Some Questions on Principal Reductions

Both Felix Salmon and DDay are arguing that if the banks lower principal on some unspecified set of loans, it’ll fix the “mortgage mess.” Now, I agree that loan modifications are one of the things we ought to strive for to solve a number of our problems. But I’ve got questions about what they’re proposing.

First, which mortgages do you intend to modify? Just those in foreclosure? If you do that, you’re stuck with the same problem modification programs already have: the point is to modify a loan early enough to make a difference for both the homeowner and the mortgage holder.

Would you extend the principal reductions to non-performing loans? Those amount for 9-10% of all mortgages. That would prevent some homes from going into foreclosure, but probably not those of people who have lost their jobs. Moreover, this only helps a fraction (maybe a third to a half?) of people underwater on their mortgage.

Both Felix and DDay suggest this plan would do something about the underwater home issue, though, suggesting they’re contemplating principal reductions on the underwater homes more generally? Those amount to 23.3% of all mortgages. This would have the tremendous value of effectively making the banks pay for the inflated prices they encouraged during the boom. But that’s already a whole lot of mortgages you’d have to modify.

But even then, you haven’t solved the shitpile problem. Because these percentages still leave out the majority of mortgages. And many of those were securitized during the bubble, either because relatively new mortgages (those written in the last decade) were securitized or because people refinanced and the new loan got securitized. If the problem lies in securitization–and I’m certain Felix and DDay agree that that’s the problem–then to clear up the title problem you’re going to have to do it for all those homes that were not securitized properly.

And we don’t know how many mortgages that includes. Indeed, how would we identify those mortgages?

Just as an example, take my home. I bought it in 2002. At some point, ABN Amro either took over the loan itself or the servicing of it. After that, Citi did. Freddie Mac claims to own the loan right now. The original mortgage was written before the securitization problems got really bad, but within the window that it might be a problem. I asked Citi where my note is using the WhereIsTheNote site. And thus far, at least, they haven’t responded by saying, “Oh, Freddie’s got your note.” Now, I’m trying to sell my house, which is just barely not underwater (I put 20% down when I bought it eight years ago, but it has lost a third of its value, largely due to the number of foreclosures in my neighborhood). Now if things go well, I’ll be able to get out of my house without any principal reduction (and trust me, I am grateful that I am better off than a lot of people trying to sell now). But what happens if it becomes clear there is no clear note holder? To whom do I pay off my mortgage when I sell it? How much value would I lose on the house in the process and would that put me underwater (answer: yes)? And if so, would I then qualify for a principal reduction? But if you don’t modify my mortgage and in the process give my house a clean title, then my house would for very good reasons be worth less than my neighbor’s house that did get a modification.

I’m all in favor of principal reductions. But I doubt you’d ever be able to reach even those underwater homeowners who would benefit from it. But it seems to me it still doesn’t fix the more general problem of shitpile.

  1. Arbusto says:

    I wonder how many people with underwater home values would rather stay in their homes if they could refi with lower interests? TMOU aren’t going to agree with, nor is Congress ever going to cram principal reduction into legislation, especially with our current Ditherer in Chief. A rate reduction, to me, seems more palatable to TMOU and investors than principal reduction.

    For example if you had a $200k mortgage refi’d at 2.5%, over 30 yrs total P&I would be about $284.5k. A cram down let’s say to $120k for the same house at 4.5% would be $218.9k. Granted $60k isn’t chump change, but people’d still be in their house, not looking for a rental in a new neighborhood. Granted I’m the only one to seems espouse this so it won’t go anywhere, but WFT.

    • Ann in AZ says:

      I think principal reduction is the rational thing to do on the basis of market values. The truth is, in this market, if the bank acquires a property through foreclosure, the bank normally takes a bath. In all likelihood, the bank has more loan than it has value in the house and a new buyer would not pay the full amount of the mortgage to buy the property free and clear. Buyer is likely to offer anywhere from 10%-50% less depending on how much the local market values dropped as the real estate bubble burst.

      Meanwhile, the bank has to pay expenses from taxes and insurance to a pool cleaner or someone to maintain the landscaping and management for the duration of the time the foreclosed house remains on their books. It seems to me that the only way they are making money from foreclosures, then, is ripping off the government program meant to help keep homeowners in their homes. That’s the only way I see that makes sense because common sense seems to tell you that it would be cheaper to try to keep the home from going vacant to begin with.

  2. scribe says:

    EW: as to your house in particular, I think you are confusing the “title” with the “debt”.

    Remember, the mortgage is a document memorializing that you have put the house and land up as collateral for the debt. The Note is a document reflecting the debt which is owed. The deed is the document memorializing the formal transfer of the legal title to you. In executing the mortgage, you transferred some of the equitable title to the property – enough to give the creditor on the note standing to sue to foreclose – to the creditor. (There are two parts necessary for the creditor to have standing to take the house. An interest in the equitable title – memorialized by the mortgage, is one. The right to collect on the note is the other.) The only upshot of some creditor or clearinghouse or whatever losing the actual blue ink note would be that, maybe, they would not have the note to collect on. Not having the note to collect on means they don’t have any entitlement to being repaid and that would deprive them of standing to sue – both to collect on the note and to forclose and take the collateral.

    Their losing the note would not affect your deed to the property – the title – in any respect. Clearing the lien which the mortgage memorializes from the title is a different issue – either you would have to (a) go into foreclosure to then force them to produce the blue ink note and then knock them out when they could not, (b) compel them – by suing them – to discharge the mortgage upon either your proffer of payment or for their inequitable conduct in keeping the lien there when they had no right to have the lien (b/c they did not have the blue ink note), or (c) working patiently with those idiots to find the note and get it paid of from the proceeds of your sale, perhaps being able to close the sale by holding the money in escrow until your creditors got their shit together. My experience is that the promise of immediate payment generates a reaction akin to a mad stampede, by the creditor, to get their ducks in a row, get paid and get out.

    • emptywheel says:

      Yes, my use of the term is sloppy.

      But not my use of the concept.

      If Freddie doesn’t have my note and someone else does, then it still means either a whole headache in closing, if we discover Freddie doesn’t have it (even assuming the noteholder is not defunct).

      But it also still introduces uncertainty abotu title going forward unless and until everyone selling a house can be sure whether they’ve cleared their note or not. And that’s going to affect home values, isn’t it?

      • emptywheel says:

        Sorry, to clarify.

        Even assuming I (having done the work to discover that the company I’ve been paying off my mortgage to doesn’t have my note) can clear it, that doesn’t account for two potential problems.

        1) What happens when the owner of the note no longer exists.

        2) What happens for the new homeowners who buy a house from someone who hasn’t checked first, and therefore is inadvertently passing on their shitpile?

        If banks can’t fix the securitization problem for foreclosures, why do we think they can for performing mortgages?

        • scribe says:

          Re: if the owner of the note no longer exists and assuming they went under without transferring the note to someone (highly unlikely as that note would be worth a lot o’ money), in a technical legal sense you could just welsh on it and they would have no right to collect from you because they no longer existed. The problem for the seller of realty in that situation, though, would be that (a) the mortgage lien on the property would still exist (until a discharge of mortgage was filed with the county, showing the mortgage was gone) and (b) more importantly, the buyer’s title insurance would not issue a title policy absent proof the prior mortgage had been cancelled of record, thereby precluding the buyer’s mortgage lender from lending them the money to buy the place.

          In theory, I suppose you could try to get the incoming buyer to assume your existing mortgage, but that would likely make little economic sense to them b/c they’d be wildly overpaying for the privilege of owning Casa Wheel and you’d be getting scalped of your equity in the place. That would, of course, obviate your problems in finding the note and lay them on your buyer’s shoulders.

          Like I said upthread, though, when the lender gets the message that you have a buyer and the lender can get their note paid, they’ll move heaven and earth to find it. They’ll move like sailors on liberty finding out the dockside whorehouse is having a 2 for 1 special with free beer thrown in.

          • emptywheel says:

            Right, that’s the problem some have identified: the originator went BK, but the note was not transferred properly, so it owuld need to go back to the BK proceeding.

            • PeasantParty says:

              Yes, it would. You may have the clerk of court search for the BK judge and the offical record of the hearing to see how the judge ruled on it.

        • Dave says:

          I refinanced 4/09 into a 30 year fixed at low interest (while I could still qualify… I would not now) with Provident Funding. They immediately sold my mortgage to Citi.

          I also submitted a request to Citi via the site you mentioned (≈ 2 weeks ago) for proof that they hold the note (or whatever the proper nomenclature is). I do not believe they have any motivation to respond to me. I put about 55% down when I bought (12/03), so fortunately I am not underwater on my house. (I AM hugely under water on the investment property I bought in 2006, but that is a different, unrelated story.)

          You KNOW if a corporation owed a debt that the creditor could not prove it owed, they would have no moral issue in trying to get out of that obligation. Unfortunately, since the problem is so systemic, all the powers to be have signaled that they will not force documentation to be researched properly and corrected (understanding that task is gargantuan).

          I imagine the banking system would collapse and create tons of collateral damage, but what if a significant portion of homeowners (underwater or not) started making their mortgage payments to an escrow account (not the servicer) until a ‘blue ink’ note, as Scribe calls it, can be produced.

  3. Mary says:

    Two sets of responses.

    Re: the broader topic, I agree with you about the principal reduction issue as a practical matter. It’s going to be a nightmare and the cutoffs won’t make sense and will cause other issues. Also, principal reduction would mostly impact the back end, not give front end relief. It also isn’t going to address the disproportionate geographic impact issues. I do tend to wonder from time to time if they might be able to do something like this, though – put the note and mortgage on hold, in currently non-performing (all banks have non-performing asset categories) and instead give homeowners the right to rent their homes, not at their mortgage payment but at a neighborhood adjusted fmv triple net rent, for up to two years, with that right assignable. The banks get rent income on the homes only during that period and banks and homeowners can negotiate regarding the overall loan/mortgage situation during that period, while no interest accrues. That’s only bare bones and probably has other issues, but I think something like the fmv regional rent concept, that takes into effect adverse impacts would be worhwhile to try to massage around.

    Re: your loan/mortgage, what you have really been paying is your note, not your mortgage, although things get mixed around. What you need to do if you are concerned is to check the real estate records with respect to your mortgage to see who has that – a mortgage is a lien interest and it is “perfected” by filing in the real estate records. So you need to see if there are any assignments of record with respect to your mortgage. That tells you who has the “record right” (which is basically the only perfected right) to claim a lien on the real property that secures your note.

    If your mortgage has never been assigned of record, you should send a demand letter (not an inquiry) to the noteholder mentioned in that mortgage to see if they have your note. If you have all your documents, you may be able to structure a demand letter in such a way as to trigger a default by the (purported) noteholder if they do not respond in a reasonable period of time. Unlike a mortgage, the rights under a note are typically not perfected by a central filing. They are typically protected by possession, but via securitization can end up being perfected by UCC filings and other avenues, depending on various facts and circumstances.

    You can also send a demand to the record holder of the mortgage asking that they verify the current noteholder and their ability to produce the wet ink note for cancellation at your sale. The record holder of the mortgage can release the mortgage. A closing agent can escrow funds. Documents can give you avenues of relief. There are lots of ways to get to Rome and if you are really concerned you should talk to a good real estate lawyer.

    As to the questions in 4- 1) It depends on why they no longer exist. If they were merged into another entity, if they were involuntarily dissolved, or if they were voluntarily dissolved. More importantly from your standpoint, though, it doesn’t so much matter what happened to the original holder of the note (holder is used more than owner in commercial paper settings) as it does who the holder of the note is now. The note holder generally has the right to collect upon the note, not the “owner” to whom it was originally given. It’s all going to vary some depending on the nature of the note given and state law, but what you really want to know is where the physical possession of your note ended up. There may have been an equitable assignment of rights to collect proceeds, but the rule is that you can only assign what you have. Because things can and do get lost in transactions, most states have a process whereby the last known holder of the note can filed lost note affidavits and evidences and will have recourse even under the lost note. That recourse may vary from state to state, from equitable reformation to a default judgement on the remainder owing, etc. Usually there are proof standards at issue under state law.

    You don’t ask, but 1a is what happens when the mortagee or assignee of mortgage of record and noteholder are not the same. This may mean that there is no longer a valid lien on your home (that isn’t the same as saying you don’t owe the note, but rather that the note is no longer secured by your home as collateral).

    2) The problem for a purchaser who is buying from you, and not from a foreclosure sale, would be along the following lines. They have to worry about the record holder of your mortgage. If a mortgage release by the record mortgagee or assignee of the mortgage is duly filed with their closing, that’s their main concern. If they are closing through a bank and/or a reputable title agency or real estate lawyer, this isn’t going to be a huge issue. The closing agent will have a release in hand to close and the title company (for the lender, even if the buyer didn’t have the prudence to get their own policy) will do a “final rundown” to make sure no one snuck in and did a last minute assignment of the mortgage to someone other than the mortgagee/assignee of record who has given the release.

    If the mortgage is released and if you give the deed (which includes your general warranties of title) and especially if the buyer gets an owner’s policy of title insurance, they are pretty much good to go and golden. The noteholder doesn’t have a lien against collateral released by the lienholder of record. You would still have an issue if you paid the mortgage holder only to find out later that the noteholder was a different entity and had not recieved $$ from the mortgage holder. The three of you might have lots of fun litigation, but it shouldn’t effect your buyer or their title.

    What makes a foreclosure different is that the seller if not giving any warranty of title – the seller is the court/sheriff and the “owner” of the property is not conveying title. Courts can extinquish liens (like mortgage) and replace them with rights to judgements/damages, but what is less clear is a court’s power to extinguish TITLE (the owner’s title that the owner isn’t conveying in a foreclosure sale) based on fraudulent representations to the court or misinformation to the court by someone other than the record titleholder.

    That’s the rub on a foreclosure sale and title to the property issues. That foreclosure deed might be void or voidable. And that causes title issues for the purchasers.

    So you have overlapping “title” concerns. You have who has “record title” to the real estate (you in your example, or a party being foreclosed on in a foreclosure setting); then you have who has record title to the mortgage lien rights. Both of those things rely on record title (except as between parties with knowledge and some other carve outs – and I’m not getting into that here). Then you have who has title to (which typically means who is the “holder of”) your commerical paper – i.e., your Note. The fact that title to a note may be hard to pin down doesn’t necessarily mean that a buyer will not get good title to property conveyed. That has to do more with what the record owner of the property and record mortgage holder produce at closing than the note. But as a practical matter, a seller who give a general warranty deed is obviously going to be way concerned if the closing proceeds go to a mortgagee of record who released the mortgage, but never pays off the note.

  4. thatvisionthing says:

    Driveby posting, I read DDay’s post last night and thought it didn’t get to the problem — which is the securitization fraud. See Bill Black and Randy Wray’s suggestion:

    What to do? We suggest an immediate moratorium on foreclosures and a requirement that all notes be produced by purported holders of mortgages within a reasonable length of time. If they cannot be found, the mortgages — as well as the securities that pool them — are no longer valid. That means that the homeowners are not indebted, and that the homes are owned free and clear. And that, dear bankers, is a big, big problem. It is also the law — without evidence of debt, there is no debtor and no creditor.

    • PeasantParty says:

      Correct! The ONLY other way I see of making the shitpile legit is:

      REVALUE all properites under mortgage leins to current value. All this bubble pricing is no longer part of our economic system. The property is no longer worth the hyped up prices nor will be sold without loss.

      Mortgage anew the revalued property with the correct HUD forms and title registration.

      The banks are still trying to step over the pricing issue only because they can get 600 grand plus interest for a home that is now really valued at 300 grand. They are stealing the life blood out of America. It is no longer a whole property due to the Economic Crash. Not just housing costs are involved. It is the entire US economy that has to be addressed in the pricing offset.

  5. b2020 says:

    In short, the train has left the station. There is no solution to this mess that would be acceptable to the elites, and unless and until The Many realize that the only way to rescue themselves and their kids from a slow-moving avalanche sweeping them – month by month, payment by payment – into poverty is to put a stop to said elites, there will be no solution at all.

    Black/Wray might have law and common sense on their side, but those have left on aforementioned train as well, probably on or before 2004. The problem is not “what is to be done”, it is “who is to do it”. Happens to be the exact same problem for torture, assassination, JSOC death squads, trials of “war crimes” that constitute actual war crimes etc. No surprise the real estate market will continue to be broken, everything else is – including matters of life and death for millions of people domestically and abroad.

  6. greengiant says:

    Only about 25 percent of mortgage borrowers are underwater by more than 25 percent. ( At least until Schiller’s forecast proves up ). Some speculators are buying mortgage securities at a discount and going to the homeowners to offer principal reductions of a lesser discount. The economic incentive is there for some parties to do just that. Its not fun paying rent through a mortgage, but there are only 12 million fewer full time jobs now, and 58 million mortgages and over 109 million people with full time jobs. So some underwater folk can be getting a tax break.

    The problem is the servicers and the banks responsible for badly lent mortgages, and the banks holding 0.6 Trillion HELOCs or seconds on underwater mortgages, and the banks with 1.6 Trillion mortgages on their books, and 1.0 Trillion in MBS, and 5 Trillion in off the books Special Investment Vehicles, ( ala Enron ), will spiral undwerwater themselves if they recognize mortgage losses through either principal reduction or foreclosure.

    As to your house sale, I sold a house a year ago, and the buyer got his title insurance, and MERs sent the county a letter saying I had paid off my note. When you sell your house and escrow pays off the mortgage server, then well, its not your problem it becomes the mortgage servers problem as far as I can see?

    • PeasantParty says:

      I respectfully disagree with the 25%. The values are based on what the market will bear, or what will sell.

    • thatvisionthing says:

      The problem is the servicers and the banks responsible for badly lent mortgages, and the banks holding 0.6 Trillion HELOCs or seconds on underwater mortgages, and the banks with 1.6 Trillion mortgages on their books, and 1.0 Trillion in MBS, and 5 Trillion in off the books Special Investment Vehicles, ( ala Enron ), will spiral undwerwater themselves if they recognize mortgage losses through either principal reduction or foreclosure.

      Driveby posting again. The big, real problem is not principal reduction or at the foreclosure level, it’s the banks having to buy back the mortgages at face value. Look, if I understand it right, all this gazzzzillions you’re writing about is like the Dallas episodes the season before Pam wakes up and finds Bobby in the shower. They were all a dream. Gone. Didn’t happen. See Bill Black quote @8.

      In the beginning, there was your mortgage. The minute after you signed and left the office, the mortgage got sold. So your mortgage was bought and paid for then. Then they shredded the notes (*ping*) and sold and sold and sliced and diced air and wind pudding and CEOs got bonuses on those churned earnings and Bobby went away and… The moment they shredded the note (*ping*), you’re in dreamland. All the gazzzzillions are a dream. And now… wake up sleepyhead, Bobby’s in the shower and the mortgage was paid.

      Oh sweet heaven.

      It’s not your fault the banksters shredded the note, never transferred it, defrauded investor upon investor upon investor like The Producers. If I remember Bill Black right, the next episode to come is where the fraudsters have to buy back all their fraudulently originated notes, at face value (it’s the law! :-) and go bankrupt. And they get put in receivership/get nationalized/get real, because only in fantasy dreamland is there enough money in the world to buy back what they sold. That’s where I think the story is, and not badly papering over yet again paper upon paper upon paper that was (*ping*) bad to begin with.

      I think this is why Elizabeth Warren says the ball’s in the state AGs’ court for now. There’s some serious law to be played out.

      • thatvisionthing says:

        edit: fraudulently originated notes securities I think. The notes, or rather, the mortgagees are the shiny object. Look at those bad people! Meanwhile, with every fresh batch of foreclosed houses, the fraud is stoked again and keeps on keeping on. Until it is stopped.

  7. greengiant says:

    Only about 25 percent of mortgage borrowers (who are underwater ) are underwater by more than 25 percent

  8. PeasantParty says:

    I have to add a few things.

    I meant to wish you the best with your sale. I would seriously suggest you get your own appraiser and have a real estate agent go ahead and give you the comps for your area. That should give you a good idea of the pricing and the difference in your payoff. I mean to do this BEFORE you put the house officially on the market.

    As for the clear title for the buyer, it would be for the closing attorney’s office to make sure the title search is done correctly and all recordings are present.

  9. Winski says:

    Hey, everybody is over thinking this… Just re-elect those dirt bag rethuglicans that created all this and they’ll make these problems go away within 6 months. AND, we’ll have all those new parks where the houses once stood..nothing like a little urban renewal with bulldozers.

    No worries, this will take no time….

  10. papau says:

    I suggest the way to chose the “lucky” ones that get a principal reduction is not “is the loan underwater”

    but is “Is the loan payment more than 40% of income of a person gainfully employed” with a loan value to market value ration after reduction of 95%, with the principal reduction loan still more than the Bank can get in a short sale.

    The above aligns economic interests and can be seen as “fair”.

    The program should not be a transfer of anything more than a minor amount of real estate wealth (5% in my example).

    If the above is not the situation, those home owners should never have been permitted to own the home and should move out, or have lost their job and and have no way to pay even with a principal reduction.

    • greengiant says:

      Fair might also be whoever buys the mortgage securities at a discount can forward some of that discount to the borrowers in the form of a principal reduction, instead of the servicers and mortgage buyers bundling the houses and selling them to investors or dealers, who are at times in collusion with the forecloser.

      But until the pants are sued off the mortgage servicers for predatory dealings with the borrowers, the servicers are only encouraged to stonewall the borrowers and jack up illegal fees and refuse to give payout totals etc. Having the US Treasury program support predatory mortgage servicer behavior should be grounds for Geithner’s impeachment.

  11. BillE says:

    Ok, correct me if I am wrong. One of the best ways for this problem to be solved is through principal reductions.

    Is this across the board for all mortgages or just failing ones? I have lived within my means. While others used their houses for ATM machines and cash out re financed like mad. My cousin’s houses they knew going in the could never really afford ( 600K house with less than 100K income, they got no down no doc option arm ) and really were just renting from the bank. So how can we as a society tell whether a loan was just living the high life and do we care? Banks should take hair cuts for moral hazard reasons ( they haven’t ) and obviously bad consumers as well.

    The lenders totally in the wrong, so were the appraisers, and the title companies (in PA) But

  12. bailey2739 says:

    Why limit it to those POOR homeowners” who owe more than they agreed to pay? It’s a Gov’t. giveaway, just like the one accorded the Banks. This is stupid, it just won’t work. What about seniors who saved their entire lifetime, paid off their mortgages & are now living on social security (because they KNOW leveraged gambling is wrong) & 1% Bank interest because the Gov’t has chosen to give Banks FREE money. Obama IS an amoral sleezy, corrupt Chicago con man who took us for a bad, bad ride. Enough is enough, no more.