Bank of America (BAC) announced they are halting foreclosure in 50 states because of potential flaws in foreclosure documents. But its not just Bank of America that is halting foreclosures. More and more banks are joining the list to halt any foreclosure action, including JPMorgan Chase (JPM).
Also Friday, PNC Financial Services Group Inc. said it is halting most foreclosures and evictions in 23 states for a month so it can review whether documents it submitted to courts complied with state laws. An official at the Pittsburgh-based bank confirmed the decision on Friday, which was reported earlier by the New York Times. The official requested anonymity because the decision hasn't been publicly announced.
PNC becomes the fourth major U.S. lender to halt some foreclosures amid evidence that mortgage company employees or their lawyers signed documents in foreclosure cases without verifying the information in them.
In addition to PNC and Bank of America, Ally Financial's GMAC Mortgage unit and JPMorgan Chase & Co. have announced similar moves in the past two weeks.
This means two of the largest banks in the United States are no longer foreclosing on homes.
Most people reading this news will think the real reason these banks are halting foreclosures is because of the
growing evidence that mortgage company employees or their lawyers signed documents in foreclosure cases without verifying the information in them.
In fact the article quoted above goes on to say;
A document obtained last week by the Associated Press showed a Bank of America official acknowledging in a legal proceeding that she signed thousands of foreclosure documents a month and typically didn't read them. The official, Renee Hertzler, said in a February deposition that she signed 7,000 to 8,000 foreclosure documents a month.
Did it slip by the average reader of this article that Bank of America was foreclosing 7,000 to 8,000 house a month? Anyone see a problem here? This should be the real story. And that's just one bank.
But Wait, Isn't the Recession Over?
Foreclosures were already hitting record highs in the third quarter of 2009. If foreclosures were hitting record highs in July, August and September of 2009, how is it the National Bureau of Economic Research (NBER) said the recession ended in June of 2009? I guess the NBER just ignores the fact that foreclosures hit a record high in the 2nd quarter of 2010 and again in August, 2010.
Of course the National Association for Business Economics (NABE) said in October 2009 the recession would be over by January 2010. So much for relying on NBER and NABE for predictions.
Banks Not Foreclosing
Before getting into the real reason I believe Bank of America, J.P. Morgan and other banks are halting foreclosure, I believe it's important to point out that banks have in fact not been foreclosing on properties for quite some time.
I pointed this out February, 2010 in The Banking Crisis Is Far From Over Revisited – FDIC Troubles and Bank Shenanigans.
Banks Are Letting Non-Mortgage Paying Homeowners Live In Their House for Free
There are numerous people I know of that are living in the homes they bought and are underwater with their mortgage being worth more than their home. They haven’t paid their mortgage in some cases for over a year.
Does anyone wonder how the homeowner can get away with this? Why aren’t they being kicked to the curb by the banks foreclosure unit?
The answer based on my research is simply that the bank cannot afford to mark that depreciated asset at current market prices for they risk falling under the threshold where the FDIC draws the line of solvency resulting in a take over of operations and the search for a more solvent bank to take them over.
In that article I pointed out the problems with FDIC insolvency and how fractional reserve banking escalated these problems further.
Many folks are trying to do short sales in getting out of their property and the mortgage they took out which is now valued more than the real estate itself. Of course, with a short sale, the buyer of the property has to come to some sort of agreement with the lender (bank). The problem is, the lender is not agreeing to the lower prices offered by the buyer. Why? Because the bank would have to mark to market that asset at a lower price and this in turn would/could cause the bank to need more cash to make sure their balance sheets are in line with Federal minimum requirements.
If that 2006 $500,000 home is worth $300,000 today, a 40% decrease, the bank that has the house listed as an asset of $500,000 would all of a sudden have to be decreased by $200,000. Their balance sheets can’t afford that steep of a decline in valuation, so they don’t foreclose.
What escalates the problem for banks is they work on a fractional reserve basis where they loan out 9 times the money they take in. Multiply this $200,000 number by a few more mortgages and you can readily see the banks balance sheet would soon be in the red if they foreclosed on these homes and the FDIC would be knocking on their door soon after.
The fact that congress allowed banks to loan out at multiples above historic norms is part and parcel of why they are in so much trouble today.
Professor George Reisman explains this in an article he wrote Our Financial House of Cards;
If a mortgage lender initially had assets worth $103 and debts of his own of $100 incurred in order to finance the purchase of those assets, a mere 4 percent decline in the value of his assets would wipe out his entire capital and then some. Multiply these numbers by many billions, and the example corresponds exactly to the real-world cases.
So what's a poor banker supposed to do in keeping the FDIC from knocking on their door? First they stop foreclosing. But as can be seen by the record number of foreclosures, probably from those people who didn't know they could squat in their house and the bank would not foreclose on them, banks have had to reluctantly foreclose. And since the amount of foreclosures in 2010 is still hitting record numbers, the banks found another way out. They found a way to stop foreclosing altogether.
They not only found a way to stop foreclosing, but they also now have Senator Harry Reid leading the way to call on lenders in all 50 states to halt foreclosures. Talk about your bank holiday! Of course Reid lives in the highest foreclosure state in the country, Nevada.
Some are saying the foreclosure issues they are experiencing could last for years. How convenient would that be for the banks as they hope and pray real estate rebounds and their balance sheets improve accordingly? Keep dreaming bankers. Banks have already received a reprieve from the Financial Accounting Standards Board (FASB) in April 2009 by not having to market to market their real estate at today's prices, but keep them listed on their balance sheets at the higher prices they once were. No one seems to ever mention this fact do they?
Even to this very moment, the banks are fighting modification of these rules. If banks had to revert to the old rules, the system would collapse and they know it.
The Banking Crisis Is Much Worse Than People Know
While there may be paperwork problems and fraud associated with banks, there's much more to this story than meets the public eye.
The following is chart from my book "Buy Gold and Silver Safely" where I reveal just how much trouble the top major banks are in (numbers in thousands).
Click to enlarge:
As you can see from the above chart, Bank of America leads the way with serious debt issues. At the same time, all of the top banks are experiencing deteriorating balance sheets. If the stimulus money they received from the government was used to shore up their balance sheets, it hasn't worked.
Banks Not Lending
The fact that banks aren't lending to anyone is another problem. This is how banks are supposed to make money. But if you own a bank right now, are you ready to lock in a 30 year fixed loan under 5% when you know at some point interest rates will shoot back up? The banker would be stuck with a loan that is below market rates for the majority of that 30 years.
I remember 25 years ago clients bragging to me about their 5% mortgages. In 10 years, the homeowners with a fixed rate loan today will be bragging again. Of course their home probably won't be worth more than it is today.
Bankers aren't stupid. That is, bankers who didn't take advantage of congressional nonsense in allowing them to take on a multiple above the normal fractional reserve lending limits aren't stupid. The others are the ones who have ruined it for everyone else.
The Coming Sub-investment Grade Derivative Problems For Top Banks
Add to this the problems of derivatives held by banks, as seen in the following chart and also discussed in detail in my book, and we have the makings of a perfect storm. Pay close attention to the figures in the column that says "Sub-investment grade maturity 1-5 years."
Click to enlarge:
Bank of America has 454 billion of sub-investment grade derivatives coming due in the next 1-5 years. JP Morgan over 1.5 trillion. Is it a coincidence these two banks names pop up as wanting to halt foreclosures? How will this effect the balance sheets of these banks that are already in debt if just a few of these sub-investment grade derivatives implode? What would happen if these banks were forced to mark to market their assets?
If any of these things occurred, is it too far out of line to say they'd be broke? And people expect the FDIC to come to their rescue when the FDIC is basically broke?
The data speaks for itself. There is trouble afoot. Many of the top banks in America are experiencing financial difficulties as well as the smaller ones.
Banks, Lenders, Insurers and the FDIC In a Nutshell
Twenty-five banks failed in 2008, 140 in 2009, 130 through October 8, 2010; Fannie Mae (OTC:FNMA) and Freddie (OTC:FMCC) were delisted from the NYSE and already received bailout money and will need more as PMI (PMI), the insurer of many of those mortgages, has had 12 straight quarterly losses stemming from defaults; 120 institutions, mostly small banks who missed their TARP payments; and the FDIC itself will eventually need a bailout.
But maybe the FDIC will raise the insured limit from $250,000 to $1 Million and all this will go away! I'm sorry, but I just have to laugh at that one. Might as well make it a cool $1 Billion FDIC coverage! This is the logic of our current system.
Turning Ignorance Into Enlightenment
Ignorance is simply not knowing what you don't know. If people just relied on the media for their intelligence, then they are limited to what the media tells them is the truth. One has to dig for themselves if they want to know what's really going on. I've been digging for five straight years. I feel my digging reveals what the truth really is.
There is a reason why I am trying to get the message out about buying gold and silver for one's portfolio through my book and with the articles I write. There's a reason I got into the business of selling bullion gold and silver too. To help people one person at a time understand the truth and prepare themselves for what's to come. And I'm not a chicken little gold bug either. I base everything I say on the facts as I see it.
Yes, gold and silver are good for hedging against that portion of your portfolio that is U.S. dollar based (U.S. stocks, U.S. corporate bonds, U.S. government bonds), but its also a hedge against a total collapse of the system, including the banking system. It is insurance that I believe everyone should have.
The Federal Reserve System is at fault for giving us fractional reserve banking to begin with. Congress is at fault for being complicit in allowing banks to loan more than historic norms. And lenders are at fault for thinking real estate prices do nothing but go higher and at the same time loaning to anyone with a pulse.
The situation for banks today will not improve by any further government stimulus. I fully expect another round of bailouts coming to help the banks, even if the Republicans take back the house in November. Hey, they did it when Bush was in office! (To save the system of course.) People should realize by now it doesn't matter who's in congress. Wake up! All this talk about left vs. right vs. tea party isn't going to change congress. The system at present is unsustainable.
More bank bailouts will only delay the inevitable collapse. The Fed's balance sheet is already a mess. Does anyone really think the bright Harvard, Yale and Wharton economists who allowed all this to happen are now going to all of a sudden wave a magic wand and fix the banking system?
The bottom line is it's our labor and taxing of that labor that will pay for what our government and the banks have done to us. It is always We the People who have to atone for their abuses.
And to think we pay them to abuse us.
You load sixteen tons, what do you get
Another day older and deeper in debt
Saint Peter don’t you call me ‘cause I can’t go
I owe my soul to the company store
—Tennessee Ernie Ford
Disclosure: Long Physical Gold and Silver