On April 3, 2009, R. Glen Ayers spoke at the American Bankruptcy Institute in Washington, D.C. Mr. Ayers is a former bankruptcy judge, now with the law firm Langley & Banack in San Antonio, Texas. He spoke on a subject I covered here on March 4 – not all mortgage backed securities are actually backed by mortgages. The rush to write more mortgages and to issue more bonds meant that mistakes were made in the paperwork.
The Ayers speech is connected to an article he wrote with Judge Samuel L. Bufford, who had the California case I mentioned last month where the mortgage note disappeared after being transferred to Freddie Mac. In the article, “Where’s the Note, Who’s the Holder”, they drop this bombshell: “A lawyer sophisticated in this area has speculated to one of the authors that perhaps a third of the notes ‘securitized’ have been lost or destroyed.” Meaning that 1/3 of the mortgage-backed securities are not backed by mortgages!
This is the junk that Treasury Secretary Geithner wants to finance the hedge funds to purchase. As of the end of 2008, there was $6,838.7 billion worth of government-backed mortgage bonds outstanding. An additional $178 billion were issued in the first two months of 2009.
Scary stuff. No wonder the hedge funds are giving Geithner’s Public-Private Investment Partnership “two thumbs-down.”
Since October 2008 I’ve been writing here about problems in mortgage backed securities (MBS). There is more evidence surfacing in bankruptcy courts that the paperwork for the underlying mortgages wasn’t provided correctly for the new bond holders, leading to delayed or denied foreclosure proceedings.
New York Times’ Gretchen Morgenson is reporting new successes in cases from Florida and California. A judgment on a home in Miami-Dade County (FL) was set aside on February 11 when the new mortgage holder could not produce evidence that the original mortgage lien had been assigned. In one of the California cases, the lender tried for foreclose on a mortgage that had previously been transferred to Freddie Mac!
The earliest decision I’ve seen is from Judge Christopher A. Boyko in Cleveland. Plaintiff Deutsche Bank’s attorney argued, “Judge, you just don’t understand how things work.” In his October 31, 2007 decision to dismiss a foreclosure complaint, Boyko responded that this “argument reveals a condescending mindset and quasi-monopolistic system” established by financial institutions to the disadvantage of homeowners. The Masters of the Universe were anxious to pump out mortgages into MBS so they could continue to earn fees – making money at any cost.
One element of the newest Homeowner Bailout program is to allow bankruptcy court judges to modify mortgage loans. If the types of cases decided in OH, FL and CA continue to spread, that may not be necessary. The first question in any foreclosure procedure will become: can you prove a lien?
This raises further questions about those “toxic assets” that Geithner and Bernanke are so anxious to buy up at taxpayer expense. According to the Morgenson article, some MBS holders are trying to force the mortgage originator to take back the paper. However, many of the worst offenders are already defunct.