As more homeowners are finding themselves either underwater in home equity or unable to afford mortgage payments, there is a growing tendency to dispute a foreclosure filing by the lender or even the underlying mortgage itself. Attempts at challenging mortgages due to fraud have not been exceedingly successful so more borrowers are using the assignment and securitization process as grounds to invalidate or challenge a foreclosure.
The issue is substantial enough to warrant being mentioned in an advisory paper released by PIMCO, a bond fund company which owns a large holding in residential mortgages. In an advisory message to their investors, an executive vice-president discloses the following:
If borrowers know they have a reasonable basis to legally contest the foreclosure, the recent revelations may embolden many more borrowers to do so. Even borrowers who know they can’t afford the home may choose to contest foreclosure if it increases the free rent period or if they have hope of improving their financial situation during the prolonged delay. Borrowers may cite an array of reasons to contest foreclosure: affidavit irregularities, lost notes, improper standing to foreclose, misapplied payments, incorrect ARM calculations, excessive delinquency-related expenses (late fees, inspections, force placed insurance), failure to offer a loan modification (which is required in some jurisdictions), or problems associated with the origination of the loan.
The mortgage assignment chain gap issue was originally dismissed as a non-issue, now some mortgage holders such as PIMCO are classifying the risk as “moderate” with possible “dire consequences”. New information is revealed in news reports regularly, and the depth of the issue is difficult to determine. The final resolution and damage to finances for mortgage owners will be determined in part by legislation and negotiation of government and cross-party acceptance of liability.
This is also reflected in the PIMCO statement:
If new information reveals far more severe impairment in the note (obligation to pay) or the mortgage (the lien on the property), things could get a whole lot worse for RMBS investors (as well as other mortgage holders and guarantors, such as Fannie and Freddie).
It is unknown to what degree bond investors such as PIMCO have factored into their risk analysis a further deterioration in home prices. More declines in values would hit investors in two ways. Properties already in the foreclosure pipeline would have a lower asset value to the fund upon sale. A less measurable factor is to what degree homeowners will increase the rate of strategic defaults if their out-of-equity position worsens. This week has produced some serious predictions about future home values from several sources.
Boston Properties CEO Mort Zuckerman said he is currently pessimistic on home prices, which will be in a decline which is “going to continue for several years.” He also said “So it’s an accelerating downtrend in those prices. This is on top of three to four years of declines.” See the CNBC interview below.
The PIMCO paper offers the opinion that any technical defects in mortgage assignments can be fixed:
our understanding is that the cure for the MERS problem is simply to assign the mortgage to an entity that does have legal standing to foreclose (e.g., the RMBS trustee).
What if a loan originator failed to provide documentation substantiating
that what’s known as a “true sale” actually occurred when mortgages were
transferred into trusts — documentation that is supposed to be provided
no longer than 90 days after a trust is closed? Well, in that situation, a true
sale may not have legally happened, and that doesn’t appear to be a
problem that can be smoothed over by revisiting and revamping the paperwork.
a) Fraudulent Document Filed in the Court Record and in Public Records. The Assignment of Mortgage filed in the instant case with the Complaint and again on October 22, 2009 and which was recorded in Duval County Public Records on February 23, 2009 constitutes a fraud upon the court.
b) The Assignment of Mortgage which was recorded in the Public Records of Duval County unlawfully clouded the title of the subject property.
c) The Plaintiff, as Trustee for the benefit of the Certificateholders for Ameriquest Mortgage Securities Trust 2006-M3, Asset-Backed Pass-Through Certificates Series ARSI 2006-M3, had no requisite authority conferred upon it by the operative and governing documents, the PSA, to accept any conveyance of a mortgage loan in February 200
Interestingly, there are some investors who may realize gains from complications in untangling the mortgage assignment issues. Sections of investments which are not exposed to principle and only rely on interest only payments will receive more interest as the foreclosure status languishes. According to the PIMCO document:
Third, RMBS investors will likely be affected as delayed liquidations result in longer duration and higher losses (due to greater costs, resulting from the longer timelines). On the other hand, credit IO RMBS will likely benefit, as the IO (interest only) period will last longer, thereby increasing the value of the interest component of their cash flows (a credit IO is a bond that is impaired to the degree that no principal is expected to be received and the only value is remaining interest payments).
Regardless, it will be interesting to watch how the parties involved navigate this combination of subjects. Property titles, mortgage assignments, institutional investors, and legal issues will all be factors in resolving the conflicts. On the other hand, if the overall value of all the properties combined is not enough to pay back all the mortgages, it really does not matter because then the entire MBS system is underwater. The LA Times reports that entire cities and even regions may never recover. Ghost towns are not limited to dead subdivisions, but now are projected to consume towns. “The housing boom elevated home prices in a number of areas far, far above what can be supported by the economic fundamentals, and so prices have fallen significantly, and they will remain below their previous peaks easily for a decade, or even two decades,” said Celia Chen, a housing economist with Moody’s Economy.com. She also predicts that a full recovery in areas such as in California, Nevada, Arizona and Florida won’t occur until 2030.