Perception and Reality

When people think of the bankruptcy and foreclosure process, a couple of thoughts generally go through their mind. It is usually one of the following

• Too bad for that guy
• Bum
• There, but for the Grace of God, go I.

Everyone knows this crisis is the cause of a great deal of economic hardship. Everyone knows the debt under which we all slave is destroying families and wealth. But here is what you don’t know. There are some fundamentals at play here which have devastating consequences for those who are not in trouble and hope for those who are. In order to cover both of these, it requires a bit of understanding of what happened to precipitate this mortgage crisis. What follows is a very simple explanation of a very complicated situation.

The banks, in their infinite pursuit of fractions of pennies of profit, sliced and diced the mortgage you took out on your home into tranches and sold pieces of these tranches into Structured Investment Vehicles (SIV’s). It got so bad, the designers of the SIV’s would order up mortgages as if they were patrons in a restaurant ordering off of a menu and the storefront mortgage brokers would deliver them up as if they were the cooks in the back. The banks would order so many mortgages at this % rate with this amount of money down, so many mortgages that were interest only of certain value, even mortgages which were 10/20 years old and they would package these Collateralized Debt Obligations (CDO’s) into “investment grade vehicles” and sell them to qualified investors such as Mutual Funds, Pension Funds, Offshore Banks, Sovereign Wealth Funds and wealthy individuals. Each owned a “piece” of the SIV’s but not the underlying assets. They were essentially black boxes into which money from the servicing banks poured in and once the magic of the black box went whiz bang, the money came out to the fractional owner. No one looked inside the black box, no one can look inside the black box and everything was fine until money from the mortgages stopped flowing. That was when disaster struck.

So what does this mean to the person being foreclosed upon? Well, it means there is a way to fight back. The only person who can foreclose on a mortgage is the person who holds the mortgage and the deed of trust. The problem is, because of the ways the SIV’s are structured, no one knows who actually owns what. Who can stand in front of the court and foreclose? The answer, ultimately, is no one and indeed, this strategy is being used all across the country to stop the foreclosure process dead in its track. The homeowner who is in trouble, or foresees they might get into trouble has hope.

So what does this mean to the homeowner who is not in trouble? How does it affect him? Well, if no one person owns the underlying mortgage, who can deliver clear title once the mortgage obligation is completed? And that is also beginning to appear to be …. no one.

Think about that a moment.

No one can deliver clear title to your home once you have completed your mortgage obligation. Who are you making your mortgage payment to? A bank, or some other mortgage servicing entity. Once they skim off their fee for servicing the loan, making sure you get your tax statements, making sure your insurance and property taxes are paid, they send the money to … the SIV. But the nature of the SIV is such that the vehicle itself doesn’t own the underlying asset which means someone inside the SIV must own it but … who? And if that is the case, who delivers clear title? There are beginning to pop up anecdotal reports of exactly this happening. People pay off their mortgage and a year later, they still don’t have clear title. When they call the servicing agency, they get the tap dance.

Do you see the problem here? No one knows who owns what. No one is in a position to foreclose. No one is in a position to deliver clear title once the mortgage is paid. It is totally messed up. Wall Street took careful aim … and shot themselves in the foot.

And it gets much worse. There are too many nuances to this story to cover here. I will do that in following newsletters. The point you need to take away is that if you are in foreclosure, or believe you might be in foreclosure soon, don’t play the game the banks want you to play of loan modification. That is a game to suck more money out of you while the foreclosure process begins its inexorable grind to completion. I mean, really. If you are having a hard time making a $1500 mortgage, will a modification to $1400 make a difference for you? And if you fight and struggle to make it, you just bleed a wee bit more until the stone wheels of the process grind you to a pulp. It’s a fool’s game. Stop playing it and start saving your money to hire an attorney who can help you navigate your way out of this mess.

And for those of you who aren’t there just yet but can perhaps see it coming. What do you do? There are steps you can take in advance of the process which will allow you to take an offensive position. You can file a form with your loan servicing company along with a set of interrogatories demanding to know who actually holds your mortgage and seeking confirmation the correct person is getting your payment. You demand to know they will indeed be able to deliver clear title once the obligation is complete. When the servicing bank ignores you, stop sending them your payment and instead send it to an interest bearing account. You can then either wait until they foreclose or you can be proactive and sue. When you have your day in court, stand up and say, ‘your honor, I have all the back payments sitting right here just waiting for them to confirm to me these things but when I asked nicely, they told me to go pound sand.’

But here is the one thing I cannot stress enough. Before you do anything other than meet your obligations, consult with a qualified attorney. I am not a lawyer and hence, anything I offer up here is worth everything you pay for it. Nothing. This is very complicated securities law. I have only offered the view from 50,000 feet. You need someone who is intimately familiar not just with the process, but also the underlying law and underlying details of these very complicated SIV’s. I researched the country on this, and found only one person who is up to speed on this. Because Guild rules will not allow me to tell you right out who to contact, if you want to know, I am limited to asking you to go to www.ChinkintheArmor.net and enter a comment in any story you may find there specifically asking me for this very capable attorney’s contact information. If you ask for it, I will be happy to give it to you. I cannot and will not offer it up otherwise.

One final word. To anyone who takes the attitude that the best foreclosure defense is to pay your mortgage, I say two things. First, you may not like the rules, but this strategy is playing by the rules. But more importantly I ask, at what point do you say enough? The rape of the taxpayer is complete and ongoing. If you partake, if you play this game, if you buy into the perception of reality “they” want you to see, you are partaking in your own demise. At what point do you say enough? At what point do you say, “ No more, here is where I take my stand?” I submit it is your patriotic duty to stand up now and help rid the country of this parasitic beast who sucks the very life blood out of all of us. See the reality, do not live by the perception.