A Lesson From Wall Street’s Principal Write-Down Playbook. Can We Emulate and Expand?

In Florida, about half of all homeowners with mortgages owe more than the value of their home. This is called “having negative equity, ” being “upside down,” or “underwater.”  Most of those families owe a LOT more, up to 50% or more than their homes are actually worth!  If a family owes tens of thousands or worse, hundreds of thousands, more than the value of their home, there is little hope of ever refinancing into a better interest rate.  Selling the home, moving for a job, or relocating for family needs is also very difficult but possible as discussed below.  It’s very likely that many families who owe so much more than their homes are worth will never catch up and will never truly own their homes.  Many of these families have hundreds of thousands of dollars owed in a balloon payment that is due after ten to twenty years of paying their monthly mortgages.  Modifications that only reduce interest rates or extend the number of years to pay off the underwater mortgage may effectively lower the monthly payment but are only delaying the inevitable day of reckoning on the disproportionate mortgage balance compared to the value of the home.

Now that the top five banks (Citi, Wells, Chase, BoA, and GMAC/Ally) get short sale “credit” towards the $25 billion foreclosure fraud settlement , there is an increased approval rate for short sales.  A short sale is when a new buyer pays less than the outstanding mortgage owed on the home and the bank allows the sale to go through without demanding the current homeowner come to the closing table with the left-over amount owed.  In many short sales though, the bank reserves the right to collect, at some point in the future, the left over (deficiency) amount that was not paid off at the short sale.   When banks claim credit towards the settlement penalty, they are required to waive the deficiency.  This waiver qualifies as mortgage debt forgiveness, which is normally taxable.  Until the end of 2012, the waived mortgage debt is exempt from taxation due to a 2007 Mortgage Debt Forgiveness Act that was passed by Congress.  This act will expire next month unless Congress votes to extend it.  Our firm helps homeowners review short sale documents to make certain that the deficiency waiver legal language adequately protects our clients.

With each passing year, there is growing awareness that millions of 2003-2007 vintage mortgages were based on a massive Wall Street demand for fraudulent loans.  A demand fueled by investment banking firms which bundled up thousands of loans into scam investment bonds and then foisted the scam bonds off on to our pensions and retirement funds but not before insuring the fraudulent bonds and often the mortgage loans themselves.  To further enrich themselves, these investment banks bet heavily on the fact that the loans would fail.

When, as expected, the loans started to fail en masse, the insurance companies couldn’t keep up with the pay outs and claims demanded by the investment banks.  AIG insured the investment bonds.  When AIG couldn’t pay out to Goldman Sachs and other investment banks, President Bush, Treasury Secretary Hank Paulson, and the current Treasury Secretary and former president of the New York Fed, Tim Geithner, all pressured the 2008 Congress to pass TARP, the $700 billion bank bailout, and a separate bailout just for AIG so it could pay dollar for dollar, 100% of the claims owed to Goldman or “Government” Sachs. Despite a loud, howling, American outcry, these bailouts also funded millions in bonuses to the AIG and other banking executives.  The bailout was also supposedly intended to aid millions of American homeowners who had become trapped in the fraudulent mortgages, but that has not occurred and we now know, it was never really the point.

Never fear though!  Wall Street has found a way to further enrich itself while throwing certain, specific homeowners a life line.  This process should be examined to see if it could be expanded to help more than a few homeowners.

There are off-shore investment bonds that are filled with delinquent, non-performing loans.  These loans started off at the FDIC or elsewhere, became delinquent, and are then bundled together to form a new bond.  Investors buy a piece of the new bond, knowing that they are buying at steep discounts, far below what the mortgages are valued on paper.  The bond investors are betting that they will make money one of two ways; the homeowners start making payments again or their homes go through a quick, easy foreclosure and are sold to a new buyer.  Since the bonds are sold to investors at a steep discount relative to the actual outstanding mortgage balance, the investors make money even when the original mortgages are written down far, far below the original value.

1^st Alliance Lending, an FHA mortgage originator, is actively involved in rewriting the mortgages in the non-performing loan bonds.  The CEO of 1^st Alliance, John C. Dilorio, actually testified at a March 15, 2012 Congressional hearing on principal write downs of mortgage loans.  The hearing webpage is here, and the webcast is fascinating to watch.  Laurie Goodman, a respected voice of reason in the banking profession, gives excellent, sourced testimony on the value and imperative to support principal write downs.  Goodman’s written testimony with charts and statistics is here.  Dilorio’s written testimony is here.  Dilorio neglected to mention 1^st Alliance’s connection with the non-performing loan trusts and the fact that the “sophisticated investors” he often refers to are shadowy figures and hedge funds which buy non-performing loan bonds.

It is not clear how non-performing loans (NPL) are selected to be placed in NPL trusts.  Research in the public land records and court files is beginning to show that some of these loans are in an active foreclosure, some are in limbo, and some have been re-written into new loans with steep, up to 70%, principal write-down loans.  These new loans are a boon for the NPL bond investors, allow the homeowner to stay in the home, and satisfy (eliminate) the unsustainable underwater mortgage.  This process begs many questions but most importantly, can this FHA principal write-down process be expanded to help millions of deserving Americans?  And, if not, why not?

South Florida Example of a Steep Principal Write Down as an Alternative to Foreclosure

This was for a 2007 mortgage for $202,500 which was in foreclosure when the case was dismissed by Citimortgage and the mortgage was “satisfied”.  Then a new mortgage, an FHA loan for $57,676 was given to the homeowners.  This is a 72% write down of the 2007 mortgage that was in foreclosure!  The only question now is where did that $202,500 mortgage start out before it ended up in the NPL trust.  It would be very interesting to know if the original investors would have benefited from re-writing the mortgage down to $57,656 instead of selling it into the NPL trust.

Feb 2007: Mortgage for $202,500 MERS/First NLC Financial  Palm Beach official record CFN: 20070055371

Dec 2011: Lis Pendens (notice of foreclosure) by Citimortgage Docket here  Palm Beach official record  CFN: 20110461146

Oct 2012 Citimortgage dismissed foreclosure lawsuit

Oct 2012  Satisfaction executed by document mill Nationwide Title Clearing: MERS as Nominee for First NLC Financial & US Bank as Trustee for Stanwich Mortgage Loan Trust 2012-6, Carrington Mortgage as Attorney in Palm Beach official record  CFN: 20120433196

Oct 2012: 1st Alliance Lending (FHA) Mortgage for $57,676  Palm Beach official record  CFN: 20120436966

County property appraiser valued property at $51,700

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