If you think the Foreclosure Crisis is a non-event which bloggers like myself are just using to ramp up doom and gloom, then check this out.
Yesterday CitiBank hosted a conference call on the Foreclosure Crisis in an attempt to understand the legal issues surrounding this explosive topic. In attendance was Adam Levitin, Associate Professor of Law at Georgetown University
Levitin presented a legal briefing on the issue for CitiBank.
CitiBank released a report on the conference call they had on the topic and you can read the full document here. This will give you an inside glimpse of what is going on at the highest level of the US Banks right now.
Levitin emphasized that all parties involved are still trying to get their arms around the legal issues in question. CitiBank noted that, relative to other opinions which they had heard on these issues, Levitin painted what CitiBank believes to be "one of the bleaker portraits of these matters and their ultimate resolution."
In providing an overview of the key legal issues, the report notes:
- The underlying issues which have recently erupted involve the proper transfer of paperwork in the mortgage securitization process. Real estate law is “arcane” and requires that paperwork be physically transferred when mortgage ownership is transferred (“assigned”) from one party to another party. It appears that in many instances during the mortgage securitization process over the past few years, the paperwork was not properly transferred. If the paperwork was not transferred in the legally required manner, it raises questions not only about who owns the mortgages in question but also about the validity and tax exempt status of the trusts in which the mortgages reside. All of these issues also bear directly on the role played by the title insurance industry.
The report notes what Levitin sees as a crucial issue:
- Banks have attempted to remedy the aforementioned problems by having employees sign affidavits that they have personal knowledge that the trust was once in possession of the necessary documents. Two problems have emerged with regards to these affidavits. First, several news stories have reported that the people signing these affidavits had no knowledge of the matters in question despite the fact that there were legally swearing that they did. Second, the affidavits may be irrelevant because the issue is not that the documents were lost but they were never properly transferred at each step of the aforementioned securitization process.
The report notes three possible outcomes of this quagmire:
- Levitin articulated three possible outcomes to the aforementioned issues and assigned an equal likelihood to each. In his best case scenario, these issues are deemed merely technical in nature and are successfully resolved but it takes at least year to do so and all foreclosures are delayed by at least a year. Levitin disputed the claim by banks that these issues can be resolved in a month or so and attributed the banks’ claims to “legal posturing.” In the medium case scenario, litigation ensues and it takes years to sort out these matters. In the worst case scenario, the aforementioned issues become a “systemic problem” which causes the mortgage market to grind to a halt as title insurers refuse to insure mortgages involving existing homes.
Levitin argued that what appears on the surface to be a series of technical glitches in the mortgage securitization and foreclosure process may well cause a “systemic problem” and that what CitiBank has recently seen and heard in the news is “just the tip of the iceberg.”
Levitin predicted that more and more lenders are likely to stop their foreclosure processes in both judicial and non-judicial states. He also expects more states’ attorney generals to get involved. At the federal level, it is possible that banking regulators might step in as there is legal and reputational risk for the banks involved.
CitiBank concludes that, if these issues do in fact escalate, the US Government may try to broker some sort of settlement. If such deal brokering does take place, Levitin believes that “some payment” will be exacted from the lenders and servicers. CitiBank speculates that the US Government could bargain for more mortgage principal write downs.
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