Yves Smith relates what could be some of the best news in a long time on the foreclosure crisis.
What is particularly interesting is that the SEC seems to be targeting specifically the sort of abuses that we have chronicled at length on this blog: failure to convey mortgages to the securitization trusts in accordance with the pooling and servicing agreements (which were part of the offering documents); whether robosiging is inconsistent representations made to investors (this frankly is a novel angle, I’m impressed the SEC is considering it), as well as an issue that has gotten more attention in the media, that investors appear to have been mislead on a widespread basis about the quality of mortgages in late vintage subprime mortgage bonds.
Note that we’ve been surprised at the complacency of investors regarding the losses banks are taking on the issue of standing in courts all over the US. The securitization industry has desperately been trying to spin this as “deadbeat borrowers trying to get a free home” when the overwhelming majority of people in court are either convinced that they are the victim of servicing abuses, are fighting the dubious and pervasive practice of banks trying to break a bankruptcy stay (all creditors are supposed to take a time out while the borrower works out a bankruptcy plan with the court), or really just want a mod, but are having to cudgel the bank in court instead. Investors have been filing a few cases, but peculiarly on the (we think) not so attractive representations and warranties issue, in which the investors argue that the mortgages in the securitization pools were far worse than they were told, and the lousy quality of those mortgages (as opposed to the economy taking a big hit) is the reason they have suffered losses.
Even though the banks clearly put a lot of dubious loans into the deals, it is difficult and costly to win these rep and warranty cases, which means these case are typically settled early on, and for not very large amounts compared to the amount at issue). The issue of failure to convey mortgages properly to the trust seems more of a slam dunk, but we wonder whether investors are loath to advance a legal theory that strikes at the heart of the mortgage industrial complex. After all, if they win, they have just established that they were sold non-mortgage backed securities. Nevertheless, the news that the SEC is taking this matter to heart may embolden some of the fence-sitters.
The Financial Times piece Smith is working off of is a good read. The SEC is asking some of the right questions, to be sure:
While declining to discuss any investigations, Mr Lench highlighted areas that could be of concern: “Were representations relating to the transfer or documentation of mortgages into the loan pools accurate? Did activities such as ‘robo-signing’ contradict those representations? Were disclosures to investors regarding the quality of the loans in the pools accurate?”
Lench goes on to say this isn’t just about what happened in the years leading up to the financial collapse of 2008, but will include issues arising today.
Mr Lench said his unit was working with “legacy” cases from the financial crisis as well as new ones stemming from the “rippling effect of the unfolding crisis”.
Hopefully this will go towards stopping foreclosures based on faulty documents and places where the current servicer does not have custody of the mortgage note with a proper chain of custody.
The real question, at the end of all of this, will be if regulators pursue criminal charges for those parties who committed criminal behavior. Short of criminal charges, I’m not sure that there is any action regulators can take which will meaningfully discourage this sort of behavior which wrecked our economy and continues to wreck peoples’ lives from happening again.