The mortgage (DOT) is a separate document, but it refers to the note ("of even date herewith"). A mortgage is not endorsed; it is "assigned." I assign my security interest (my lien on your property) to another party, meaning the party who has the right to receive the loan payments. I do this by recording the assignment in the land records of the county where the mortgage is filed, so that anyone searching public records can see who owns the lien. (These days, that is often accomplished by recording the assignment to an outfit called MERS, which is an electronic database that acts as "nominee" for the owner of the security interest. This is one of those "technological innovations" that everybody likes until it pisses them off.) In any case, I could assign the security interest to the party who bought the note, or I could assign it to the servicer nominated by the investor. Bob and Carol and Ted and Alice don't want to have to file motions in court to foreclose on a property; they're just coupon-clippers. If the security interest is assigned to the servicer as nominee for the note-holder, the servicer can act on the note-holder's behalf.

It therefore makes approximately jack shit difference to an individual borrower who owns the note. You are obligated to pay the money to the party indicated in your note, unless that party sends you notice (the note says this) that you should send the money to someone else. You then send your money there. It makes no legal difference whether you are sending your money to a servicer on behalf of an investor or to a servicer who is also the investor. That would be the investor's problem. And anyone who can bring evidence of assignment of mortgage in its favor, not superceded by any subsequent assignment, can sue your ass in court or foreclose on you. That party does not have to own the note.

By this point, I am always wishing I was out behind the loading dock smokin' a doobie.

Question: There are implicit protections afforded a borrower who is buying a property through a purchase money loan. The most important, as you know, is that in a foreclosure the lender may not seek a deficiency judgement against the borrower. However, those protections are lost for any second liens, or if the original purchase money loan was refinanced.

What are the options of the junior lien holder? Can they 1099?

Nick, the purchase money rule you're referring to is a California law. I don't know off the top of my head how many other states might have such an exclusion, but my memory is not very many. You must always beware of people making sweeping claims about how FCs work when they don't specify the state they're talking about. I won't suggest that Californians tend to see themselves as the center of the universe, but, well . . .

As far as I know, any lender who forgives debt is required to send a 1099. That is not a matter of state foreclosure law; that is a matter of federal tax law. We should probably get dryfly to ask his sister . . .

1) So when we see REO listings (like the many with CFC) these include homes for which CFC was lender of record and now owns, as well as homes for which CFC holds the MSRs?

You can never assume that the party offering the REO for sale is the party who made the loan or owns the note; it could just be the servicer who is selling the REO on behalf of the investor, who will get paid off out of the proceeds.

I seem to recall that CFC does report those things separately in its financial statements (true REO and serviced or subserviced REO).

Bob, the owner of the real estate is the party who took title at the auction. The confusion reigns because we forget that these things can happen directly (by the party of the first part) or by nominee (by the party of the nth part on behalf of the party of the first part).

So, say CFC makes a bid at a foreclosure sale and wins. That could mean:

1. CFC now owns real estate, because the loan foreclosed was originated by CFC and never sold.
2. CFC now owns real estate, because the loan foreclosed was originated by someone else but purchased by CFC for its investment portfolio.
3. An MBS now owns real estate, because the loan foreclosed was owned by that security, and CFC is the servicer for the security.
4. Your pension fund now owns real estate, because the loan foreclosed was owned by your pension fund, and CFC is the servicer.

And so on. An investment bank doesn't own anything unless it has an ownership interest in the security.

The GSEs are different because GSE MBS are guaranteed. Fannie will buy a defaulted loan out of the MBS (so the investor gets principal back), and then the servicer will foreclose on Fannie's behalf. If you happened to have a private issue security in which an investment bank offered such a guarantee--that'd be news to me, frankly--the same situation would apply.

Now, if you had to foreclose on a loan that was so new it was still secured by a lien owned by a warehouse lender? Help me, Rhonda. The system isn't set up to make sense of things like that: remember that "normal" mortgage markets do not experience EPD epidemics. So in that case the warehouse lender (could be an IB) would have to get the endorsement and file the assignment (in favor of its servicer) and then be the party of the first part. Send guns and money to the lawyers.

Anyway, this is what we mean when we say that a foreclosure "returns principal to the investor." Until such time as the REO is sold, the security holds RE assets (which used to be loan assets). When the sale takes place, the proceeds net of expenses become principal and are paid to whoever owns a principal tranche.

Cartman, I cannot answer your question because I do not understand the terms you use.

Legally, the date of "transfer of servicing" is not identical to the date any assigment of mortgage is recorded. In fact, there is no such necessary relationship between the two. Any party can service a loan without an assignment recorded in its favor. The only thing it generally cannot do without a recorded assignment is foreclose. But it can certainly collect payments without an assignment. An investor can, if it wants to, require that the mortgage be assigned to it, rather than to its servicer. It makes a little more work for the investor should foreclosure be necessary--since it means the investor must be party to the FC directly--but there's no law against it.

There are also "master servicers" and "subservicers." It is certainly possible that Litton became the master servicer in 1999 or early 2000, but BoA sub-serviced the loan for Litton until 8/00.

In most cases, an assignment is recorded after a servicing transfer. Sometimes it isn't recorded at all; it is prepared in "recordable form" and kept by the servicer, to be recorded if and only if foreclosure becomes necessary.

It isn't usual to find someone recording an assignment prior to transfer of servicing, but it can happen. Your example would make more sense to me if you told me who assigned this mortgage to Litton in 2/00 or 3/99. Why would there be two assignments to Litton?

You are aware that assignments are never removed from the public record? They are merely superceded by new assignments?

It's possible that, if BoA were the original lender, it recorded an assignment in to Litton in error in 2/00. In order to fix that, Litton would have to record an assignment back to BoA. Then BoA could re-assign to Litton correctly. In other words, there could be 50 different assignments recorded in the land records. You follow the chain to the most recent to see who has the legal lien at the moment. My point is that every assignment has an assignor and an assignee. I don't think anyone could tell you what is happening here without that information.

There are no tax advantages to recording an assignment, and it has no effect on your accounting or your rating.

Yal, this is how it's supposed to work in the "textbook" case:

Property A and B are basically identical, except that A has the fancy kitchen upgrade and B has the plain old standard kitchen.

A was recently sold for $300K. B is under contract for $290K. The appraiser wishes to use A as a "comparable" sale to support the value of B.

If the appraiser concludes that the "market reaction" to a fancy kitchen is plausibly $10K, he "adjusts" the price of A by ($10K) to bring it in line with the subject property B. Now they are the "same price," and so he concludes that A supports the value of $290K for B.

What he does not do is say the value of B is $300K, because the house next door sold for that. He accounts for these differences.

Now take a situation in which C, with the fancy kitchen, sold recently for $300K, and D, the subject property being appraised, is under contract for $300K with a "free" kitchen upgrade. In this case it is certainly questionable whether the upgrade is actually "free," but the fact that C sold for $300 justifies the value of $300 for D.

But what if you have E, sold for $300 with a fancy kitchen, as a comp for F selling for $310 with a "free" upgrade? If the true "market reaction" to the fancy kitchen is $10, then the appraised value of F would be $300, not $310. This is why lenders calculate LTV on the lesser of sales price or appraised value in a purchase transaction. A prudent lender making an 80% loan for F would calculate the maximum loan amount as 80% of $300, not 80% of $310.

The real difficulty comes in when you play around with that concept of "market reaction" to certain amenities. What if you had a situation where G just sold for $300 with a plain kitchen, and H is under contract for $300 with a "free" upgrade that nobody disclosed to the appraiser? The appraiser might use G as a comp for H and say that the value of $300 for H is supported.

But why does the builder have to give away a free kitchen upgrade in order to get someone to buy the house for the same price as an identical house? An appraiser taking this into account might reduce the value of H to $290.

Haps, the way I think of it is not that the lender just got a call option, it's that the borrower just lost his put option.

The ability to prepay a mortgage without penalty is a free at-the-money put. The ability to prepay with some prepayment penalty is a put with an out-of-the-money strike price.

You can exercise your put by selling the property or by refinancing it.

So you never lose your legal right to prepay, you just lose your ability to raise the funds, or you find your put is out of the money in any scenario.

If what you were buying was a place to live and you counted on making the payments, you just shrug and keep on keepin' on.

If you went long house and hedged it with the famous always-in-the-money-put, you might as well be getting a margin call.

Tanta: So you're saying that part of the traditional 20% down was to account for the difference between "fair market value" and "liquidation value."

Yes and no.

In the sense that the "traditional 20% down" meant the lender's exposure was reduced in the event of forced liquidation, yes.

But if you're just talking about lender exposure, the 20% doesn't have to come from a down payment out of borrower funds. It could come from MI, a second lien, a gift of equity, or just property appreciation (in a refi).

The idea of 20% as a down payment made by the borrower from his or her own funds, not just 20% down, has more to do with lessening the probability of foreclosure than lessening the severity of loss in a foreclosure. The idea being that the borrower with 20% of his own skin in the game will work harder at the loan than the borrower who has nothing to lose.

What a lender who allows high LTV with mortgage insurance or a second lien basically is doing is accepting the risk of increased frequency of loss with less severity, since the MI or the second lien holder takes what loss (and possibly then some) the borrower would have in the traditional mortgage. The MI or the second lien lender accepts increased frequency and severity by pricing premiums or interest rates high enough, given its own prediction of likely liquidation value, so that the losses are affordable. This is the theory.

What people tend to forget is that if the "market conditions" change such that all buyers are now required to come up with 20% in cash, the buyer pool shrinks until the prices come down. That's fine until you take into account the old loans on the books that no longer have a 20% cushion because that was based on the old prices. This implies that sellers are now scarcer, because they can't sell without bringing cash to closing to pay off the lender.

And that gets us back to my on-going fixation with DTI. Down payment is nice; FICO is nice. But people carry loans with cash income. No lender has "limited" exposure if it has borrowers who cannot afford the payments and cannot afford to sell.

I wouldn't think that concessions that convey are the problem

I would agree with you if I trusted the calculations of "market reaction" that have been going on.

I've seen too many cash-out refis where somebody expects to see dollar-for-dollar increase in value for "improvements" that do not, in my view, increase value to the extent of their cost.

Granite countertops are cool? Then what about all those homes with Corian? Or marble? Weren't those cool once? What if it's harvest gold granite? You're giving value to something that someone is going to slice beets on? What's the expected appreciation of that?

I use "granite countertops" as a kind of short-hand for a kind of "improvement" that may present more questions about value than it answers. It could be and has in the past been something else.

Bill & Hapsburger and anyone else who cares:

This is back from March on FED:

SANTA MONICA, Calif., Mar 12, 2007 (BUSINESS WIRE) -- First Federal Bank of California, the wholly-owned subsidiary of FirstFed Financial Corp. and the fourth largest Los Angeles-based financial institution(a), today announced the appointment of Brian Leonard to lead its Residential Wholesale Lending Division.
Mr. Leonard built and implemented the secondary marketing department and oversaw the retail and wholesale production from product development to funding at Oakmont Mortgage Company, Inc./Ownit Mortgage, a start-up operation Mr. Leonard joined in 1989.

Ownit?

Most recently, as Senior Vice President and National Sales Manager at Mandalay Mortgage, Mr. Leonard managed a sales force of 100 across the United States and significantly increased funded loan volume.

Mandalay?

Prior to Mandalay, Mr. Leonard started his own mortgage company, West Coast Financial, and sold that business to United Capital Funding, Inc. where he served as President until 2005.

United Capital Funding?

According to James P. Giraldin, First Federal Bank of California's President and Chief Operating Officer, "As a 19-year veteran in financial services, real estate development and manufacturing, having functioned at all levels of management in positions responsible for sales, production, real estate development and operations, Brian brings with him a wealth of experience and expertise that will enable First Fed to achieve its lending goals of expanding its product lines and geographic reach for 2007 and beyond."

What I am interested in lately is which ocean liner is picking up which additional crew members out of what lifeboats it happens to find floating at sea . . .