The Housing Bubble

sorry, the Stockholder Maw devoured the $pirit-of-the-Law about 1985

The spirit of the law is alive and well if you’re poor.

It’s also very malevolent.

There is no question as to who owns the loans. That is what MERs does and it does it well. They know who owns what or they wouldn’t be able to make payments on the bonds. The process of securitization requires the transfers only happen when the loan is paid off or fails. Not enough time to fully explain now, but since some bonds were supposed to take the hit of losses on the loans, you couldn’t assign the loan to a particular tranche of bonds until it failed. How do you assign the first 10% of failed loans to bond tranche Q until you know which ones fail first?

“Sloppy paperwork” is because it is a violation of county/state laws and they don’t have the money or resources to take on banks this big. If you violate rules of people who have no practical ability to take you to court, it has the same effect as not doing it at all. Why do you think that 40 or so state AGs were willing to sign on to the deal without even getting it as good as it is now which is still a great deal fr the banks. This is all they were going to get. They don’t have the resources to do a systematic job. They might be able to get a few low level employees of contractors on probation, but that doesn’t win elections.

Polly, is it possible for a majority of bondholders to get together and fire a trustee? If somebody gets precedent pushing mortgages back to the securitzer at par for failure to properly put them into trusts, I could imagine a cottage industry of law firms specializing in doing just that.

I haven’t read a set of “typical” documents, but I would assume that if you could get enough bond holders together (possibly a supermajority of every tranche), they could do something to the trustee. Whether that something includes firing them, would depend on the specifics of the documents.

Rather than see a law firm specialize in this (locating the clients is hard), I would expect to see it come out of the hedge fund/private equity world and they would do it by buying enough bonds to be able to do it themselves.

Englishman in New Jersey is the person who might be able to tell us if this is really possible, but I expect he is constrained by attorney/client privilege from discussing it even in general terms.

The deal was reached prior to even an investigation by most state AGs.

Try and work that deal if you are accused if a crime.

In a “normal” REMIC transaction, a simple majority of bondholders is sufficient to replace the trustee.

But in reality this is very rare. It takes time and money for interested parties to canvass the bondholders…..it’s even very difficult to find out who they actually are in many cases.

Suppose you get the majority of bondholders to vote to fire the trustee, what is really gained? Any successor trustee is likely to perform these duties in exactly the same way as the original trustee.

Also worth noting, finding a successor trustee can be difficult all by itself. No-one really wants to be the successor trustee because of potential issues like contingent liability associated with the performance of the prior trustee or (and this is most important) past actions of the Servicer/Master Servicer/Accountants, etc.

The Trustee is paid very little money and really doesn’t do much. They just receive debt service from the servicer on the 24th of each month and send it to the DTCC on the 25th. The DTCC keeps the actual register of nominal holders.

The trustee is really caught in the middle of all this BS. They don’t make much money by being the trustee and incur HUGE legal fees in all the ongoing litigation. It is true that they get to reclaim all the legal fees from the debt service monies as a first priority lien, but this is itself a painful process.

Not to defend trustee too much, many of them are lazy and cheap. But they are not really to blame for much in all this disaster. They have to act according to the Pooling and Servicing Agreement and Trust Indenture for each MBS deal. These agreements are constricting and often vague when it comes to litigation.

Lazy and cheap are fine in a trustee. In fact, cheap is usually a good quality. IMHO the problem is that like appraisers during the runup, their interests align with those who decides to hire them, rather than to the person whose interests they are supposed to protect. We’ve seen that trustees have been very slow to try and push mortgages with obvious material defects back onto the originators. Even when this would offer a measure of relief for bondholders, it would “bite the hand that feeds them,” and mean that they probably wouldn’t get any more work as trustee’s from the dealmakers who put that cr@p into the pool in the first place.

Jim:

It is not the role of the trustee to “put-back” mortgages to the originator. In fact, once in the Trust, the loans are a static pool (other than those that fall out because of default or pre-payment of course) and there are no mechanisms for substitutions.

I believe the underwriters of the deals are supposed to have “certified” each loan for the pool. Out of the scope of trustee duties, rightly or wrongly.

You are right that there is some conflict of interest in the relationship between the trustee and the underwriter (in fact, sometimes, they are part of the same company!!), but not for the reasons you state here.

It’s mainly this: In the event the underwriter is holding a first loss piece of the bonds, will this effect how the trustee chooses to allocate the losses in the “waterfall” of payments and how it defines the losses (uncoverable, will the trustee make a determination that losses are recoverable and therefore make “advances’ of P&I to the first loss holder?).

There are these and other very awkward issues that were not contemplated clearly in the governing docs because, after all, real estate only goes up. Right?

But if the trust is a victim of fraud by the underwriter (and a pretty good case can be made for many of these loans) doesn’t the trustee have a duty to the bondholders to DO something?

But having to transfer a mortgage at the county level everytime a bond changes hands? What would the counties do if they are told that yesterday there were 70 transfers of 1/1000th of Bob’s mortgage from pension fund Y to mutual fund Z, and mutual fund W to insurance company V and….?

Breaking up a loan into a thousand slivers and selling those slivers merely increases exposure to the risk of loan default by a thousand times.

We’ve watched the current system melt down. It has definitely been very lucrative for FIRE sector. But it’s been extremely destructive for the taxpayer.

These theories of securitization and tranching have been tested in the crucible of the real world. We have valid experimental data now. From the perspective of the financial sector, the system has been wildly successful. From the perspective of the taxpayer, the system has been an abject failure.

The societies need to elect legislators who will not sell them out, and who will not be representatives of the highest bidder. And then those legislators need to dismantle this failed experiment.

I was doing securitizations of car loans and financing of large business machines and even credit card receivables back in the 90’s. No problems at all.

BUT, we required the trust to keep the “worst” 10% of the loans (they took the hit for 100% of the loan failures up to 10% of the pool) as an “equity” tranche to protect the bonds from all being considered equity interests. The clients fought it. They hated it. They didn’t want to tie up that sort of capital and they didn’t want the risk. But the partner on the deals refused to budge, and they gave in.

I don’t think there was much of a problem with those loans.

“….But having to transfer a mortgage at the county level everytime a bond changes hands?”

I would think that regardless of the securitization process, by following the recording rules of the county in which a property is part, the original warranty deed AND the original hard copy signed mortgage would be a matter of public record, including a satisfaction of lien when applicable.
The legal book owner of the property is on record and their acknowledged mortgage obligation is on record until a satisfaction of mortgage is duly recorded.
I think the loan servicer would have the power to enforce foreclosure on this basis since they could produce a formal record of the original document and demonstrate the terms of payment were violated.

Yeah, I’m will Polly here, at least in that the problem isn’t the securitization of the payment stream. You can come up with a contract agreeing to slice and dice payments in almost any way imaginable. But you can only foreclose on real property pledged as collateral for a mortgage in the specific manner provided for by state law in the state that the property is located in. In general, this means that each successive owner of the right to foreclose has to sign this over to the next owner.

What is SUPPOSED to happen is that the right to foreclose if the borrower defaults ends up in the hands of the ultimate trustee who is responsible for taking the payments and giving them to the bond-holders in the manner specified. The problem is that for tax reasons that are beyond my understanding, most of these trusts are “closed.” Once mortgages have been bundled up and bonds sold, no further mortgages can be added to the mix. And the securitizers believed their own propaganda that “the note follows the mortgage,” and therefore relied on MERS’s ability to track payments as a substitute for recording. So in many cases transfers of the right to foreclose never occurred. And it is NOT clear to me that you can transfer them after the bonds have been created.

Polly knows her stuff. The Trust “owns” the mortgage loans - they are assigned to the trust when the deal closes.

As I said earlier, the trustee doesn’t really do much, just passes the collected monies onto the DTCC who keeps the register of benefical owners (or nominal owners….but I don’t want to get this too complicated).

The trustee really isn’t in the pocket of the “securitizers”, whatever that means. These underwiters usually don’t have much of a residual interest in the loans after securitization and may not really care what the trustee does.

It’s worth nothing though that the trustee is really in a difficult position. They are legally obliged to act in the interests of the bondholders and no-one else. Sounds simple, it’s anything but. The bondholders aren’t really in contact ever with the trustee to make their feelings known. The trustee also may be in a position where bondholders have differing wishes, how should the trustee juggle these competing bondholder interests?

Well, in the end the trustees punt to the courts to avoid being sued themselves by the bondholders. This is immensely expensive and time-consuming.

Believe me on this, the trustees are as unhappy as any party in the deals these days.

Certainly the prospect of “tranche warfare” where the interests of different bondholders are radically different is a real problem for trustees these days. Witness some of the “They’re too quick to modify loans” talk that we heard early on in the crisis from some bondholders whose interests were best served by foreclosure rather than modification. And while the underwriters have very little interest once a pool has been given to the trustees, future business from those underwriters depends on not rocking the boat on pools that the trustee has already taken control of.

Jim, true in the old days. I don’t think trustees are concerned about rocking the boat with the underwriters any more. There are no private deals any more and many of the underwriters have either gone to the wall or effectively been closed by the large banks that own them.

Tranche warfare is a continual serious issue though. The reality is that no-one thought any of these issues could come up.

Trustees are now in the position of virtually refusing to do anything without a court order so that they can’t be accused of favoring one holder over another.

I have a very close friend who is the head of the MBS Administration area for a very large trust bank. She and her main officers spend the majority of their time on legal calls these days. I’m not exaggerating.

Tranche warfare is a continual serious issue though. The reality is that no-one thought any of these issues could come up.

“It is difficult to get a man to understand something, when his salary depends upon his not understanding it.” — Upton Sinclair

Yeah, servicing look like easy money (although not big bucks) when there were few defaults. It turns out that when the default rate goes up, it’s not so easy.

I hear that coffee drinking leads to hard drugs (e.g. alcohol).

I hear that coffee drinking leads to hard drugs (e.g. alcohol).

How many folk$ on Wall $t. you reckon start the day with coffee?

“I hear that coffee drinking leads to hard drugs (e.g. alcohol).”

In my case hard drugs and alcohol led to coffee drinking.

“In my case hard drugs and alcohol led to coffee drinking.”

Coffee drinking certainly strikes me as a more prudent antidote to a bender than a hair of the dog cure.

I hit 24 years clean and sober Jan. 31 2012

Here is a little homespun economic logic that might discourage private equity firms which might be interested in snapping up GSE rental properties. Withholding these properties from the market for a forced lockdown period will drive up prices to levels unsupported by supply-and-demand fundamentals. The above-market prices will stimulate other, unrestricted sources of supply, such as granny-and-gramps trying to downsize their living space from McMansion to retirement condo, or new construction such as I have recently seen starting up along my daily commute route. As a consequence, market prices will remain depressed for a very long time, probably well beyond the point when your option to sell can finally be exercised.

The laws of economics will not be repealed by central planning, no matter how hard or often the central planners attempt to repeal them.

“the need for deal-sweeteners”

They may run low on Splenda.

Dicking around moving property back and forth between owner/occupied and rental property isn’t going to change the fact that during the bubble construction exceeded household formation. Excess housing will tend to drive down prices.

Dicking around moving property back and forth between owner/occupied and rental property isn’t going to change the fact that during the bubble construction exceeded household formation. Excess housing will tend to drive down prices.

I think Jim nailed it. (Yes, I know. I see the word at the very beginning of Jim’s paragraph.)

Keep in mind that household formation is probably more elastic than some believe. The more expensive it is to get a place, (rental or purchase) the more kids will live in their parent’s basement, the more people will stay in unhappy marriages etc. At some level prices will fall until the lowest fall enough for marginally employed 20somethings and divorcees.

You know eyes a thinkin’ it’s just all ’bout comma’s … move ‘em left, adding $ome number$, flanking left again… Moreover, to be honest, eyes don’t even knows iffin’ the chine$e use comma’s or which direction you’d have to move ‘em or even how far before you get an inkling that $omething’s very, very, wrong!

They use some sort of a ratio for taxes. So you can’t say house x has a tax value of $100K,so it would sell for $100K. That, plus if you’re homesteaded your taxable value can’t go up more than 3% per year. So the exact same house owned by a snowbird NY resident will almost always have a different tax value than the one of a FL resident.

4% interest rates.
Keeping inventory off the market via multiple mechanisms.
Buying as many mortgages as the market generates, including low and no downpayment loans.

As I said earlier, the government has done everything the FIRE sector has asked.

BUT - in order for the roaring 2000s to come back for the FIRE sector, they need to do one more thing: start making utterly debauched liars loans again. Looks like the FHA has been trying to do that.

Nearly 20% delinquency, wow. The FHA has been run by a motley cast of characters:

1) In 2009, Obama named the CEO of Long and Foster, David H. Stevens to be the agency head. He left to become head of the Mortgage Bankers Association in April 2011.

2) Robert Ryan, former VP of pricing and portfolio management then became the head of FHA in April 2011.

3) Now, Carol Gallante has been nominated to head the FHA as of October 2011. She was formerly the CEO of a housing developer company.

So, who’s next I wonder? Bob Toll? They’re running the FHA exactly as the FIRE sector would like as they are central figures in the FIRE sector. And per the sector’s modus operandi, the sector benefits while the taxpayer is left holding the bag.

1000-to-1 leverage. Yeeha. 20% delinquency? Wow. It’s like there’s been no reform. Sound and fury.

“The government’s attempts at financial reform are a tale told by an idiot, full of sound and fury, signifying nothing.” — apologies to the Bard.

” A house was supposed to “pay” you $100K per year in home equity loans.”

Maybe in the crazy places. In 10 years our place appreciated 100K tops, and I would say at least half of that appreciation is already gone.

But that is what was happening here in South Florida. My house, around 15 miles from that one in Boynton, went up over $100K per year in 2003 and 2004. I’m kind of a pessimist by nature, so I knew it couldn’t last. But most people in Florida by 2006 thought of their house as a 2nd income. So after all these years, many are only at stage 2 - “can’t make income off the house, but can live for free”. Stage 3 - “no income, and you have to pay rent”, is going to be very interesting. I think the wait at the restaurants and the boat ramps is going to be much shorter.

From what Jeff has chronicled here, I would say that Florida was one of the “crazy places”.

A house was supposed to “pay” you $100K per year in home equity loans.

Utter brilliance. Going 100K into debt and putting your house up as collateral was billed as “paying yourself.”

This is instructive. It highlights just how bad at math a certain subset of the American public is, and how beholden to the FIRE sector the US government is.

Really! Maybe Jeff and I can even start saving up to help our grandchildren buy homes of their own, given that our kids are most likely going to find renting cheaper and more financially practical than home ownership, due to the government’s private-equity-to-rentals program to prop up prices in the purchase market.

“Really! Maybe Jeff and I can even start saving up to help our grandchildren buy homes of their own,”

You`re bummin me out man, can`t you just let me enjoy this one day?

Misery has provided the inspiration for great art throughout the ages. I’m just trying to help you find the creative energy to pen your next HBB classic hit, Jeff!

And also why the US continues to be flooded with foreigners from all over, legal and illegal. No national identity or sovereignty. Where the only color that matters is the long green.

Where the only color that matters is the long green.

Thank you, palmetto, for making a key point about this country. It’s not like the European countries, where your ethnicity is paramount. (The same can also be said about Asian countries.)

Methinks that the only thing mattering is the long green is one of the reason why we’re such a magnet for the rest of the world.

It didn’t look that far on the map. Maybe 10 miles from Lebanon as the crow flies.

Out here in the west, 10 miles is considered nothing.

If it was out in the boondocks I would I agree. But it’s not, it’s near Dartmouth U. I’ve been to the area. It ain’t Cleveland or Buffalo.

It appears to be exactly in the forest, and its neighbors are mostly bubble construction as well. The three listings I clicked on were also foreclosures. As for Dartmoth U, this doesn’t look like the student housing I remember from college days. I’m guessing that even though valuations have fallen by 50%, they are still listing at well over construction cost. Discounts for bad taste and too many bathrooms, in my book. Cape Cods are really awful, even though the windows are nice.

Colorado…. you don’t know what you’re talking about. My family still lives in those parts… I grew up there. The economic decline there is no different than any other area in NE and the northeast. There are NO fulltime, year round jobs.

“As for Dartmoth U, this doesn’t look like the student housing I remember from college days”

Just saying this isn’t BFE country. The University and the Medical Center (it’s huge) are major employers and pay good salaries. I have a friend whose wife is an ICU nurse, and with some OT she makes 130K. The Dartmouth-Hitchcock Medical center is a VERY big hospital/

We have no University in our little burg and our hospital is tiny. That house would easily fetch 350K here, especially since it’s on a acre. We sold a much smaller place on an acre in 1999 for 350K.

You might think that not being in town is negative, but a lot of people see that as a plus (personally, I don’t).

I’m not negative about living outside of town. My thought was that there are large large areas of land which were undeveloped, until the bubble peak years.

“Cape Cods are really awful”

They really are. They look nice but the innards are a chopped up mess.

Colorado…. You don’t understand what happened there over the last 30 years. Yes… there is one big employer…. the hospital. There were scores of large employers 35 years ago. They’re all gone.

Scores of large employers in the Upper Valley 35 years ago? Really? I don’t think the paper companies were big there. Who was a large employer in the Upper Valley in the 70’s?

All I can say is that I saw nice cars in downtown Hanover. No boarded up stores. The place looked very prosperous. I’ve been to Buffalo and Rochester. It was nothing like those places.

I’m sure that they’ve lost their industrial base, but then again, who hasn’t?

I just took a looksie at the Hospital’s website, The place has a 1.6 BILLION dollar budget, and that was in 2010.

I’m not saying the place is a boom town. If it was that house would go for a lot more than 160K. But it isn’t a Detroit either.

Buffalo hasn’t been in Buffalo for over a generation. It’s in Amherst.

“Who was a large employer in the Upper Valley in the 70’s?”

Rutland and Bennington. Let’s start with GE.. then there was 3M, Telescope, International Paper, Hollingsworth and Vose, GP, Chase Bag plus countless medium and small papermakers.

Gone.

Lebanon is no different than the rest of the post industrial towns in New England. The “good jobs” left a long time ago Colorado.

I wonder if the number of very well paying jobs in this particular area exploded like the number of expensive homes. If the area is analogous to Western NY, the very well paying jobs were on the decline the entire time all these glitzy houses were springing up on previously undeveloped land.

That’s close to the White Mountains, which are beautiful. That whole area there, the White Mountains over to the Adirondacks, is beautiful country.

It’s beautiful 3 months out of the year. It turns into frozen tundra the other 9 months.

And there are no jobs.

“And there are no jobs.”

Job$!
Job$$!
Job$$$!
JOB$$$$!
JOB$$$$$!

Let’s check the cla$$ifieds and see what the ratio’s are shall we?

(Hey, it works for the Restaurant Indu$try, don’t it?)

Its beautiful 7 or eight months of the year and a frozen tundra 3 months in years with a bad winter. The other 1 or 2 months are kind of raw and wet and muddy, but very survivable.

“Its beautiful 7 or eight months of the year and a frozen tundra 3 months in years with a bad winter.”

That’s pretty much what the folks at DH Medical told me. The winters are brutal, even by Colorado standards.

Anyway, there are no jobs in Loveland, CO either and a LOT of people commute 1 hour to Denver. And even then that house would easily fetch 350K out here, and would have gone for 450K during the peak.

And I think we’re STILL hanging onto our version of bubble prices here in Colorado. Hence my extended stay in the “modular home community”. At least until we get back to 1997 prices or hyperinflation finally takes hold…

“And I think we’re STILL hanging onto our version of bubble prices here in Colorado”

I’d say that my neighborhood is back to 2000 prices, but we didn’t get that much appreciation in the 2000’s to begin with. Prices were crazier in Denver, especially in places like Highlands Ranch. Still, compared to SoCal prices, Colorado remained “cheap”. Our SoCal friends would visit us and marvel at how cheap houses were.

To this day the tiny hovel we used to own in a lousy neighborhood in Escondido, CA is worth more than our current house.

“Its beautiful 7 or eight months of the year and a frozen tundra 3 months in years with a bad winter. The other 1 or 2 months are kind of raw and wet and muddy, but very survivable.”

BS. I spent the first 24 years of my life there and returned for another 6.

Decent weather doesn’t occur until late May. August is the most unpredictable month on the calendar as it can be cold and rainy all month or 100 with 95% humidity. First snow in October and continues until April.

Hardly beautiful 7 months of the year.

So NAR PR does nothing? They spend tens of millions per quarter for no reason?

“And those that assume renting means apartments”

You notice that too eh? Another favorite realtor lie that I swat down instinctively. But realtors have never been known to think critically.

Do an experiment over there. Champion deflation and watch who shows up. Same inflationistas…. same distortionists. I say it’s contrived but I don’t have proof. Just observations.

Charger and Masonjar is same person.

PS- I was banned from Peppermint Patty’s “housing blog”…… for harrassing realtors.

I think 69charger is an actual Eddietard not a paid troll.

40,000 square feet == 1 acre.

It has a 40,000 square foot lot. That commands a stiff premium out here. Subdivision houses out here are usually on 7-8000 sq foot lots.

Where in CO are you? In a great part of the state i see parcels in the section size.

So what we seem to have here is a crime against architecture that ain`t got no flow. I won`t even mention the one eyed pumpkin that seems to be being molested by a garage with a couple of undersized doors.

“Their.” Are these two-income households?