David R. Henderson  

Real Estate Time Bomb?

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One more problem with securitization.

This morning, Yves Smith over at Naked Capitalism has a sobering article about a not-very-well-known time bomb in real estate. Here's a relevant section:

Given how many sales will be done out of REO, and the rising number of problems surfacing with making sure that mortgage securitizations took all the steps to become the real party of interest in a particular property, it is only a matter of time before we see some blowups of the sort the attorney was worried about, of a buyer shelling out hard dollars for a house, or taking a big mortgage, and winding up with nothing. And a few incidents like that getting the press they deserve will put a pall on REO sales.

Think the risk isn't real? Then why has Wells bothered to insist that REO buyers sign a new type of addendum, when it has been selling REO for decades? This effort to shift all title risks on to the buyer is a tacit admission of problems. And look at the document itself. The buyer has to initial it in eight places as well as sign it. That's a clear statement of Wells' intent to shift the risk to the buyer.


"REO", by the way, means "real-estate owned." Wikipedia defines it as "a class of property owned by a lender, typically a bank, after an unsuccessful sale at a foreclosure auction."

Read the whole thing.


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CATEGORIES: Property Rights



COMMENTS (11 to date)
TJIC writes:

Link for the article that we're supposed to read all of?

Paul Bogle writes:
Trent McBride writes:
David R. Henderson writes:

Sorry, TJIC. Thanks, Trent. Correction made. Attribute it to its being early a.m. in California when I wrote the post. :-)

quadrupole writes:

I think the article is here.

John Jenkins writes:

The initialing requirement doesn't tell you much. Most large banks require initialing every page of every document in a mortgage transaction (even pages you sign, oddly).

That said, the addendum is ridiculously onerous and I would advise a client not to sign it. It's also sloppily drafted ("In the event that" = "If" 90% of the time. If that kind of stuff isn't edited out of a document, you can tell it's not well-drafted).

Steve writes:

I thought this was why a purchaser buys title insurance. Then the purchaser is protected. What am I missing?

scott clark writes:

Steve, you could be missing a lot if your title insurance provider gets it wrong and goes all AIG (without the bailout).

Kevin writes:

Brutal document. Particularly hinging the optionality on the waiver of the right to specific performance. Provisions like this are why there are so many lawyers in hell.

John Jenkins writes:

ยง 27 is pretty harsh (I wonder whether it's even enforceable: equitable remedies are within the court's discretion, so the court could order specific performance if it saw that as the appropriate remedy).

I don't think the special warranty deed provision is that big a deal. I never expect anyone to give a general warranty deed (some people do, but they shouldn't). Essentially, the special warranty deed only warrants title against encumbrances that arose while you own the property, as opposed to a general warranty deed that warrants title period. You can see why most deals involve special warranty deeds and not general warranty deeds (basically, if the grantor is represented, it's going to be a special warranty deed).

Rufus T. Firefly writes:

I read the article, but must be missing something basic. If Mr. Otis Driftwood buys a house with a loan from Countrywide, the title is in Driftwood's name. If the mortgage gets sold from Countrywide to Wells Fargo, there is no break in the chain of title of the underlying property: the title remains in Driftwood's name.

If Wells Fargo forecloses, title will transfer from Driftwood to Wells Fargo, and then from Wells Fargo to a real estate investor.

At what step in the process is a cloud on title developing? Does the mortgage transfer from Countrywide to Wells Fargo have to be publicly recorded, and if so is that where the problem is arising?

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