Foreclosure Moratorium: What Does It Mean for the Housing Market? [View article]
I agree with you wholeheartedly about the need for vigilance regarding this turning into a potential backdoor bailout, and worse a further erosion of property rights.
This definitely has the potential for some very serious systemically structural consequences. I would also expect that title insurers are likely to be forced into some payouts as a result of litigation from class action attorneys looking to create a class out of foreclosed former home owners who had mortgages with certain servicers. If the litigation prevails than the title insurers will have to pay out claims to the new owners of the property who may have to give back title and to the lenders which funded the loans used for purchasing the property.
I agree with you but would like to add one more piece that you seemed to have overlooked.
If the loan is part of a traditional RMBS than it is owned wholly by the trust for that security. If, however, the loan was sliced up and became part of multiple securities or if the initial security which owns the loan was itself sliced up and became part of multiple securities than the establishment of ownership may become more than a technical issue requiring the trust to initiate the foreclosure process.
Additionally the original mortgage note must still be tracked down and in many cases has been lost. If this is the case than the owners of the payment stream may be out of luck as they will not be able to foreclose.
Very possible, and in fact somewhat likely in the short term. The issue becomes what happens to the unmarketable properties and how are the banks forced to account for them in the mid and long term.
There are a lot of critical details missing from the coverage of this. It will be very interesting to see what kinds of loans are involved. Is it only ALT-A and subprime? Is it everything?
Logical indeed but the number of properties without a mortgage is rather small in comparison to the number of properties with a mortgage. Also thus far the issue has been with shortcuts in the foreclosure process. Some of these revolve around the actual ownership of original paperwork and some revolve around improper practices where employees are forced to take shortcuts. The shortcuts are fairly easy (though somewhat costly) to eliminate and will only result in lower servicing revenue for banks and a delay of days in future foreclosures started using the appropriate process. If the issue is one of proper documentation and lack of ownership of original notes than much larger problems are at hand.
I don't agree with your take on this necessarily washing out and not having any meaningful long term effect on the banks. If the defects in documentation which have so far been ignored begin to receive the attention they deserve the banks may have some serious writedowns on their hands as they lose servicing revenue, and more importantly may have to repurchase defective loans from securitization trusts. If the banks were not the originators and are simply the owners of the servicing rights than the pain stemming from the inability to foreclose would impact the owners of the RMBS. This could also potentially have an effect on FRE/FNM but that would be immaterial as they will simply get more $ from the treasury which will receive funding from the Fed via QE2. However this is a very significant problem which can potentially hurt pension funds, insurers and banks depending on who owns the RMBS.
The squatters would turn into renters. Their credit is damaged to a point where they will not qualify for a mortgage for 4 to 7 years if not longer. There is a much sharper reduction in supply than in demand, if there is any reduction in demand at all.
You are completely correct if the process is halted temporarily. However, my comments were meant to address a situation where no workaround is found and the properties become unmarketable for all intents and purposes. Sorry about the confusion.
Foreclosure Moratorium: What Does It Mean for the Housing Market? [View article]
John,
There are some critical pieces of information missing in all of the discussions of these issues. In my opinion the most important questions yet to be answered are:
1. Are the mortgage in question the more complex and now defunct private label ALT-A and subprime loans, Conforming FNM/FRE loans or both? In my experience as a mortgage broker conforming loans were originated to tighter standards with less shortcuts taken. Most of the high flying players who were relatively loose with the rules did ALT-A and subprime business. The main examples would be Aurora Loan Services and Bear Stearns Residential Mortgage/EMC mortgage who were huge wholesale and correspondent players taking in much of the ALT-A and subprime junk of 2005-2007.
2. How much of this has to do with MERS? There have been separate lawsuits with MERS as a central issue. Are these issues truly separate or will they compound? MERS seems to be a case-by-case situation with judges taking both sides of the issues and no clear resolution in sight.
3. The worst case scenario here is the banks being forced to sit on properties which lack marketable title. This can take a tremendous amount of time to cure and will likely involve some opportunistic attorneys. The banks will than be burdened with disposing of these assets.
The thing that seems to be missed by the analysts is the drastic reduction of available inventory which would result from the foreclosure freeze and title insurer blacklisting of certain servicer’s properties. If title insurance cannot be issued for a property than that property essentially becomes worthless as no lender will lend on it and few cash buyers would be willing to take the risks associated with buying the property without an assurance of clean title. This will devastate the value of the properties in question and put a serious strain on bank balance sheets and earnings. At the same time this will also limit the supply of homes for sale and potentially help lift prices in the rest of the market by eliminating supply without impacting demand.
Treasury Bonds: The Short of the Century [View article]
I think this argument applies on the short end of the curve as well. Treasuries yielding less than 50bips for 1 year are also a screaming short. The tricky part is nailing down the timing. I have called several brokers and have been told that you can't short the cash bond, which is too bad because paying less than 50bip in annual cost to hold the position seems like a no brainer.
In a new paper, two leading economists back up government claims that stimulus spending, the Wall Street bailout and other emergency economic measures helped prevent Great Depression II; without them, U.S. GDP would be 6.5% lower this year, there would be 8.5M fewer jobs and the economy would be experiencing deflation. [View news story]
I think the problem was not the concept of the stimulus and the stabilization of the financial system but rather the execution.
The appropriate thing to do with the banks would be something much closer to what was done with Fannie and Freddie. Destroy the bottom two tiers of the capital structure, flush out management, but provide enough aid to keep the systemically important operations intact. In the case of the banks this would mean backstopping the deposits and making sure that we have a functional payment exchange system. Allow them to fully dump the bad debt and write off the unsustainable loans which now serve as an overhang preventing economic growth. There would be very little moral hazard as incompetent managers would have been dismissed and the equity and preferred stock holders would have been made to pay the price for their risky bets. Depending on how dire the straights of some of these banks were, the debt holders may also have taken some significant haircuts. This would restore discipline to the markets while at the same time preventing a meltdown of critical payment systems and ensuring the ability of the truly credit worthy to borrow at low interest rates.
With the stimulus we missed an amazing opportunity to address extremely expensive but nonetheless important infrastructure issues. Crumbling bridges, sewer systems and an inefficient power grid. The revamping of these critical bits of infrastructure would have created a tremendous amount of jobs both blue and white collar and would have brought significant long term benefits.
Instead we did the opposite. We bailed out incompetent management. We allow the banks access to extremely low interest rates which are not passed on to anyone but the largest of corporations capable of issuing bonds. We have a huge overhang of unsustainable debt. We have cut interest rates on savings to nothing but continue to allow the banks to make tremendous credit spreads while silently taxing the rest of the economy. We have allowed misaclocations of capital to be rewarded. We have redefined moral hazard. At the same time on the stimulus front we spent a large but insufficient amount of money. The money was spent in a hodge podge fashion which has helped with some road projects but which has not addressed serious infrastructure related problems. Once the short term stimulus wears off we will plunge back into a double dip recession and will come out with huge pile of government debt, zombie banks and a complete lack of confidence on the part of consumers and businesses alike.
There are potential avenues for productive long term investments. However the level of risk aversion prevalent in the markets today makes it highly unlikely that significant amounts of capital will flow towards these investments. Alternative energy is one area. There are high levels of risk and other headwinds and despite the increasingly low returns offered by "safe" investments like treasuries or high quality corporate bonds investors do not seem to have the risk appetite or the long term outlook necessary to make such investments.
The White House on Financial Reform: Distortion of the Facts [View article]
The legal definition of fraud would in this case be met when one of the perpetrators of the fraudulent misrepresentation is a real estate agent who has signed a buyer agency agreement. There is a special relationship established as the agent has legal responsibilities to act on behalf of his client and to first and foremost consider his clients' interests. In this case if the real estate agent colluded with the title company and mortgage broker to mislead the client about the terms of the financing being obtained that agent would legally be guilty of fraud. You may be correct that the high burden of proof may not be met when applied to the lenders but it certainly would when applied to the real estate agents.
The White House on Financial Reform: Distortion of the Facts [View article]
wooly, you are right in saying that these people were seeking to borrow money to buy a house and were given the money. However the contract stating the terms of repayment was not clear to them. Often times these people did not speak English and were never provided accurate translations of the documents they were signing. OptionARMs which had a 1 month teaser rate of 1% were sold as having the 1% rate for 5 years or all 30 years of the loan. Subprime loans with an interest rate reset at the two year mark were sold as fixed rate. The concept of interest only was never explained. This was outright fraud. It did not constitute a majority of the bad loan transactions but it was prevalent enough to warrant attention.
Foreclosure Moratorium: What Does It Mean for the Housing Market? [View article]
This definitely has the potential for some very serious systemically structural consequences. I would also expect that title insurers are likely to be forced into some payouts as a result of litigation from class action attorneys looking to create a class out of foreclosed former home owners who had mortgages with certain servicers. If the litigation prevails than the title insurers will have to pay out claims to the new owners of the property who may have to give back title and to the lenders which funded the loans used for purchasing the property.
So whom to believe? The foreclosure mess likely will blow over, says one analyst who is baffled that banks - which have every incentive to keep people in their homes - are being accused of all sorts of chicanery. Or, up to 9M foreclosures in the pipeline may face legal challenges, lenders could eat up to $6B and housing Armageddon could ensue. [View news story]
If the loan is part of a traditional RMBS than it is owned wholly by the trust for that security. If, however, the loan was sliced up and became part of multiple securities or if the initial security which owns the loan was itself sliced up and became part of multiple securities than the establishment of ownership may become more than a technical issue requiring the trust to initiate the foreclosure process.
Additionally the original mortgage note must still be tracked down and in many cases has been lost. If this is the case than the owners of the payment stream may be out of luck as they will not be able to foreclose.
So whom to believe? The foreclosure mess likely will blow over, says one analyst who is baffled that banks - which have every incentive to keep people in their homes - are being accused of all sorts of chicanery. Or, up to 9M foreclosures in the pipeline may face legal challenges, lenders could eat up to $6B and housing Armageddon could ensue. [View news story]
So whom to believe? The foreclosure mess likely will blow over, says one analyst who is baffled that banks - which have every incentive to keep people in their homes - are being accused of all sorts of chicanery. Or, up to 9M foreclosures in the pipeline may face legal challenges, lenders could eat up to $6B and housing Armageddon could ensue. [View news story]
So whom to believe? The foreclosure mess likely will blow over, says one analyst who is baffled that banks - which have every incentive to keep people in their homes - are being accused of all sorts of chicanery. Or, up to 9M foreclosures in the pipeline may face legal challenges, lenders could eat up to $6B and housing Armageddon could ensue. [View news story]
So whom to believe? The foreclosure mess likely will blow over, says one analyst who is baffled that banks - which have every incentive to keep people in their homes - are being accused of all sorts of chicanery. Or, up to 9M foreclosures in the pipeline may face legal challenges, lenders could eat up to $6B and housing Armageddon could ensue. [View news story]
So whom to believe? The foreclosure mess likely will blow over, says one analyst who is baffled that banks - which have every incentive to keep people in their homes - are being accused of all sorts of chicanery. Or, up to 9M foreclosures in the pipeline may face legal challenges, lenders could eat up to $6B and housing Armageddon could ensue. [View news story]
So whom to believe? The foreclosure mess likely will blow over, says one analyst who is baffled that banks - which have every incentive to keep people in their homes - are being accused of all sorts of chicanery. Or, up to 9M foreclosures in the pipeline may face legal challenges, lenders could eat up to $6B and housing Armageddon could ensue. [View news story]
Foreclosure Moratorium: What Does It Mean for the Housing Market? [View article]
There are some critical pieces of information missing in all of the discussions of these issues. In my opinion the most important questions yet to be answered are:
1. Are the mortgage in question the more complex and now defunct private label ALT-A and subprime loans, Conforming FNM/FRE loans or both? In my experience as a mortgage broker conforming loans were originated to tighter standards with less shortcuts taken. Most of the high flying players who were relatively loose with the rules did ALT-A and subprime business. The main examples would be Aurora Loan Services and Bear Stearns Residential Mortgage/EMC mortgage who were huge wholesale and correspondent players taking in much of the ALT-A and subprime junk of 2005-2007.
2. How much of this has to do with MERS? There have been separate lawsuits with MERS as a central issue. Are these issues truly separate or will they compound? MERS seems to be a case-by-case situation with judges taking both sides of the issues and no clear resolution in sight.
3. The worst case scenario here is the banks being forced to sit on properties which lack marketable title. This can take a tremendous amount of time to cure and will likely involve some opportunistic attorneys. The banks will than be burdened with disposing of these assets.
So whom to believe? The foreclosure mess likely will blow over, says one analyst who is baffled that banks - which have every incentive to keep people in their homes - are being accused of all sorts of chicanery. Or, up to 9M foreclosures in the pipeline may face legal challenges, lenders could eat up to $6B and housing Armageddon could ensue. [View news story]
Treasury Bonds: The Short of the Century [View article]
In a new paper, two leading economists back up government claims that stimulus spending, the Wall Street bailout and other emergency economic measures helped prevent Great Depression II; without them, U.S. GDP would be 6.5% lower this year, there would be 8.5M fewer jobs and the economy would be experiencing deflation. [View news story]
The appropriate thing to do with the banks would be something much closer to what was done with Fannie and Freddie. Destroy the bottom two tiers of the capital structure, flush out management, but provide enough aid to keep the systemically important operations intact. In the case of the banks this would mean backstopping the deposits and making sure that we have a functional payment exchange system. Allow them to fully dump the bad debt and write off the unsustainable loans which now serve as an overhang preventing economic growth. There would be very little moral hazard as incompetent managers would have been dismissed and the equity and preferred stock holders would have been made to pay the price for their risky bets. Depending on how dire the straights of some of these banks were, the debt holders may also have taken some significant haircuts. This would restore discipline to the markets while at the same time preventing a meltdown of critical payment systems and ensuring the ability of the truly credit worthy to borrow at low interest rates.
With the stimulus we missed an amazing opportunity to address extremely expensive but nonetheless important infrastructure issues. Crumbling bridges, sewer systems and an inefficient power grid. The revamping of these critical bits of infrastructure would have created a tremendous amount of jobs both blue and white collar and would have brought significant long term benefits.
Instead we did the opposite. We bailed out incompetent management. We allow the banks access to extremely low interest rates which are not passed on to anyone but the largest of corporations capable of issuing bonds. We have a huge overhang of unsustainable debt. We have cut interest rates on savings to nothing but continue to allow the banks to make tremendous credit spreads while silently taxing the rest of the economy. We have allowed misaclocations of capital to be rewarded. We have redefined moral hazard. At the same time on the stimulus front we spent a large but insufficient amount of money. The money was spent in a hodge podge fashion which has helped with some road projects but which has not addressed serious infrastructure related problems. Once the short term stimulus wears off we will plunge back into a double dip recession and will come out with huge pile of government debt, zombie banks and a complete lack of confidence on the part of consumers and businesses alike.
A Bleak View of the U.S. Economy [View article]
The White House on Financial Reform: Distortion of the Facts [View article]
The White House on Financial Reform: Distortion of the Facts [View article]