Mortgage workarounds

I found this blog today. A Florida lawyer who’s spied some rather large holes in the knickers of mortgage servicers and is pointing it out to all who’ll listen. God might have created trust, but the Devil created admin to keep track of it. Unfortunately, mortgage servicers and the banks themselves have been extremely sloppy with admin– no wonder, with all the checks they were cashing for a while.

“We are all familiar with the securitization process. The steps, if not the process, is simple. A borrower goes to a mortgage lender. The lender finances the purchase of real estate. The borrower signs a note and mortgage or deed of trust. The original lender sells the note and assigns the mortgage to an entity that securitizes the note by combining the note with hundreds or thousands of similar obligation to create a package of mortgage backed securities, which are then sold to investors.

“Unfortunately, unless you represent borrowers, the vast flow of notes into the maw of the securitization industry meant that a lot of mistakes were made. When the borrower defaults, the party seeking to enforce the obligation and foreclose on the underlying collateral sometimes cannot find the note … a person seeking to enforce a missing instrument must be a person entitled to enforce the instrument, and that person must prove the instrument’s terms and that person’s right to enforce the instrument … Enforcement of a note always requires that the person seeking to collect show that it is the holder.”

There were a number of lenders who have simply gone under. Another lender or servicer may have bought the mortgages, but might not actually have any paperwork to back it up. Mortgages/deeds/encumbrances are public record. Without document verification, I could claim I own your mortgage now and have your payments sent to me. Even bigger hole: if I’m a sleazy servicer or lender, I may have told my MBS holders, perhaps some town’s pension fund in Norway, that their investment is kaput, here’s 20 cents on the dollar, have a nice day. Mortgage package owners don’t know the exact house addresses they held a claim to, and they wouldn’t have the deeds. Borrower has no idea who the underlying holder(s) of the mortgage are. They are only in communication with the servicer. Servicer continues to collect mortgage and try to repo if it comes to that. But the point is that the two parties who really have the interest in this are completely in the dark, both relying on the servicer.

I am speculating here, but I think it’s a good one. In my experience, processes tend to get “complicated” when something’s trying to be hidden. I am suggesting that either the underlying owners of a mortgage package might be being told it’s worth 20 cents on the dollar–take the settlement now because we [the servicer] foreclosed and resold on your behalf [but we're still making deals with the borrower or snarfing TARP funds to keep the party going]. Or that the package of mortgages could’ve been sold more than once, which I’d be willing to bet happened in some cases. Either way, it’s fraud. Doing things like asking for the actual documentation may be striking at the heart of some seriously criminal activity.

One more thing: the Devil, being a thorough sort, also created insurance for defaults. Now the servicer can tell the MBS holder to go bug their insurance company for some coverage for their losses. Then the insurance company soils itself when it finds they are a wee bit overextended on all those policies they wrote (expecting that 98% of them wouldn’t be called in). I can imagine the talk with the insurance company sounding something like this.

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