Category Archives: Credit markets

Administration Acts on Mortgage Fraud Against Military, Yet Denies It Exists Anywhere Else

We have yet another example of media cravenness. You would assume that when official positions presented in the media contradict each other, it would represent an obvious opportunity for reporting, and an intrepid young journalist would take up the task. But since the job of US news outlets is increasingly to distribute propaganda, they manage not to notice.

We’ve had a stenography masquerading as reporting on the result of the recent Foreclosure Task Force “review” of servicer practices. When it looked at 2800 severely delinquent loans, it found only some operational shortcomings and no unjustified foreclosures. Given that all that this cross agency effort did was to have tea and cookies with the servicers while reviewing their documents, as opposed to doing any validation of their data, this means the “exam” was a garbage in, garbage out exercise.

Similarly, today the Fed made the similarly ludicrous statement that there were “no wrongful foreclosures” based on a review of a mere 500 loan files. Given that there are 14 major servicers, that means it looked at 36 files on average per servicer. Heck of a job, Brownie!

Aside from the fact that there have been numerous reports of colossal errors that should be impossible in a system with any integrity (homes with no mortgages or where the mortgage had been paid off, where borrowers had been given letters that they had been approved for permanent HAMP mods being foreclosed upon), there are also numerous accounts of servicer-driven foreclosures. As Karl Denninger noted:

This Is How QE Really Works

QE2 Is Equivalent to Issuing Treasury Bills. In actual fact, all QE2 does is drain the real economy of interest income by swapping an interest-bearing government liability for a non-interest bearing government liability. This decreases aggregate demand in the economy. So the real economy effects of QE are to slightly lower aggregate demand. This is offset by changing interest rate expectations, which alter private portfolio preferences and risk premia, leading to credit growth, leverage and speculation, forces which should pump up the real economy. The Fed had intended to lower interest rates via the lowered risk premia. To date, the Fed has lowered risk premia. But this has also provided the tender for speculation and leverage. Moreover, the Fed has also raised inflation expectations to boot, causing interest rates to rise and working at cross-purposes with the lowered risk premia. Thus, QE2 has only been successful insofar as it has increased business credit and raised asset prices. In my view, QE2 has been a bust as it adds volatility to the system and will have negative unintended consequences down the line.

A New “Whocoulddanode” Defense, This Time of Coddling Banksters in the Crisis

I hate shooting the messenger even when he lets us know that he is a tad invested in the information he is conveying, but sometimes it is warranted. Floyd Norris now tells us that maybe it wasn’t such a good idea to have been so generous to the banks during the crisis. He cites the usual reasons: the recovery is shallow, the officialdom missed the opportunity created by the crisis to restructure the financial system, sparing bondholders created moral hazard, and we are now stuck with banks in the driver’s seat. His lament, as the headline accurately summarizes, is “Crisis Is Over, But Where’s The Fix?”

The problem is that his account is larded with a rationalization of the decisions made at the time to treat major financial firms with soft gloves:

At the time, rescuing seemed more important than reforming. The world economy was breaking down because of a lack of financing. Trade flows collapsed, and companies and individuals stopped spending. It seemed clear that halting the slide was critical…

A surprising citadel of that second-guessing is at the International Monetary Fund, where researchers this week concluded that the rescues “only treated the symptoms of the global financial meltdown.”

“Second guessing” is simply misleading.

Spiralling into the Moussaka

From the morning links

Explosive growth of unemployment recorded in Greece, with a total number of unemployed is at 733,645, according to data from the Greek Statistical Authority (ELSTAT) that were released Wednesday.

The percentage of registered unemployed reached 14.8% in December 2010 an increase of one percentage point compared with November.

Drop in Foreclosure Filings Reveals Operational Mess at Servicers

The level of complaints about servicer screw ups in the HAMP program and more recent horror stories from borrowers not seeking loan modifications confirms something we’ve noted on this blog: that servicers fee structures aren’t set up for them to handle the workload associated with high volumes of foreclosures. Accordingly they devised processes like robosigning, […]

Moody’s on MERS in 1999: “No Material Impact on the Ability to Foreclose and Sell Foreclosed Homes”

The folks at ForeclosureFraud were kind enough to pass along an archival document that I thought readers would enjoy.

This Moody’s report illustrates what the prospect of higher fees for securitization-related ratings did to rating agencies’ quality of analysis.

Richard Koo: How the West is Repeating Japan’s Mistakes

Richard Koo’s book The Holy Grail of Economics is the definitive work on what he calls “balance sheet recessions”. He explain, among other things, why QE2 is not likely to be successful.

BofA “Bad Bank” for Legacy Assets: Will This Eventually Be a First Use of Dodd Frank Resolution Powers?

In a move not noticed much three weeks ago, Bank of America announced that it was segregating its crappy mortgages into a “bad bank”. It got more attention today by virtue of being discussed long form in an investor conference call (see related stories at Bloomberg and Housing Wire).

The use of a “bad bank” is strongly associatied with failed institutions. Some of the big Texas banks that went bust in the 1980s (Texas Commerce Bank and First Interstate) used “good bank/bad bank” structures to hive off the dud assets to investors at the best attainable price, and preserve the value of the performing assets. The Resolution Trust Corporation, the workout vehicle in the savings and loan crisis, was effectively a really big bad bank. The FDIC is (and I presume was) able to sell branches and deposits pretty readily; the remaining bad loans and unsellable branch operations reached such a level that the FDIC was forced to go hat in hand to Congress and get funding while it worked out the dreck. A similar structure was used in in the wake of the banking crisis in Sweden in the early 1990s.

I am told by mortgage maven Rosner and others that this move is not meant as a legal separation, but a mere financial reporting measure, so that BofA can declare, “See, we do have this toxic waste over here, but we are chipping away at it and we’ll have that resolved in some not infinite time frame” (the current talk is 36 months) “and look at how the rest of the bank looks pretty good!.”

So I may be accused of being cynical, but I read more into it than that.

Shades of 2007: Synthetic Junk Bonds

Aha, the level of financial innovation spurred by super low interest rates is starting to have that “I love the smell of napalm in the morning” feel to it.

The Financial Times reports that there is a frenzy to create synthetic junk bonds, ostensibly to satisfy the desire of yield-hungry investors. Any time you see a lot of long money flowing into synthetic assets rather than real economy uses, it’s a sign that Keynes’ casino is open for business (“When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”)

The author compare this development to that of the asset backed securities CDO market, one of our betes noirs which blew up spectacularly in the crisis. There are some similarities and differences.

Banks Beef About Fraudclosure Settlement As Stocks Rise on the News

I’ve pointed out how effective a non-negotiable posture can be, at least until the other side pulls out its ammo or threatens to walk from the deal. Most people in negotiations go on the assumption that the other side is reasonable or at least sincere (even if sincerely deluded) and will offer concessions on the assumption the other side will reciprocate.

The poster child of the usual outcome of offering concessions to a party who is non-negotiable is can be summarized in one word, as in “appeasement” circa 1939. And the ridiculous part is that the banks are being allowed to cop a ‘tude when the other side holds all the cards.

Let’s get this straight: this “settlement” should not be a negotiation. Virtually all the items in the 27 page outline of mortgage settlement terms that was leaked yesterday simply restates existing law or existing contractual obligations. If the officialdom wants to rely on mechanisms beyond the courts (since some judges are more pro-bank than others, which can produce the dreaded disease of “uncertainty”), the same results could be achieve by rulemaking without regulators or state attorneys general providing any releases from legal liability to the banks.

As banking/mortgage expert Josh Rosner said in an e-mail to clients:

Adam Levitin: Alabama Mortgage Ruling “doesn’t have precedential value anywhere“

Georgetown law professor and securitization expert Adam Levitin has weighed in on the ruling in an Alabama case, U.S. Bank v. Congress, in which a state court judge ruled against what we have called the New York trust theory. For readers new to this terrain, the short form is that the parties to mortgage securitizations are governed by a so-called pooling and servicing agreement. The PSA, among many other things, described how the notes (the borrower IOU) were to be conveyed to a trust that would hold them for the benefit of investors. The trust was almost without exception a New York trust. New York was chosen because its trust law is both very well settled and very rigid. New York trusts have no discretion in how they operate. Any measure undertaken that is inconsistent with explicit instructions is deemed to be a “void act”.

Now it appears that the notes were not conveyed to the trusts as stipulated in the PSAs on a widespread basis. (You can read the details here). Because the trusts are New York trusts, that means you have a really big mess. You can’t convey the notes in now, that’s not permitted because the trust had specific dates for accepting the assets that have long passed. The party that has the note (someone earlier in the securitization chain) can foreclose, but no one wants to do that. It isn’t just that this would be an admission that that parties to the agreement didn’t fulfill their contractual obligations; there is no way to get the money from the party that foreclosed to the trust and then to the investors.

Since the securitization industry has had so little good news of late, and this New York trust issue has the potential to make the chain of title problems that banks are facing in courtrooms all over the US even more acute, Paul Jackson of Housing Wire was quick to jump on this pro-bank decision as a major victory. We argued that it was probably not a significant precedent, and that some of the legal reasoning looked like a stretch, other parts were at odds with decisions in other states (meaning those states were unlikely to change course based on a lower-court decision in Alabama). But we acknowledged that parts of the decision were hard to parse and over our pay grade.

Levitin has taken an even more dismissive view of the decision

Many Foreclosures in Oregon Halted Due to Decisions Against MERS

We pointed last week to an analysis by Lynn Syzmoniak that showed that foreclosures across a number of different servicers were way down in January 2011 versus the same period in January 2010. This was admittedly a tally in only two Florida counties, but she indicated that a quick look at other counties in Florida showed a similar pattern.

We are seeing analogous developments, but the drivers appear to be state specific, as judges give adverse rulings on common practices in foreclosure land. Reader wc4d pointed to a report in the Portland Oregonian, that lenders are withdrawing cases because five court decisions have found that lenders that used MERS violated state recording laws.

Paul Jackson Declares “Mission Accomplished” on Securitization Woes Based on Alabama Foreclosure Decision

Paul Jackson has posted on a decision by an Alabama trial court involving the so-called New York trust theory that we have discussed at some length on this blog. Given how banks have been taking it on the chin ever since the robo-signing scandal broke, I suppose I’d be inclined to gloat a little, as Jackson does, in response to a verdict in favor of a bank; bank PR has been a particularly tough assignment these past few months.

But Jackson tries to treat this particular lower court decision as an important precedent, when this is anything but. In addition, Jackson evidently is not familiar the normal process of getting new legal arguments accepted in court, or of how decisions in one court are viewed in another. Finally, as I will touch on here and discuss at greater length next week, there are good reasons why it is unlikely courts in other states (or even Federal bankruptcy courts in Alabama) will look to this decision as a precedent.