This post was first published in January 2010…
The $786 Million Dollar Question No One Wants to Answer
According to one estimate, the total dollar value of foreclosure final judgments entered in Pinellas County in 2009 was $786,464,927.80. The vast majority of those judgments were given to entities who were not the original lender or the lender who’s name appears on the loan documents. As will be described below there are very real questions regarding whether the parties seeking to collect this pot of money are legally entitled to do so. The named plaintiffs that were granted summary judgment and who seek to collect this money read like a who’s who of the dead lender carcasses that litter the annals of American business. Aurora Loan Services, Argent Mortgage, Bear Stearns, Citigroup, Countrywide, JP Morgan all the failed players of American finance are included. Many of these Plaintiffs never originated loans and even if they did (as in the case of Argent, Aurora or Countrywide), the loans they are foreclosing on in some of these cases do not bear their company name.
An Alphabet Soup of a Catastrophe
The most interesting issue surrounding the names of Plaintiffs that appear in foreclosures is the thousands of final judgments that courts have entered in Pinellas County and across the country to exotically-named entities like, ” Ace Secs Corp Trust 2007-Asap2″,” Ace Securities Trust 2005-He6″, ” Bear Stearns Alt-A Trust 2006″, ” Citigroup MTG Trust 2005-He2″. These entities and the thousands of other similarly sounding ” Alphabet Soup Entities” have been issued title to properties after foreclosure sales in courts across the country. The names indicate they are an investment vehicle known as a REMIC or Real Estate Mortgage Investment Conduit. (See Wikipedia here for a full explanation.) After a borrower signs and a mortgage is closed in the name of an initial lender that mortgage was sold to an investment house like Bear Sterns, Citigroup where it is grouped together with thousands of other mortgages, after the group of mortgages are pooled together, they’re given a name say, the ” Citigroup Mortgage Trust, 2005-HE2″.
Breaking the Rules- All of the Rules
The REMIC investment vehicle was designed so that the money coming into the vehicle, (in this case, the monthly mortgage payments made by homeowners) is not taxed by the IRS. The REMIC’s servicer collects each borrower’s monthly payment, takes their fee off the top then the institutional investor who bought into the REMIC is given the monthly payment they are entitled to under the Pooling and Servicing Agreement. Both the pooling and servicing agreement and IRS regulations create very specific timelines and rules that must be followed in order for that REMIC to retain its tax free status. One of the most important rules is that all mortgages that are part of a REMIC must be transferred or formally assigned into the REMIC within 90 days of the startup date or ” birth” of the REMIC. If a mortgage is not formally transferred into the REMIC within this 90 days, it is not legally or effectively in that REMIC and the Alphabet Soup Entity that claims it owns it in foreclosure does not really own it. (For More info on REMICs, click here.)
Lies on Top of Lies With Still More Lies
In their rush to close and fund REMICs, the investment houses played fast and loose with this most important aspect of the vehicle. Loans were closing here in Pinellas County, then pledged to the REMIC but no one ever got around to assigning it into the REMIC””and certainly not within the 90 day period required by REMIC rules. After the homeowner stops paying and a foreclosure is filed the Alphabet Soup Entity needs to doctor up an Assignment of Mortgage to give it some claim of ownership. In the good old days before pesky foreclosure defense attorneys started questioning the integrity of documents provided by foreclosure firms, they could doctor up any old lie of an Assignment of Mortgage they wanted without risking any consequence. Now as courts have begun examining these Assignments, the Plaintiffs have been busted concocting thousands (millions??) of fake assignments and other documents. This issue is related to the ” Lost Note” issue because the note and mortgage are two documents that must stay tied together in order to retain their enforceability against the homeowner. Through sloppiness, greed, lies and fraud, the lenders have separated the documents they need to prove ownership. If they cannot prove ownership, they cannot foreclose the mortgage, they cannot take the property back and the investment is lost until some entity with a legitimate claim of ownership to the mortgage shows up.
I Don’t Care- I’m Not in Foreclosure and I Just Want the Deadbeats Borrowers to Pay
Not so fast. Everyone is affected by this colossal breakdown. It has been estimated that such securitized trusts potentially jeopardize approximately 50% of all long term retirement securities. As this system continues to break down, the value of these investments will plunge, real estate prices will continue to plunge and these decreases will continue to drag down the overall economy. The sloppy and fraudulent assignment and ownership problems call into question the ownership and title to every property that is encumbered by any mortgage and especially any mortgage that has been claimed to be owned by a securitized trust. These legitimate questions about ownership and clean title to properties risks bankruptcy and failure of the title insurance and much greater instability in the US and international financial market. So until the $786 bajillon dollar question gets answered with any real certainty or until we all acknowledge that the question cannot be honestly answered under the existing legal rules, we all will continue to suffer under a massively unstable system. If something is not done to address this problem and correct the fundamental problems that exist a much larger collapse could occur.
For more information or to find out how this affects you personally, whether you are behind on your mortgage, in foreclosure or are invested in the financial markets, contact Matt Weidner at