From 2004 through 2007, several trillion dollars in American residential mortgage loans were bundled into pools, usually with about 5,000 loans in each pool. Investors, including many pension funds, bought shares in the income stream (the monthly mortgage payments) from these loan pools. This huge investment in private equity funds in residential mortgages ended very badly for most investors and also for millions of homeowners who lost their homes to foreclosures by strangely-named trusts. In many states, the mortgage crisis continues in 2014, with trusts on the brink of insolvency, neighborhoods plagued by abandoned trust-owned homes, and foreclosure rates actually increasing from the 2013 rates.
An examination of the foreclosure results shows that foreclosures did not provide significant relief to the massive unpaid debt problem of the loan pools. In every case in a study of 500 foreclosures by trusts, the foreclosed home sold for significantly less than the amount of the final judgment. In many cases, the foreclosed homes sold for much less than the original loan sold to the trust.
Whether sold at a county auction to third parties, or bought by the trust, then sold to a third-party by the trust, these homes sold for very low prices relative to their mortgage amounts. In most communities, home prices were steadily declining from 2008 to 2012, but these homes lost value at a much greater rate than the decline in sales prices for existing single-family homes in the same county.
The trusts’ very poor foreclosure re-sale results are attributable in part to the poor maintenance of many of the homes. In many cases, the homes were vacant for two to five years. Homeowners often vacated when the foreclosure actions were begun, but the trusts were often very slow to foreclose. During this litigation period, the homes were often vacant and unmaintained and frequently vandalized. Appliances, cabinets and fixtures were often removed from these homes.
The delays in foreclosure were often also attributable to the trusts and servicers themselves and their default management decisions. Trusts and servicers frequently selected just a few law firms to handle their foreclosures and paid these firms the bulk of their fees upfront, at the time the foreclosure was commenced, providing an incentive to file foreclosures, but not to complete the foreclosures.
The cases were most often commenced without filing a copy of the endorsed note and mortgage assignments at the commencement of the action. This was done even though the Pooling and Servicing Agreements for most trusts specifically provided that the original, endorsed note and assignments were to be furnished to the servicer in the event of a default. The foreclosing law firms often substituted mortgage assignments made at the time of default for the original loan documents held by the document custodians of the trusts. These documents further clouded the legal standing of the trusts to foreclose, delaying the completion of the foreclosures.
In thousands of cases, even after a final judgment of foreclosure was obtained, the trusts and servicers delayed the sale of the foreclosed homes, repeatedly cancelling sales at a time when home prices were declining monthly.
There is also significant evidence of re-sales for less than fair market value. In many cases, the foreclosed homes were purchased at auction by the trusts for $10 or $100, because no other bidders bid on the property. The trusts then sold these properties to third-party purchasers who resold the properties within the next 30-180 days at a profit of $10,000 to $60,000.
Foreclosures have also left a massive multi-trillion dollar problem of deficiency judgments looming on the U.S. economic horizon.
500 randomly selected foreclosures by trusts in Palm Beach County, FL, were included in the study. All the foreclosure cases were filed after January 1, 2007. The study was limited to cases where a final judgment was entered on behalf of the bank-trustee and where the foreclosed home was bought by a third-party at the county clerk’s auction, or bought by the plaintiff bank-trustee, then resold to a third party.
500 FORECLOSED HOMES
Final Judgment Compared to Re-Sale Prices
AGGREGATE FINAL JUDGMENT AMOUNT: $168,191,055
AGGREGATE SALES PRICE AFTER FORECLOSURE: $56,888,607
LOSS PER 500 HOMES: $111,302,448
- If this one pool of 500 loans lost $111,302,448 in foreclosures, and this loss was representative of the losses per each bundle of 500 foreclosures (not yet determined), the total loss for 12 million foreclosures would be approximately $2.7 trillion dollars.
- In a pool of 10,000 homes, with initial values of $5 billion, foreclosures of 75% (7,500) of these homes by 2014, at a loss of $110 million per 500, would result in a loss of $1.65 billion to that pool.
- In all of the 500 cases, the sales price after foreclosure was less than the amount of the Final Judgment, making the former homeowners potentially liable for billions of dollars in deficiency judgments.
The sales price was taken from the property appraiser’s records. In cases where a third-party bought the property at the county clerk’s auction, this is the amount listed on the Certificate of Title. In cases where the plaintiff-bank bought the property (often for $10 or $100), and the bank subsequently sold the property to a third-party, the sales price from the deed of this third-party sale was used, with the interim bid by the plaintiff-bank at auction disregarded.
In 462 of the 500 cases, the Final Judgment was over $100,000 greater than the subsequent sales price.
In 226 of these 462 cases, the Final Judgment was over $200,000 greater than the subsequent sales price.
In 88 of these 226 cases, the Final Judgment was over $300,000 greater than the subsequent sales price.
In 44 of these 226 cases, the Final Judgment was over $400,000 greater than the subsequent sales price.
In 17 of these 44 cases, the Final Judgment was over $500,000 greater than the subsequent sales price.
In 10 cases, the difference between the Final Judgment and the subsequent sales price was over $600,000.
In 107 of the 500 foreclosures, the resale price was less than 20% of the Final Judgment amount.