I thought I would address the foreclosure scandal tonight since the markets were so quiet today as investors prepare for tomorrow's big job report.
I haven't really discussed this topic because I am still trying to get my arms around it. Dylan had a great piece on it this afternoon that does a nice job explaining what happened in layman's terms:
What a mess eh?
The plot to this story thickened today when Obama vetoed a bill that would have allowed the banks to wash their hands of the liability associated with this massive fraud:
"WASHINGTON — President Barack Obama will not sign legislation that could have made it more difficult for homeowners to challenge unjustified foreclosure actions, the White House said on Thursday.
The bill would have required courts to accept all out-of-state notarizations, including those stamped en masse by computers in a practice that critics say has been improperly used to expedite foreclosure orders.
False notarizations figured in disclosures that GMAC, JPMorgan and other big mortgage processors filed false affidavits in thousands of cases, part of the wave of foreclosures that came in the wake of the financial and economic crisis.
The bill, passed by the House of Representatives in April, seemed destined to die with no action on it in the Senate Judiciary Committee. But on September 27, the day before the Senate recessed for the midterm election campaign, it was rushed through and passed by the full Senate.
Ohio Secretary of State Jennifer Brunner said it seemed odd that the law passed just as disclosures of fraudulent foreclosure were mushrooming, leading to widespread halts in foreclosure proceedings. "
HeHe....Anyone who doesn't believe that Congress is bought and paid for by Wall St needs to read the last two paragraphs above. If this doesn't change your mind then nothing will.
Folks, you can't make stuff like this up.
How does a foreclosure bill that cleanseds Wall St of the foreclosure mess suddenly soar through the Senate with bipartisan approval on September 27th when it appeared to be dead way back in April of this year?
I bet you could see the green ink on the Senators hands when they raised there hands to vote yes for the bill.
Folks, I am sorry but this group of politicians has to go. Vote them the hell out on November. All of them that are on both sides of the aisle! They are bought and paid for by Wall St's finest and we will never get out of this mess with this cast of characters.
Kudos to President Obama for killing this bill. The last thing the US taxpayers needed was another punch in the gut.
The Foreclosure Fraud: Where Do We From Here?
This is a great question. I discussed this topic with a credit trading friend of mine. We both concluded that the legal ramifications of the foreclosure mess is mind boggling.
The troubles are endless:
There are reports of multiple banks claiming they own same properties.
The ability for the banks to prove ownership when the mortgages are sliced and diced into tiny pieces is virtually impossible.
Many question remain unanswered:
What are the values of the CDO's that contain these mortgages if there is no proof of ownership?
Will the the title insurers ever touch any foreclosures moving forward if things are not reformed?
What are the legal ramifications of a house that was bought out of foreclosure if the documentation that was used for the purchase was fraudulent?
How many people are going to stop paying their bloated mortgage because they believe that their bank cannot prove they own the house?
Better yet, If you bought a bloated McMansion that you can't afford, why WOULDN'T you stop paying your mortgage?
Obviously the risk of moral hazard here is off the charts to say the least. This is a problem that isn't going to go away and the government MUST take drastic measures to address it. The whole banking system hangs in the balance.
Wait let me change that, the whole financial system hangs in the balance. I don't know what the answer is here. I think a moratorium on home sales for the time being is a good place to start. Nobody is going to touch a foreclosure until this problem gets straightened out. Since foreclosures are the only thing really selling at this point this pretty much means that the whole housing market has been shut down.
You thought home sales looked ugly this summer, I can't wait to see the numbers moving forward!
The Bottom Line
The way I see it, the biggest problem housing has is that the buyers have no skin in the game.
What little money they did put down has now been evaporated because the home has lost so much value.
This makes "walking away" or simply not paying the mortgage extremely tempting because people can't afford the homes and they feel like they have been robbed blind by the banks.
That sad truth here is for the most part they are right. Granted they are somewhat to blame because they bought the house. Nonetheless, it's become very apparent that the whole housing game was just one gigantic sloppy fraud.
The banks got so greedy at the end that they didn't do their "due diligence" to make sure that the documentation was done properly. They were too busy making a fortune by slapping these mortgages together and selling them off as fast as they could.
At the end when the lending got really sloppy, the banks sold this crap as fast as they could because they knew the CDO would fail as soon as it got out the door as the "no doc" buyers stopped paying on their loans. The pension funds and other suckers around the world got stuck holding the bag.
The problem here is the banks weren't able to get rid of all of this crap before the game ended. Usually Wall St is smart enough to dump the toxic financial waste after they have stripped it to the bone much like a vulture does with a carcass.
So this leaves us with a nasty dilemma:
You have the banks holding trillions of dollars in mortgages that are counting on Main St to pay them back. Meanwhile, the borrowers who took out these loans are now left with a house that's worth 30% less than what they paid for it. Most of them were given loans that they could not afford in the first place and they now feel like they were scammed as the stories of mortgage fraud continue to leak out into the media.
This situation alone makes the problem bad enough. When you add in the foreclosure fraud you have a full out fire on your hands because the borrowers now feel like they might have found a way to "get out" of their financial mistake because they don't believe the bank can prove they own the house.
This is pretty much a PERFECT STORM folks. I don't see a solution. I don't see how the banks can prove they own most of these loans when they were sliced and diced in so many different ways.
How in the heck does the housing market recover from this blow? I think buyers are starting to seriously lose faith in the whole home buying process. Potential buyers didn't want to buy before this foreclosure crisis. How are you ever going to get them back in the game after this?
I think you are going to see home sales fall off a cliff unless Congress takes action. The first thing that has to be done is to somehow find a way to force the home buyer to have some skin in the game while this mess is straightened out. Forcing them to pay for insurance and taxes for the property while the loan is negotiated would be a good start.
Doing nothing here is not an acceptable solution and to date this is how we have reacted to this crisis. We keep trying to sweep it under the rug and it hasn't and WILL NOT work.
Letting people sit in their homes without paying there mortgages will only lead to more copycat behavior and it will eventually take down the whole financial system.
We must force the banks to take huge haircuts on these loans and get housing payments in line with incomes. This is the ONLY solution. We need to LET THE BUBBLE POP before it takes us all down.
Continuing to extend and pretend is not working and the fraud has now been completely exposed as a Ponzi scheme. Now that the fraud is out of the closet it's time to deal with it because there is nothing left to hide.