rssThe Fed Is (Finally) Talking About Toxic Titles
Thursday, December 10, 2009 at 9:04 am
- 12 Comments
It looks like the problem of banks walking away from distressed properties is finally getting some serious attention. Federal Reserve Board Governor Elizabeth Duke tackled the subject in a recent speech, Housing Wire reports. She detailed a disturbing trend TWI has been following since January 2008: Banks abandoning properties in severely troubled markets even before completing the foreclosure process, leaving the cities stuck with “toxic titles” and trashed vacant homes.
Speaking at the Community Stabilization Symposium in Harbor, Md., Duke said that recent increases in foreclosures have only “exacerbated a pre-existing vacancy problem” in certain cities, according to Housing Wire.
“In the most devastated neighborhoods, some lenders do not even complete the foreclosure process or record the outcome of foreclosure sales because the cost of foreclosing exceeds the value of the property,” Duke said.
These “toxic titles,” she added, have placed a large number of properties in legal limbo. High rates of abandonment pushed many cities such as Flint, Mich. and Cleveland to pursue plans to “right size” by demolishing vacant properties and create land banks, Duke said.
The term “toxic titles” was coined by Kermit Lind, a Cleveland State University law professor who deals with abandoned foreclosure cases all the time. The problem never seemed to get the attention it deserved, probably because housing markets in Cleveland and some other Rust Belt cities are very weak.
As we reported nearly two years ago, here’s how a toxic title results when a bank abandons a property:
The mortgage company retains a lien, or a charge, on the house, but the borrower still is considered the owner. The property sits in limbo, with the mortgage usually exceeding what it would sell for, because of its decline. If the city has to tear it down, it adds its own $8,000 to $10,000 demolition lien. Not surprisingly, potential buyers aren’t exactly lining up. Non-profit neighborhood groups that could fix up the property face long and expensive legal battles to claim it.
But, as Duke points out in her speech, vacant properties are causing problems in stronger markets as well, spreading “into once economically vibrant coastal cities with jobs and growing populations.”
“Vacant properties are creating a different kind of problem in some California markets. Indeed, as investors sense that home prices have bottomed out, they are approaching servicers with cash offers for the bulk purchase of properties,” Duke said. “In fact, community organizations in areas of California complain that investor interest has heated up to the point that qualified first-time homebuyers and local community organizations are being crowded out of the market.”
During this economic crisis, so much of the attention has been focused on executive pay, the Troubled Asset Relief Program, and bank lending — all worthy subjects. But somehow the problems of growing numbers of vacant homes and toxic titles has been mostly overlooked. And that’s a big mistake. As we wrote last spring, decades of work to rebuild and reinvest in communities is being lost to blight caused by foreclosures — or to speculation by real estate investors.
Now that a top Federal Reserve official is making toxic titles a public issue, that may finally change. But Duke is doing more than just highlighting the problem. It appears the Fed is actually doing something about it as well. From Housing Wire:
The Federal Reserve System will provide assistance to neighborhood stabilization efforts. The Community Affairs staff, chaired by Duke, will provide data analysis and technical assistance to state and local governments trying to solve the foreclosure problem in their communities.
Duke said that the Federal Reserve banks of Cleveland, Richmond and Atlanta are collaborating on a series of capacity-building sessions for several communities in Appalachia to help them leverage federal Neighborhood Stabilization funds.
“In addition, we are studying the Neighborhood Stabilization Program and interviewing some 50 program grantees nationwide to learn about the early successes and challenges to this effort to restore health to communities with high foreclosure rates,” Duke said.
The Fed’s actions to address the fallout from the foreclosure crisis is a great example for the rest of the government to follow. Lawmakers long ago should have tied some strings to taxpayer bailout money that would have required banks to take responsibility for their foreclosed properties, not just walk away from them. It should have been a bigger scandal that banks took TARP money and stuck already hard-hit cities with trashed and vacant properties. Good for Duke for speaking up. Now it’s time for Congress to follow suit.
12 Comments
Pingback posted December 10, 2009 @ 1:36 pm
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Comment posted December 10, 2009 @ 1:49 pm
The way the game works, a Mortgage Bank Securities Sponsor (MBS) purchases the mortgage loans from loan originators, and assemble them into asset pools and structure them into mortgage back securities. Then a special purpose vehicle/entity (SPV), who is also the issuer of the MBS, is formed to fund the loans ( SPV is designed to protect the parent corporation from the accounting, tax, or regulatory consequences, and to keep debt or risky business ventures away from the parent company). Once the loans are transferred to the issuer, there is no recourse to the originator. The next move is for the originator to file bankruptcy or is sold to a private equity firm for pennies on the dollar. The assets are sold off and the debt is wiped out when the originator files bankruptcy or when the company is sold. The originator is gone and so are the original notes…the mortgages are toxic even before the mortgage bank walks way.
Why won't the banks/servicers work with more homeowners? They are making money hand over fist on the backs of homeowners by foreclosing. For these pooled loans, Mortgage Insurance was taken out on 62% of the pooled properties without required legal disclosure (PMI Insurer would provide insurance coverage, down to 60% of the value of the related mortgaged property.) In depressed areas, the Banks are happy to get the insurance money and walk away. The media hasn't even scratched the surface with the illegal PMI and TILA violations. Loans with Mortgage Insurance (PMI) would be above board if the homeowner was told that they were paying for this through a higher interest rate and if it was stated on the HUD-1 as required by law, but in most cases, it is not. And to this add the undisclosed yield spread premium on all the other undisclosed Monthly fees to the Master Servicer, Trustee, PMI Insurer, NIMS Bond Insurance and the SWAP provider, – it's no wonder we will have 475,000 notices of defaults in Calif alone this year. The nation could see as many as 13 million foreclosure starts according to Elizabeth Warren, chair of the Congressional Oversight Panel. Investors are warned of the risks when buying mortgage backed asset bonds but none of this is disclosed to the homeowner. So much deceit is still continues to carry on and our lawmakers are letting Wall Street Investment Bankers get away the fraud, greed and the unscrupulous business practices. It’s no wonder they can pay back TARP and Goldman has made a record $3B profit this last quarter. And we are relying on Geithner, who is in bed with Wall Street, to stop this? Banks are using TARP money to hire more attorney's to fight homeowners and take more homes. And Geithner is giving them more money by extending TARP, pretending this will help prevent foreclosures?
Just one example of bank foreclosure fraud…
Homeowner in trouble hires attorney to save home as suggested by the Notice of Default to postpone foreclosure. Servicer agrees to 60 day postponement and then lifts foreclosure hold without notifying the attorney or homeowner and sells property at auction. So much bank fraud continues to take place and lawmakers are letting this happen. After breaking the contract, Servicer (AHMSi) foreclosed on homeowner and the Trustee (Citibank, pretending to be a third party investor) buys back the home at foreclosure auction for half the value. Default amount – $775K, Trustee purchased the home at auction for $350K. Property is stolen from homeowner, Bond Investors are ripped-off, and the state is cheated out of property tax revenue. Even in the worst case, Property should have remained as an REO until property sold and paid appropriate taxes; instead, the Bank/Wall Street fraud and greed continues. So many investment banks are involved making the paper trail very hard to follow for judges, politician, homeowners, and attorneys. Option One was the Original Lender, sold to AHMSi which is also the Servicer, the Loans were pooled in the name of Merrill Lynch Asset Back Securities 2007-HE2, CitiBank, N.A. the Trustee. CitiBank N.A purchased the home as the Trustee for Merrill Lynch Asset Back Securities.
In this example, WL Ross, a Private equity firm buys Option One which consists of $50B in pooled loans from H&R Block for $1.1B which means the above referenced loan value of $775,000, was really purchased for $14,700. So any amount over $14,700 this is profit. WL Ross & Co., AKA American Home Mortgage Servicing, Inc. (AHMSi). AHMSi forecloses on home and receive 60% of the loan value, which is $465K (illegally placed PMI on home without disclosing to homeowner).Then they sell the home for $386K (because property values have dropped 50% plus in Sacramento County). So, WL Ross & Co, operating as AHMSi stands to make $465,000+ $386,000 – $14,700 = $836,300 Profit. Mortgage Bankers are not losing money, they profiting from taking our homes, stealing from investors, and cheating our government out of tax dollars. Lawmakers know this and are letting this happen.
Homeowners go to the SEC.gov Edgar Search engine and research your loan info and see for yourself how Banks/Wall Street and our lawmakers rip you off, as well as the investors, and the taxpayers.
Comment posted December 11, 2009 @ 1:21 am
Lift a class to you, Mary Kane
-Kathleen Engel
Pingback posted December 11, 2009 @ 3:49 am
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Pingback posted December 11, 2009 @ 5:08 am
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Comment posted December 11, 2009 @ 6:21 am
Lift a class to you, Mary Kane
-Kathleen Engel
Pingback posted December 11, 2009 @ 7:04 am
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Comment posted June 2, 2010 @ 3:36 pm
Thank you for your sharing.I'm very interested in it.
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