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Reggie,

Thanks for your work.

Aren't you actually UNDER-selling the crisis here?

Let's look at the story again: aren't PIMCO, Blackrock and the FRBNY asserting SERVICER liability here? In essence, CountryWide is behaving like a servicer who refuses to collect mortgage checks - except in this case they're refusing to service the loans by "refusing" to foreclose on these properties with valid documents.

As an illustrative counter-factual, let's consider how a bank would behave if it had a lot of loans to be serviced that COULDN'T be serviced - I mean, there's no real borrower, there's no house, the loan has been sold more than once, the loan documents are all signed by "Mickey Mouse", etc.. (You know, standard operating procedure in 2005).

First things first, if I'm a servicer of unserviceable loans, I am going to find a way to "refi" as many of those loans as practicable (and thus generate all-new paperwork) without actually reworking the terms very much. After all, doing "re-fis" in order to kick the default can down the road is old hat for me.

Sounds like the counter-factual matches reality so far.

So if I'm that servicer, what do I do if I actually have to foreclose? I can't possibly risk sending this garbage into a court the way I would a normal foreclosure, so I wait. A year goes by, two years, maybe even three or four years without a payment. I present the court with scores of default notices and no response (because Mickey Mouse can't write). AND, I don't present the judge with just a few loans. No, I BURY the judge in foreclosures. The judge is now doing so many foreclosures on loans two and three years without a single payment that shealmost gets to the point of "robo-signing" foreclosure judgments herself. Occasionally I make a mistake and somebody challenges on one of these zombie loans. The judge actually takes time to examine the paperwork and goes nuts, but this is just a small (but growing) percentage of my foreclosures. Dead people and illegal immigrants who "buy" their houses from the subprime Mafia don't ask many questions.

Again, this counter-factual looks strangely familiar.

But what do I do on the investor side? That's much trickier. If I'm dealing with Fannie and Freddie, there's probably not much I can do to the loan pools as they generally demand a pretty straightforward pass-through, (even with the Alt-A garbage WaMu and CountryWide dumped on them. Fortunately, those loans are probably a little better, and also fortunately the GSEs are not eager to cause a lot of foreclosures, so I can delay quite a bit. But basically if the GSEs bitch, I quietly take some putbacks. Again, this is what we're seeing.

Then we come to the private RMBS. At this level, if I'm a servicer of unserviceable loans, I start to engage in hijinks. The simplest, easiest thing to do is, again, to just let the loans go into default for a REALLY long time. By this time, the lower-tranche buyers of the pools I'm servicing are all speculators and they have no time or money to examine things like why the foreclosures are recovering only a tiny fraction of par. Here is a place where we can test the counter-factual against reality, because this would show up in breakdowns of the recovery data. Also, "first loss" tranches would, I guess, start to be wound up - or is that true?

The real problem comes when I start getting into the tranches where big investors with deep pockets (like PIMCO) will start asking loan-level questions. I can't just stick these guys with horrendous losses on foreclosures all at once or they are going to go mental. Again, the first, best thing to do is delay, delay, delay. Again, the counter-factual and the facts match.

Still, I have a problem. If my behavior doesn't fit their models and assure them that the revenue will keep coming to those pools, these guys are going to tell me to start foreclosing and foreclosing fast. They want to get their money OUT. If I'm an originator-servicer, or a packager-servicer then maybe I can mollify them for a time by massaging the pools. As in: "We end up restoring them, and they go back in the pools."?????

Is this the counter-factual and the facts matching once again?

Finally, if I'm a desperate originator-servicer or packager-servicer and I didn't put the loans out to a truly "arm's length" entity and the securitizing agreements are "flexible" enough, I am going to start to head off recourse by either buying back some mimimum of vulnerable tranches myself (Santander?) *or* by siphoning off cash to the pools somehow.

Are we seeing a lot of complex, total-return swap agreements these days? Have desperate originator-servicers and packager-servicers engaged in a bit of semi-off-balance-sheet synthetic DE-securitization? Are banks being generous with cash collateral on deals that transferred risk (but not formal ownership) from their QSPEs back onto their own balance sheets?

Now if I saw that kind of stuff, I would definitely start to believe that banks are dealing with a problem of unserviceable loans.

You get what I mean.