Certified Forensic Loan Auditors, LLC

  Upcoming Classes

Search CFLA's Article Archive:

California Mortgage Grabs Are a Terrible Idea

bloomberg.com | September 18, 2013

By Matthew C. Klein

During World War II, Richmond, California, was the home of legendary shipyards that could build a single Liberty cargo vessel in a matter of days. Now it's mostly known for hosting a Chevron refinery and for being one of the most dangerous cities in the United States.

This month it also became the first municipality to formally express interest in using eminent domain to seize certain mortgages held in private-label securitization trusts and then restructure them. Not only is this probably unconstitutional, a thorough examination of the facts shows it is a bad idea for the city and deeply unfair to the current owners of the targeted mortgages.

Richmond's city council is hoping to repair some of the damage caused by the housing bubble. According to Zillow, home values collapsed by two-thirds from the beginning of 2006 until the beginning of 2012. While home prices have recovered somewhat since then, about 38 percent of mortgages in Richmond (7,000 loans) are still underwater, according to RealtyTrac.

Securitization is partly to blame. During the bubble years, mortgage originators sold trillions of dollars of loans to banks that then put them into trusts, which then issued securities to investors with different appetites for risk. Pension funds, insurers, and mutual funds generally bought the supposedly less-risky senior pieces, while the junior securities were usually purchased by hedge funds and bank trading desks. The structure of these trusts led to "tranche warfare" between the holders of senior and junior securities once the housing market turned south. Making matters worse, the mortgage servicers often preferred foreclosing on delinquent borrowers to reducing their principal balances. The net result was millions of unnecessary foreclosures, which in turn flooded the market with excess supply.

Richmond is trying -- belatedly -- to make up for the government's failure to intervene with a plan concocted by Cornell law professor Robert Hockett. He thinks states and municipalities should buy underwater loans owned by securitization trusts and then refinance those loans into new Federal Housing Authority-guaranteed mortgages. The theory is that this will increase consumer spending by lowering monthly payments and reduce the risk of default by giving borrowers equity in their homes. There is nothing wrong with this part of the plan.

The controversy comes from Hockett's additional recommendation that local governments use eminent domain to seize loans at prices far below their face value. This is ostensibly necessary to minimize the burden on local taxpayers. It also happens to create a sizable profit opportunity for the clever investors who founded Mortgage Resolution Partners, which is paying all of Richmond's legal fees and has picked the 624 mortgages the city is interested in acquiring.

Those 624 loans have some interesting characteristics. According to CoreLogic (sorry, no link), 52 percent of them loans have already been modified at least once. Interest rate reductions and principal forgiveness have cut those borrowers' average monthly payments by about 54 percent. Federal Reserve researchers believe this is economically equivalent to the principal write-downs proposed by MRP. In fact, about 220 of the 624 loans targeted by MRP aren't even underwater any more.

The default risk on the remaining loans -- about 6 percent of the 7,000 underwater borrowers in the city -- also seems minimal. More than two-thirds have perfect payment records. It's hard to believe that anyone who refused to walk away from his mortgage when house prices were collapsing would suddenly decide to default at a time when Richmond home values are increasing by 29 percent a year. This is why the holders of the mortgages deny MRP's assertion that the underwater loans are actually worth much less than their face value.

MRP bills itself as a "community advisory firm" -- a term that they appear to have invented. It is actually a for-profit enterprise founded and owned by Grail Partners, a private investment group. According to Grail's website, MRP is supposed to provide investors with annual returns of about 15 percent to 25 percent.

MRP would use eminent domain to buy a performing mortgage from a securitization trust with a balance of $300,000 on a house worth $200,000 for only $160,000 ("fair value"), and then immediately refinance the borrower into a new FHA-backed loan worth worth $190,000. After paying $9,500 to the city of Richmond and $3,210 to investment bankers, lawyers, and mortgage servicers, MRP and its investors keep $17,290 -- a profit of about 10.6 percent. If it can get past the courts, a large-scale version of this program would be a very attractive investment.

You might think that these profits -- to say nothing of the reduction in mortgage principal owed by the homeowners -- would come at the expense of those who own the senior tranches issued by the trusts that hold the targeted mortgages. Yet, in a fascinating paper, Donald Putnam (the founder of Grail Partners) argues that the only victims of his plan are a handful of speculative hedge funds. That shouldn't affect the legal outcome, but it could affect MRP's performance in the court of public opinion.

Putnam's theory is that the "speculators" are buying lower-rated tranches at pennies on the dollar and collecting substantial interest payments before borrowers "inevitably" default. In his view, these hedge funds are the obstacles preventing the pension funds and insurers from restructuring underwater mortgages. While there are certainly funds that buy debt on the cheap in the hope that borrowers won't default, that isn't what is happening here. The face values of the lower-rated tranches have already been written down substantially.

Don't believe me? Well, thanks to the Bloomberg terminal, I was able to study the makeup of 500 separate securitization trusts that hold the 624 Richmond mortgages targeted by MRP. The highest concentration of targeted loans is found in WFMBS 2006-AR2. This trust originally held 4,119 mortgages and now holds 1,509. Just seven of those loans are being targeted by MRP. Of the original 21 tranches in this deal, 14 have already been wiped out. Even the senior tranches have endured steep losses. The balance of the senior-most tranche (1A1) has dropped to $407 million from an initial value of about $1.2 billion. The lowest remaining tranche (2A6) is worth less than 10 percent of what it was at issuance.

MRP is targeting 5 loans held in WAMU 2007-HY3. It originally had 29 separate pieces, of which only 7 remain. Those 7 pieces are worth about $1.1 billion today. The original deal with all 29 pieces was worth $3 billion. There are another 5 target loans in AHMA 2007-1. Only the senior-most piece of that deal (A1) remains. It has already been written down to 610 million, from $1.1 billion.

I tried to speak with Putnam about these findings, but I wasn't able to get him to talk at any time over the past two weeks.

The city of Richmond should be commended for its boldness in addressing a problem where the federal government has failed. The proposed solution, however, doesn't help Richmond nearly as much as it helps a clever group of wealthy investors. Meanwhile, the cost of Richmond's plan would be borne by insurers, pension funds, and regular savers. It's a bad idea all around.


Back to September 2013 Archive

CFLA was founded by the Nation's Leading Foreclosure Defense Attorneys back in 2007 to serve the Foreclosure Defense Industry and fight pervasive Bank Fraud. Since opening our virtual doors, CFLA has rapidly expanded to become the premier online legal destination for small businesses and consumers. But as the company continues to grow, we're careful to hold true to our original vision. For us, putting the law within reach of millions of people is more than just a novel idea—it's the founding principle, just ask Andrew P. Lehman, J.D.. With convenient locations in Houston and Los Angeles, you can contact Our National Account Specialist and General Manager / Member Damion W. Emholtz at 888-758-2352 for a free Mortgage Fraud Analysis or to obtain samples of work product, including cutting edge Bloomberg Securitization Audits, Litigation Support, Quiet Title Packages, and for more information about our Nationally Accredited and U.S. Department of Education Approved "Mortgage Securitization Analyst Training Certification" Classes (3 days) 24 hours for approved CLE & MCLE Credit (Now Available Online).

SEE BELOW- http://www.certifiedforensicloanauditors.com

Call us toll free at 888-758-2352

Bookmark and Share
Facebook Like us on Facebook
Twitter Follow us on Twitter
YouTube View our YouTube Videos
LinkedIn Connect to us on Linkedin
BBB Logo


Contact us or view our Sample Documents & Audits by completing the form below.

International Bloomberg Securitization Audits


DVD Sets Only $99


FREE Mortgage Fraud Analysis


Order Cutting-Edge Services Now


Quiet Title Packages from Licensed Attorneys


Affiliate Services


CFLA Sponsored Attorney Links


Take-Home Education Package