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You are here: Home » 2011 » September

MERS IS LEGIT?

If you haven’t heard of MERS before, I don’t have room to fully explain it here (do an Internet search for more info). The short version is that many lenders used MERS to save time and money to record and sell mortgages via an electronic database rather than record the physical documents with the local county recorder’s offices. I’ve heard reports that MERS has recorded more than HALF of all mortgages in the US since 1997.

There have been big questions about the legality of how MERS records mortgages and whether lenders can foreclose because of these questions. There have been many lawsuits on this issue, and as of yet, many of the cases were dismissed on technicalities, or the decisions didn’t provide a clear legal precedent on the matter. However, there was a recent case that may be the one that finally does it. I’ll spare you the details of the case, but it definitely puts some wind in the sales of the lenders that are foreclosing on properties where MERS was involved by saying that MERS is legitimate and isn’t a reason to stop or reverse a foreclosure. If this case holds, it may reduce one arrow from the quiver of the attorneys that are trying to either fight or reverse foreclosures on behalf of their client.

However, before I could even get this blog out, MERS was hit with another lawsuit in Texas on 9/21. This one takes a different tact than the other suits that question the legitimacy of MERS. This one is filed on behalf of the local counties that were denied the revenue from the recording of documents because of MERS. With MERS, the lenders didn’t have to record new documents each time the loan was sold. When you add up all the loans, and how many times they were sold, the damages could be over $1 Billion, just for the Dallas lawsuit. If they win, you can bet other counties across the US will pile on and the losses could be huge. If this happens, it won’t be so much a victory for homeowners, because it doesn’t change whether lenders can foreclose. It will be good news for cash-strapped counties, but it could also be a huge financial hit to many banks that are already struggling to stay solvent.

PRINCIPAL REDUCTIONS?

If you are upside-down on your home and are having trouble making the payments, I have some good news for you. If you’ve been renting for years, or you own a home, but you made a conscious decision to buy a smaller, less expensive home years ago because you saw the “bubble” forming, then you will think what I am about to report is entirely unfair. I’m only reporting the facts, here, not saying whether or not it’s “right.”

I’ve been reviewing loan modification offers with local homeowners now for quite a few years at no charge. I do it just to help them try to figure out exactly WHAT they are being offered, and if it makes sense to them to accept it, or hold out for a better deal. [If you’d like me to review yours, feel free to contact me.] Over the past few years, I would rarely see principal reductions offered. In fact, most of the loan mods weren’t very good at all. Usually just temporary band-aids of temporary lower rates. However, over the past 3-4 months I’m seeing much better loan mods being offered. And here is the big shift: I’m seeing more and more principal reductions being offered, and some of them are substantial! Some as high as $175K off the balance. What’s interesting about these is that they are almost all staggered over 3 years. So they don’t take it all off at once, they’ll take off 1/3 each year, as long as your account is in good standing. But they stop charging you interest on the amount of principal reduction right away. So if you take the loan mod, and make your payments for 3 years on time, it’s the same result to you as if they had dropped the principal right away. But for your lender, they get to stretch out the accounting loss on their books over 3 years. Pretty creative, and it’s making a big difference for a lot of people. Most of the time they are still upside-down after the reduction, but now only by $25-75K, not $250K, and that’s usually something they can live with.

WHERE ARE THE REOS, PART II

Last week I wrote about the lack of REO (Real Estate Owned by banks) properties in the marketplace. Sure, there are REOs out there, but not as many as there “should” be based on the amount of delinquency, upside-down homeowners, etc. I listed several reasons, but told you I’d share with you this week what I think the #1 reason is. Here it is: Accounting Rules.

That’s right. Boring old accounting. Specifically where banks have to value their assets at what the market says they are worth, or what their “model” says they are worth. These are commonly known as “Mark to Market” vs. “Mark to Model” rules. Let’s say a bank makes a loan of $400K on a home worth $500K. Then let’s say the value of the home drops to $250K. Under Mark to Market rules, the bank would have to write down that loan to $250K (or less, considering foreclosure costs) and take a loss of $150K+. However, under Mark to Model they can hold it on the books at $400K. No loss. They can do this because their “model” (a complex formula) can say that they are going to hold that loan until the market comes back, or the borrower pays it off, hence they don’t have to book the loss now.

Whether they are using one or the other of these rules has a HUGE impact on banks’ financials, especially when the real estate market crashed. They were using the Mark to Market rules, but then switched to Market to Model in late 2008. Ever since then, banks have a BIG accounting incentive NOT to foreclosure, because they have to actually “realize” the loss if they were to foreclose. Banks are already in a precarious financial position. If they foreclosed on all the homes they SHOULD foreclose on, they’d have to book Gatrillions (yes, I made that up…) in losses. Many banks wouldn’t survive that process. So, that’s why the solution they keep going back to is some version of “extend and pretend.” Anything to stretch this out another quarter, or another year, hoping things magically “get better.”

WHY WE DON’T SEE MORE REOS

It’s coming…It’s coming… We keep waiting for the next big “wave” of REOs to come, but it hasn’t. (REO stands for “real estate owned” — when a bank forecloses on a home and becomes the owner.). When the market first collapsed in 2006-2007, we did see a very large number of REOs hit the market. Then it slowed down quite a bit after that. The explanation given was that the banks were overwhelmed at the first wave and had to staff up and get their processes ready to handle the next wave. They promised that the next wave of REOs would be much larger than the first one. But since then we’ve seen only a moderate amount of REOs on the market.

There are many reasons given for this, all of them have some validity. The most common reason given is that the banks don’t want to tank the market even further, which would most certainly happen if they released a flood of REOs on the market. Another reason is that the banks are having to be more cautious now to make sure that their legal processes are done correctly because of all the lawsuits by individuals and government agencies. The list of problems is long: Robo-signing, can’t find the note, can’t prove who owns the note, MERS scandal, etc. I know first-hand of one large bank that has completely called off any foreclosures until they have their legal team review every single file to make sure it will stand up in court. Another reason is that the banks are trying to work out loan modifications and/or short sales with homeowners.

I think all of the above are partial explanations for why banks have been slow to foreclose, but there is one more big reason that most people don’t talk about. This other reason is, in my opinion, the main reason we aren’t seeing many REOs right now, and won’t for a little while. It takes a bit to explain, so I’ll do that next week.

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