Monday, October 11, 2010

You'll never guess who's behind the foreclosure crisis about to crush the housing market again (hint: it begins with a Fannie and ends with a Mae)

The financial blogs have been atwitter for months over paperwork problems in the housing industry related to foreclosures. Around one-quarter of all recent home sales are foreclosures and now it appears many of those transactions -- and, worse, the mortgage-backed securities that undergird much of the economy -- may be at risk.

For example, the title insurance business -- which protects homeowners from the risk of faulty ownership paperwork -- may be next to implode.

Old Republic National Title Insurance, among the nation's largest title insurance companies, will no longer write new policies for homes foreclosed upon by J.P. Morgan Chase and Ally Financial's GMAC Mortgage unit –– a sign that concerns about faulty foreclosure paperwork could now endanger new sales of foreclosed homes.

Just when you think things can't get any worse, we discover that Democrats are thinking of implementing a foreclosure moratorium, which would literally freeze the entire housing market in its tracks.

A major securities lobbying group said on Monday that a U.S.-wide foreclosure moratorium would be "catastrophic" ...Investors who buy mortgage-backed securities free up money that can be used by lenders to make new loans...

The market for such securities nearly dried up during the height of the 2007-2009 financial crisis but the instruments have rallied since March 2009 as investors bet depressed prices more than account for losses that will come as homes backing bad loans are liquidated... Moody's Corp warned on Monday that most residential mortgage-backed securities could see losses increase because of delays in foreclosures.

Who's behind the effort to stop foreclosures, even though no one is disputing that the homes really should be foreclosed upon? I'll give you three guesses and all of them end with "Reid".

[Senate Majority Leader Harry] Reid's latest ploy has been to demand a moratorium on home foreclosures because of a faux scandal about banks using robo-signers to sign massive numbers of foreclosure documents. Never mind that Nevada, a subprime ground-zero where thousands of Mr. Reid's constituents are defaulting on loans they never could afford, is not a state where the document snafu is even alleged to have occurred.

Did criminality occur? Absolutely -- and it should be prosecuted to the full extent of the law. Just how much fraud occurred during the foreclosure process? Yves Smith at Naked Capitalism describes the sort of bogus paperwork used by the foreclosure mills.

We’ve said for some time that document fabrication is widespread in foreclosures. The reason is that the note, which is the borrower IOU, is the critical instrument to establishing the right to foreclose in 45 states... The pooling and servicing agreement, which governs the creation of mortgage backed securities, called for the note to be endorsed (wet ink signatures) through the full chain of title...

Evidence is mounting that for cost reasons, starting in the 2004-2005 time frame, originators like Countrywide simply quit conveying the note. We are told this practice was widespread, probably endemic... We finally have concrete proof of how widespread document fabrication was... you can view the entire Lender Processing Services price sheet here, and here are the germane sections:

Not only are there prices up for creating, which means fabricating documents out of whole cloth, and look at the extent of the offerings. The collateral file is ALL the documents the trustee (or the custodian as an agent of the trustee) needs to have pursuant to its obligations under the pooling and servicing agreement on behalf of the mortgage backed security holder...

...This revelation touches every major servicer and RMBS trustee in the US... And this means document forgeries and fraud are not just a servicer problem or a borrower problem but a mortgage industry and ultimately a policy problem. These dishonest practices are so widespread that they raise serious questions about the residential mortgage backed securities market, the major trustees (such as JP Morgan, US Bank, Bank of New York) who repeatedly provided affirmations as required by the pooling and servicing agreement that all the tasks necessary for the trust to own the securitization assets had been completed, and the inattention of the various government bodies (in particular Fannie and Freddie) that are major clients of LPS.

Put simply, if there is a widespread issue -- and despite Yves' sensationalistic descriptions, there really is no proof of structural problems at this point -- but if there is, the Democrat payoff centers known as Fannie Mae and Freddie Mac are once again at the center of the storm.

James Howard Kunstler asks the proper questions even if the name of his blog can't be repeated in mixed company.

Did nobody, for instance at Fannie Mae or Freddie Mac, review any of the paperwork fluttering in from places like Countrywide or Ditech and scores of other boiler rooms where mortgages were hatched like Peking ducklings? There was an awful lot of it, I'm sure, but aren't there a lot of seat-warmers at Fannie and Freddie who collect their salaries for the express purpose of reading mortgage documents? Was nobody the least bit suspicious about the mysterious flurry of "restaurant employees" and "lawn-care technicians" buying million-dollar condominiums with no money down at terms that would make a three-card monte dealer weep with laughter?

...And what of the numberless agencies, federal on down, starting with, say, the Office of Thrift Supervision, or the Comptroller of the Currency, or the Federal Deposit Insurance Corporation, or the Board of Governors of the Federal Reserve, or the chairpersons of a dozen senate and house subcommittees on matters related to finance, or the various inspectors general from sea to shining sea or the attorneys general of all fifty states plus the US Department of Justice, or the countless fiduciary officers of the pension funds who tripped over each other buying all the tainted paper churned out like so much Purina Rat Chow - or, for Godsake, a lonely loan officer here or there with something resembling a conscience?

Yes, what indeed?

I'll say it for the umpteenth time: whenever the government gets involved with extra-constitutional pursuits, it screws them up. This is a failure of Democrat policies, not the free market. Agency after agency, bureaucracy after bureaucracy, politician after politician failed to unwind the disastrous policies of Fannie Mae, Freddie Mac, HUD and the other Statist programs hatched by Bill Clinton, Andrew Cuomo and Janet Reno to make homes "affordable".

Fannie and Freddie were raped and pillaged by connected Democrats like Franklin Raines, Jim Johnson, Jamie Gorelick, Tom Donilon, and many others. It was wracked by accounting scandals that mysteriously spawned generous bonuses for these executives. With the help of Democrats in Congress, it blocked eighteen separate attempts by the Bush administration to audit the entities and to implement traditional risk management controls.

Should the housing market collapse again, a large part of the blame must once again be assigned to the Democrat Party and its policy of wealth redistribution. The central planners' plans can't work, won't work and have never worked.

And you and I -- the beleaguered taxpayers -- are on the hook for their idiocy.

Barney Frank, Chris Dodd, Maxine Waters and the rest of the social engineering geniuses who protected Fannie Mae and Freddie Mac from regulatory oversight during the Democrat housing boom -- and their own outrageous and damning testimony can be seen here -- should be serving life sentences in Leavenworth.


Harry Bergeron said...

The only way out of this is a quick law absolving the robo-signers where there is no fraud against a homeowner.

Dims and Reps both are loathe to do that, but it's the best way to get the inventory moving again, AND soothe the Title Insurers.

sTevo said...

Barney Frank, Chris Dodd, Maxine Waters and the rest of the social engineering geniuses who protected Fannie Mae and Freddie Mac from regulatory oversight during the Democrat housing boom -- and their own outrageous and damning testimony can be seen here -- should be serving life sentences in Leavenworth.

You can't scream this loud enough,

Whitehall said...

Let's not forget Barbara Boxer and Nancy Pelosi. They went around San Francisco in the 90's proundly promising special mortgage funds to new immigrants and certain ethnic groups.

Federal mortgages have been a backdoor way of buying votes for a long time.

A Jacksonian said...

What is a lot of fun is that the problems that we are seeing now were understood in the 1990's. The people who looked into it? Strangely enough it was researchers at the FDIC who pointed out the way the mortgage market was going and did an exacting historical review of it.

It turns out that part of this problem is linked to the S&L crisis. We wouldn't have had that withoug government 'regulation', either. And it sources to the same set of agencies, too.