As more and more of the dirty laundry of "Mortgagegate" (good article linked) gets aired, it's becoming increasingly obvious that the usual trio of victims - U.S. homeowners, investors and taxpayers - face risks that are far worse than we ever before imagined.
First some basics!
There are basically two types of title insurance:
- An "owner's policy," which protects the property purchaser from claims against their rightful title to the insured property.
- And a "lender's policy," which is purchased by mortgage lenders to protect their interest in a property as collateral for the loan they've made against it. The lender's policy, sometimes called a "loan policy," follows the assignment of the mortgage when it is sold from one lender to another.
When a mortgage is made lenders and buyers both purchase title insurance.
When lenders sell the mortgages that they've made to homebuyers (in investment vehicles) to other lenders, banks or mortgage-pool securitizers, they are supposed to record the "transfer" of the loan and essentially document the process in what becomes the recorded chain or chain of title.
Now go back to the post I put up on the FRAUD of MERS. From there we learn that most lenders didn't bother to properly document and record changes to titles when they traded loans back and forth.
So there is no recorded chain, or no chain of title. Therefore no clear title!
When Risk Comes Home to Roost
What's important to understand now is that when foreclosed homes are sold to new buyers by the banks that took them back, buyers (and lenders, too) want title insurance to protect themselves against past owners, lenders, or the servicers and trustees of mortgage-backed securities pools challenging their free-and-clear ownership of the purchased property.
Imagine having a huge inventory of foreclosed homes that you can't sell because buyers can't get title insurance. After all, why would any title insurance company write a policy when there's a good chance it will later be involved in costly litigation with potentially severe damages from making good on the policies that it writes?
The secondary market for almost any foreclosed home would come to a screeching halt without title insurance. And we're not talking about a small market, either: Currently, about 2.5 million people have already lost their homes and there are estimates that as many as 5.7 million more face imminent foreclosure.
2.5 million and another 5.7 million for a total of 8.2 million foreclosed homes.
Where do American taxpayers come in?
Bank of American wanted Fidelity National Financial - America's largest title insurance company, with an estimated 50% of the market - to write title-insurance policies on the foreclosed homes that BofA wanted to sell. To get Fidelity to agree, Bank of America agreed to indemnify the title-insurance firm on any title-insurance policy written on the homes that the bank sold from its inventory of foreclosed properties.
Needless to say, the indemnification deal was a complex one. It amounts to backstopping an entire insurance company's risk by subjecting U.S. taxpayers to liability if the title company is sued until it's insolvent and then Bank of America can't make good on the claims it's agreed to cover.
I am going to repeat that "backstopping an entire insurance company's risk by subjecting U.S. taxpayers to liability"
All the too-big-to-fail banks have proven once again that they run America for their own financial gain.
But, it get's even worse!
I say "all the too-big-to-fail banks" because the scheme doesn't work unless all the big banks indemnify all the title insurance companies. Why? Because the legality of what Bank of America is doing is highly questionable and the bank has to make sure it's done in an across-the-board fashion to eradicate any and all questions about this strategy.
Where We Go From Here?
Try not to get sick, but here's what will likely happen next:
Fidelity National Financial, after getting its indemnification from BofA, pressed other banks, servicers and sellers of foreclosed properties to follow suit - and required an indemnity agreement before insuring any individual foreclosed property. For the time being, however, that hard-nosed play didn't fly. Other title-insurance companies didn't follow the industry leader's lead. They didn't immediately demand their own indemnification deals.
If at first you don't succeed try, try again!
But Fidelity National still kept its BofA indemnification agreement in its front pocket and has no intention of ever giving that up.
According to the memo issued by Fidelity and cited by Bloomberg, Fidelity "may make individual agreements with other lenders."
And why not? It's only going to take a few victories in court - or for any of the class-action lawsuits being filed to gain traction - before the rest of the title-insurance companies demand the exact type of indemnification that Fidelity got BofA to agree to.
And this is where Joe and Jane America bail the banks. AGAIN.
If all the "to big to fail" banks end up backstopping title insurance to this degree, the sins of Wall Street will once again reach all the way to Main Street: The banks will be in the business of underwriting insurance risk on the collateral they already own, and we - the U.S. taxpayers - will discover that we're the backstop of last resort in this latest chain of financial incompetence and deceit.Bear this in mind.
Once again, it's the banks that are being protected from the mess they made so they can go back to making profits to fill their corporate coffers and bolster their balance sheets so that they can finance American capitalism. In reality, all we're doing is financing a bunch of institutionalized Bernie Madoffs - none of whom will ever see the inside of a jail cell.
With every new Mortgagegate disclosure, the American public is getting an eyeful of how Wall Street and Washington have collaborated to play it again.
Keeping in mind the Christmas Season and that cheezy song, "All I want for Christmas is my two front Teeth". What bankers want for Christmas or Hanukkah, is money. Your money.
So while you and me, collectively "we" go without. They will be giving themselves big bonus cheques!
About three dozen of the top publicly held securities and investment-services firms—which include banks, investment banks, hedge funds, money-management firms and securities exchanges—are set to pay $144 billion in compensation and benefits this year, a 4% increase from the $139 billion paid out in 2009, according to the survey.
Pigs at the trough.