Archive for October 2010
Foreclosure fiasco, redux
It’s not normally my practice to imbed other people’s videos, but this is absolutely a hoot, and frankly quite informative. Sad, but true.
http://www.thedailyshow.com/watch/thu-october-7-2010/foreclosure-crisis
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October 10 — Update #2
Since my last post, I also had the privilege of attending (and speaking) at the semi-annual meeting of the Real Estate Counseling Group of America (RECGA). RECGA is a small but highly influential group, founded in the 1970’s by the great real estate valuation leader, Dr. Bill Kinnard, and over the years has counted in its membership many of the presidents of the Appraisal Institute and other leading groups, editors of several of the top real estate journals, noted professors and highly influential authors in the field.
The Fall meeting was held in Washington, DC, and the core of the meeting was Friday’s educational session. Max Ramsland opened up with a presentation demonstrating the impact of the number of anchor tenants on the appropriate cap rate of shopping centers. Carl Shultz, a member of the Appraisal Standards Board, followed with a discussion of impending changes to the Uniform Standards of Professional Appraisal Practice (USPAP). These changes are currently discussed in an Exposure Draft, which he invited RECGA members to revieww and submit comments about, and will be incorporated (with appropriate changes) in the 2012 edition of USPAP. Both Mr. Ramsland and Mr. Shultz are also RECGA members.
Two non-members followed with somewhat related presentations on eminent domain. Scott Bullock from the Institute for Justice was one of the attorneys who argued the famed Kelo case before the U.S. Supreme Court, and he discussed the status of eminent domain law since that landmark case. With a somewhat different perspective, we heard from Andrew Goldfrank, a U.S. Justice Department attorney who heads up all Federal takings litigation.
The afternoon session kicked off with David Lenhoff, a RECGA member and former editor of the Appraisal Journal, who discussed the complex issues surrounding hotel valuation. I followed with a brief synopsis on the Gulf Oil Spill, focusing on the current status of the claims and litigation processes. Reeves Lukens, a RECGA member, and his son, Tripp Lukens, discussed the state of pharmaceutical properties in the U.S. Joe Magdziarz, who is the incoming president of the Appraisal Institute (AI) discussed the current issues facing that organization, with a particularly emphasis on the recent controversies between AI and the Appraisal Foundation (AF). Notably, the founding Chair of AF, Jeff Fisher, is a RECGA member and was able to provide some historic commentary. RECGA members Jeff Fisher and Ron Donahue brought the day to a conclusions with discussions about the state of the securitized real estate market, including REITs.
For more information about RECGA, visit the web site, www.recga.com.
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October 10 — Update #1
It’s a rainy Sunday here in the ‘burbs of the Emerald City, and I have a LITTLE bit of time to catch up on things. First thingie on my mind is the somewhat back-page article in many newspapers recently about Bank of America forstalling the foreclosure process until they get the legality of certain title problems straightened out. The Washington Post syndicate had a pretty good article by Brady Dennis and Ariana Eunjung Cha on Thursday that was carried widely, including by our local Seattle Times and the Mortgage Bankers Association.
Recall that home ownership and mortgage lending (or specifically, the act of pledging a home as collateral in a lending transaction) is LEGALLY a state-governed issues. The Federal government regulates banking and the lending process, but the actual pledging of a home (or any real estate, for that matter) is strictly a state issue (subject, of course, to certain Federal oversight.) Thus, if a nationwide lender like Bank of America (or Countrywide, which it bought) wants to make loans across the U.S., it still has to get permission in each and every state in which it does business, and the lending process needs to be tailored to each state’s peculiar laws.
As it happens, property ownership had a somewhat different emphasis from one state to the next. In South Carolina, where I used to live (and for that matter, in about half the states), foreclosing on a home is a very difficult process. The lender has to go to court and prove that the mortgage is in default, and further prove that the lender has the right to foreclose. In those states, the foreclosure process simply cannot proceed without a judge’s orders. In other states (my current home of Washington, for example), the process is much easier and does not require a judge.
The distinction is less important than the fact that there is a variance in processes among the states. When you are BofA (or Wells, or Chase, or any big lender), you want to bundle the loans together and sell them as pools. The pool actually WANTS loans from different parts of the country, to benefit from diversification. To facilitate this, and to make mortgage pools fungible and tradeable, the various lenders started subscribing to a service about 10 years ago called the Mortgage Electronic Registry Service (MERS), in Reston, VA. MERS separates the “real estate pledge” (that’s what the mortgage actually is) from the promissory note (which is what investors actually want to buy). In theory, MERS wouldn’t be an issue in an individual loan unless that loan went into foreclosure.
Now, in any given mortgage pool, even in GOOD years, a few of the loans will go into foreclosure. Fortunately enough, in “good” years, there are enough foreclosure buyers out there to keep the mortgage pool solvent, and no one really cares if every “i” wasn’t dotted and every “t” wasn’t crossed in the process.
But… sigh… these are anything but normal or GOOD times, and apparently bankers are churning ou the foreclosure doc’s so fast they’re getting carpel-tunnel from filling out paperwork. Guess what? If the mortgages were made slopily in the first place (as many were), and if the mortgage-note bifurcation was handled too rapidly (as most apparently were) and if the foreclosure applications are coming out of the bank like a firehose, then… well, remember that about half of the states require a judge to sign off on each and every foreclosure, right? And judges just HATE sloppy paperwork, right?
With THAT in mind, the foreclosure process is quickly grinding to a halt. In some states, the courts have ruled that MERS does not have a valid standing to initiate foreclosure proceedings. Class action suits have been filed in California and Nevada, no doubt with more to follow. The nightmare scenario for banks is that not only are foreclosures invalid because of sloppy paperwork (let’s don’t forget the sloppy underwriting that got us in this mess in the first place) but also one might argue that any foreclosure initiated in the past 10 years is also invalid. Thus, if you lost your house at the leading edge of this mess, two years ago, assuming the statute of limitations is still in effect, you may have a case.
Sadly, the vast majority of these foreclosurse are probably valid, albeit that may be difficult to substantiate with the sloppy paperwork. Homeowners who can’t make their payments anymore need closure so they can move on with their lives. Lenders (and mortgage pool investors) need to get assets redeployed. Neighborhoods with boarded up homes need families living in those homes again, whether they are homeowners (who frequently buy “fixer-upper” foreclosures) or renters. The system is not served at all by dragging this process out.
On the other hand, we constantly teach students that one of the strengths of the western economy is the rule of law. Contracts mean something, and badly drawn or poorly executed contracts cannot have the same legal standing as good ones. To allow such in the name of expediency puts us pretty far down the slippery slope.
I’ll be following this story. This is a complicated story, and newspapers, sadly, end up putting complex stuff on the back pages. This issue, however, deserves some front page attention.
EDIT #1 —
Since I wrote this, Foxnews.com published a very good synopsis of the problem.
From a small northwestern observatory... 