Subir and WSQ Capital are profiled in the February issue of Mann on The Street (pages 50 and 51 for those of you with a subscription). The article features an overview of the services we provide, a summary of our investment philosophy and a very large picture of Subir’s face.
The Massachusetts (MA) Supreme court upheld a ruling invalidating two foreclosures that were executed incorrectly. The judgement is quite clear cut, and says banks need to ensure they are following the letter of the law when transferring, selling or assigning mortgage notes amongst themselves if they hope to have the court’s protection when they go to foreclose. Nothing unusual here, and it is clear that documentation practices at many banking institutions and securitization firms were at best sloppy, and at worst fraudulent, heading into the real-estate crisis. The plaintiffs (Wells Fargo and US Bank, attempting to foreclose on two delinquent mortgaged properties) argued that invalidating foreclosures where the borrower was clearly delinquent or had defaulted would create “widespread confusion” and impose “significant costs to innocent parties” (i.e. themselves).
We thought that what the MA attorney general had to say was interesting on this score:
Plaintiffs’ claims that the Land Court’s ruling will cause widespread confusion or significant cost to innocent parties are greatly exaggerated, and such reasoning does not warrant ignoring the plain requirements of the law designed to protect Massachusetts consumers. Indeed, it is the foreclosing entities themselves who will bear the greatest cost of clearing title from their invalid foreclosures. Having profited greatly from practices regarding the assignment and securitization of mortgages not grounded in the law, it is reasonable for them to bear the cost of failing to ensure that such practices conformed to Massachusetts law. (emphasis ours)
and further on:
Distressed homeowners often face challenges in the foreclosure process. In certain cases, they may lack the technical knowledge and the financial resources to contest a wrongful foreclosure or otherwise ensure that the lender adheres to the obligation to serve the interests of the mortgagor in good faith. Thus, plaintiffs’ implication that the borrowers have waived their right to challenge the legitimacy of the sale because they had “ample opportunity to challenge the foreclosure proceedings prior to the sales but failed to do so” is particularly troubling when the plaintiffs themselves have failed to comply with the statutory requirements to foreclose.
and further:
Thus, the plaintiffs profited from the risks they took, at the expense of each of the borrowers. Having reaped the benefits of their casual attitude toward ensuring they possessed valid assignments of the mortgages, it is not unjust that plaintiffs should now bear the costs of their errors.
The MA supreme court found that the plaintiffs who had foreclosed on the properties in question did not have valid assignments that gave them an interest in the mortgage at the time of foreclosure. The documents they did have were either in incorrect form, or had been executed after the foreclosures. They also found that MA’s foreclosure notice requirement was not met because the mortgage holder was incorrectly identified in the notice (because the mortgages were never correctly assigned to the banks attempting to foreclose). In our view, there was really no other conceivable outcome for this case given the messy mortgage documentation.
Contrary to Felix Salmon’s view on the matter, we do not believe the court ruling is a housing-market catastrophe. We do agree that it raises many questions about title to homes that may have been foreclosed on incorrectly (Judge Cordy in a concurring opinion made much the same note), and that many, many parties to real-estate transactions over the past few years may need to go back and confirm both their title-insurance and the documentation chain for mortgage assignment and transfer. We also agree that banks who securitized mortgages will find that investors now have cause to question some of the representations made in the securities concerning transfer of mortgage documents. However, the key fact preventing wholesale catastrophe in our our mind, is the court’s view on prospective remedies to any flaw in documentation.
In essence, the MA supreme court found that a party attempting to foreclose in Massachusetts had a strict responsibility to ensure their documentation was in order and that they had followed the letter of the law. The court felt this was especially important since foreclosures in MA do not require judicial supervision, except for a couple of steps. That said, the court writes concerning mortgage assignments:
We do not suggest that an assignment must be in recordable form at the time of the notice of sale or the subsequent foreclosure sale, although recording is likely the better practice. Where a pool of mortgages is assigned to a securitized trust, the executed agreement that assigns the pool of mortgages, with a schedule of the pooled mortgage loans that clearly and specifically identifies the mortgage at issue as among those assigned, may suffice to establish the trustee as the mortgage holder. However, there must be proof that the assignment was made by a party that itself held the mortgage.
In one of the foreclosures, the bank failed to produce the schedule of loans and mortgages that comprised the trust. In the other case, the bank provided a schedule, but that did not identify the mortgage with adequate specificity. The court has, in our view, been very reasonable as to how this situation may be remedied:
A foreclosing entity may provide a complete chain of assignments linking it to the record holder of the mortgage, or a single assignment from the record holder of the mortgage.
and also:
where an assignment is confirmatory of an earlier, valid assignment made prior to the publication of notice and execution of the (foreclosure) sale, that confirmatory assignment may be executed and recorded after the foreclosure, and doing so will mot make the title defective. A valid assignment of a mortgage gives the holder of that mortgage the statutory power to sell after a default regardless whether the assignment has been recorded. Where the earlier assignment is not in recordable form or bears some defect, a written assignment executed after foreclosure that confirms the earlier assignment may be properly recorded. A confirmatory assignment, however, cannot confirm an assignment that was not validly made earlier or backdate an assignment being made for the first time.
Creating new assignments with fresh dates, or confirming a prior assignment so they are in correct form will be time-consuming, tedious and expensive. As will restarting foreclosure proceedings once all documents required by state law are in correct form. Ensuring staff who do this are competent and aware of the issues at stake will also be key, however, the problem is not insurmountable, nor is it prohibitively expensive. No doubt there will be cases where documents are in such poor shape that they cannot be remedied by banks or servicers alone. But that is exactly the sort of situation the land transfer process is supposed to help fix. In the two foreclosure cases covered by this ruling, the original mortgage was correctly executed and recorded, and the trustees may get an assignment from the holder of record (Option One, who was one of many mortgage originators supplying mortgages to banks for securitization). No doubt there will be cases where the mortgage originators no longer exist, but with sufficient time and effort, successor entities can be identified.
The court’s ruling suggests it has no patience with mortgage-holders whose own sloppy practices got them into this mess:
The legal principles and requirements we set forth are well established in our case law and statutes. All that has changed is the plaintiffs’ apparent failure to abide by those principles and requirements in the rush to sell mortgage-backed securities.
However, as we outlined above, it has left a route out for banks to cure problems with mortgage documentation, but is plainly unwilling to allow foreclosure proceedings when the process for real-property transfer has not been followed correctly. We believe this is an important and correct ruling. It clears the air for both consumers and mortgage-holders and should encourage banks to rectify errors in mortgage documentation. We believe the banks and mortgage servicers will incur additional costs in rectifying these errors (of their own making), and that this will slow down the foreclosure process.
We do not believe this is an “apocalypse” scenario. Rather, we believe the housing market will remain distressed for many years to come as these issues are sorted out and broader macroeconomic factors such as high unemployment fade. For those who had been expecting a relatively quick rebound in housing, construction and real-estate price levels, this may well constitute an apocalypse.
Since we’ve now closed the chapter on 2010, we’d like to review our “10 economic themes for 2010” from last January, to see how well our ideas performed.
We’ve graded ourselves using these symbols: Y Right N Wrong ? Not Exactly.
So the final tally is 5 themes right, wrong on 3, and not exactly on 2.
[2] The Investment Company Institute, http://ici.org/research/stats/trends/trends_11_10
[3] http://www.federalreserve.gov/releases/z1/Current/
[4] http://dealbook.nytimes.com/2011/01/03/confident-deal-makers-pulled-out-checkbooks-in-2010/
[5] http://www.mscibarra.com/products/indices/global_equity_indices/gimi/stdindex/performance_em.html
Dear Client,
We hope you enjoyed a restful holiday season and have had a good start to the New Year.
We’ve attached two documents to this quarterly letter, one reviewing our economic themes for 2010, and another outlining our themes for 2011.
In the fourth quarter of 2010, risky assets (stocks, commodities) recovered sharply from mid-year lows, while safe-haven treasuries sold off dramatically in the last few weeks (the 10 Yr yield went from 2.81% to 3.30% in December). The Federal Reserve continued to keep short-term interest rates at 0.00-0.25% and began a second round of extraordinary monetary easing (QE2). Unemployment continued to remain high and over 15 million Americans (9.7% of the labor force) were unemployed over the holiday season. The mid-term election cycle was an expression of the electorate’s frustration with the lackluster recovery and increasing concerns about the national debt burden.
Our view remains that high levels of unemployment, household debt-reduction and relatively tight credit standards will continue to dampen growth in 2011. We believe stock market prices are higher than sustainable levels, and down-side risk has increased materially. We continue to recommend holding substantial cash allocations while waiting for more attractive values to deploy cash.
We look forward to speaking with you during our quarterly review and wish you the best over the coming year.
Regards,
Subir Grewal Louis Berger
