Interesting Appeal - Deutsche Bank and the California Housing Mess
California, some say, was ground zero for the housing crisis brought about from reckless lending to unqualified borrowers. I say it was the natural, rational outcome created by the reckless FED printing worthless FRN's using the illusion that somehow those worthless FRN's have any value.
Saving was dis-incentivized, while borrowing, at artificially low rates, was incentivized. Yield-chasing TBTF institutions needed underlying collateral upon which to build their behemoth derivative structures, and housing was it.
Not only did the financial engineers recklessly lend, they single-handedly revolutionized the entire traditional residential real estate market, right down to the local land records. Gone were the anachronistic paper documents, on file at the local land office. Instead, a new scheme was created where the residential real estate backed loans, which loans were in turn used to support financial securities, in turn which were marketed to yield-chasing institutions. All of it rested upon the assumption that the underlying collateral backing the loans would not all collapse. Under that assumption, risk models were created that forecast SOME defaults would occur, but not defaults or loss of underlying value of the thousands of residential units serving as collateral.
Of course, this was the weak point, as was the oversight at the loan initiation starting point. So long as residential real estate values kept rising, or at least did not decline, the entire collateral structure would produce revenue. If some of the residential units declined in value, or, alas, defaulted, no worries, because in the aggregate, those in last position on the lending tranches would take the losses while the first position tranches would still enjoy revenue streams. Or so it was thought.
No one, and I mean no one, correctly anticipated the reality and natural outcome of forcing too many unqualified borrowers into the pool. No one did so because NO ONE HAD ANY INCENTIVE TO DO SO. The FED loved this concept, as it provided a ready means to blow another bubble and prop up the failed Keynesian economy. Banksters, and their FIRE economy-dependent sycophants loved it too, as they all made off, well, like banksters.
Politicians, those ever money grubbing psychopaths, true to form, loved it too, as it gave them cover to buy votes and pander to the down-trodden, ala Bawney Fwank.
Marginal, unqualified borrowers loved it, too, because they could fog a mirror and get the keys to a shiny new home no questions asked. Income from which to make payments? Shhhh! Just pretend. Housing never goes down in value. If someone gets into trouble, just refinance the loan and roll over the debt! Yaaayy!
Durable goods manufacturers loved it, too, because all of those homes needed appliances, etc.
Auto manufacturers loved it, too, because all of that fake wealth, the so called "home equity," accruing yearly in amounts greater than the median yearly income, created tons of paper wealth, that was immediately tapped in the form of home equity loans, and spent like crazy on consumer goods, including brand new cars, yaayyy!!! What could go wrong?
So it went, for years.
Some people clued in, most did not. Then, the greed and avarice, manifested nicely by ol' orange face Mozillo, came into focus, and things began to unravel. The FEDS undertook QE to infinity, not to stimulate the economy, no. It was done to stave off massive deflation occurring from the utter destruction of trillions of paper debt, based on inflated home values bearing no rational relationship to median incomes. As that debt defaulted, and was destroyed, it jeopardized the derivative structures based upon that now worthless, or soon to be worthless, "collateral" known as overbuilt residential housing.
Then, of course, we have the aftermath. Granted, it has taken years, and years, but we have arrived at the end game. Foreclosures, bankruptcies, ad nauseum, tons of human suffering and misery from misallocated capital. But still, those residential structures have some value, and for that, there is still a story to be told.
One such natural consequence is highlighted in a case decided against TBTF Deutsche Bank. The court of appeal ruled that the lender, here, Deutsche Bank, is exposed to California State Law wrongful eviction claims, despite Deutsche Bank's claims that only the servicer bears liability for kicking out a tenant. "Deutsche Bank National Trust Co., a U.S. unit of Europe’s largest investment bank, was the beneficiary of the deed of trust securing the loan on the property in Sunnyvale, California. Deutsche Bank, as trustee, acquired the home, which had a two-bedroom garage rental unit, after the owner defaulted on the mortgage. The tenants, who paid rent to the owner, sued after their belongings were tossed outside and destroyed and police barred them from the home. Deutsche Bank says the foreclosure ended the tenants’ lease, it played no role in evicting them, and loan servicers are responsible for dealing with renters."
The court of appeal ruled against Deutsche Bank, and said they can be held accountable for wrongfully evicting the tenants.
The ramifications are ENORMOUS!
The federal law, which expires at the end of this year, requires that tenants be given 90 days’ notice of eviction. The San Jose appeals court said Deutsche Bank stepped into the landlord’s shoes when it acquired the home and had to honor the existing lease until it expired 10 months later or a new owner moved in and gave the tenants 90 days’ notice.
It doesn’t matter that the rental wasn’t legal because the owner hadn’t obtained the proper permit, the court said.
A California law granting the same protections to renters in foreclosed properties was passed last year, Rothschild said. [Link is here: http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201120120AB2610]
“We are unaware of even a mild dent in the housing market,” he said in a filing urging the California Supreme Court not to review the case. Median home prices in California rose to a six-year high in March to $376,000, according to San Diego-based research firm DataQuick.
More than 480,000 properties nationwide were bank-owned as of last month, compared with more than 1 million in January 2011, according to research firm RealtyTrac. Almost 45,000 California homes were bank-owned, down from about 146,000 in January 2011, according to RealtyTrac.
In any event, in what is not a surprising ruling at all given the facts, Deutsche Bank lost the ruling, and the California Supreme Court let stand the decision that said this here:
Deutsche Bank lost its challenge to a California court ruling that exposes bank trustees to wrongful-eviction claims it says will depress prices in foreclosure sales and spur lawsuits against unsuspecting homebuyers.
The California Supreme Court yesterday let stand a lower-court ruling that the Frankfurt-based bank stepped into the shoes of a landlord for a rental unit on a property it acquired through foreclosure and must face a lawsuit the tenants filed after they were evicted and their possessions trashed. The court didn’t give a reason for its decision to deny the bank’s petition to review the ruling.
“It’s good news and not surprising,” said Richard Rothschild, an attorney for renter Rosario Nativi, who lost her possessions and Sunnyvale, California, home in 2009 after the homeowner she’d been paying rent to defaulted on the mortgage, unbeknown to Nativi, and the bank acquired the property.
The ruling upheld yesterday “says essentially that banks and other players in the mortgage industry have to play by the same rules as other property owners,” Rothschild said in a phone interview. Nativi’s lawsuit, which seeks damages for the loss of home and property, will proceed in state court in San Jose, California, he said.
So, what does all this mean?
The TBTF banks, are now potentially liable for state law violations upon foreclosing. "Lenders and investors will have to weigh the risks of buying properties that house unwanted tenants, are subject to leases, or are vulnerable to lawsuits brought by renters evicted by paid middlemen, they said." [From the article, here].
Look what the dunce bankster had to say:
Ari Cohen, a Deutsche Bank spokesman, declined to comment after yesterday’s decision.
Cohen said earlier that Deutsche Bank filed the petition for review with the California Supreme Court as trustee of the mortgage-backed security “on behalf of the investors.”
“Deutsche Bank has no financial stake in this case,” he said in an e-mail. “Loan servicers, and not Deutsche Bank as trustee, are responsible for foreclosure activity, including actions relating to tenants of foreclosed properties, and the maintenance and resale of foreclosed properties.”
No financial stake in the outcome? What a buffoon! Of course the TBTF bank has a stake in the outcome! If there was not financial stake, then why did the bank allow the servicer to foreclose? Oops.
What this will do, of course, is engender indemnity or breach of contract lawsuits. What is even more likely is a shareholder derivative lawsuit against the TBTF banks for their failure to hold the servicers accountable for their foreclosure misdeeds. Watch and see.
The aftermath will no doubt result in more foreclosure delays, if not outright pull backs in the rate of foreclosures. This is going to slow down the resolution of foreclosures, and the mark to market, absolute dire necessity to clear inventory and bring the housing market back to normal.
All of this means yet "MOAR QE" because there is no way that all of this debt can go "poof" without seriously jeopardizing the collateral supporting the big derivative structures held by the TBTF institutions and sovereigns.
Isn't this fun?
Stay tuned for more from the lovely, but crazy, State of California.