process of talking with Carrrington about supporting their lawsuit. The reason is that what I can show, would open up Carrrington to save the Junior Tranche investors, yet allow mods to take place.

When the loans were securitized, different tranches were awarded different income streams from the loans.
The problem is that the Senior Tranches are paid first, whether it is the income streams, or it is payoff of the loan. If there is not enough money from the payoff or the income stream, then the Junior Tranche holder is “holding the bag”.

When the loans were securitized, there were “protections” in placed for such eventualities. However, these protections were based upon certain probabilities of events. What has actually occurred was far beyond the estimated probabilities.

The Servicers do have the ability to conduct loan modifications to a certain degree. However, it must meet a Net Present Value Test. The problem is that there is no true set standard for the test. The Fannie Mae/Freddie Mac test has tried to standardize the test, but the Servicers can make certain assumptions about the loans, and can work around the standards in that manner.

For the Private Securitizations, there is no standard for this determination.

Another thing that affects the Tranche holdership is the Credit Enhancements. These are the methods and processes of attemtping to ensure that if defaults did occur, there would be funds available to pay the income streams.
Some of the enhancements were

Credit Default Swaps

Substitution of bad Loans with new “good” loans.

Income Reserves from monthly payments. The Tranche owner might receive a portion of the monthly payment,
with the rest going into a “slush fund” in the event of too many defaults, and missed payments would be made from this fund.

Now, imagine this. Many of the investors who bought tranches would then take those tranches and break them up into new, smaller tranches and sell those slices off. And some of the new buyers would do the same thing again. Just imagine the headaches on all of that.

It would take hours to explain this whole mechanism. I am having the devil of a time explaining it to attorneys and writing it up in a simple format for the courts to understand.

– – –

housingrealist Says:
July 20th, 2009 at 9:43 am

Patrick, I think what you described at the end is what they refer to as CDO squared and CDO cubed. It is amazing how complex, and nearyly impossible it will be to deal with this problem. I think it may just have to play out.

Mr. M – How do you see your princ. write down happening with the issues we’ve been discussing?

– – –

Patrick Says:
July 20th, 2009 at 11:29 am

The only way to get true principal reductions would be to litigate them, for the most part. This would mean making each case so expense for the servicer and lender that they would accept the easiest route.

Part of this tactic would involve attacking the legality of MERS and also Securitization, which involves “breaking” holder in due course, which I am working on now.

– – –

JB Beyer [http://www.portlandrealestateinvestmentgroup.com/] Says:
July 20th, 2009 at 4:38 pm

Patrick

Is there a way you could email sample of standard PSA to see how it reads…very interesting..

also lots of outsourcing loss mitigation going on also

Saxon is outsourcing to Hill Bridge Capital Group

Taylor Bean to Sparta Servicing

CIT outsourcing to Loan Resolution corp.

we closed a short sale in May where American Home Mortgage originated it and sold to Citi Financial. American Home mortgage maintained servicing when payments were good. When it went south they transferred to Real Time Resolutions.

We played ‘who has the damn note’ for awhile finally we foundStrategic recovery group had it on someone’s desk for 3 months.

who are all of these companies?

– – –

Benzy Says:
July 21st, 2009 at 12:28 pm

I have been receiving quite a few mailings and a voice mail from Chase asking me to call about refinancing into fixed (I have a 5/1 ARM set to recast in 2010). And I’m talking a letter a week for the past month. I am not sure if Chase is doing some mass promotion being “new” in CA or targeting ex-WaMu bubble borrowers specifically.

I am trying to fix a threshold for doing business with them.

I estimate my rate indexed to the 1 year CMT to drop from 5.x to 3.x on recast day. My home is still above water by 5-7 %. And, in all of WaMu’s wisdom it made more sense for them to lend to myself with stated income than to both my wife and I, i.e my wife is NOT on the loan.

So, stick with 5.x% for through mid 2010, the 3.x % through mid 2011 and see how this economy plays out, or refinance to current jumbo rates (6.5+) and expose my wife’s credit to this home?

The answer seems clear to me, but my situation illustrates the leverage many prime borrowers have over the lender.

[svelte]

You must have missed this infamous thread from Piggington history.

http://piggington.com/subprime_mess_explained_in_a_cartoon

[svelte]

You must have missed this infamous thread from Piggington history.

http://piggington.com/subprime_mess_explained_in_a_cartoon

[svelte]

You must have missed this infamous thread from Piggington history.

http://piggington.com/subprime_mess_explained_in_a_cartoon

[svelte]

You must have missed this infamous thread from Piggington history.

http://piggington.com/subprime_mess_explained_in_a_cartoon

[svelte]

You must have missed this infamous thread from Piggington history.

http://piggington.com/subprime_mess_explained_in_a_cartoon

[CricketOnTheHearth]

Oh yeah!

That ‘un’s a classic!

I guess what I needed drummed into my head is that the *responsibility* for the mortgages is also divided into teeny tiny bits… the people managing (servicing) them have absolutely no skin in the game.

[CricketOnTheHearth]

Oh yeah!

That ‘un’s a classic!

I guess what I needed drummed into my head is that the *responsibility* for the mortgages is also divided into teeny tiny bits… the people managing (servicing) them have absolutely no skin in the game.

[CricketOnTheHearth]

Oh yeah!

That ‘un’s a classic!

I guess what I needed drummed into my head is that the *responsibility* for the mortgages is also divided into teeny tiny bits… the people managing (servicing) them have absolutely no skin in the game.

[CricketOnTheHearth]

Oh yeah!

That ‘un’s a classic!

I guess what I needed drummed into my head is that the *responsibility* for the mortgages is also divided into teeny tiny bits… the people managing (servicing) them have absolutely no skin in the game.

[CricketOnTheHearth]

Oh yeah!

That ‘un’s a classic!

I guess what I needed drummed into my head is that the *responsibility* for the mortgages is also divided into teeny tiny bits… the people managing (servicing) them have absolutely no skin in the game.

[UCGal]

[quote=CricketOnTheHearth]Oh yeah!

That ‘un’s a classic!

I guess what I needed drummed into my head is that the *responsibility* for the mortgages is also divided into teeny tiny bits… the people managing (servicing) them have absolutely no skin in the game.[/quote]

One of the better suggested reforms I’ve heard would require loan originators (who often act as servicers, as well) keep some skin in the game on the mortgage for a period of x-years after the loan is made. If the underwriters had to hold the loan longer, they’d underwrite more conservatively.

Example:
You loan a coworker $100 to cover their rent shortfall till the next day (payday?). You don’t have much worry that they’ll pay you back, since the time period is so short.

Now make the same loan but make it for a year… lots of variables and risks come into play. They could lose their job, they could die, etc… Even if they’re an upstanding person, the risks are higher the longer the term of the loan.

Translate that into mortgages. In the old days (back before the big GSE’s started buying up mortgages) banks made loans locally and new their customers. They did full underwriting and were very conservative. They had to be because they HELD the mortgage for the life of the loan. When banks started selling off the mortgages, the underwriting started changing… they only had to have confidence the loan wouldn’t default before they were able to sell it off. A much shorter period (6months to a year, typically).

It’s been suggested that loan originators be held on the hook for defaults for a period of years after the loan is sold. If the loan defaults, it would automatically revert to the originator/servicer. Kind of like bad seafood.

[UCGal]

[quote=CricketOnTheHearth]Oh yeah!

That ‘un’s a classic!

I guess what I needed drummed into my head is that the *responsibility* for the mortgages is also divided into teeny tiny bits… the people managing (servicing) them have absolutely no skin in the game.[/quote]

One of the better suggested reforms I’ve heard would require loan originators (who often act as servicers, as well) keep some skin in the game on the mortgage for a period of x-years after the loan is made. If the underwriters had to hold the loan longer, they’d underwrite more conservatively.

Example:
You loan a coworker $100 to cover their rent shortfall till the next day (payday?). You don’t have much worry that they’ll pay you back, since the time period is so short.

Now make the same loan but make it for a year… lots of variables and risks come into play. They could lose their job, they could die, etc… Even if they’re an upstanding person, the risks are higher the longer the term of the loan.

Translate that into mortgages. In the old days (back before the big GSE’s started buying up mortgages) banks made loans locally and new their customers. They did full underwriting and were very conservative. They had to be because they HELD the mortgage for the life of the loan. When banks started selling off the mortgages, the underwriting started changing… they only had to have confidence the loan wouldn’t default before they were able to sell it off. A much shorter period (6months to a year, typically).

It’s been suggested that loan originators be held on the hook for defaults for a period of years after the loan is sold. If the loan defaults, it would automatically revert to the originator/servicer. Kind of like bad seafood.

[UCGal]

[quote=CricketOnTheHearth]Oh yeah!

That ‘un’s a classic!

I guess what I needed drummed into my head is that the *responsibility* for the mortgages is also divided into teeny tiny bits… the people managing (servicing) them have absolutely no skin in the game.[/quote]

One of the better suggested reforms I’ve heard would require loan originators (who often act as servicers, as well) keep some skin in the game on the mortgage for a period of x-years after the loan is made. If the underwriters had to hold the loan longer, they’d underwrite more conservatively.

Example:
You loan a coworker $100 to cover their rent shortfall till the next day (payday?). You don’t have much worry that they’ll pay you back, since the time period is so short.

Now make the same loan but make it for a year… lots of variables and risks come into play. They could lose their job, they could die, etc… Even if they’re an upstanding person, the risks are higher the longer the term of the loan.

Translate that into mortgages. In the old days (back before the big GSE’s started buying up mortgages) banks made loans locally and new their customers. They did full underwriting and were very conservative. They had to be because they HELD the mortgage for the life of the loan. When banks started selling off the mortgages, the underwriting started changing… they only had to have confidence the loan wouldn’t default before they were able to sell it off. A much shorter period (6months to a year, typically).

It’s been suggested that loan originators be held on the hook for defaults for a period of years after the loan is sold. If the loan defaults, it would automatically revert to the originator/servicer. Kind of like bad seafood.

[UCGal]

[quote=CricketOnTheHearth]Oh yeah!

That ‘un’s a classic!

I guess what I needed drummed into my head is that the *responsibility* for the mortgages is also divided into teeny tiny bits… the people managing (servicing) them have absolutely no skin in the game.[/quote]

One of the better suggested reforms I’ve heard would require loan originators (who often act as servicers, as well) keep some skin in the game on the mortgage for a period of x-years after the loan is made. If the underwriters had to hold the loan longer, they’d underwrite more conservatively.

Example:
You loan a coworker $100 to cover their rent shortfall till the next day (payday?). You don’t have much worry that they’ll pay you back, since the time period is so short.

Now make the same loan but make it for a year… lots of variables and risks come into play. They could lose their job, they could die, etc… Even if they’re an upstanding person, the risks are higher the longer the term of the loan.

Translate that into mortgages. In the old days (back before the big GSE’s started buying up mortgages) banks made loans locally and new their customers. They did full underwriting and were very conservative. They had to be because they HELD the mortgage for the life of the loan. When banks started selling off the mortgages, the underwriting started changing… they only had to have confidence the loan wouldn’t default before they were able to sell it off. A much shorter period (6months to a year, typically).

It’s been suggested that loan originators be held on the hook for defaults for a period of years after the loan is sold. If the loan defaults, it would automatically revert to the originator/servicer. Kind of like bad seafood.

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