Author Archives: David Reiss

SEC 2012 Report on NRSROs

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This SEC staff report has some interesting findings that relate to asset-backed securitizations.  Highlights include

  • The pie charts on page 6 that indicate the overall market share of NRSROs as well as their share by sector.  It is interesting to see that Fitch does significantly better rating Asset-Backed Securities (20%) than it does overall (13%).
  • “In some structured finance rating files, the Staff found incomplete rating recommendations relating to the final tranches and were unable to ascertain what the committee ultimately approved. In some instances, there was no rationale recorded for why the final rating recommendation deviated from the original.” (14)
  • “The Staff found that [one large] NRSRO placed certain European residential mortgage-backed securities tranches on watch for potential downgrades for over two years and failed to review the watch within the timetable specified in its policies. In doing so, the NRSRO failed to follow its policies and procedures with regard to the use of rating watch status and the timeliness of reviews conducted on the rating watch status. The NRSRO also failed to apply new criteria to these transactions within the time period required by its policies.”  (13)

More on Hockett’s Eminent Domain Solution for Underwater Mortgage Debt

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Bob Hockett has posted this update to his plan by which localities would use their power of eminent domain to take underwater mortgages and reduce the principal amount owed so that the debt would be sustainable for homeowners.  The discussion on pages 19-20 of how the solution can benefit everyone from homeowners to junior lien-holders is particularly interesting.  It appears as if this proposal has been gaining traction since the summer with the FHFA taking note as well as the bar and the securitization industry.

Further Thoughts on Prosecutorial Abdication

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I was discussing Prosecutorial Abdication with a friend who used to work in a prosecutorial office.  While she agreed with what Brad and I had written, she also highlighted the technical and training challenges that prosecutors face in putting together an effective investigation.

Where an insider trading or corporate fraud case might be very difficult and involve tens of thousands of emails, it usually only involves a few key people.  As a result, it is easier to get a handle on the case.  In contrast, she noted, a securities fraud case based on even a single mortgage-backed security involves thousands of mortgages originated by many different lenders.  Numerous different hands touch those files at origination as well as during the securitization process.  On top of that, many of the key documents are missing or at least their chain of custody is uncertain.

The net result, according to her, is that building such a case can be exponentially harder than building an insider trading case.  This is particularly true because many prosecutor offices will not have the sophisticated software (Excel is not enough!) to track all of the relevant data nor the training (forensic accounting skills would be nice) to do an effective job. Let’s see what the Financial Fraud Enforcement Task Force can do with the resources made available to it . . ..

Borden & Reiss: “Beneficial Ownership and the REMIC Classification Rules”

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We just posted “Beneficial Ownership and the REMIC Classification Rules” which can be most easily downloaded here.  It follows up on our previous piece, “Wall Street Rules Applied to REMIC Classification,” which ban be easily downloaded here.

Primary Architect of Mortgage Initiatives at CFPB To Leave

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Raj Date, the number two official at the CFPB, is leaving as the Bureau completes its mortgage regulations.  Story here.

Hurricanes Hitting Underwater Mortgages

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A former colleague, Barry Goldberg, raises an important financial issue relating to the devastation that Hurricane Sandy left in its wake.

Massive flood, storm and fire casualties on homes with underwater mortgages may make for an odd set of incentives for borrower and RMBS investor.

A Fannie/Freddie form of mortgage contains language like this:

“In the event of loss, Borrower shall give prompt notice to the insurance carrier and Lender.   . . .  Unless Lender and Borrower otherwise agree in writing, any insurance proceeds, whether or not the underlying insurance was required by Lender, shall be applied to restoration or repair of the Property, if the restoration or repair is economically feasible and Lender’s security is not lessened.”

Homeowner has no financial incentive to rebuild — in all likelihood she would still be underwater.  If the owner of the mortgage believes in good faith that restoration is not economically feasible, then it will accelerate the balance of the loan and direct the insurance proceeds to be applied to sums owed pursuant to the mortgage.

Take this example:

Homeowner purchases home for $250,000.

The house is now worth              $150,000.

The mortgage is for                    $200,000.

The insurance policy is for          $200,000.

The homeowner (mortgagor) would be incentivized to abandon the property in a non-recourse jurisdiction and the owner of the mortgage (mortgagee) would be incentivized to take the proceeds from the insurance policy, foreclose and sell the property as a tear down.  It looks, from this simple example, like the mortgageee would be better off financially as a result of the massive casualty.

I would be interested to hear from others who have seen how this plays out in reality, given real players and real documents.

 

Judge Cote (SDNY) Allows FHFA To Proceed in Suit Against JPMorgan

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The court said that the FHFA, Fannie and Freddie’s regulator, can proceed with its securities fraud claim relating to billions of MBS bought by the two mortgage companies. The allegations turn on allegedly false representations made by the bank relating to the mortgages underlying the securities.

The quoted representations are pretty strong. One reads:

depositor will not include any loan in the trust fund for any series of

securities if anything has come to the depositor’s attention that would
cause it to believe that the representations and warranties of a seller or
originator will not be accurate and complete in all material respects in
respect of the loan as of the date of initial issuance of the related series of
securities.

The Opinion and Order can be found here:
https://bit.ly/PX00xX