Wednesday, April 16, 2014 02:58pm
North Adams, MA now: 37 °   
Send news, tips, press releases and questions to info@iBerkshires.com
The Berkshires online guide to events, news and Berkshire County community information.
SIGN IN | REGISTER NOW   

Home About Archives RSS Feed
The Independent Investor: Understanding the Foreclosure Scandal
By: Bill Schmick On: 04:56PM / Thursday October 21, 2010
Important
0
Interesting
0
Funny
0
Awesome
0
Infuriating
0
Ridiculous
0

This week one of my clients asked me to explain the ongoing foreclosure debacle in "plain English" as she put it. It dawned on me that there may be a lot of readers out there who would benefit from the same thing, so here goes.

The first point to understand is that homeowners can only be foreclosed and evicted by the person or institution that actually holds the mortgage loan note. That noteholder is the only entity that has the legal authority to ask the courts to foreclose and evict the mortgageholder. That note is what you sign and give to the original lender, promising to pay the loan back over 10-20-30 years. It is that note (not the mortgage) that is the important legal document.

Back in the day, before mortgage-backed securities and loan securitization, most mortgage loans were issued by your local S&L or bank. The note stayed with the local financial institution who serviced the loan, just like in the movie "It's a Wonderful Life."

Then some Wall Street rocket scientists decided to modernize that business. Since all mortgageholders are not the same and some are riskier than others, these Gordon Gekko-lookalikes decided there was a buck to be made in wholesaling mortgage loans to investors hungry for higher-yield securities. Wall Street bought these mortgage loans off the banks and bundled them into huge pools called Real Estate Mortgage Investment Conduits (REMICs). At that point, these mortgages were spliced and diced into tranches according to their risk, (among other variables). The REMICS never owned the mortgage notes, but were simply re-packaging the mortgage loans, taking a fee and selling them to others.

Investors bought these loans, which were separated into a whole range of tranches according to how much risk the investor wanted to take on. What is important to understand is that each tranche holder owned a portion of the same mortgage, rather than investor A owning my mortgage and investor B holding yours. If my mortgage defaulted and you owned a junior (riskier) tranche of my mortgage (times many, many more) then you would be hit with that loss first. If there was still some loss left over, the more senior (safer) tranche holder would take a hit as well. It was physically impossible, even if the sellers owned the notes, to divide them fractionally between thousands if not millions of buyers. So once again these mortgages (tranches) were sold but not the notes.

Imagine the complexity of keeping track of what mortgages were defaulting versus those that were not and how much loss to assign each individual trancheholder? Enter the Mortgage Electronic Registration System (MERS), which became the repository for millions of digitized mortgage notes that all the financial institutions originated from the actual mortgage loans signed by you and me. These digitalized mortgage notes were sliced and diced and rearranged once again and came out the other end as mortgage-backed securities. The problem was that MERS didn't actually hold the mortgage notes either. And therein lies the rub. Legally, the chain of title for these mortgage loans has been broken a couple of times.

As I've explained, the key document in taking out a mortgage is the note. In order for that note to be sold or transferred to someone else (for example, transformed into a mortgage-backed security), the note has to be physically endorsed over to the next person. If it isn't, the chain of title is broken. If the chain is broken than legally the mortgage note is no longer valid. The person who took out the mortgage no longer owes the loan, because he no longer knows who to pay. In my opinion, I still believe that everyone has an obligation to repay money they have borrowed, otherwise, the entire system of credit will disintegrate.

Of course, with the number of foreclosures that have hit the nation, this issue was bound to be discovered as homeowners began to contest eviction. The banks, realizing their error, hired foreclosure mills, (legal firms that specialized in foreclosures), to remedy the problem. Accusations that these foreclosure mills actually went back and falsified documents in order to repair the broken chain of titles caught the attention of attorneys-general throughout the nation as did stories of robo-signers who were signing their names to foreclosure documents that attested that they had reviewed the loan documents when they hadn't.

In an election year, this issue has disrupted everything to do with the mortgage markets from foreclosure to new home sales. Everyone from the White House, the Justice Department, the U.S. Treasury and the Housing Departments are announcing task forces to dig deeply into this mess. In my opinion, the digger they deep the worse the true story will become so stay tuned.



5Comments
Tags: mortgages, foreclosures, crisis      
News Headlines
BHS Closing In On Deal To Acquire NBH
Edith Wharton Writing Competition Winners Announced
Volunteers needed for the Y's Tie Dye Dash
Lanesborough Loses Lawsuit Over Laston Park Construction
Williamstown Board Rejects Housing Panel Developer Choice
Save NARH Campaign Looks to Drum Up Wider Support
North Adams Closes Beaver Street Over Mudslide Fears
2014 Alma Riello Scholarship Deadline May 9
Bunny Hop Race Will Support Homeless Shelter
NARH Advocates Bringing Petitions to Beacon Hill
Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of BMM. None of his commentary is or should be considered investment advice. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com Visit www.afewdollarsmore.com for more of Bill’s insights.

 

 

 



Categories:
@theMarket (131)
Independent Investor (178)
Archives:
April 2014 (3)
April 2013 (3)
March 2014 (6)
February 2014 (6)
January 2014 (7)
December 2013 (8)
November 2013 (7)
October 2013 (6)
September 2013 (6)
August 2013 (8)
July 2013 (3)
June 2013 (5)
May 2013 (7)
Tags:
Japan Currency Commodities Pullback Deficit Euro Stimulus Fiscal Cliff Selloff Election Rally Markets Debt Ceiling Economy Interest Rates Metals Bailout Congress Recession Jobs Federal Reserve Stocks Debt Greece Stock Market Europe Energy Banks Crisis Oil Employment Health Care Taxes Retirement Markets
Popular Entries:
The Independent Investor: Understanding the Foreclosure Scandal
The Independent Investor: Don't Fight the Fed
The Independent Investor: Does Cash Mean Currencies?
@theMarket: QE II Supports the Markets
@theMarket: Markets Are Going Higher
The Independent Investor: General Motors — Back to the Future
The Independent Investor: How Will Wall Street II Play on Main Street?
@theMarket: Economy Sputters, Stocks Stutter
The Independent Investor: Will the Municipal Bond Massacre Continue?
The Independent Investor: Why Are Interest Rates Rising?
Recent Entries:
The Independent Investor: Banks Face Tougher Regulations
@theMarket: A Crowded Trade
The Independent Investor: Obamacare Confounds Critics
@theMarket: The Faint of Heart
The Independent Investor: Do Women Have a Choice?
The Independent Investor: What's Wrong With This Flight Plan?
@theMarket: Hanging In There
The Independent Investor: Income Inequality Among Women
@theMarket: Markets Turn Positive for the Year
The Independent Investor: True Confessions


View All
Softball: Lee vs Hoosac
4-14-14 Kassandra Kazimierczak went 2-for-4 with a double...
Baseball: MG vs Hoosac
4-11-14 Dan Flynn's suicide squeeze with the bases loaded...
Softball: MG vs McCann
4-11-14 Mount Greylock and McCann Tech played an atypical...
Sullivan School CPR Class
Seventh-graders at Sullivan School in North Adams learned...
Lacrosse: Mounties vs. Hoosac
Mounties overwhelmed Hoosac Valley on Wednesday 14-1....
North Adams Furnace St. Fire
Firefighters contained a top floor apartment blaze on...
Berkshire Chamber Career Fair...
More than 50 employers connected with job seekers at...
Lacrosse: MG vs St. Joe
Mount Greylock boys lacrosse team won 17-4 St. Joseph at...
Softball: MG vs Drury
4-8-14 Mount Greylock softball claimed a 7-2 victory over...
Wahconah High School Musical...
Wahconah Regional High School is putting on the 1930...
Drury Coach Marceau Benefit
Friends and supporters filled the Eagles Hall on Friday...
Lenox High International Fair
Lenox Memorial Middle and High School students got to...
Slice of Life Pizza 2014
Moments House's annual Slice of Life fundraiser that pits...
North Adams Hospital Closes
Union members and supporters of North Adams Regional...
2014 Berkshire Awards
The Berkshire Awards ceremony was held on Friday night at...
Chamber Night At Moments...
The Berkshire Chamber of Commerce visited the new Moments...
Softball: Lee vs Hoosac
4-14-14 Kassandra Kazimierczak went 2-for-4 with a double...
Baseball: MG vs Hoosac
4-11-14 Dan Flynn's suicide squeeze with the bases loaded...
Softball: MG vs McCann
4-11-14 Mount Greylock and McCann Tech played an atypical...
Sullivan School CPR Class
Seventh-graders at Sullivan School in North Adams learned...
Lacrosse: Mounties vs. Hoosac
Mounties overwhelmed Hoosac Valley on Wednesday 14-1....
| Home | A & E | Business | Community News | Dining | Real Estate | Schools | Sports & Outdoors | Berkshires Weather | Weddings
Advertise | Recommend This Page | Help Contact Us | Privacy Policy| User Agreement
iBerkshires.com is owned and operated by: Boxcar Media 102 Main Street, North Adams, MA 01247 -- T. 413-663-3384 F.413-664-4251
© 2000 Boxcar Media LLC - All rights reserved