August 14, 2014
From 2004 through 2007, several trillion dollars in American residential mortgage loans were bundled into pools, usually with about 5,000 loans in each pool. Investors, including many pension funds, bought shares in the income stream (the monthly mortgage payments) from these loan pools. This huge investment in private equity funds in residential mortgages ended very badly for most investors and also for millions of homeowners who lost their homes to foreclosures by strangely-named trusts. In many states, the mortgage crisis continues in 2014, with trusts on the brink of insolvency, neighborhoods plagued by abandoned trust-owned homes, and foreclosure rates actually increasing from the 2013 rates.
An examination of the foreclosure results shows that foreclosures did not provide significant relief to the massive unpaid debt problem of the loan pools. In every case in a study of 500 foreclosures by trusts, the foreclosed home sold for significantly less than the amount of the final judgment. In many cases, the foreclosed homes sold for much less than the original loan sold to the trust.
Whether sold at a county auction to third parties, or bought by the trust, then sold to a third-party by the trust, these homes sold for very low prices relative to their mortgage amounts. In most communities, home prices were steadily declining from 2008 to 2012, but these homes lost value at a much greater rate than the decline in sales prices for existing single-family homes in the same county.
The trusts’ very poor foreclosure re-sale results are attributable in part to the poor maintenance of many of the homes. In many cases, the homes were vacant for two to five years. Homeowners often vacated when the foreclosure actions were begun, but the trusts were often very slow to foreclose. During this litigation period, the homes were often vacant and unmaintained and frequently vandalized. Appliances, cabinets and fixtures were often removed from these homes.
The delays in foreclosure were often also attributable to the trusts and servicers themselves and their default management decisions. Trusts and servicers frequently selected just a few law firms to handle their foreclosures and paid these firms the bulk of their fees upfront, at the time the foreclosure was commenced, providing an incentive to file foreclosures, but not to complete the foreclosures.
The cases were most often commenced without filing a copy of the endorsed note and mortgage assignments at the commencement of the action. This was done even though the Pooling and Servicing Agreements for most trusts specifically provided that the original, endorsed note and assignments were to be furnished to the servicer in the event of a default. The foreclosing law firms often substituted mortgage assignments made at the time of default for the original loan documents held by the document custodians of the trusts. These documents further clouded the legal standing of the trusts to foreclose, delaying the completion of the foreclosures.
In thousands of cases, even after a final judgment of foreclosure was obtained, the trusts and servicers delayed the sale of the foreclosed homes, repeatedly cancelling sales at a time when home prices were declining monthly.
There is also significant evidence of re-sales for less than fair market value. In many cases, the foreclosed homes were purchased at auction by the trusts for $10 or $100, because no other bidders bid on the property. The trusts then sold these properties to third-party purchasers who resold the properties within the next 30-180 days at a profit of $10,000 to $60,000.
Foreclosures have also left a massive multi-trillion dollar problem of deficiency judgments looming on the U.S. economic horizon.
500 randomly selected foreclosures by trusts in Palm Beach County, FL, were included in the study. All the foreclosure cases were filed after January 1, 2007. The study was limited to cases where a final judgment was entered on behalf of the bank-trustee and where the foreclosed home was bought by a third-party at the county clerk’s auction, or bought by the plaintiff bank-trustee, then resold to a third party.
500 FORECLOSED HOMES
Final Judgment Compared to Re-Sale Prices
AGGREGATE FINAL JUDGMENT AMOUNT: $168,191,055
AGGREGATE SALES PRICE AFTER FORECLOSURE: $56,888,607
LOSS PER 500 HOMES: $111,302,448
- If this one pool of 500 loans lost $111,302,448 in foreclosures, and this loss was representative of the losses per each bundle of 500 foreclosures (not yet determined), the total loss for 12 million foreclosures would be approximately $2.7 trillion dollars.
- In a pool of 10,000 homes, with initial values of $5 billion, foreclosures of 75% (7,500) of these homes by 2014, at a loss of $110 million per 500, would result in a loss of $1.65 billion to that pool.
- In all of the 500 cases, the sales price after foreclosure was less than the amount of the Final Judgment, making the former homeowners potentially liable for billions of dollars in deficiency judgments.
The sales price was taken from the property appraiser’s records. In cases where a third-party bought the property at the county clerk’s auction, this is the amount listed on the Certificate of Title. In cases where the plaintiff-bank bought the property (often for $10 or $100), and the bank subsequently sold the property to a third-party, the sales price from the deed of this third-party sale was used, with the interim bid by the plaintiff-bank at auction disregarded.
In 462 of the 500 cases, the Final Judgment was over $100,000 greater than the subsequent sales price.
In 226 of these 462 cases, the Final Judgment was over $200,000 greater than the subsequent sales price.
In 88 of these 226 cases, the Final Judgment was over $300,000 greater than the subsequent sales price.
In 44 of these 226 cases, the Final Judgment was over $400,000 greater than the subsequent sales price.
In 17 of these 44 cases, the Final Judgment was over $500,000 greater than the subsequent sales price.
In 10 cases, the difference between the Final Judgment and the subsequent sales price was over $600,000.
In 107 of the 500 foreclosures, the resale price was less than 20% of the Final Judgment amount.
Re-Sale Prices Compared to Foreclosure Mortgage Amounts
The majority of these properties were modest, relatively small (under 1400 sq. ft.) homes, wood-frame, and built prior to 1950. After foreclosure, 252 of the 500 homes sold for $77,000 or less. The selling price for 162 of these homes after foreclosure was less than $56,000. 106 of these homes sold for less than $42,000. 62 of these homes sold for $30,000 or less. These were the homes that often carried mortgages of $200,000 or greater when sold to the trusts.
The large disparity between re-sale prices and foreclosure mortgage amounts indicates that the values of the homes securing the loans may have been significantly inflated. The mortgage histories of these homes show that many of the homes were refinanced repeatedly from 2002 – 2006. Many of the homes were refinanced within 12 months of the previous refinance.
In many cases, the sales histories of these homes indicated that the last sale before foreclosure was more than double the prior sales price, even though the prior sale occurred within seven years. At least according to Countrywide, Ameriquest, American Brokers Conduit, and other sub-prime lenders, the foreclosed homes had often doubled in value in less than seven years.
The mortgage histories of many properties in the trusts show frequent refinancing and steep increases in appraised values as the following ten examples of foreclosures by trusts indicate:
1994 Mortgage: $127,870
1997 Mortgage: $129,000 from New American Finance
2003 Mortgage: $140,000 from GMAC
2005 Mortgage: $241,951 from Ameriquest
Final Foreclosure Judgment: $264,643
Bank-owned one year after final foreclosure judgment
1995 Mortgage: $52,613 from Barnett Bank
2002 Mortgage: $72,500 from Saxon Mortgage
2003 Mortgage: $106,250 from Ameriquest
2006 Mortgage: $127,250 from American Brokers Conduit
Final Foreclosure Judgment: $157,274
Sold for $6,500
2005 Mortgage: $258,000 from BNC Mortgage
2006 Mortgages: $240,000 and $60,000 from WMC Mortgage
Final Foreclosure Judgment: $297,741
Sold for $47,800
2004 Mortgage: $164,000 from Acoustic Home Sales
2006 Mortgage: $236,000 from American Brokers Conduit
Final foreclosure Judgment: $269,778
Sold for $81,000
1995 Mortgage: $36,750 from CTX Mortgage
2006 Mortgage: $150,000 from First NLC Financial
Final Foreclosure Judgment: $172,994
Sold for $32,399
2004 Mortgage: $161,000 from ACCU Funding
2007 Mortgage: $393,250 from Option One
Final Foreclosure Judgment: $580,247
Sold for $114,204
1999 Mortgage: $33,400 from Aames Home Loan
2001 Mortgage: $55,900 from Ameriquest
2006 Mortgage: $193,500 from Argent
Final Foreclosure Judgment: $275,025
Sold for $38,000
1995 Mortgages: $251,200 and $62,800 from Bayrock
2006 Mortgages: $372,000 and $46,500 from Countrywide
Final Foreclosure Judgment for $449,512
Sold for $52,000
2000 Mortgage: $20,000 from Washington Mutual
2002 Mortgage: $92,000 from First Nationwide
2004 Mortgage: $117,000 from Washington Mutual
2006 Mortgage: $243,750 from American Brokers Conduit
Final Foreclosure Judgment: $294,391
Sold for $24,700
2004 Mortgage: $112,000 from Aegis Wholesale
2005 Mortgage: $175,200 from Mortgage Works Unlimited
Final Foreclosure Judgment: $211,728
Sold for $32,175
Price inflation also was a major factor in new homes, built in 2005 and 2006, in exclusive, luxury, gated communities with names like Bella Terra, Renaissance, Emerald Dunes, Valencia Isles and Versailles. These homes sold for $700,00 – $1.5 million in 2005 and 2006, but often sold for less than $300,000 after foreclosure, when they lost their luster and became 4/3, 2 car garage homes in the suburbs.
The borrowers often were offered 80/20 mortgage loans, essentially a pair of loans used to purchase a home with no money down. The first loan covered 80% of the home’s price, while the second covered the remaining 20%. With this device, borrowers could purchase a home with no down payment, because the two loans combined would cover the entire purchase price.
Borrowers were also offered NINA Mortgages – an abbreviation for No Income/No Asset loans. These loans were made without Income or asset verification, though employment was supposed to have been verified. Other mortgage products included “no doc” loans, “pick-a-pay” loans, interest-only loans and 2/28 or 3/27 Adjustable Rate Mortgage options that offered a low initial rate for the first two or three years of the loan.
The loan originators (Ameriquest, Argent, Bank of America, Countrywide, IndyMac, Long Beach, New Century, Washington Mutual and hundreds of other mortgage companies) sold their loans to mortgage securitization as fast as the loans could be made. These loans most often carried hefty up-front origination fees – sometimes as high as 15% – 20% of the total loan value – for the lenders. Once the fear of financial repercussions from bad loans was removed by the nearly immediate sales to securitization, the mortgage companies churned out loans at amazing rates – making new residential loans for over $3 trillion dollars from 2004 – 2007, about 25% of the total U.S. mortgage debt.
By the time the foreclosures were filed and completed, the final judgments often included several years of taxes, as well as insurance at extraordinarily high rates, court costs, very inflated service of process costs, including fees for serving the Mortgage Electronic Registration System as a defendant, and non-existent unknown tenants, and attorney’s fees. The banks and servicers also tacked on a title search fee of $350 – $500, a broker price opinion fee of $350 – $500, inspection fees of several hundred dollars, property preservation fees and recording fees. Some of the stranger fees include “scan file fees” and “U.S. Mail” fees, “automated valuation model” (AVM) fees, and preliminary address verification fees (usually, $39), items that in most every other case would have been considered law firm overhead. A $14 “breach fee” was occasionally added as well as a $45 tax search fee, even in cases where the servicer has charged for paying the taxes.
THE MORAL HAZARD THEORY
During the worst days of the U.S. foreclosure crisis in 2008 and 2009, some financial experts warned that programs intended to help homeowners avoid foreclosure created a “moral hazard” that more and more people would simply choose to stop paying their mortgages.
Principal reductions would have benefited struggling homeowners, and also the pension funds and other investors in the loan pools that were filled with defaulting mortgages, but the fear of the moral hazard of encouraging loan defaults prevented state attorneys general from pressuring banks to make meaningful principal reductions, even in the face of very widespread egregious conduct by the mortgage servicing companies working for the banks.
Principal reductions in many cases would have forced a return to reality. Home prices that doubled and tripled during the reign of the sub-prime lenders, from 2000 – 2006, would have been brought back down nearer to their pre-bubble levels. Despite the painful 2008 crash of the U.S. housing market, the U.S. seems to be entering another cycle of booming real estate prices, with single-family home prices rebounding nearly 15% to 20% per year, particularly in the areas hardest hit by foreclosures, indicating that cycles of extreme boom and inevitable bust may be the new normal for the housing market.