RSS Feed by Calculated Risk on 10/19/2009 08:40:00 AM
Monday, October 19, 2009
U.K. FSA: "More intrusive and interventionist style of regulation"
The Financial Services Authority (FSA) today sets out proposals for the major reforms required in the UK mortgage market to ensure that it works better for consumers and is sustainable for all market participants.They are going to ban stated income loans, limit risk layering (a key problem), limit arrears charges, hold mortgage lenders personally accountable, and require affordability tests.
The proposals, published in the mortgage market review discussion paper, reflect the FSA’s changed approach to a more intrusive and interventionist style of regulation.
...
“The paper sets out the main findings of the FSA’s comprehensive analysis of the mortgage market. It clearly shows a rapid explosion in mortgage products; the emergence of high risk lending strategies which typically focused on higher risk borrowers; relaxed credit standards; and a mutual assumption by too many borrowers and lenders that the good times could not end.
“The FSA needs to ensure that firms only lend to people who can afford to pay the money back. The reforms that we have announced today will ensure that the mortgage market works better for consumers and that it is sustainable for firms.”
...
The discussion paper is out for discussion until 30 January 2010 and the FSA will be actively seeking views from consumer groups and industry. A feedback statement will be published in March. Implementation will be phased ...
•Affordability tests: the DP proposes making the lender ultimately responsible in every sale for verifying affordability. It also proposes that in each case a lender should assess the consumer’s ability to repay, i.e. calculate the free disposable income a consumer has to pay for the mortgage.
•Self-certification: the DP proposes requiring verification of income for all mortgage applications;
• Toxic combinations: the DP discusses whether a type of product regulation likely to be more effective in protecting consumers would be to prohibit loans to borrowers that exhibit certain multiple high-risk characteristics, such as prohibiting loans to credit-impaired borrowers that are also at high loan-to-income.
• Arrears: the FSA will publish specific proposals in January to toughen up rules on arrears handling as well as banning administration charges where a borrower is adhering to an arrangement to repay arrears; and prohibiting the charging of early redemption charges on arrears fees.
• Requiring all mortgage advisers to be personally accountable to the FSA; DP proposes extending the Approved Persons regime to mortgage advisers who deal with consumers and to advisers and/or arrangers who are responsible for overseeing compliance ...
emphasis added
This is a good model for the U.S.
For amusement, here is The Times headline: Homebuyers face questions on alcohol spending
Homebuyers could be forced to provide detailed information about the amount of money they spend on alcohol each month to qualify for a new mortgage under a new clampdown on reckless lending. ... It said lenders should delve deeper into homebuyers' personal spending including the amount they spend on alcohol and tobacco.
Sunday, October 18, 2009
Weekend Summary
by Calculated Risk on 10/18/2009 09:23:00 PM
Some long posts earlier, so here is a summary:
... Almost 51 million square feet of office space in Los Angeles County, Orange County and the Inland Empire is now empty -- more than 17% of the total.
[T]he Financial Services Authority ... plans to tighten up regulation and crack down on risky lending ...
The FSA's Mortgage Market Review, published tomorrow, will focus on the third of the market considered "higher risk". ... Among the report's proposals, the financial regulator is expected to call for an end to self-certification mortgages and rule that responsibility for income verification be transferred from mortgage brokers to lenders.
This will be another busy week with two key housing reports: Housing starts on Tuesday, and Existing home sales on Friday. I expect single family starts to be about the same as last month (the number to watch), and existing home sales to be higher than last month (based on regional reports).
U.S. Bank v. Ibanez: More fun with foreclosures
by Calculated Risk on 10/18/2009 04:34:00 PM
CR Note: This is a guest post from albrt.
Another interesting foreclosure decision came down this week – U.S. Bank v. Ibanez by Massachusetts Land Court Judge Keith Long. The case is about securitized subprime mortgages that were foreclosed in mid 2007. The originating banks had assigned the notes and mortgages “in blank,” and the documents were then given to a custodian who kept them safely filed away while the securitization machine went to work. The mortgages were assigned to pools, and the pool trustees eventually sought to foreclose on these particular mortgages.
The pool trustees used a non-judicial process called a “power of sale.” In states that allow non-judicial foreclosures, banks can legally take back a house and sell it with little or no oversight if they follow the steps of the statute carefully. The Massachusetts statute required the banks to give notice of who held the mortgage. The pool trustees in Ibanez named the wrong party on the notices because they had not updated the assignment stamps on the documents at the time they advertised the sale.
The pool trustees were not able to get title insurance for the properties after the sales, so they filed complaints with the land court asking to have their titles validated. Judge Long held that the foreclosure sales were void. The pool trustees asked the court to reconsider, and filed a lot of paperwork explaining the securitization process. Judge Long held that the foreclosure sales were still void, and also made some interesting comments along the way about the representations in the securitization documents.
Ibanez is a trial court decision, but it is apparently expected to have significant influence in Massachusetts because of the special nature of the court. The Massachusetts Land Court has the job of examining titles and conclusively certifying who owns land. This is different from most states, where private parties record title documents with a local official, but the local official usually has very limited power to decide whether the document is any good. In most states, courts will look at the records and quiet title as between the parties who are in court, but the courts will not necessarily preclude another party from coming in later and challenging the title on a different basis. I don’t practice in Massachusetts, but I would expect that because the Massachusetts Land Court is specialized and its judgments are conclusive, the judges probably try not to differ too much in their interpretation of the law. I would expect the basic points of Judge Long’s decision in Ibanez to be followed by other land court judges unless the case is overturned on appeal.
Please note that Judge Long invalidated the foreclosures, not the mortgages. In all likelihood, the holders of the mortgages will be able to go back and foreclose eventually, but they will spend some additional time and money doing it. This gentleman has been following the case and has provided some local commentary, and has also graciously posted a copy of the Ibanez decision .
There were a few points in the case that I thought were worth discussing further:
Non-judicial foreclosure. The foreclosure in this case was done using an abbreviated process without much oversight from a judge. The Massachusetts statute on powers of sale allows the bank to enter the property, publish notices, and then sell the property on a specified date at least thirty days later. If the bank is not able to use the accelerated process, it takes three years for the bank to get clear title in Massachusetts. Any time during the three year period the former borrower has a right of redemption, which means the borrower can come back, pay the bank whatever is due on the mortgage, and get the property back.
More than half the states have accelerated foreclosure processes that have little or no involvement by the court, including states that allow “deeds of trust” instead of mortgages. Banks generally like non-judicial foreclosures because they are faster and cheaper. But if the bank screws up a non-judicial foreclosure, the sale may be invalid and the bank may be liable for problems caused by the invalid sale. Many states allow either judicial or non-judicial foreclosures. If there is something wrong with the transaction, for example questionable assignments as in the Ibanez case, the bank may want to consider a judicial foreclosure. If there is a judge handling the case, the judge will usually have the power to consider evidence and decide whether the foreclosing bank really is the owner of the mortgage. Once the judge decides who owns the mortgage, the foreclosure should be able to go forward. Situations where the mortgage completely disappears and the borrower gets to keep the house without paying should be rare.
On the other hand, this gentleman has an interesting if somewhat speculative point:
The true holder of the Note was insured by AIG so they are covered. AIG and the banks were bailed out by taxpayers. So, unless the American tax payer can produce a “blue-ink” original Note, no one has standing to foreclose.The process of figuring out whether an insurance company should be able to collect from somebody else after the insurance company pays a claim is called “subrogation.” When the word subrogation appears in a legal pleading, well, let’s just say it tends to complicate the case a little bit. It seems to me this gives the average borrower something to talk about when explaining to a judge why he or she wants to see the original note. I have not seen a case where a borrower could show that the holder of the note had been bailed out by AIG or the taxpayers, but it must have happened. In fact, I would say it seems to have happened a lot.
Representations and warranties. Judge Long mentioned several times that he was shocked to discover the security offering documents represented to investors that the mortgages had been validly assigned, when in fact the mortgages had not been validly assigned. There is a lot of law here, but Judge Long’s discussion is pretty clear on most points so I won’t try to rehash it. This certainly gives us something to think about when we are wondering why the Fed and the Treasury and all the other wholly-owned subsidiaries of Goldman Sachs are so motivated to overpay for mortgage securities. If the government ends up buying all the bonds at some large fraction of face value, then the government is probably the only party that can sue the securitizers for making misrepresentations like this.
MERS. This case also demonstrates that recorded title documents can get plenty screwed up without any help from a third party like MERS. As Tanta explained, banks have been using third-party custodians to hold original documents for a long time, and the proper assignments didn’t always get made in a timely fashion. In fact, Judge Long seemed to suggest in two footnotes that the banks would have had an easier time in this case if they had used MERS.
Title Insurance. The Ibanez banks brought these cases because they couldn’t get title insurance. For anyone who wants to avoid complications like this, title insurance is the key. Title insurance doesn’t guarantee that you’ll never have any problems – like any insurance company, sometimes title insurers will deny claims and leave you hanging. But for the most part it is the title insurer’s job to figure out if there are problems with your title, and then provide insurance to cover your legal expenses and your losses if any problems come up. The way you get title insurance is different in different states, but the policies are generally standardized in something called “ALTA” format. ALTA stands for “American Land Title Association.”
If you want to buy a house from a bank and the title insurance company thinks the foreclosure sale was no good, the title company most likely won’t insure the title at all. You should not buy a property that a title company won’t insure unless you can afford a good lawyer and are looking for adventure.
It is also possible that the title company will insure the title subject to “Exceptions.” When you get a title policy commitment before the sale, Schedule A will show your proposed coverage, Schedule B will show the Exceptions, and there will also be a list of “Requirements” that need to be completed before the title company will actually issue the policy. Requirements that aren’t completed before closing will generally migrate over to the Exceptions page.
It is very important to understand the Exceptions in you title policy. Sometimes, after careful consideration, you can decide to disregard the Exceptions. For example, my title policy has an Exception for water rights. I live in the city and have city water, so I am not going to spend a lot of time worrying about whether I have a right to drill a well. Maybe I will regret my decision in the Hard Times ahead, but basic plumbing is not one of the technologies I expect to disappear in the Hard Times, so I’m willing to take my chances. The title company also made an Exception for the racial covenants that were placed on my neighborhood in the 1920s. The U.S. Supreme Court has decided those are clearly not enforceable, and the title company doesn’t want to pay for anyone to try to relitigate either side of that question.
If a title company were trying to offer you a policy without covering a bad foreclosure, the exception might look something like this:
Any loss, claim or damage by virtue of the failure of the public records to disclose an assignment of interest from the instrument recorded in Book 107 of Deeds, page 49 to the instrument recorded in Book 109 of Deeds, page 377.This is hard to understand out of context because it is basically a big nominal phrase without a real subject or a verb or an object. The subject and the verb and the object are “We will not provide coverage for __________.” If there are any Exceptions in your title policy that you don’t completely understand, you should probably consult a lawyer.
There is plenty more to talk about, but this is already almost as long as the MERS post, so I’ll stop here. Ibanez appeared several times in the comments this week, but CR was the first person I heard about it from so no hat tips, except to Tanta for having all this figured out a few years ago.
CR Note: This is a guest post from albrt.
Inventory Restocking and Q3 GDP
by Calculated Risk on 10/18/2009 02:43:00 PM
Professors Hamilton and Krugman have mentioned that Q3 GDP will probably be reasonably strong, see Hamilton's No L and Krugman's A smidgen of optimism. I agree.
But I don't think growth in Q3, or even in Q4, are the question. The key question is what happens in early 2010.
The following graph shows the contributions to GDP from changes in private inventories for several recessions. The blue shaded area is the last two quarters of each recession, and the light area is the first four quarters of each recovery.
Click on graph for larger image in new window.
The Red line is the median of the last 5 recessions - and indicates about a 2% contribution to GDP from changes in inventories, for each of the first two quarters coming out of a recession. But this boost is always transitory.
Following the 1969 recession, changes in inventory added 6.2% to GDP in the first quarter of recovery - and GDP increased at an 11.5% (SAAR) that quarter. No one is predicting a quarter like that. But a 1% to 2% contribution from changes in inventories is possible.
And Personal Consumption Expenditures (PCE) will be strong too.
The following graph shows real PCE through August (2005 dollars). Note that the y-axis doesn't start at zero to better show the change.
The quarterly change in PCE is based on the change from the average in one quarter, compared to the average of the preceding quarter.
The colored rectangles show the quarters, and the blue bars are the real monthly PCE.
The July and August numbers suggest PCE will grow at about a 3.6% (annualized rate) in Q3, however retail sales suggest less growth in September (July and August were boosted by cash-for-clunkers). So maybe we will see 3% PCE growth in Q3, and that would mean a contribution to GDP of about 2%.
Add in positive contributions from net exports, an increase in residential investment (for the first time since Q4 2005), some increase in equipment and software investment - and Q3 should look pretty healthy. Yes, investment in non-residential structures will be ugly, but overall private investment will be positive (first time since Q3 2007).
However, I expect early 2010 to be a different story.
Although I expect solid GDP growth in Q3 (and probably OK in Q4), I think GDP growth in 2010 will be sluggish, with downside risks.
McClatchy: "How Moody's sold its ratings"
by Calculated Risk on 10/18/2009 12:21:00 PM
Kevin Hall at McClatchy Newspapers writes: How Moody's sold its ratings -- and sold out investors (ht Atrios)
A McClatchy investigation has found that Moody's punished executives who questioned why the company was risking its reputation by putting its profits ahead of providing trustworthy ratings for investment offerings.How can securities be rated AAA one day, and junk the next?
Instead, Moody's promoted executives who headed its "structured finance" division, which assisted Wall Street in packaging loans into securities for sale to investors. It also stacked its compliance department with the people who awarded the highest ratings to pools of mortgages that soon were downgraded to junk.
The rating agencies pocketed the fees, and investors (including the Fed) still use their ratings. As Atrios jokes: "Not sure there have been negative consequence for them, so call it a win!"
