As the banking industry and their allies in the regulatory apparatus and the traditional media continue to downplay violations of law in the foreclosure fraud crisis, you get the feeling that they can no longer fool themselves. Separate and apart from the relatively modest global settlement proposal, which may not present the kind of accountability appropriate for rampant criminal activity, you still have open possibilities for litigation, particularly by investors against the banks who sold them bad mortgage-backed securities under false pretenses. The investors, which include some of the largest institutions in the world, have the firepower to pursue cases and force banks to repurchase the assets, which could cost tens if not hundreds of billions of dollars. And there’s fresh reason to believe that bondholders will have allies in that fight.
One big legal obstacle for investors has been getting documents they say will prove those bonds were anything but low-risk. Demands for documents have to come from the trustees who administer the bonds, and until recently trustees have stayed out of the legal fray.
That may be changing. A recent Delaware lawsuit illustrates the increased aggressiveness of trustees in helping investors make their case. An attorney for one trustee, Wells Fargo & Co, spent a year pursuing documents from EMC Mortgage Corp, a unit of JPMorgan Chase & Co.
Court documents show EMC, which JPMorgan inherited as part of its shotgun acquisition of Bear Stearns in 2008, faces several other requests from trustees, including Citigroup Inc.
The lawsuit is among the first of its kind by a trustee, partly because investors have only recently organized themselves in large enough numbers to force trustees to consider their demands.
Now you have something interesting. The trustees are helping investors in their pursuit of documents from other servicing units and mortgage lenders, which are divisions of competing banks. This starts to look like bank-on-bank warfare pretty quickly. And the documents are really the Holy Grail of all of this – if a pattern can be established through that discovery that originators misrepresented their product and broke their own guidelines for granting mortgages, investors will start winning put-back cases pretty rapidly. And it really only takes one for other investors to come in and pursue lawsuits.
Will any of this 10,000-foot fight spill down into help for the individual borrower? That’s unclear. But if investors start winning these cases, the banks may be the ones stepping up with a global settlement. And in general investors have endorsed the concept of loan modifications over foreclosures; it’s the servicers who aren’t acting in the interests of their bosses on this one. The Association of Mortgage Investors has even endorsed the foreclosure settlement talks and broader investigations of servicer conduct.
There are other opportunities for borrowers as well, aside from the global settlement. Some states are experimenting with principal write-downs, using the Treasury Department’s Hardest Hit Fund to finance them, and the results have in some cases been positive. We’re talking about 40,000 borrowers at most, a paltry sum compared to those in need, but it could lead to data showing the stability of principal reductions as a modification strategy (data we already have, but this would be in the current context). And this is even more interesting:
When American Homeowner Preservation was first conceived, the vision was a solution which benefited homeowners, investors as well as existing lenders. In practice, homeowners and investors have recognized the advantages and have responded mightily. However, AHP’s offers of prompt resolutions which maximize lenders’ recovery on their troubled mortgages have generally been poorly received by lenders. As a result, approximately 15% of AHP short sale offers are ultimately approved by lenders and a great deal of time and effort is spent trying to resolve the other 85% of applicants who ultimately cannot be assisted due to lack of cooperation from existing servicers.
To solve this challenge, AHP has been bidding to acquire pools of REO’s and subperforming mortgages at large discounts. By gaining control of the REO’s and mortgages, AHP can then approach each family and offer them an AHP Lease/Option if they want to stay, or an incentive payment if they want to move.
If the family does not want to stay or the home is vacant, the home is marketed through local real estate agents to sell promptly at discounted prices to cash buyers. Because the pool properties are purchased at substantial markdowns, they can be resold at wholesale prices and still generate a good return.
Basically you have American Homeowner Preservation using private investor money to buy up mortgage pools and give the borrowers the solutions they need, not the ones that maximize profits for the company. I don’t know that there’s that much money out there to do this on a grand scale, even though the short-term returns are pretty high, but it’s an exciting development, and it shows you can do well and do good at the same time. Frankly, it’s what the government did with the Home Owners Loan Corporation in the 1930s, and what they should be doing today.