High and Low Finance Column
in yesterday’s New York Times, could mean that although borrowers could be held liable for paying back the loans, the property could not be foreclosed. That potentially would mean borrowers could sell the properties for less than what is owed, leaving the banks with nothing to show for a non-performing loan. At the same time, it has been widely reported by the Times and other major dailies that not only are there legal flaws in these mortgage documents that will most likely be challenged by the MBS investors whose trusts technically own the mortgages, but many people hired by loan servicers (banks) may have fraudulently signed foreclosure documents (“robo” affidavits) without even looking at the paperwork. Attorneys representing thousands of foreclosed homeowners are challenging property seizures based on the alleged fraud.
“The robo affidavits are an attempt to hide the fact that (1) the mortgage securitization trusts or REMICs didn’t comply with the IRS rules, and (2) the trusts may not have had a legal interest in the mortgages they were selling,” wrote James McRitchie in his Oct. 13 CorpGov.net blog post. “The consequences in both cases are dire.”
It could have huge ramifications. It could cripple the already debilitated housing and mortgage securities markets, negatively affect the bottom line of big banks that act as servicers of those loans, hurt the investments made by companies and possibly lead to another credit crisis if troubled banks decide to rein in lending.
“It’s brutal,” Yves Smith, author of the Naked Capitalism financial blog and head of corporate financial consultant and advisor Aurora Advisors, said in an Oct. 13 Business News Network Canadian TV interview. “Normally, if it was just a case of the note, you could endorse the note over to anyone. But, [since you are dealing with trusts], you can’t do that under the trust law.”
“There really aren’t any quick fixes. They have to take place on a state level. You would have to suspend the Uniform Commercial Code in 50 states, suspend real estate laws in 50 states, suspend New York trust laws and get a waiver for the IRS REMIC rules.”
What does this all mean for directors of public companies?
For starters, it might be a good time for management to look at their crisis management plans for dealing with financial risks, such as lack of liquidity and a credit crunch. Also, it might be a good time to for the CFO’s office to look at lining up other investments and types of liquidity in case this foreclosure crisis does indeed turn into another major financial crisis. Of course, it is up to the board to oversee how management is prepared for such a crisis. One suggestion I have is to reread my blog post of Jan. 8, 2010 (Top 10 Issues Facing Directors in 2010
). In that post, there was a thorough list from Wachtel, Lipton, Rosen & Katz (Some Thoughts for Boards of Directors in 2010
). Included in that list on page 7 is a link to a WLRK memo on risk management that offers a how to dealing with risk management issues related to a financial crisis (Risk Management and the Board of Directors, November 2009
Unfortunately, the foreclosure logjam and spate of litigation from investors and homeowners against the banks is not even the biggest problem those banks face. In a Canadian Business News Network interview Oct. 13, (See it here
.) Smith said it may get so bad the federal government may have intervene.
“These [foreclosed and troubled] loans should’ve been written down already,” she said. “They are carrying them at 90 cents on the dollar instead of 50 cents.”
We’ll all have to wait and see how this plays out, but meanwhile boards may not have the luxury of waiting. They may want to act now by preparing for the worst.
Don’t look now public company directors, but the next financial crisis may be upon us and it looks a lot like the 2008 crisis that was borne out of the housing bubble. Apparently, the underlying cause of the collapse of the mortgage-backed securities (MBS) and collateralized debt obligations (CDO) markets two years ago has not gone away.
The attempted resolution of millions of foreclosures on American homes by big banks (prior to Bank of America’s decision yesterday to reinstitute foreclosures after a short investigation of its processes, many large banks had temporarily halted foreclosures) that have acted as servicers of those loans has exposed an ugly secret. It was that those banks may not have the legal right to seize those properties because the oversecuritization of the notes has made proof of ownership a problem. In short, one by one some state courts are finding the Mortgage Electronic Registration Systems (MERS) that was used to make securitization of those loans easier may have decoupled the payment promises made by borrowers from the mortgages they signed.
This possibility, as described clearly and succinctly by Floyd Norris in his