Further Thoughts on Prosecutorial Abdication
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 . . ..
November 19, 2012 | Permalink | No Comments
November 15, 2012
Borden & Reiss: “Beneficial Ownership and the REMIC Classification Rules”
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.
November 15, 2012 | Permalink | No Comments
November 14, 2012
Primary Architect of Mortgage Initiatives at CFPB To Leave
Raj Date, the number two official at the CFPB, is leaving as the Bureau completes its mortgage regulations. Story here.
November 14, 2012 | Permalink | No Comments
Hurricanes Hitting Underwater Mortgages
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.
November 14, 2012 | Permalink | No Comments
More on Hockett’s Eminent Domain Solution for Underwater Mortgage Debt
By David Reiss
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.
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November 19, 2012 | Permalink | No Comments