CrunchedCredit : Capital Markets Finance and Real Estate Attorneys

Now, among the list of towns, cities and counties considering the Program (or some version of it) is the City of Brockton, Massachusetts. Brockton, MA like a lot of municipalities across the U.S. has seen its share of falling housing prices, unemployment and homeowners living in underwater homes (approximately 7,000 of them are underwater as of January 2013). With that said, things aren’t just gloom and doom. As interest rates continue to remain low and housing prices slowly creep up, the situation in many areas (including, Brockton, for example) has improved: in 2010, Brockton had 422 foreclosures filed and 766 notices of foreclosure issued, while in 2011, there were 281 foreclosures and 500 notices issued, and in 2012, there were 266 foreclosures and 489 notices issued. Rest assured, the market will continue to correct itself (albeit slowly).

In an effort to help struggling homeowners, the Brockton City Council, at the end of last year, voted to form a group tasked with exploring “using eminent domain power to seize bad mortgage loans that have devastated many residents and, with a private financial partner, sell them back at lower interest rates to help people keep their homes.” The working group will consider the eminent domain program, the legal ramifications of such program and may even consult with MRP. The first meeting was held on or about March 7 and a second meeting was held on March 21st. A third meeting on this topic is scheduled for April 11th.

Before the first meeting on or about March 7, one of the Brockton City Council members published a working paper which outlined the proposal being considered and its goal. According to the working paper, “there will be no problem in translating eminent domain law to apply to mortgage debts because mortgages are considered a type of ownership of property in Massachusetts, a type of title in property” and the “goal of this initiative is to purchase all underwater, securitized mortgages to re-stabilize the local market, to protect the homes of those who hadn’t been foreclosed yet but were already in the foreclosure pipeline or in danger.” The working paper goes on to tout the benefits of the eminent domain proposal by stating that (a) the purchasing of loans at current fair market value immediately stabilizes the local housing market creating a floor to the downward price slide created by foreclosure sales, (b) stops the market push of rental costs as major banks empty foreclosed properties, and (c) getting homeowners out from underwater mortgage loans will cause homeowners to spend the savings elsewhere—estimating $2.7 million in spending per year mostly in Brockton. Moreover, the working paper estimates that the cost to Brockton to purchase all of the underwater mortgage loans would be about $200-$400 million (the entire Brockton City budget is $330 million). Brockton will need to consider fundraising proposals like bonding and loans to pay for the proposal.

At the March 21st meeting, the working group was to investigate the use of eminent domain to acquire and restructure underwater mortgages. The working group has targeted about 2,300 mortgages which could result in more than $15,600,000 in savings to property owners. The working group plans to finalize a strategy for consideration and review by May.

The eminent domain plan being considered by Brockton, MA is opposed by the usual suspects (e.g., the American Securitization Forum and SIFMA) making arguments we have discussed previously here and here. The American Securitization Forum issued a comment letter (which I highly recommend reading) setting forth its arguments against the proposal, including, (a) the fact that the Program raises fundamental legal concerns, (b) to the extent that the Program targets ‘performing’ loans, the proposal is not a valid “public use”, as required by eminent domain jurisprudence, (c) the Program would run afoul of the prohibition against impairing the obligations of contracts, (d) Brockton’s power is not broad enough to affect mortgage loans held outside of its jurisdiction, and (e) MRP’s valuation model is flawed and would not withstand a “fair value” challenge, thereby making the Program uneconomical for MRP (which, as we all know, is the real reason for MRP’s proposal). SIFMA also commissioned a memorandum, which found, among other things, that “Brockton’s plan is wholly incompatible with the lawful and constitutional exercise of the eminent domain power delegated by the Legislature to Brockton under the governing statute and the Massachusetts Declaration of Rights.”

MRP isn’t laying low either. Steven Gluckstern, the chairman of MRP, is campaigning in favor of the Program, arguing that “everybody is better off” if foreclosure is prevented and the homeowner is able to stay in his/her home. It looks like Salinas, a farming town located in central California, is working with MRP. If Salinas decides to adopt the Program (or some version of it) this would be a win for MRP as Gluckstern considers Salinas “just the right size” with 2,500 underwater mortgages. This “right size” appears to be necessary so that the nation’s attention is grasped and, ultimately, MRP’s lawyers can argue “during the all-but-inevitable Supreme Court case that reducing homeowners’ mortgage payments has macroeconomic benefits such as boosting consumer spending.” MRP has reached out to at least one member of the City Counsel of Merced, California regarding the Program (and likely others in CA, Nevada and across the country), and it appears that Gluckstern has found a town willing to partner with MRP stating that “[t]hey are ready to go and we [MRP] are just holding them off for the moment because it is so small that it might even be dismissed as irrelevant.”

Even as I write this article, another city has joined the ranks of Salinas, CA and maybe has gone even further. On April 2, 2013 (see agenda here) (see webcast of the council meeting here), the City Council of Richmond, CA approved an agreement with MRP, pursuant to which MRP will “assist the City of Richmond in reducing the impact of the mortgage crisis, by advising on the acquisition of mortgage loans through the use of eminent domain, in order to restructure or refinance the loans and thereby preserving home ownership, restoring homeowner equity and stabilizing the communities' housing market and economy by allowing many homeowners to remain in their homes.” From listening to the City Council meeting (but without the benefit of having a copy of the agreement), it appears that the City of Richmond is ready and willing to move forward with the Program (or some other version of it). The City Council is looking to set loan criteria in advance and to evaluate such criteria before MRP moves forward with implementing the Program with respect to specific properties. It will be interesting to see what that criteria looks like—underwater, performing, profitable for MRP. According to the city attorney, MRP will be paying all the costs and indemnifying the City of Richmond. There is some debate about whether MRP has enough money and insurance to cover all of the City’s losses but, in the end, it looks like the City will be relying on MRP’s insurance.

I doubt this is the last we have heard of the Program and its various permutations, as more and more cities, towns and counties are considering the Program. Hopefully, the fact that none of San Bernardino County, Wayne County or Chicago have implemented the idea will weigh heavily on Brockton’s decision (even some members of the Brockton City Council seem to have considered that there may be inherent flaws in the proposal) but you just need one city council willing to act in the face of the better argument and we may be discussing and fighting more than just proposals. And then there is the City of Richmond . . . . We will keep you updated as we hear more.

By: Krystyna Blakeslee
 

The report highlighted four specific areas of concern present in equity-pledge structures:

● Severity of Substantial Consolidation: The lack of individual mortgage liens presents significant risks to investors in the case of substantive consolidation of the property-owning SPV with its Sponsor, as investors would be forced to compete with all of the bankruptcy estate’s other creditors without the benefits afforded to a secured creditor.

● Increased Likelihood of Legal Challenge: A corollary to the first point, the lack of first priority liens on the underlying assets would incentivize creditors of the estate to push for substantive consolidation.

● Unauthorized Sales of Properties: The lack of individual mortgages leaves investors open to property-level risks ordinarily covered by mortgages. For instance, in the event of an unauthorized sale of an underlying property, the investors would still enjoy the protection of the mortgage lien, which would “travel” with the property. Not so in the equity-pledge structure, as investors would need to rely on suing on covenant defaults and would not have direct access to the transferred properties as collateral.

● Additional Liens: The lack of individual mortgages leaves investors open to additional liens, including additional mortgage liens and mechanics’ liens. These liens are ordinarily primed by a first mortgage. In the equity-pledge structure, these liens would need to be satisfied by the foreclosing trust.

For more information on REO-To-Rental structures, please see our prior blog posts here and here, and Dechert OnPoint Updates here and here.

By: Matthew Clark
 

Commentators have championed this bill for criminalizing “robo-signing”, but upon further examination, the wide net cast by this bill might impose felony liability on parties not really responsible for the false documentation that this bill is purported to prevent.

To begin, let’s examine what constitutes a crime under the Foreclosure Fraud Prevention Act. The Act defines Residential Mortgage Foreclosure Fraud (a misdemeanor) to occur when a person, acting as an agent of a residential mortgage business, authorizes, prepares, executes, offers or presents for filing any written instrument, if the person:

● knows or believes the instrument will be filed with a court or other public office in connection with a pending or prospective residential mortgage foreclosure action; and

● knows the instrument contains a material false statement, material false information or a material omission.

The Act includes a felony offense of Residential Mortgage Fraud in the First Degree, if either:

● an individual engages in Residential Mortgage Fraud in connection with at least 5 foreclosure actions in a one year period as a part of a systematic ongoing course of conduct; or

● an individual who, as "a high managerial agent" of a residential mortgage business, knows (or reasonably should know) that one or more agents of such business are engaging in Residential Mortgage Foreclosure Fraud and such managerial agent recklessly tolerates such conduct (or otherwise fails to take reasonable measures to prevent it from continuing).

Let's parse the foregoing. In order to be convicted of Residential Foreclosure Fraud (the misdemeanor), an agent of a residential mortgage company would have to "know" that a document they are preparing, authorizing and/or executing for filing in court contains materially false information, or a material omission. There is no qualifier with respect to knowledge. A plain reading of the bill would not allow for conviction for mere simple negligence. That's good. But wait.

The bill included a felony provision. With respect to a felony conviction (obviously the more severe punishment), the standard seems to be less onerous than is required to convict of the misdemeanor of committing Residential Mortgage Fraud, allowing for a felony conviction in the event a Manager knows ("or reasonably should know") that an employee is engaging in residential mortgage fraud (and thereafter, such Manager recklessly tolerates such conduct). Here, knowledge is qualified, so that the standard has dropped from "knows" to "knows or reasonably should know", taking an objective standard and making it very subjective.

How does that make sense?

It seems that in order to convict someone of a Felony, the standard should be something more than "should have known". "Should have known" is a notoriously amorphous standard. Easy to charge. As the trial guys say, "you may not do the time, but you ain't gonna avoid the ride!" The bill offers no guidance as to what steps a Manager must take in order to avoid conviction for "recklessly tolerating" something they might not know is occurring (but, hey, they "should have known"). If you are a Manager at a residential mortgage business, and you suspect that one of your employees is engaging in Residential Mortgage Fraud, does such suspicion now give rise to a duty of the Manager to take some action against the employee (firing them, placing them on leave, personally verifying every document filed with a court), and if you don’t (because, when was the last time you fired someone based on a suspicion?), are you now guilty of recklessly tolerating such action? I sure hope you didn’t like voting, or other freedoms associated with not being a convicted felon.

Intentionally making false statements in connection with a foreclosure (or any civil proceeding) should not be tolerated. We can also agree that perjury should not be tolerated in any court filing. But to impose criminal liability, and potentially years of jail-time, as a result of the false statement of an employee (that you should have known about) is over the top, especially when the proposed bill does not provide a clear safe harbor for Managers that take reasonable precautions to prevent such conduct. Another example of the trend towards criminalizing merely bad behavior and bad outcomes. Next thing you know, New York City will ban the sale of 16 ounce sodas; oh, wait, they already tried that. This is not good.

By: Ralph Mazzeo and David Pildis
 

At a glance, the Eaton decision establishes that:

·         In order to exercise the statutory power of sale in Massachusetts, a mortgagee must either be the holder of the underlying promissory note or be acting under the authority of the note holder.

·         Physical possession of the note is not necessary in order to foreclose.

·         Mortgagees should ensure the loan file clearly indicates their ownership of the promissory note at the time foreclosure is commenced in Massachusetts.

·         Mortgagees should ensure the loan file clearly demonstrates their ownership of the mortgagee’s interest in the mortgage.  Best practice dictates the recordation of all mortgage assignments.

·         Mortgagees in Massachusetts should be careful to properly document servicing arrangements to provide servicers the statutory authority to foreclose in Massachusetts.

Matt Clark and B. Paul Goulet discuss this much-anticipated decision in more detail in their Dechert OnPoint, Massachusetts Supreme Judicial Court Clarifies Foreclosure Requirements: Eaton v. Federal National Mortgage Association, July 2012.   

By:  Stewart McQueen and Gennady Gorel

Under the new law, if a recorded mortgage fails to state the maturity date, the lien will automatically expire 10 years after the execution date of the mortgage (or if the mortgage does not state the execution date, the date the mortgage was recorded). Furthermore, any existing mortgage which is older than 10 years and fails to state a maturity date will be deemed to expire on July 1, 2012. Although the new law allows a holder of a mortgage to correct this issue by recording an affidavit in the county where the applicable mortgage is recorded, the affidavit must be recorded prior to the later of July 1, 2012 or 10 years following the execution date of the mortgage.

To the extent you have not already done so, if you are a holder or servicer, you should review your Indiana mortgages now to determine if the new Indiana mortgage law has an adverse impact on your existing mortgage liens. It's better to be safe than sorry. 

By:  Stewart McQueen

A few weeks ago, S&P released considerations for REO to Rental securitizations. One threshold issue is whether the sponsor is structuring the securitization based only on the projected stream of future rental payments or if the proceeds from the property sales are also included in the sponsor's cash flow projections.  In either case, the properties will be transferred to the issuing entity and will be valuable collateral for bondholders. And if proceeds from the property sales are included in the cash flow projections, S&P would also consider home price forecasts and the timing of property sales. S&P also notes that while geographic diversity was always a plus in RMBS deals, the opposite may be true here, where a concentrated pool would be more efficiently managed. Keep in mind too that the core competencies and experience of the property manager and projected operating expenses for maintenance and home upkeep will be important credit considerations. In terms of the rental income, key credit considerations will be the minimum lease term and renewal provisions, an analysis of vacancy and time-to-lease scenarios and rental rate factors such as demographics, interest rates and location. 

We have blogged (here and here) about REO financing and securitization in the past. There is no doubt in my mind that this topic will dominate the residential mortgage space for many months to come. There are many investors sitting on cash who see the REO to Rental market as an attractive way to get yield. Warehouse lenders are also eager to get into this game.  The warehouse lenders may only be willing to lend up to 50 or 60% LTV on a pool of REO in the current regulatory and economic environment.  Nevertheless, there is plenty of demand from private equity shops and other investors in the process of acquiring REO who could always use some leverage to improve their yield.

We’ve also discussed at length (here and here) the recent offering by Fannie Mae of pools of REO (with requirements that the purchaser rent out the homes for at least three years before selling) and the key considerations for bidders interested in acquiring one or more of those pools. With respect to the Fannie offering, note that in recent testimony before the House, Meg Burns from the FHFA made it very clear that this initial offering is just a pilot and should not be construed as an indication that Fannie will abandon its reliance on existing retail sales strategies as the primary vehicle for liquidating its REO inventory. It seems like the government was shocked by how much interest there was in the offering and wanted to reset industry expectations concerning the pace of future government sales. In any event, the genie is out of the bottle. 

Am I excited about all of this activity surrounding investments in REO? Yes. Do I think this offering by Fannie Mae will influence how banks dispose of their own portfolios of REO? Yes. Do I think there is a larger problem looming behind the headlines surrounding REO to Rental? Yes.

That problem is how to slow the rate of delinquencies and mortgage foreclosures. Offering pools to encourage the REO to Rental strategy is a great initiative and the industry should continue to pursue it. It’s a smart way to reduce the oversupply of housing in distressed markets and meet the demand of families who are no longer able to qualify for purchase money mortgage financing. Nevertheless, we can’t lose sight of the mountain of delinquent mortgage loans that have not yet been converted into REO. The question is how do we accomplish “delinquent mortgage loan to Rental” and thereby prevent the next wave of REO from hitting the balance sheets of the GSEs and the private banks. There may be 500,000 REO on the books of Fannie, Freddie and private banks but there is a shadow inventory in the pipeline of 3 million borrowers who have not made a payment in over a year. The continuing high default rate that has persisted throughout the credit crisis is the disease that needs to be cured. This high default rate is made more problematic by the fact that it often takes well over a year to foreclose on a defaulted mortgage loan. While this delay may benefit the individual borrower for some period of months, the ultimate burden falls on the GSEs and the private banking system whose collateral deteriorates in condition and value in the meantime, further compounding losses. Before we can see a meaningful bottom to housing prices and truly see prices stabilize, we need wage increases, more credit and more employment opportunities across the board. This problem is too large to solve with targeted programs. We need to grow our way out of it by changing our overall economic and fiscal policies.

But in the meantime, there are deals to be done and many opportunities for us lawyers to get involved...

By: Ralph Mazzeo

Over the past few months, an inter-disciplinary group of Dechert finance, real estate, regulatory, banking, securitization and financial services attorneys have had several conversations with clients discussing how these deals will work.  This week, I co-authored a brief article together with my partners Patrick Dolan, Mac Dorris, Bob Ledig, Ralph Mazzeo, Tom Vartanian, Jay Zagoren and Gordon Miller that highlights an innovative program initiated by the FHFA, designed to convert thousands of single family REO to rental properties.  This article focuses primarily on the issues faced by investors, and provides a detailed explanation of the FHFA’s plan and recent events related to the initiative.

Now if only we could convince this year’s crop of college graduates to rent an apartment instead of returning home … 

Click here to access the full Dechert OnPoint.

By:  Matthew Clark

Ironically, just last month the Supreme Judicial Court of Massachusetts  had a decidedly different reaction to one homeowner’s occupation of Massachusetts real estate – and in the process cast doubt on the state of title for thousands of owners of foreclosed homes.  In late October, the SJC decided Bevilacqua v. Rodriguez, 955 N.E.2d 884 (Mass. 2011), extending its holding in Ibanez to a (former) homeowner that had purchased REO from a securitization trust [See here for our prior thoughts on the Ibanez case].  

The facts of Bevilacqua are, by now, too-familiar: a securitization trustee executes a foreclosure deed in June, 2006 but doesn’t take assignment of the mortgage from MERS until three weeks later (an assignment that, importantly, is actually placed of record).  Under Massachusetts statute, only a mortgagee or its executors, administrators, successors or assigns can execute foreclosure – the late assignment meant the trust had foreclosed before it owned the mortgage, invalidating the resulting transfer.  And, in Massachusetts, you (usually) can’t sell what you don’t own. 

On appeal, Bevilacqua argued, among other things, that he should be entitled to the protections against adverse claims afforded a bona fide purchaser purchasing for value – a legal theory protecting unwitting purchasers who take title without notice or knowledge of a defect in the power of vendor to sell.  The Court rejected this argument – a scrub of the Registry’s records would have shown the trustee to be, at various times during the summer of 2006, either a complete stranger to title, a mere assignee of a mortgage, or a party that had foreclosed in error.  (It’s interesting to note that at least part of the Court’s analysis here rests on the fact the assignment from MERS to the trustee was placed of record – something the Ibanez court found that, while good practice, was unnecessary as a matter of Massachusetts law.)  

Like Ibanez, the Bevilacqua decision seems exactly right on the merits and exactly wrong in practice, and will almost certainly result in corrective legislative action to prevent the divesture of thousands of innocent – albeit decidedly not bona fide – purchasers of foreclosed Bay State homes. 

As an aside, in divesting Bevilacqua, the SJC made a point of relaying the Land Court’s observation that accepting Bevilacqua’s theory that his deed was sufficient to establish record title would render the “Brooklyn Bridge” problem insoluble.  As the Land Court wrote: “in the classic example, a litigant could go to the registry, record a deed to the Brooklyn Bridge, commence suit, hope that the true owners ignored the suit or ... could not be readily located and [would thus] be defaulted, and secure a judgment.”  Of course, last Thursday, that same crafty litigant would have found his bridge teeming with thousands of displaced Occupy Wall Street Occupants – a scenario the legal ramifications of which confound the mind.

As one Occupant wrote:  “Dude, where’s my title policy?” 

By Matthew Clark and David Pildis

In the realm of mortgage reform, the Dodd-Frank Act was designed to prohibit lenders from steering any consumer toward a residential mortgage loan that the consumer cannot repay or that has predatory characteristics and from steering consumers away from QMs and toward non-QMs. Under the Dodd-Frank Act, a mortgage lender is presumed to have satisfied the ability-to-repay requirement and receives some protection from liability when it originates a QM (and exactly how much protection is still open to debate).  (See our OnPoint explaining the difference between the proposed safe harbor and rebuttable presumption alternatives for QM).

The GAO analyzed a proprietary database of loans originated from 2001 through 2010 from CoreLogic, Inc. to assess the potential impact of mortgage-related provisions in the Dodd-Frank Act on the availability and affordability of mortgage credit. The GAO notes up front that such analysis may not be fully representative of the mortgage market as a whole. It also reviewed housing and mortgage market research and interviewed mortgage industry stakeholders-- including those representing mortgage lenders, securitizers, investors and consumers. 

What I’ll call an “abstract” of this GAO report can be found on page 58.  Here, the report states that limited data and research show that certain provisions could provide benefits to homebuyers and the larger mortgage market, but that the ultimate impact of the Dodd-Frank Act’s mortgage-related requirements is not yet known and will depend, in part, on regulatory actions, decisions to fund housing counseling and mortgage market adjustments that have not yet occurred.

On the up side, it appears that the bulk of loans do meet QM criteria; on the down side, there’s a sizable hole in the data and final regs may exclude even more loans.

Let’s take a look at what the report says:

The Dodd-Frank Act specifies nine QM criteria, but gives regulators the authority to add, subtract or modify the QM criteria as they see fit. The GAO examined five of the nine QM criteria specified and states that it generally found that most mortgages would likely have met such individual QM criteria. However, the GAO notes that the impact of the full set of QM criteria is uncertain, partly because it could not analyze the other four QM criteria and partly because federal agencies could establish different criteria as final regulations are developed. Maybe I’m not grasping the extent of the usefulness of this examination because it seems rather useless. Moving on…

Generally, the Dodd-Frank Act requires securitizers of RMBS to retain at least five percent of the credit risk of any residential mortgage securitized that does not meet specified criteria. In its report (which focuses on risk retention for RMBS), the GAO notes that key decisions that have yet to be made (including the characteristics of mortgages that would be exempt from risk retention requirements, the form(s) of risk retention that would be allowed, the percentage that securitizers would be required to retain and risk sharing arrangements between lenders and securitizers) could affect the availability and cost of mortgage credit as well as the viability of a private mortgage securitization market. However, the GAO report makes a number of recommendations for rulemakers to consider when crafting the final risk retention requirement, including a recommendation that the requirement be tailored to each major class of securitized assets.

Additional uncertainty arises, the GAO notes, from provisions in the Dodd-Frank Act concerning homeownership counseling and regulation of high-cost loans which could enhance consumer protections and improve mortgage outcomes for some borrowers. As required under the Dodd-Frank Act, HUD has initiated plans to establish an Office of Housing Counseling to perform a number of functions related to homeownership and rental housing counseling, including establishing housing counseling requirements and standards and performance measures; certifying individual housing counselors; conducting housing counseling research; and performing public outreach. Findings from the GAO’s limited research on housing counseling for mortgage borrowers are reported to be mixed, with some studies suggesting that some types of counseling can improve mortgage outcomes and other studies’ findings less clear. 
 
Yet again, the GAO acknowledges data limitations and notes that although lenders have generally avoided making “high-cost loans,” additional information on mortgage costs would be needed to assess the extent to which a newly expanded definition of high-cost loans under HOEPA would affect mortgages that may be made in the future. In addition to expanding the definition of high-cost loans, the Dodd-Frank Act requires that borrowers undergo counseling with a HUD-approved counselor before taking out a high-cost loan. Industry stakeholders who spoke with the GAO indicated that the new definition of high-cost loans would further increase disincentives for originating mortgages with potentially predatory terms and conditions. Additionally, they said that lenders would likely continue to avoid offering high-cost loans because the strict penalties and liabilities attached to such loans make them risky to originate and difficult to securitize.

So far this birthday party leaves a lot to be desired. 

By Laurie Nelson.

Last month we discussed the Ibanez opinion – the SJC’s decision upholding the Massachusetts’ Land Court’s refusal to quiet title with respect to two foreclosed homes because the mortgages, in the Court’s eyes, were not properly assigned by written instrument. The fallout of Ibanez is already being felt throughout the Commonwealth, and the SJC has just agreed to affirm – strike that – has just agreed to hear - Bevilacqua v. Rodriguez – a lower court decision extending the mechanic of Ibanez to bona fide purchasers that bought homes from foreclosing lenders. Judge Keith Long (you’ll remember him as the author of the lower-court Ibanez opinion) denied Mr. Bevilacqua’s request to clear title to a house purchased from a securitization trustee that had acquired the property via foreclosure. Judge Long determined that the documentation assigning the mortgage to the trustee was defective and, as a result, the trustee never acquired clear title to the property (and if the trustee didn’t own the home, it could not have passed title to Mr. Bevilacqua).

Let’s make no mistake: the story of these cases extends well past a scholarly interpretation of “title theory”, and the defeasance of Mr. Bevilacqua was deemed by the Court to be acceptable collateral damage. These are populist decisions intended to punish a mortgage industry that has been roundly demonized by politicians and media-types. As Massachusetts’ Attorney General Martha Coakley (you’ll remember her as the heir apparent that lost “Ted Kennedy’s seat” to Scott Brown) wrote in a her press release on the Ibanez decision:

“In their careless and hasty stampede to securitize loans, the banks moved at their own peril. Whether by robo-signing or failing to properly transfer title, these financial institutions created this real estate chaos. They should bear the brunt and the cost of the remedy.”

Not what I would call a measured response, especially in light of the fact that the “chaos” in question amounted to a missing pooling agreement schedule and an incomplete assignment-in-blank (as an aside, Ms. Coakley seems to take a particularly extreme view of scriveners' errors). But never let the facts (or common sense) get in the way of a good press-op. The SJC’s decision in the Bevilacqua case won’t be handed down for months. In the meantime, banks will double-check their paperwork, title insurers will wring their hands, politicians will expound vitriol, and my friend’s search for a new home will continue.

By Matt Clark and Krystyna Blakeslee

The case arose with the trustees’ efforts to quiet title to two foreclosed residences in Springfield, Massachusetts (home to the Basketball Hall of Fame and (arguably) the fictionalized hometown of Homer Simpson). The homeowners had defaulted on their debt and the properties had been auctioned and acquired by the trustees at the resulting foreclosure sale. Because Massachusetts law permits for non-judicial foreclosure (ahem, for now), the trustees asked the Massachusetts Land Court to bless their ownership of the homes - an (unfortunately) all too-familiar story in the Commonwealth these days (upwards of 20,000 foreclosures in just the past two years).

The Land Court, however, denied the trustees’ request in March ’09, leading to appeal and the Ibanez ruling. The SJC’s opinion rests on the fact that the trustees were unable to document ownership of the mortgages at the time the foreclosure proceedings were commenced (which, in Massachusetts, begins with the publication of notices of foreclosure) or at the time the foreclosure sales occurred. The Court was somewhat harsh in its analysis of some of the paperwork presented for its review – noting assignments left in-blank (a common securitization practice but one that holds little water in Massachusetts), an (unsigned) pooling and servicing agreement missing critical schedules describing the pooled loans, and assignment chains omitting intervening note holders entirely. It’s important to note that this decision is, in large part, a recognition of a particular aspect of Massachusetts’ law. In many jurisdictions, the sale of a mortgage note necessarily results in the transfer of the related mortgage – whether or not a written assignment is executed (this commonly known as the mortgage “following” the note). Massachusetts, however, as a title theory state, views a mortgage grant as an interest in real property, the transfer of which requires written assignment. When the mortgages were not assigned along with the promissory notes, the mortgages, by law, remained vested in the assignor as trustee for the benefit of the note-buyer (a convenient legal fiction).

Some commentators have posited that this decision could cast doubt on the state of title for thousands of foreclosed homes in the Commonwealth, but it remains unclear the extent to which files will be re-opened (and, whether it would matter – any problems with the assignment chain could be rectified and foreclosure reinstated). It is interesting to note – as the ASF did in their statement on the case – that the Court, in fact, reinforced the view that the securitization documents (the PSA, in particular) would have been effective to show ownership of the mortgages had they not included certain critical omissions (the Court noted: “Where a pool of mortgages is assigned to a securitized trust, the executed agreement that assigns the pool of mortgages, with a schedule of the pooled mortgage loans that clearly and specifically identifies the mortgage at issue as among those assigned, may suffice to establish the trustee as the mortgage holder.”)

This week - presumably emboldened by the Ibanez decision - Massachusetts legislators are introducing broad new rules aimed at making properties more difficult to foreclose. “Foreclosure Practices” has replaced “Wall Street Fat Cats” as the sound bite du jour for media outlets and talking heads intent on placing blame. The reality of the situation is that the system was never pressure-tested for the hundreds of thousands of foreclosures, a PSA with an incomplete schedule is not evidence of moral depravity, and institutional buyers didn’t snatch up MBS with an eye toward owning multiple homes in Springfield, Massachusetts.

By: Matt Clark and Bene Ness
 

The main event - former Secretary of HUD Henry Cisneros' comments on the state of the CRE market. Whatever your politics, Cisneros is a vastly powerful intellect and commanding speaker. In 35 minutes (speaking without notes that I could see) he forecast the next 30 years of commercial real estate. To survey my scribbles - he is bullish on multifamily, contrasting the plight of countries suffering population decline (Japan, Spain) with the explosive growth expected Stateside (376mm by 2030; 400mm by 2050). The first Baby Boomers will turn 65 this January, with many down sizing to rentals (apparently the new trend in getting gray is "Aging in Place" - bad news for Arizona). If Generation Y will just (at some point) move themselves (and their Xboxes) out of their parents' basements at rates that even approach historical norms another 1.4mm people could be looking for a place to rent. Combining these factors with increased immigration (something like 82% of new U.S. immigrants rents for their first 5 years in this country) and lower home ownership rates (Barney Frank's victory notwithstanding), Cisneros' math leads him to a need for the construction of over 2 billion square feet of new multifamily by 2030.

However, the former mayor of San Antonio (as an aside - see this story on that city's growth during these past few years) is significantly more bearish when it comes to other asset classes - specifically office and retail. As far as retail goes, he's had overseas investors tell him they think we're 30% overbuilt (I say we are not a foot more than 25% overbuilt, but that might be the Patriot in me). The flat, jobless recovery; sector consolidation; internet shopping - the cards are stacked against retail as we near Christmas.

 Some parting highlights - Cisneros doesn't see the home mortgage interest deduction going away (you could tell this just killed him to admit). He points to strength in specialty sectors like medical and assisted living. (Did I mention the first Baby Boomers turn 65 this January?) Infrastructure of all kinds is booming - Cisneros relayed an interesting trend - internet purveyors (think Zappos building distribution sites in (or adjacent to) airports (that's how you get your wingtips the next morning). Alternate energy was another sector where technology will drive the need for growth - Green building and retrofits are now the norm.

I have more notes, and will recap the balance of the conversation in a forthcoming post - including a great panel that included the Davis Companies' Jon Davis. Again, congrats to TREC BC for a great event.
 

By Matt Clark.

We need to get on with it.  There are already lots of good ideas in circulation.  We’re not going to get any smarter.  We do not need more symposia. Official leadership just needs to get out of the “I’ll think about this some day” box and into the “do today” box.  When your pants are on fire, stop worrying about the tailoring!

A few things seem obvious to me.  First, there will be a private securitization market again.  That market, when not crushed by a giant securitizer with zero cost of funds and no need to make a profit, will re-flate.  Simply and syllogistically, the need for credit will be met by supply.

Second, the government is going to continue to fill the role of guarantor of last resort.  Okay, some countries, many with much larger governmental sectors than ours, seem to have done pretty well without a government role in housing, but that train has left the station.  There’s a notion that government needs to remain a final bastion of defense against the next housing apocalypse.  That is received wisdom and will be part of Housing Finance 2.0.

Third, we have two great organizations full of bright and hard-working people who can and should be part of the solution.

So let’s stop kicking this can down the road.  The outlines of the solution are apparent.  Freddie and Fannie need to be re-launched using some variant of a good bank/bad bank structure.  A private tranche of guaranty capital must be developed with some ultimate governmental backstop bought and paid for.  Paying a premium for a federal backstop, at least on some type of mortgages, will even-out the playing field and open the tap for private money and conventional securitization.  We need that.  Otherwise, housing will continue to be starved for capital and, simultaneously, suffering as a political football.  I personally think some sort of co-op structure, such as can be found today in the federal home loan bank system, seems appealing.

The problem is, of course, politics.  The GSEs have been a third rail. Fixing them will take courage. Within a week, the election will be over and perhaps we’ll get down to business.  The Treasury, the GSEs and the business community should be able to sit down and sort this out.  Fundamentally, it's not that hard. And it’s hugely important.

By Rick Jones.