Some more Notes on Mortgages, Securitisation and Repossession/foreclosure.

I am developing my model of how the securitisation Food Chain of mortgage debt is structured. My latest discovery is that the Default and foreclosure agenda is driven by distribution contracts for the securitised Mortgage pools, nothing to do with the original Lender/borrower relationship.

Further insights from the American experience of MERS and the infamous recent cases of banks trying to foreclose properties never the subject of a mortgage charge in the first place are all very illuminating. My task is slightly complicated by the difference between the US and UK laws and the further complication of Mortgage and securities Laws being State originated and not Federal. All good stuff and actually quite enjoyable to study when one gets locked into the obsessive detail.

Anyway heres my typical cut and paste mix and match, I started my spreadsheet model today and hope to develop it to a publishable state in a week or so. It may well be sooner if inspiration strikes and the Gods of Google are helpful in answering well targeted search terms.

So far this morning I have tried.

7:35 AM
6:46 AM
5:51 AM
The following notes a titbits from those searches.
I have also come across an excellent Blog that has been documenting some very good research
into the securitisation factors in all of this.


Anyway heres my cut and paste.



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Juddebar, have you seen this film.


Its a very good film available widely on the internet to download it gives a good account of the
depth of dysfunction now attendant in the current banking system.
The initial mortgage contract as represented Banks matching deposits it takes to Investments others
wish to make is absolutely fine and this contract n=must of course be enforceable.
The Misrepresentation/Fraud Bit.
1. The Banks do not match 100% deposits in fact 96% or more of the money is a bookkeeping entry
( Thin air)
2. The Banks Take the promise to pay back the 96% thin air and securitise that income ( Usufruct )
3. In event of default, The Bank achieving anything above 4% of the original mortgage advance
recover the capital reserve at risk.( a huge Conflict of interest over the borrowers interest where
they have equity)
4. The banks have a conflict of interest in that by forcing borrowers to take losses on their assets by
strangulating the money supply they make capital profits on either foreclosures or are getting back a
portion of the thin air that was never real in the first place.( further conflict of interest)
In addition to the need for more regulation of banks it is also essential that the creation of money
through debt is taken out of their hands and placed in a Public Trust or other vehicle. This hugely
profitable natural monopoly should not be gifted to commercial interests it is truly ridiculous.


Juddebar, have you seen this film.


Its a very good film available widely on the internet to download it gives a good account of the depth of dysfunction now attendant in the current banking system.

The initial mortgage contract as represented Banks matching deposits it takes to Investments others wish to make is absolutely fine and this contract n=must of course be enforceable.

The Misrepresentation/Fraud Bit.
1. The Banks do not match 100% deposits in fact 96% or more of the money is a bookkeeping entry ( Thin air)
2. The Banks Take the promise to pay back the 96% thin air and securitise that income ( Usufruct )
3. In event of default, The Bank achieving anything above 4% of the original mortgage advance recover the capital reserve at risk.( a huge Conflict of interest over the borrowers interest where they have equity)
4. The banks have a conflict of interest in that by forcing borrowers to take losses on their assets by strangulating the money supply they make capital profits on either foreclosures or are getting back a portion of the thin air that was never real in the first place.( further conflict of interest)

In addition to the need for more regulation of banks it is also essential that the creation of money through debt is taken out of their hands and placed in a Public Trust or other vehicle. This hugely profitable natural monopoly should not be gifted to commercial interests it is truly ridiculous.



Uses

Risk, Return, Rating & Yield relate
There are many reasons for mortgage originators to finance their activities by issuing mortgage-backed securities. Mortgage-backed securities:
  1. Transform relatively illiquid, individual financial assets into liquid and tradable capital market instruments.
  2. Allow mortgage originators to replenish their funds, which can then be used for additional origination activities.
  3. Can be used by Wall Street banks to monetize the credit spread between the origination of an underlying mortgage (private market transaction) and the yield demanded by bond investors through bond issuance (typically, a public market transaction).
  4. Are frequently a more efficient and lower cost source of financing in comparison with other bank and capital markets financing alternatives.
  5. Allow issuers to diversify their financing sources, by offering alternatives to more traditional forms of debt and equity financing.
  6. Allow issuers to remove assets from their balance sheet, which can help to improve various financial ratios, utilise capital more efficiently and achieve compliance with risk-based capital standards.
The high liquidity of most mortgage-backed securities means that an investor wishing to take a position need not deal with the difficulties of theoretical pricing described below; the price of any bond is essentially quoted at fair value, with a very narrow bid/offer spread.[citation needed]
Reasons (other than investment or speculation) for entering the market include the desire to hedge against a drop in prepayment rates (a critical business risk for any company specializing in refinancing).

[edit]







Recording and MERS

One of the critical component of the securitization system is Mortgage Electronic Registration Systems (MERS) created in 1990s, which made legally possible to re-assign underlying mortgages without cumbersome recordation process in county courts as customary required. Indeed, since every time a financial instrument containing mortgages is sold, every mortgage (deed of trust) and note (obligation to pay the debt) presumably have to be re-recorded in US County courts and recordation fees have to be paid. So, the financial industry eager to trade in Mortgage Based Securities needed to find a way around those recordation requirements, and this is how MERS was born to replace public recordation with a private one. The MERS legal standing is currently widely challenged, with focus on legal inconsistencies, which originally looked trivial, but in fact may reflect dysfunctionality within the entire mortgage securitization approach itself and therefore have a profound impact on financial system.

[edit]
http://en.wikipedia.org/wiki/Mortgage-backed_security

That said, what you want to watch if you’re looking at a servicer is the category of loans that are 90+ days delinquent but not yet REO. That may not be anyone’s largest pile of delinquent loans (out of the total of 30-60-90-120-FC-REO), but it’s the one that is the expense-hole. Anyone who is letting that bucket get bigger at a faster rate than it is racking up 60-day delinquencies has a problem. Every loan that is 90 days down this month was 60 days down last month, so out-of-proportion increases in the 90+ category means that the trouble is on the liquidation (escape) side, not just the credit deterioration (entry) side: BKs or legal-document troubles are delaying foreclosure, or nobody really wants to foreclose right now because the bids are going to suck so badly. Dragging it out, though, just makes the servicer wait that much longer to get paid and eats away at what the investor will recover. It’s expensive to carry REO and market it, but you can’t list it until you own it and you can’t sell it until you list it. There are ways to win at the servicing game, but there are also many ways to lose.



The end of the long story is that “normal” mortgage environments have lots of opposing forces in more or less equilibrium: the originator, the investor, the servicer. When the environment is not normal, distortions come in and risk levels can appear that are not “historically” usual (and everybody acts surprised). There is going to be some major whining, moaning, and gnashing of teeth by mortgage originators, should we have a real-live credit crunch, that you won’t necessarily hear from mortgage servicers, who have been taking it the shorts all these boom-years and are about to start getting profitable, assuming that delinquent-servicing costs don’t explode on them. If they have the staff to handle the FCs and BKs and REOs, it’s gravy because the investor and insurer are going to end up covering those costs as long as they’re justifiable. If you’re an inefficient servicer whose expense reports don’t pass the investor’s smell test, you’ll lose money if the REO doesn’t sell fast enough. If you’ve been puzzled about what motivates the “nuclear waste” buyers, now you know—they aren’t looking for yield on a note, they’re looking for profit on distressed-loan servicing. The reason they’re offering such crap bids is that the REO isn’t moving fast enough, which increases their expenses and thus eats into their profits. (That and the fact that the loan documents are such a giant mess in so many of these deals that it will take the Olympic Lawyer Relay Team to sort it out.)
http://www.calculatedriskblog.com/2007/04/foreclosure-sales-and-reo-for-ubernerds.html
Non-judicial foreclosure is almost always faster and cheaper for the lender than a judicial foreclosure. Most of the time, when there is a choice, the lender chooses the non-judicial option for that reason. The big benefit to the lender of a judicial foreclosure is that the lender can ask the court, when appropriate, to enter a “deficiency judgment” against the borrower; this makes the borrower liable for any difference between the proceeds of the sale and the debt owed when the borrower is upside-down. Practically speaking, a lender who chooses non-judicial foreclosure generally waives its right to seek a deficiency judgment. The lender’s calculation, obviously, comes down to weighing the benefit of quick sale and reduced expenses against the cost of (potentially) writing off part of the debt.



Trustee shall apply the proceeds of the sale in the following order: (a) to all expenses of the sale, including, but not limited to, reasonable Trustee’s and attorneys’ fees; (b) to all sums secured by this Security Instrument; and (c) any excess to the person or persons legally entitled to it.

For our present purposes, the important part of this is the last sentence, regarding the order of application of the sale proceeds. Notice that after expenses and the mortgage debt are satisfied, any excess proceeds belong to the borrower (or a junior lienholder, if there is one). As a practical matter, of course, there are rarely any proceeds left for the borrower; if the property can fetch that much, it is usually sold before things get that bad. The point here is that a lender cannot take advantage of a borrower with a big equity cushion who for some reason is unable to make payments but also unable or unwilling to sell the property himself. You have to understand that in order to understand how lenders bid at auctions (and how other people bid to compete with them).



A large part of this grief is that too many consumers (and their betters in the press, quite often) confuse the “exposure time” of a property they just bought with its likely “marketing time” should they need to unload it some day, and confuse “appraised value” with liquidation price. An appraisal prepared for a lender in a mortgage loan transaction is not intended to give you liquidation value, or the price someone would pay you today if you were so distressed as to need that cash pronto. The value indicated in the appraisal is contingent upon the allowance of reasonable exposure and marketing, and assumes that the seller is typically motivated, not desperate. Those appraisals prepared during the boom, when all the buyers were “typically” desperate to buy, may now be considered waste paper.

Therefore, foreclosure and REO sales are not “comps” or comparable sales used by appraisers to form an opinion of the value of a normally sold property. That doesn’t mean they don’t affect prices or marketing time: a market full of REO is a market full of existing homes somebody wants to get out from under and will likely undercut other sellers to do so. I have used the term “flood the market” before in reference to REO. I don’t just mean “flood” in the sense of a lot of REO. I mean “flood” the way we used to mean it when our cars had carburetors instead of fuel injectors. If that metaphor doesn’t make sense, we’ll have to let the engineers tinker with it in the comments.













Mortgage Broker and some reaction to call to sell more mortgages?






Jim, I concur with your position and will add that I believe government control on mortgage originator compensation will not only restrict would-be homebuyers from entering the market, but increase the foreclosure rate as well. Take for example a conversation I had last week with Lori, a recently divorced mother of 3, who could barely make ends meet. When her monthly escrow was raised by $60, she could not make her mortgage payments. While her lender gave her a 3-month payment reduction, after that term she found herself in the same position and was foreclosed on 4 months later. I asked Lori if the lender suggested she review her homeowners and other insurance to see if she was paying for unneeded coverage. I also asked if the lender suggest she appeal her property tax bill for a property located in an area that suffered a 40% reduction in values. What about reducing her withholdings to give her more disposable income each month? The answer to each of these questions was “No, the lender never suggested these things.” It’s possible that had Lori been able to reduce the aforementioned expenses, she may have been able to make her monthly payments and keep her house. As for 1st-time homebuyers, most require loan amounts less than move-up buyers. When the economy turns around, and more buyers are seeking financing, those of us who offer the same high level of guidance regardless of loan amount may be incented to disregard the smaller loan amounts. Right now, we have the option of offering a rate with a premium commensurate with our effort. The smaller loans require the same effort to close as larger ones, often more. If we don’t have the option of charging a premium for the smaller loan amounts, we’ll be forced to make a decision as to how much time we wish to allot to the smaller loans. Sure, there will be discount lenders who will be happy to cater to the smaller loan amounts. But, will these discount lenders provide the guidance that Lori really needed?
Russell Bear
on
Mortgage Bankers/Brokers, Real Estate Briokers, and used car salesman…all one in the same. Saying that mortgage banking is an honorable profession, after the mess that we have been in is akin to saying McDonalds is a vascular surgeons friend. These professions are all necessary evils in a world of insurmountable greed. Wow! “Key facilitators for the future of housing in America”? There are far too many mortgage product out there with the invent of the interest only mortgage, stated income, and ARM’s for mortgage banking to be stable and positive for housing and our economy. Going back to 10-20% down 15-20 yr terms and low rates will keep people in their homes! Without a vested interest in their home people will continue to walk away. Causing a backlash fannie and freddie ie the GOVERNMENT ie taxpayers. Not that you care b/c you have made your money (originating/bundling/selling) and you are on to the next trick.



Secondary Marketing Risk Management
A successful mortgage banking company must maximize profits while minimizing the variability of those profits in the long run. With volatile markets, unpredictable origination volumes, and complex new mortgage products, the task can be daunting. Institutions must take a simultaneously optimized and integrated approach to pricing, risk reporting, hedging, pooling, and loan delivery. Otherwise, consistently achieving optimal profits is not possible.

Since 1987, QRM has been partnering with clients and applying modern option theory to all aspects of secondary marketing, in order to manage risk and maximize all-in risk-adjusted profitability. QRM’s Mortgage Banking Practice includes the entire secondary marketing process—from pricing, risk reporting, trade management, pool and hedge optimization, to loan delivery. QRM’s clients have hedged trillions of dollars of mortgage originations under virtually every imaginable market scenario and include over 65 of the nation’s most sophisticated lenders, including the top 10.

QRM clients create optimal secondary marketing strategies that produce a predictable flow of profits limited only by the amount of business coming in and the degree of competition in pricing. Clients accurately price and measure the exposure of all their loan products and use robust best execution analysis to accurately hedge, pool, and deliver those loans. QRM clients make informed decisions which preserve profitability and decrease earnings volatility, thereby increasing shareholder value.

Increase Profitability through Comprehensive Pricing of Loan Products
QRM clients model virtually every mortgage product or related hedge instrument, including all conforming, jumbo, alt-A, sub-prime, hybrid, reverse, interest-only, and other adjustable rate loan types. As part of that analysis, QRM clients model all possible loan delivery options, including mortgage securities, cash trades, whole loan bids, assignments-of-trades, and CMO securitization. Our Trading Analytics Research group is committed to dissecting new financial instruments and passing the best practice modeling methods on to our clients.
Our clients build refined and transparent, profitability-driven loan pricing processes that keep them ahead of the curve. These processes accurately incorporate forward price, interest carry, loan pricing adjustments, base and excess servicing values, hedge costs, overhead costs, and other attributes. QRM clients are assured that their processes for rate sheet-generation truly incorporate comprehensive, all-in analysis.
Precisely Model Rate Lock Optionality in Your Mortgage Pipeline
QRM clients perform precise and comprehensive daily interest rate risk exposure analysis, covering all aspects of their positions no matter the fallout profile, driven by deterministic factors such as the purpose, origination source, or type of product. Clients create parallel, non-parallel, or key rate interest rate shocks using robust option-adjusted spread (OAS) analytics to determine a single-number index of net exposure. In addition, clients perform contingency analysis showing how exposure and hedge position sensitivities change in response to market movements. These processes use the variable quantity option model to measure all the financial properties of a mortgage rate lock, whether the rate lock is a standard, float-down, floating subject to a cap, or path-dependent rate lock. Hedge costs are computed to precisely reflect the different risk attributes of each.
On a periodic basis, our Behavioral Modeling group performs advanced statistical analysis of each client’s actual rate lock-fallout experience to determine the sensitivity of their mortgage pipeline to interest rate changes, and other deterministic variables. Clients then quickly adopt these findings in their framework to accurately reflect their borrowers’ fallout behavior.
Incorporate Best Execution Analysis into Underlying Pricing, Hedging, and Delivery Decisions
Before engaging QRM, many secondary marketing operations find that their best-intentioned analytical packages lack the seamless integration necessary in the fast-paced secondary marketing process. QRM clients incorporate best execution analysis at every step of their process; pricing, hedging, and pooling; from rate lock inception, through loan closing, to the delivery of each loan. Clients are also able to make improvements to the initial execution at any stage in the process.
Our clients’ processes combine the speed, ease, analytical pick-ups, and integration that make optimizing loan selection and trade allocation extremely profitable and efficient. Clients determine the all-in value of alternative loan sale executions, based on current investor prices, buy-down and buy-up factors, attribute-driven guaranty fees, retained servicing preferences, multi-faceted investor constraints, and parameters determining the earliest opportunity for loan delivery.
Accurately and Thoroughly Measure Exposure and Hedge Risk under Any Scenario
QRM consultants help clients identify risk exposures and set a risk policy customized to their needs. Clients build robust hedge, trade management, and loan delivery processes incorporating every delivery-based and cross-hedge instrument that a mortgage bank might trade. Clients generate hedge optimization recommendations that meet their risk policy and trading preferences.
Pool and Deliver More Profitably
Maximizing pipeline value while also taking advantage of investor appetites for specified pools has always been a secondary marketing challenge. QRM clients utilize a powerful rules engine that models their business processes within a rigorous optimization analysis. These rules can incorporate eligibility and aggregation constraints, as well as expected pay-ups, to achieve optimal loan slotting. QRM clients utilize a variety of loan delivery vehicles— security and cash, specified pools, heterogeneous bid packages, and non-conforming securitization (integrating with the client’s Intex CMO Database).
Effectively Report to Provide Business Intelligence Necessary to Actively Manage Risk
Clients not only have access to 200 risk management reports germane to all aspects of secondary marketing and management, they also create custom reports that effectively and concisely deliver accurate business intelligence. Clients use industry-standard Online Analytical Processing (OLAP) and Microsoft Reporting Services technologies to generate customized report books that can be distributed as web pages, Excel files, or Adobe PDFs.
Against this macroeconomic backdrop, Norges Bank is concerned that risk weights for residential mortgages have fallen for many of the larger Norwegian banks because they are increasingly using their own internal rating based (IRB) models to calculate their capital requirements. These rely on historical loss data, which has remained low in Norway, even during the 1990s Nordic banking crisis. Such low risk weights fail to reflect the risks from households with a high, and rising, debt burden: at year-end 2010, debt as a percentage of disposable income was just under 200%.
The exhibit below shows that the average risk weights on mortgage loans range between 10% and 14% for a selection Norway’s banks using IRB models. According to Norges Bank, other European countries tend to have risk weights of 13%-20% although there is considerable variation by country and by individual bank. The exhibit also shows how much lower the risk weights are than in the Norwegian standardised model, which is favoured by the majority of smaller banks. Such a wide variance in weights is counterintuitive as mortgage loans should be one of the most homogenous products offered by banks.



Bank of America Puts Moratorium on All Foreclosures

By Michael Kraus on October 8, 2010
Real quick update here:
I guess this was probably inevitable, but wow… Bank of America is suspending all foreclosures nationwide as legislators and attorney generals call for investigations in foreclosure documentation practices.  This comes after Senator Richard Shelby called for the Senate Committee on Banking Housing and Urban Development to conduct an investigation into industry practices.  The day prior Rep. Edolphus Towns, the Chairman of the House Committee on Oversight and Government Reform requested a nationwide foreclosure moratorium.
The big mortgage foreclosure mess just gets bigger and bigger.  The outcome of everything is uncertain, but rest assured we will see reams of litigation filed as foreclosures across the county are called into question.  I expect sales of foreclosed properties will grind to a halt while this is sorted out.



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