A Court Ruling Makes Mortgages Vanish Into Thin Air

I am far less savvy when it comes to this market however I know there's 1-2 members here who actually work in real estate so I'm hoping they can chime in here.

Bloomberg

For generations, budding lawyers have been taught that if the bank forecloses on your mortgage and can’t sell your house for the amount of the loan, the bank can come after you personally for the rest. Apart from a handful of “non-recourse” states (California being the most prominent), this has long been the rule. But a mystifying recent decision by the U.S. Court of Appeals for the 8th Circuit might inadvertently lead to a reevaluation of what had been settled law — and potentially change the way the secondary market values mortgage loans.

This is another issue popping into view with the banks, add this to the repo market liquidity issues and tbill purchase program being run by the Fed.



This is the audio version of the article essentially.

Reuters

Citigroup subsidiary CitiMortgage Inc cannot force a mortgage-loan originator to repurchase defective loans that have already gone through foreclosure because it has not shown that those loans still exist, a divided federal appeals court held on Wednesday.

So, thoughts from the people working in real estate?

originally posted by: toysforadults
I am far less savvy when it comes to this market however I know there's 1-2 members here who actually work in real estate so I'm hoping they can chime in here.

Bloomberg

For generations, budding lawyers have been taught that if the bank forecloses on your mortgage and can’t sell your house for the amount of the loan, the bank can come after you personally for the rest. Apart from a handful of “non-recourse” states (California being the most prominent), this has long been the rule. But a mystifying recent decision by the U.S. Court of Appeals for the 8th Circuit might inadvertently lead to a reevaluation of what had been settled law — and potentially change the way the secondary market values mortgage loans.

This is another issue popping into view with the banks, add this to the repo market liquidity issues and tbill purchase program being run by the Fed.

This is the audio version of the article essentially.

Reuters

Citigroup subsidiary CitiMortgage Inc cannot force a mortgage-loan originator to repurchase defective loans that have already gone through foreclosure because it has not shown that those loans still exist, a divided federal appeals court held on Wednesday.

So, thoughts from the people working in real estate?

I work in mortgages. Essentially, the court is saying that Citibank can't go after the originating bank for a defective mortgage (meaning not underwritten properly) if a home has already gone through foreclosure because if the home was foreclosed, then the mortgage in question doesn't exist anymore. However, the logic isn't clear to me because if a home is in foreclosure, Citibank may have still lost their shirts on the loan and going after the originating lender/broker still might be prudent to recoup that loss.

So when you get a mortgage from a company like Quicken Loans, they are underwriting the mortgage to say Citibank or Fannie/Freddie guidelines. Quicken is the originating lender. Citibank buys the servicing rights from Quicken (essentially they pay Quicken for the stream of payments expected on that mortgage at X interest rate). This is known in the business as a service release premium.

Quicken loans is certifying to Citibank in their representations and warrants that they underwrote the loan in accordance to the guidelines (required income, asset, and appraisal documentation).

What happens is that if that mortgage goes into default, Citimortgage then goes back and audits the file. They may find that Quicken actually didn't underwrite the loan properly. They then go back to Quicken loans and say you need to buy this mortgage back because it is defective.

The case is saying that if the home goes into full default and a foreclosure is completed (citibank repossess the house) then the mortgage in question doesn't exist anymore. The buyer isn't paying the mortgage. Citibank now has the house. So given this, how can Citibank require the originating lender to repuchase a loan that technically no longer exists?

To be honest, it is kind of lawyer double speak trying to get out of something on a technicality.

a reply to: Edumakated

Does that also prevent Quicken or Citi from going after the former owner who was foreclosed on?

a reply to: Edumakated

Hmmm. Interesting. Thanks for the response

What impact do you expect this to have on the le ding process now moving forward?

Should we expect less lending or more stringent lending in the market?

a reply to: toysforadults
I don't work in real estate but I do think it is a wise decision. Should an entity that makes the original loan even be eligible to sell those loans? I don't think so. I think the originator of the loan should be made to keep it on their books until the loan is paid.
Buying and selling these packages is just another way to game the system.

originally posted by: AugustusMasonicus
a reply to: Edumakated

Does that also prevent Quicken or Citi from going after the former owner who was foreclosed on?

When the home is foreclosed on, that is basically going after the owner of the house. The only reason a bank is willing to make a mortgage (at relatively low rates) is because the mortgage is secured by the home. If the borrower doesn't pay, the bank can foreclose on home and maybe resell it and get their money back or take a relatively small loss.

This case is why mortgage underwriting is such a PITA and there is so much paperwork. Mortgage underwriting really isn't about determining if someone can pay a mortgage back. that is maybe 1/3rd. The other 1/3rd is preventing fraud. The last 1/3rd is making sure there are no flaws in the file so that the originating lender doesn't get hit with a buy back request. Essentially CYA.

The vast majority of foreclosures occur because of loss of income - death, divorce, medical, and job loss. In other words, you cannot underwrite a mortgage to prevent any of those events from occurring. There is no way to predict it.

For example, some guy will get divorced and winds up in foreclosure. There is no way the originating lender could possibly know this guy's marriage was on the rocks and wife was going to take him to the cleaners. It doesn't matter though. Once he goes into default, the auditors will start looking for anyway to blame someone else for the default.

They will go through the loan file and may find the originating underwriter miscalculated income or something by a few dollars. The lawyers will then come out and try to claim that is why the home went into foreclosure even though everyone knows it was because he got divorced. It doesn't matter. The originating lender will then have to buy the loan back for this small mistake.

A lot of the big banks had actually stopped or curtailed FHA lending (quicken actually was fighting HUD in court over this) because FHA was trying to hold lenders accountable for small and inconsequential underwriting mistakes when a loan went into default. I think Quicken said FHA tried to make them buy a loan back over like a 90 cent miscalculation on one file.

a reply to: CharlesT

I'm with you on that point of view.

I'm trying to understand the implications on this ruling from a macro perspective as I have a few bearish positions on the financial sector and I'm trying to isolate the liquidity issues with the banks and figure out what's going on

originally posted by: toysforadults
a reply to: Edumakated

Hmmm. Interesting. Thanks for the response

What impact do you expect this to have on the le ding process now moving forward?

Should we expect less lending or more stringent lending in the market?

More stringent lending. Stuff like this is why it such a pain in the ass to get a mortgage.

a reply to: Edumakated

Do you think a ruling like this will lead to risk off lending by the banks?

This question may seem redundant

But this may have larger implications when theres already trust issues between banks and JPM and others moving into risk off investments like bonds and PMs

a reply to: Edumakated

Do you think a ruling like this will lead to risk off lending by the banks?

a reply to: toysforadults

Maybe they are just telling banks to quit buying and selling these trash contracts.

If this is upheld watch out. The rats will start selling this crud as fast as possible. That market will crash.

originally posted by: CharlesT
a reply to: toysforadults
I don't work in real estate but I do think it is a wise decision. Should an entity that makes the original loan even be eligible to sell those loans? I don't think so. I think the originator of the loan should be made to keep it on their books until the loan is paid.
Buying and selling these packages is just another way to game the system.

The ability to buy and sell mortgages is what keeps rates down and injects liquidity into the market. If originating lenders can't sell the loans, they can't free up their credit lines to make more loans.

For example, XYZ mortgage company will have something known as a warehouse line. It is essentially a big line credit that they use to fund mortgages. It may have say $100 milliion limit on it. The company may make $50 million worth of mortgages in one month. The then turn around and sell that $50 million of mortgage loans to another bank or entities SO that $50 million gets paid off and they can continue making loans.

If they couldn't sell the loans, then they'd run out of money essentially.

This is actually what happened during the housing bust. Most of the mortgage companies that failed did so because the secondary market stopped buying the mortgage loans and the mortgage lenders couldn't make any additional loans as their warehouse lines were full. Basically, liquidity dried up.

a reply to: CharlesT

Things like this can lead to assets losing value and will impact the targetted inflation rate

This could be another reason among many why the fed will continue to cut rates which is currently not priced into the market

We have big issues when the Fed cant achieve its targeted rate which it currently is having trouble doing

Q4 wasnt exactly great and cPI came out today and it's still below 2%

Assets will co tune to lose value and Schiff will be proven right again when the Fed starts paying people to take loans and then the inflation genie really comes out of the bottle as he says

a reply to: Edumakated

I wonder if this is a case of unintended consequences or building blocks for something down the line. It looks like they went to court over 6 house that got foreclosed on which is unusual for such big entities.

Btw since you are in the industry whats your feel and trends for mortgage interest rates between nov 22nd and january .
Closing in a house 1st week of January

a reply to: interupt42

Google CME rate probability

It's not priced in but Powell states today they will continue to accommodate the market based on data


That means more cuts are coming

It will just be more work for the lawyers to rewrite contracts. That's all.

a reply to: CharlesT

So this wouldnt mean risk off lending for certain risk averse institutions

originally posted by: interupt42
a reply to: Edumakated

I wonder if this is a case of unintended consequences or building blocks for something down the line. It looks like they went to court over 6 house that got foreclosed on which is unusual for such big entities.

Btw since you are in the industry whats your feel and trends for mortgage interest rates between nov 22nd and january .
Closing in a house 1st week of January

It is always hard to say. I can't see mortgage rates going up much, but who knows? The market has kind of painted itself into a corner with low rates. Rates start getting up into the 4s and will choke off housing and could have broader negative implications.

originally posted by: Edumakated

originally posted by: interupt42
a reply to: Edumakated

I wonder if this is a case of unintended consequences or building blocks for something down the line. It looks like they went to court over 6 house that got foreclosed on which is unusual for such big entities.

Btw since you are in the industry whats your feel and trends for mortgage interest rates between nov 22nd and january .
Closing in a house 1st week of January

It is always hard to say. I can't see mortgage rates going up much, but who knows? The market has kind of painted itself into a corner with low rates. Rates start getting up into the 4s and will choke off housing and could have broader negative implications.

Yeah, imo the rates were kept low way too long which allowed the prices to go crazy down here in swfl . We typically buy and hold long term as rentals , but its nearly impossible to find investment properties now. If it wasnt for the type of property it is i wouldnt even entertain buying something now.

a reply to: Edumakated

How does this new ruling impact the homeowner?