MERS and the US foreclosure mess

[alexlee]

As some may know, the US mortgage industry is in a new mess with lenders unable to provide proper documentation to back up foreclosures. As a result, many foreclosures are being fought and delayed.

Article
http://www.businessweek.com/magazin...6208349.htm?chan=magazine+channel_top+stories

Warning - 5 meg file:
http://images.businessweek.com/mz/10/44/1044_78foreclosure.pdf

The key is the MERS, or Mortgage Electronic Registration System. Seems that a lot of mortgages in the US have 'MERS' as the mortgagee. Within MERS, it then states which lender actually owns the mortgage.

Think of MERS as a nominee system. For example, a share may be owned by ANZ Nominees, but internally ANZ 'knows' it's owned by John Smith. The current breakdown is that the courts won't accept that the mortgage is actually owned by John Smith. Think of it as the courts rejecting that you have money when you show them a bank statement, because the court won't accept the bank account system.

The advantages are clear: when people want to pool the mortgages and sell them, it's just a matter of doing a transfer within MERS, as opposed to changing the title deed. This is especially useful as a lot of land title deed systems in the US seem to be local, as opposed to Australia where it's by state. Imagine if every local council was in charge of lodging title deeds: much greater difference in quality, etc.

Now, in Australia the lender puts their own name on the title deed as mortgagee. So your mortgage will show ANZ or CBA or whoever, for the life of the loan.

This raises a few interesting points and questions for Australian mortgages:
1) This implies ANZ, for example, owns your loan until you repay it. How do their mortgage-backed bonds work? Is it more a general bond that is not tied to specific mortgages? Or internally, does each institution 'mark' a mortgage to be included in the pool for a particular bond? How does ownership work if it's all just owned by ANZ and how would the buyer of a bond, if specifically tagged to a pool of mortgages, enforce their ownership if all the mortgages are legally just owned by each bank?

2) It appears Australian institutions can't slice and dice loans like the US can, because it would likely involve change of mortgagee, and I've never seen that. In the US, it's unclear who even owns the mortgage, and who payments should be made to, because they've been sold so many times. Part of the issue in the US was that because they could just offload all the mortgages, lenders just focused on getting the volume because they didn't take on the risk. Australian banks appear to be more on the hook for the mortgages.

3) Interest rates are much more uniform. When banks raise variable rates, they usually raise them on all their variable products.

As dangerous as the phrase 'it's different here' is, it would appear there really are many fundamental, structural differences between the US and Australia. This is not a statement about whether Australian property is overvalued or whatever. However, looking at the causes of and issues relating to the US property bubble and (still developing) mortgage crisis, a lot of the factors that contributed to it doesn't exist in Australia. As in, it really can't happen here because we don't have the system to do it. Therefore, at least those specific issues (confusion about mortgage ownership, in this case) are not problems for us.

 

[Indifference]

This is something I have been been reading about almost daily...

There are alot of anxious recent foreclosure purchasers at the moment, because the properties they have bought could have legal technical glitches in the paperwork as a result of this mess. Consequently, some of the big banks are putting a temporary freeze on foreclosures... yep, it is that scary. It seems some foreclosures have not been completely legal as the promissory notes associated with the mortgage liens were not correctly handled.

It boils down to banks forcibly selling properties they technically have no legal right to sell... OMG, can they do that? We will see...

It is an interesting play of events and I continue to watch with eager anticipation of the wash-up...

 

[Spectre]

Great thread Alex
I was reading this a few days ago.
http://www.americasnewsonline.com/bank-foreclosure-fiasco-gets-worse-now-all-50-states-are-in-910/

IMO really theres a lot of mixed signals coming out of the US. I saw an Economist speak for MLC here in Brisbane about six months ago and they thought the US was going to be growing.

 

[Lofty]

Hi Alexlee

In relation to your point (1), you're referring to mortgages that operate under the Securitisation process. Australia's big 4 don't uses Securitised funds for their home loans.

You will notice that all the mortgagees on all securitised loans are State registered Trustee companies, e.g. Perperual Trustees, Permanent Custodians, etc. There are many and varied Mortgage Managers of the loans that make up these bonds but the Mortgagee is always one of these Trustee companies.

It is therefore very easy for an agreement to exist between the bond owner and the single mortgagee (the Trustee company). It is this agreement between just two parties that gives the bond owner effective control.

Cheers, Paul

 

[alexlee]

In relation to your point (1), you're referring to mortgages that operate under the Securitisation process. Australia's big 4 don't uses Securitised funds for their home loans.

So the bonds that the big 4 issue are just bonds secured generally by the bank as opposed to a specific pool (and government guaranteed, these days)?

You will notice that all the mortgagees on all securitised loans are State registered Trustee companies, e.g. Perperual Trustees, Permanent Custodians, etc. There are many and varied Mortgage Managers of the loans that make up these bonds but the Mortgagee is always one of these Trustee companies.

It is therefore very easy for an agreement to exist between the bond owner and the single mortgagee (the Trustee company). It is this agreement between just two parties that gives the bond owner effective control.

I see. However, servicing seems to be specific. e.g. if I take out a loan with RAMS, I still make my payment to RAMS regardless of who the loan is sold to. So RAMS continues to act as the loan processor. Whereas in the US, it seems that there is more confusion as the loan processor is often different from the organisation that originated the loan.

Then in theory, interest rates for fully securitised lenders should completely track whatever underlying reference rate is, as funding cost is borne by the bond buyer? So in terms of the second-string fully securitised lenders raising their rates, especially the lo-doc and no-doc stuff, was it because the mortgaged backed securities they sold were relatively short term, so their costs increased when they had to roll them because the risk premium increased?

 

[Lofty]

Hi Alexlee

A good overview of the Securitisation process can be read at:
http://australiansecuritisation.com.au/docs/residential_mortgage_backed_sec.pdf

Actually, if you have a loan with RAMS you now make your payments to Westpac. The pdf I mention above shows who normally collects the payments in Australia and should answer most of your questions about the Australian system. I'll leave comparisons to the U.S to others.

Cheers, Paul

 

[Amadio]

Whereas in the US, it seems that there is more confusion as the loan processor is often different from the organisation that originated the loan.

Yes. And then continually changes for the life of a loan. During a 20 year mortgage we were notified about 5-6 times that our mortgage check had to be sent to a different company. We always verified this, but many US homeowners do not. They get behind because they haven't a clue who they should be paying and if you pay the wrong company it's a devil to get the money back and re-send to the current holder.

It's still happening now with our US credit cards. The Bank of America became GE became OMNI became Virgin became....it's extremely messy, especially if you start with 3-4 credit cards to begin with which is common in the USA. It's a big merry go round, so if BoA card became the Omni card, sometimes the Omni card became the BoA card, but you had to be careful because the rules regarding the use of the card still remained with the originator.

If you are confused reading this, imagine how some of the semi-illiterate poor folk of America are trying to cope not understanding anything of how the system works. Or doesn't work

You are right Alexlee, it is very different here.

 

[kotim]

When you take out a bank loan for a house in Australia you sign up and give the banks power of attorney and with that amongst other things they create a promissory note. Banks do all sorts of strange things.

Just go into a bank and ask them to explain what they do and they will say, "go and speak to a lawyer"

You'd be surprised by the number of banking people in Australia who don't realise that promissory notes are created via power of attorney.(or in fact if they do know don't want to tell you.)

The banks are a necessary evil but they don't have to pay tax on the repayment of capital that they don't really lend in the first place, that is why banks make such big profits.

The big problem is that corporations were initially 'designed' to improve everythign for us, unfortuantley the game has changed where we are now there for the benefit of the banks.

Australia is not that much different to USA people just think we are.

 

[Token Funder]

Hi Alexlee

In relation to your point (1), you're referring to mortgages that operate under the Securitisation process. Australia's big 4 don't uses Securitised funds for their home loans.

You will notice that all the mortgagees on all securitised loans are State registered Trustee companies, e.g. Perperual Trustees, Permanent Custodians, etc. There are many and varied Mortgage Managers of the loans that make up these bonds but the Mortgagee is always one of these Trustee companies.

It is therefore very easy for an agreement to exist between the bond owner and the single mortgagee (the Trustee company). It is this agreement between just two parties that gives the bond owner effective control.

Cheers, Paul

The big 4 have used securitisation, just not in a significant way.

Not all securitized programs use a trustee as lender of record, in tends only to be the non-banks. St George, by way of example, had a large securitisation program.

 

[Token Funder]

When you take out a bank loan for a house in Australia you sign up and give the banks power of attorney and with that amongst other things they create a promissory note. Banks do all sorts of strange things.

Just go into a bank and ask them to explain what they do and they will say, "go and speak to a lawyer"

You'd be surprised by the number of banking people in Australia who don't realise that promissory notes are created via power of attorney.(or in fact if they do know don't want to tell you.)

The banks are a necessary evil but they don't have to pay tax on the repayment of capital that they don't really lend in the first place, that is why banks make such big profits.

The big problem is that corporations were initially 'designed' to improve everythign for us, unfortuantley the game has changed where we are now there for the benefit of the banks.

Australia is not that much different to USA people just think we are.

I await delivery of the usual conspiracy theories with interest

 

[Rolf Latham]

I await delivery of the usual conspiracy theories with interest

tee hee..........

 

[alexlee]

The big 4 have used securitisation, just not in a significant way.

Not all securitized programs use a trustee as lender of record, in tends only to be the non-banks. St George, by way of example, had a large securitisation program.

So does it mean that where a trustee is used as lender of record, it's likely if not certain that the loan will be securitised?

On the other hand, it appears Australia doesn't have a more centralised loan nominee system such as MERS.

 

[alexlee]

I await delivery of the usual conspiracy theories with interest

I'm not as interested in the conspiracy theories. There are different systems, different ways of doing things. By understanding these systems, and their differences, we can see the picture more clearly.

My question is, is the Australian system sufficiently different from the US that what's happening in the US now won't happen here, at least in the same form? We know securitisation occurs. However, is there sufficient sloppiness in the system that there might be legal issues concerning who owns the mortgage?

 

[.toe]

One advisor in the U.S. is sudgesting that people who's LVR has gone under water could deliberately default, & then fight foreclosure in the courts. Apparently they'd likely win by arguing that the group foreclosing on them can't produce a physical note with their signature. Also foreclosures could be delayed a very long while, advantaging the defaulter who still occupies the property.

 

[Indifference]

One advisor in the U.S. is sudgesting that people who's LVR has gone under water could deliberately default, & then fight foreclosure in the courts. Apparently they'd likely win by arguing that the group foreclosing on them can't produce a physical note with their signature. Also foreclosures could be delayed a very long while, advantaging the defaulter who still occupies the property.

It is not just the odd advisor.... Class actions have commenced all over the country this is a big issue in the US at the moment... really big.

 

[Macca]

It is not just the odd advisor.... Class actions have commenced all over the country this is a big issue in the US at the moment... really big.

Thanks for letting us know the USA action, I have also been reading about this in newsletters and they are suggesting that QE3 may be needed just to absorb all the mortgages while they work out who owns what.

 

[Rob G.]

One advisor in the U.S. is sudgesting that people who's LVR has gone under water could deliberately default, & then fight foreclosure in the courts. Apparently they'd likely win by arguing that the group foreclosing on them can't produce a physical note with their signature. Also foreclosures could be delayed a very long while, advantaging the defaulter who still occupies the property.

There is surprisingly little law regulating Australian securitisation practice in this area. Most of it has to do with financial reporting !

Most Australian securitisation is done via equitable assignment, so that way your primary "lender" can secretly sell your liability to somebody else.

If you are not informed, this is an equitable assignment.

Therefore, you only owe a duty to pay the original lender.

Unfortunately, you signed a mortgage contract that gave the bank all sorts of little clauses that would enable them to foreclose on a wide range of technicalities AND have recourse to your other assets (all monies clause).

We know that banks try to keep what is left of their tarnished reputation and there is also a somewhat reluctant and toothless banking ombudsman. They are also relatively robustly financed and stable.

But what of the loan assigned to a small, unstable finance company that is capable of sharp practice by bank standards ? After all ... you probably chose a loan from a bank based on its credentials as well.

If the shaky 3rd party finance company desperately needs some cash, it is able to take action against any of your minor technical breaches.

However, because it is not a legal assignment they will need to join with the original lender to take the action against you. They may also be able to enforce all those other asset grabbing clauses you gave to the bank.

Hopefully the bank will buy back this loan before these 3rd party lenders wreak havoc on your financial health.

A judge described the debt factoring arrangement in GE Crane Sales Pty Ltd v FC of T as "a deception practiced upon its customers" in the context that they were not informed of who the beneficial owner of their debt was.

I beleieve we have been insulated from the GFC mostly by the fact that our securitites industry was slow off the mark. Towards the end, we were seeing some reputable banks aggressively chasing market share with lo doc loans that were then securitised to keep such risky assets off the balance sheet.

Cheers,

Rob

 

[alexlee]

Unfortunately, you signed a mortgage contract that gave the bank all sorts of little clauses that would enable them to foreclose on a wide range of technicalities AND have recourse to your other assets (all monies clause).

It was in the contract and we signed it. If we didn't like the contract, we shouldn't have signed it. Full recourse is why people will do everything to keep paying the mortgage.

While that is true, my view is still that banks don't want to foreclose because of the costs and uncertainty involved. What banks want is for you to keep making the payments year in, year out. Banks are in the business of making spreads between borrowing and lending, not to manage property.

But what of the loan assigned to a small, unstable finance company that is capable of sharp practice by bank standards ? After all ... you probably chose a loan from a bank based on its credentials as well.

If the shaky 3rd party finance company desperately needs some cash, it is able to take action against any of your minor technical breaches.

Surely if this was a likely scenario, we would have seen more of it during the GFC. As it was, the lo and no-doc smaller lenders kept jacking up rates to try to get rid of borrowers, but deliberately forcing foreclosure so that they can get at the rest of your money? Possible doesn't mean likely.

However, because it is not a legal assignment they will need to join with the original lender to take the action against you. They may also be able to enforce all those other asset grabbing clauses you gave to the bank.

Hopefully the bank will buy back this loan before these 3rd party lenders wreak havoc on your financial health.

Again, I find this scenario possible but highly unlikely. It's more likely that they would just keep jacking up the interest rate. In any case, securitised lenders would only be desperate if they used short term funding and couldn't renew, in which case forcing default on borrowers would take too long. See the old RAMS. If they can't renew their own funding, THEIR default is immediate. Foreclosure and sale of the mortgagor's property would take months.

A judge described the debt factoring arrangement in GE Crane Sales Pty Ltd v FC of T as "a deception practiced upon its customers" in the context that they were not informed of who the beneficial owner of their debt was.

Surely debt factoring is not the same as resi mortgages?

I beleieve we have been insulated from the GFC mostly by the fact that our securitites industry was slow off the mark. Towards the end, we were seeing some reputable banks aggressively chasing market share with lo doc loans that were then securitised to keep such risky assets off the balance sheet.

Not just that, but because Australian interest rates didn't get so low that super funds, etc were desperate for yield as was the case in the US. Also, because of dividend franking, Australia doesn't have as big an appetite for bonds that the US has.

 

[Token Funder]

There is surprisingly little law regulating Australian securitisation practice in this area. Most of it has to do with financial reporting !

Most Australian securitisation is done via equitable assignment, so that way your primary "lender" can secretly sell your liability to somebody else.

If you are not informed, this is an equitable assignment.

Therefore, you only owe a duty to pay the original lender.

Unfortunately, you signed a mortgage contract that gave the bank all sorts of little clauses that would enable them to foreclose on a wide range of technicalities AND have recourse to your other assets (all monies clause).

We know that banks try to keep what is left of their tarnished reputation and there is also a somewhat reluctant and toothless banking ombudsman. They are also relatively robustly financed and stable.

But what of the loan assigned to a small, unstable finance company that is capable of sharp practice by bank standards ? After all ... you probably chose a loan from a bank based on its credentials as well.

If the shaky 3rd party finance company desperately needs some cash, it is able to take action against any of your minor technical breaches.

However, because it is not a legal assignment they will need to join with the original lender to take the action against you. They may also be able to enforce all those other asset grabbing clauses you gave to the bank.

Hopefully the bank will buy back this loan before these 3rd party lenders wreak havoc on your financial health.

A judge described the debt factoring arrangement in GE Crane Sales Pty Ltd v FC of T as "a deception practiced upon its customers" in the context that they were not informed of who the beneficial owner of their debt was.

I beleieve we have been insulated from the GFC mostly by the fact that our securitites industry was slow off the mark. Towards the end, we were seeing some reputable banks aggressively chasing market share with lo doc loans that were then securitised to keep such risky assets off the balance sheet.

Cheers,

Rob

To save time:

Here's how it...you know...actually works

 

[Rob G.]

To save time:

Here's how it...you know...actually works

Paragraph 4, page 10.

In fact, most assignments are equitable and they rely on arm's length consideration to perfect their rights.

To avoid having to inform the mortgagor, they make the original lender a fiduciary or trustee to keep those assets out of reach of the latter's creditors. (similar to the GE Crane Sales case mentioned above).

If they inform the mortgagor about the new owners of their debt it becomes a legal assignment and the 3rd party obtains standing to sue in their own name.

In any case, the 3rd party creditor might be able to enforce all those nice little contract clauses that you thought that a reputable bank lender would never enforce but had included for technicalities.

Cheers,

Rob