U.S. Housing Market Foreclosure Chinese Water Torture

By: Douglas_French

The real-estate bust continues at a pace akin to Chinese water torture. Home prices peaked five years ago, but a mountain of foreclosures still looms. RealtyTrac reports that filings rose 7 percent in March from the previous month but are down 35 percent from March of last year, when RealtyTrac recorded the highest number of default filings since the company started in boom-time 2005. Foreclosure filings for the entire first quarter fell to a three-year low.

RealityTrac's senior vice president, Rick Sharga, told MarketWatch that, once procedural issues start to be resolved, foreclosure filings will begin slowly to rise. He adds, "We're not expecting to see an explosion as lenders and servicers try to catch up."

"It's likely that these delays [in foreclosure processing] will push out the housing recovery further than anticipated," Sharga noted.

Those unaware of the tangled web of the world of mortgage defaults and modifications should chat with Duke and Tina Renslow. The Renslows have a loan on their home with, well, either Wells Fargo or the Federal Home Loan Bank of, well, nobody knows for sure.

There is no question that Wells Fargo was the originator of the note secured by a deed of trust on the Renslows' home in Washoe County, Nevada. The family had some money issues and contacted their lender in July of 2009 to see about a modification.

Of course, representatives for the lender said they would only discuss a modification if the borrowers were 60 days or more delinquent. Taking the hint, the Renslows missed a couple payments and contacted the bank. The bank then provided the couple with a Home Affordable Modification Program (HAMP) application.

The couple made a payment so as not to be 90 days late and thus in default, but carefully remained 60 days late so the bank would continue to speak with them about modifying the loan.

The Renslows completed the HAMP application and on September 17, 2009, received a letter from Wells Fargo stating "You did it!" and accepting the couple into the HAMP program. The bank told the borrowers they didn't need to make the October payment and the HAMP trial period would begin November 1.

Missing the October payment meant the borrowers were in default. However the Renslows received the HAMP trial-period packet indicating that Wells Fargo was their lender and their monthly payment would be $1,127.06.

The trial period would end in February of 2010, and if payments were made on time the couple would receive a permanent modification. The borrowers made (and the lender accepted) their three trial payments as agreed, but when the lender didn't send a modification agreement, the Renslows called Wells Fargo to see what the deal was.

Instead of receiving the modification, the couple was sent a letter informing them that they "may not be eligible" for HAMP because, "[Wells Fargo] service[s] your loan on behalf of an investor or group of investors that has not given us the contractual authority to modify your loan under [HAMP]."

The letter said for the Renslows to keep making their trial payments and that the file would be reviewed in a month. However, less than a month later, Wells Fargo informed the couple that it would not modify the loan because "the investor on your mortgage has declined the request."

The bank said it was keeping the trial payments and could only recommend a short sale or a deed in lieu of foreclosure to resolve their problems. Even though the Renslows had made their payments as agreed, Wells Fargo reported their loan 180+ days delinquent, making a refinance with another lender impossible.

On August 6, the bank started foreclosure by recording a notice of default. The Renslows elected mediation under a recently passed Nevada law. At the mediation, the bank first provided the original deed of trust demonstrating that it was the beneficiary and that the bank had every right to be negotiating at the mediation. A deed of trust is the legal document that is the security for the note, which is the obligation to pay.

Then, a Wells Fargo employee on the phone said the bank didn't own the loan; it was just the servicer. When asked to provide to the mediator the entity that actually owned the loan, so that the appropriate party could represent the lender side of the mediation, a two-hour search ensued, but to no avail.

And in fact it is still unknown who owns this particular loan. It's a federal home-loan bank (FHLB), but there are a dozen of these banks. There is no recorded assignment that might indicate which of the dozen might own the Renslow's note.

That the owner of the loan is an FHLB is significant. A Wells Fargo employee admitted that the bank refused to do the HAMP modification that had been previously agreed to, not because the Renslows didn't qualify, but because "the underlying lender did not participate in HAMP and thus had not authorized the servicer to enter into a HAMP modification."

Judge Patrick Flanagan's footnote on this point is precious:

This Court professes a certain shock at the fact that a FHLB, as a federal GSE, does not participate in HAMP, which is required for loans owned by FNMA and FHLMC, two other federal GSE's. The fact that the Federal Home Loan Mortgage Corporation authorizes HAMP modifications while the Federal Home Loan Bank does not, that WELLS FARGO has sold mortgages in the past to both of these entities, and that the election to sell to one over the other is completely outside of the borrower's control has a certain Kafkaesque quality. Had WELLS FARGO simply chosen FHLMC instead of FHLB, this entire matter would have been averted.

In the end, Judge Flanagan found that Wells Fargo, among other things, "lacked authority to negotiate and modify the loan," and in turn used the court's power to modify the note, for whichever Federal Home Loan Bank actually owns the loan.

The current principal is being reamortized, a new payment amount of $1,145 has been set, and the interest rate is reduced to 2 percent for the life of the loan.

This is one tiny loan among millions that are out there in a wilderness of GSEs, too-big-to-fail institutions, individual state-court systems, real-estate laws, and of course underwater homeowners who are just trying to figure out who to negotiate with.

This is the opinion of one judge on one small case. However, it should give pause to servicers thinking they can step into the shoes of note owners (known or unknown) to negotiate modifications or foreclose on properties. Mortgage Electronic Registration Systems (MERS), a firm with 50 employees in Reston, Virginia, claims to hold title to half of the home loans (60 million) in America, yet hasn't invested a dollar in a single loan — not to mention that it lacks the clear paper trail that the courts insist on.

Mr. Sharga might think the case chronicled above is an example of "working out the procedural issues." Others might be harsher in their description. Either way, this housing bust will take a long, long time.

Douglas French is president of the Mises Institute and author of Early Speculative Bubbles & Increases in the Money Supply. He received his masters degree in economics from the University of Nevada, Las Vegas, under Murray Rothbard with Professor Hans-Hermann Hoppe serving on his thesis committee. See his tribute to Murray Rothbard. Send him mail. See Doug French's article archives. Comment on the blog.

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