Ares
8th October 2010, 09:18 AM
We are on the precipice of an economic cataclysm, and this time, there may be no amount of government bailout money that can fix it.
Pretty strong, yes?
Consider the source.
In today's Washington Post, Ariana Cha and Brady Dennis write the story that the financial and real estate industries have no doubt been dreading for some time. The article states:
"Millions of US mortgages have been shuttled around the global financial system...without the documents that traditionally prove who legally owns the loans. Now, as many of these loans have fallen into default and banks have sought to seize homes, judges around the country have increasingly ruled that lenders have no right to foreclose because they lack clear title."
Said another way, if you are one of the millions of Americans whose mortgage company sold off your loan to Wall Street, which subsequently bundled these loans into mortgage-backed securities that were sold and resold, it is no longer clear who owns your property.
Yep. You read that correctly.
Up until now, the ailing US housing industry has been seen through the prism of the foreclosure crisis, which in turn has been viewed as the sad but necessary fallout from the financial collapse in 2008.
The thinking was that once the backlog of non-performing housing inventory was cleared out, the housing market would find a floor and begin growing (appreciating) again, either leading or joining other industries in contributing to economic recovery.
But this is only half the story.
I first wrote about this, in August 2009; how TARP, while successful, only dealt with the banks and that the foreclosure crisis had wider ramifications because it did not make appropriate adjustments for mortgage borrowers.
At the time, I did not fully appreciate how the process of securitization of mortgages impacted property title and thus the legal standing of banks in foreclosure procedures. More recently, in this post, the situation came into sharper focus, if it was still mostly hypothetical.
But a rash of events have rapidly shed light on the this pending disaster.
Recently we have had states and major banks suspend foreclosures based on the actions of "robo-signers" who processed foreclosure paperwork without thoroughly reviewing the file for completeness an accuracy. This was followed by the announcements by title insurers who stated that they would not cover mortgage titles lost in securitization nor issue insurance on foreclosed properties without evidence of a clear title. That cascaded into today's story regarding how those titles have been chopped up or lost in the maze of securitization, threatening the very concept of ownership amid charges of fraud.
This destructive securitization was made possible by a little known system, the Mortgage Electronic Registration System (MERS), based in Reston, VA. About 62 million Americans home mortgages are registered through MERS, which according to the Post, "allowed big financial firms to trade mortgages at lightning speed while largely bypassing local property laws throughout the country that required new forms and filing fees each time a loan changed hands...Without [MERS], the business of creating massive securities made of thousands of mortgages would likely have never taken off."
Not only did MERS allow lenders to cut corners, but the path of securitization that MERS enabled may have placed lenders on the wrong side of the law.
In September 2000, the Federal Accounting Standards Board (FASB) propagated Rule 140 (FAS 140) - "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities."
Gripping reading, I know.
But through the dense prose, there is evidence that financial institutions may have failed to comply completely with FAS 140 in their securitizations, not only by creating today's bifurcated and disconnected system where loan originators have morphed into loan servicers without property title, but crucially, by how they these transactions have been booked, which has a potentially huge and unstated impact on the actual profit and loss of the financial institution.
It is potential fraud on multiple levels.
The impacts here are profound and potentially catastrophic.
First, there are the homeowners in foreclosure.
On the positive side for these folks, they stand to get a reprieve from eviction as lenders will have to prove their legal standing to pursue a foreclosure. No easy task based on the pending title chaos. But a nation-wide foreclosure freeze will be devastating to the housing market. It will lock the industry in limbo, unable to tackle the backlog in non-performing inventory, depressing housing prices nationally.
Then there are the sellers of existing homes. If your existing mortgage was securitized, there is now a likely title issue. If a clean title cannot be produced, and the title company will neither insure against the original securitization nor provide a new policy on a new title, banks won't lend and people can't sell.
It will bring the housing market to a screeching halt.
As if that were not enough, there is the existential problem.
You're a homeowner with a mortgage. Through the recession, you have continued to make your payments, even under difficult financial circumstances or with knowledge that your mortgage was worth more than your house. Now that company that you have been making payments to can't prove that they own your loan.
What do you do?
A reasonableness test here requires that at a minimum you ask yourself whether you are paying the proper party. If your mortgage holder can't produce a title, who is that proper party? After months of paying the bank, will a third party pop up out of the securitization wreckage with your title and demand back payment of foreclosure? Who will have standing, the bank or the investor with the title?
Can you simply refuse to pay your mortgage - legally - until you know who owns it?
Preposterous, right? But no.
In a most simplified form, we no longer know with certainty who owns what, or how much or to whom.
How frightening is that?
By acts of omission and commission, we have created a situation where there is no judicial precedent to govern business practice. We are in completely unknown territory.
Consumer and business confidence will be the first casualty, and the beginning of a cascade.
As the housing market freezes then collapses from inaction, there will be unbearable pressure on financial institutions that can neither support new lending for existing homes, nor clear off non-performing debts ostensibly on their books. That does not even factor in the impact of FAS 140 on previously stated profit and loss, and continuing and mounting allegations of fraud in documentation.
Credit, already hard to come by, will get tighter still. This will squeeze businesses further, leading to a new round of private sector business consolidation and fresh unemployment. That, in turn, will sap demand, as consumers retrench. It then becomes an unvirtuous downward cycle, where each retrenchment will initiate another, that will be hard to break.
What is worse is that no amount of money will solve the problem.
In 2008, the much reviled TARP program was able to staunch bank losses and provide breathing room for the financial sector to recover, and repay almost all of the temporary loans, stabilizing the markets in the process.
But remember, TARP's original purpose was to invest in those illiquid mortgage backed securities. However, only days after TARP passed, Treasury Secretary Paulson changed the nature of TARP from investing in securities to investing in the banks themselves, because no one knew the value or disposition of mortgages underlying the securities.
Fact of the matter is, we still don't.
Pumping money into banks this time still will not help identify who owns what.
As a nation we have never faced and dealt with that problem which Treasury officials identified in October 2008, and now we are going to pay for inaction.
And that is all the more galling, because In the two years since that epic crisis, we have spent a trillion dollars in government stimulus, while unemployment has gone up and growth has gone down. We have passed a trillion dollar health care program that neither reduces costs for consumers or the nation, or improves care quality. We have passed a financial services bill that did not include reform for the two primary beneficiaries of mortgage securitization, Fannie Mae and Freddie Mac.
Washington frittered away money and time, fiddling with policy experiments while a half solved housing finance crisis simmered and grew to potentially unmanageable proportions. Now we must reap what we sow.
No matter how badly you were hurt by the financial panic and recession over the last two years, I fear that this time, we will not get off so easy.
http://www.examiner.com/conservative-in-arlington/warnings-of-a-second-economic-meltdown
Pretty strong, yes?
Consider the source.
In today's Washington Post, Ariana Cha and Brady Dennis write the story that the financial and real estate industries have no doubt been dreading for some time. The article states:
"Millions of US mortgages have been shuttled around the global financial system...without the documents that traditionally prove who legally owns the loans. Now, as many of these loans have fallen into default and banks have sought to seize homes, judges around the country have increasingly ruled that lenders have no right to foreclose because they lack clear title."
Said another way, if you are one of the millions of Americans whose mortgage company sold off your loan to Wall Street, which subsequently bundled these loans into mortgage-backed securities that were sold and resold, it is no longer clear who owns your property.
Yep. You read that correctly.
Up until now, the ailing US housing industry has been seen through the prism of the foreclosure crisis, which in turn has been viewed as the sad but necessary fallout from the financial collapse in 2008.
The thinking was that once the backlog of non-performing housing inventory was cleared out, the housing market would find a floor and begin growing (appreciating) again, either leading or joining other industries in contributing to economic recovery.
But this is only half the story.
I first wrote about this, in August 2009; how TARP, while successful, only dealt with the banks and that the foreclosure crisis had wider ramifications because it did not make appropriate adjustments for mortgage borrowers.
At the time, I did not fully appreciate how the process of securitization of mortgages impacted property title and thus the legal standing of banks in foreclosure procedures. More recently, in this post, the situation came into sharper focus, if it was still mostly hypothetical.
But a rash of events have rapidly shed light on the this pending disaster.
Recently we have had states and major banks suspend foreclosures based on the actions of "robo-signers" who processed foreclosure paperwork without thoroughly reviewing the file for completeness an accuracy. This was followed by the announcements by title insurers who stated that they would not cover mortgage titles lost in securitization nor issue insurance on foreclosed properties without evidence of a clear title. That cascaded into today's story regarding how those titles have been chopped up or lost in the maze of securitization, threatening the very concept of ownership amid charges of fraud.
This destructive securitization was made possible by a little known system, the Mortgage Electronic Registration System (MERS), based in Reston, VA. About 62 million Americans home mortgages are registered through MERS, which according to the Post, "allowed big financial firms to trade mortgages at lightning speed while largely bypassing local property laws throughout the country that required new forms and filing fees each time a loan changed hands...Without [MERS], the business of creating massive securities made of thousands of mortgages would likely have never taken off."
Not only did MERS allow lenders to cut corners, but the path of securitization that MERS enabled may have placed lenders on the wrong side of the law.
In September 2000, the Federal Accounting Standards Board (FASB) propagated Rule 140 (FAS 140) - "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities."
Gripping reading, I know.
But through the dense prose, there is evidence that financial institutions may have failed to comply completely with FAS 140 in their securitizations, not only by creating today's bifurcated and disconnected system where loan originators have morphed into loan servicers without property title, but crucially, by how they these transactions have been booked, which has a potentially huge and unstated impact on the actual profit and loss of the financial institution.
It is potential fraud on multiple levels.
The impacts here are profound and potentially catastrophic.
First, there are the homeowners in foreclosure.
On the positive side for these folks, they stand to get a reprieve from eviction as lenders will have to prove their legal standing to pursue a foreclosure. No easy task based on the pending title chaos. But a nation-wide foreclosure freeze will be devastating to the housing market. It will lock the industry in limbo, unable to tackle the backlog in non-performing inventory, depressing housing prices nationally.
Then there are the sellers of existing homes. If your existing mortgage was securitized, there is now a likely title issue. If a clean title cannot be produced, and the title company will neither insure against the original securitization nor provide a new policy on a new title, banks won't lend and people can't sell.
It will bring the housing market to a screeching halt.
As if that were not enough, there is the existential problem.
You're a homeowner with a mortgage. Through the recession, you have continued to make your payments, even under difficult financial circumstances or with knowledge that your mortgage was worth more than your house. Now that company that you have been making payments to can't prove that they own your loan.
What do you do?
A reasonableness test here requires that at a minimum you ask yourself whether you are paying the proper party. If your mortgage holder can't produce a title, who is that proper party? After months of paying the bank, will a third party pop up out of the securitization wreckage with your title and demand back payment of foreclosure? Who will have standing, the bank or the investor with the title?
Can you simply refuse to pay your mortgage - legally - until you know who owns it?
Preposterous, right? But no.
In a most simplified form, we no longer know with certainty who owns what, or how much or to whom.
How frightening is that?
By acts of omission and commission, we have created a situation where there is no judicial precedent to govern business practice. We are in completely unknown territory.
Consumer and business confidence will be the first casualty, and the beginning of a cascade.
As the housing market freezes then collapses from inaction, there will be unbearable pressure on financial institutions that can neither support new lending for existing homes, nor clear off non-performing debts ostensibly on their books. That does not even factor in the impact of FAS 140 on previously stated profit and loss, and continuing and mounting allegations of fraud in documentation.
Credit, already hard to come by, will get tighter still. This will squeeze businesses further, leading to a new round of private sector business consolidation and fresh unemployment. That, in turn, will sap demand, as consumers retrench. It then becomes an unvirtuous downward cycle, where each retrenchment will initiate another, that will be hard to break.
What is worse is that no amount of money will solve the problem.
In 2008, the much reviled TARP program was able to staunch bank losses and provide breathing room for the financial sector to recover, and repay almost all of the temporary loans, stabilizing the markets in the process.
But remember, TARP's original purpose was to invest in those illiquid mortgage backed securities. However, only days after TARP passed, Treasury Secretary Paulson changed the nature of TARP from investing in securities to investing in the banks themselves, because no one knew the value or disposition of mortgages underlying the securities.
Fact of the matter is, we still don't.
Pumping money into banks this time still will not help identify who owns what.
As a nation we have never faced and dealt with that problem which Treasury officials identified in October 2008, and now we are going to pay for inaction.
And that is all the more galling, because In the two years since that epic crisis, we have spent a trillion dollars in government stimulus, while unemployment has gone up and growth has gone down. We have passed a trillion dollar health care program that neither reduces costs for consumers or the nation, or improves care quality. We have passed a financial services bill that did not include reform for the two primary beneficiaries of mortgage securitization, Fannie Mae and Freddie Mac.
Washington frittered away money and time, fiddling with policy experiments while a half solved housing finance crisis simmered and grew to potentially unmanageable proportions. Now we must reap what we sow.
No matter how badly you were hurt by the financial panic and recession over the last two years, I fear that this time, we will not get off so easy.
http://www.examiner.com/conservative-in-arlington/warnings-of-a-second-economic-meltdown