US bank foreclosure fraud threatens global financial markets
Posted on 18 October 2010 with 11 comments from readers
Bank foreclosures across the United States have been stopped due to alleged widespread fraud in the foreclosure process. Essentially subprime mortgages were sold in a hurry and the paperwork not completed properly.
Compounding the issue banks have been acting heavy handedly victimizing home loan owners and repossessing their homes fraudulently by writing up the paper work that is missing. Some evicted mortgagees are now fighting back and actually repossessing their homes after repossession.
US mortgage market paralysis
This threatens to paralyse the US housing market that is already trading at all-time lows. Nobody in the US now knows who owns what except for property owned before the 1980s when securitization started, and the total amount of money involved is $45 trillion, twice the value of the US stock market.
It’s an amazing final chapter to the US subprime crisis. The banks that gotten bailed out two years ago are now turning on their customers with repossessions that they are not legally entitled to make, and being shafted by their own subprime derivative loans.
The foreclosure chain threatens to reveal the fundamental insolvency of the US banking system with bad loans way ahead of bank equity value. This surely calls for a political solution and it ought to come quickly to avoid disaster. But what can be done with mid-term elections in progress and Washington on the campaign trail?
Property rights
Property rights are a fundamental pillar of the US constitution and this is clearly not an issue that is going to go away, and once the stock market realizes the full extent of this problem the impact will be obvious.
As respected financial commentator John Mauldin reports in his newsletter today this also very serious for the investment banks that packaged these mortgage securities because under their warranties they may now have to buy them back. The potential liabilities are bigger than Lehman.
Buy the leveraged short US bank stock ETFs FAZ and SKF to make a return on this new financial crisis which is only just starting to unfold. This is the next and final chapter of the US subprime crisis and there seems no easy solution. And all this is coming up as the European banks face up to their own sovereign debt problems. As John Mauldin says this has shades of late 2008.
This video link gives a full report:
11 Comments posted by readers:
What happens if you pump in another 1.5T _through the same banks_ that make up the shorts that you endorse?
You will of course be proved right eventually, but seriously, if these guys do fail then US problems would be magnified X100. So there is no option but fed print and go all in.
Banks will leave these toxic assets on the book for at least another 6 Q’s, kicking the can down the road.
Ed Note: the securitized derivative mountain is $45 trillion – $1.5 trillion will not make any difference! This is a global financial crisis – the bond market will not take that scale of QE.
Of all the entities involved in the subprime real estate businesses, only the real estate agents who took prospective buyers from house to house, are the ones NOT certainly guilty of criminal fraud in SOME way. Anyone doubting this should watch David Faber’s award winning CNBC special, ‘House of Cards’. Lying about anything on an official financial document IS A CRIME.
That said, I don’t think this foreclosure fraud is as big a problem as it now appears. I’m thinking (always a dangerous thing) that the end of foreclosures, for a time, could actually help the US economy. People may be able to stay in homes for free for quite a while. That will free up a lot of money for other spending, and boost demand for all kinds of goods and services. More people will be put back to work. The economy will improve faster than if all those homeowners had to pay their monthly house notes. Real estate taxes will still get paid, so local governments won’t lose more and more revenue. Economically, the freeze will act like a stealth mortgage write down, and could become an actual one, over time.
The banks can just sit on their bad debts for quite some time. How long can they get away with that? Not being a banking expert, I have no idea. If they do get into trouble, the US Government will do another bank bailout, even if the President has to declare a ‘National Emergency’, should Congress fail to agree on the next bailout. They could try to impeach him. But suppose they do, and he refuses to leave? I doubt if they want to risk that, with the economy in the state it is already in. This isn’t 1974.
Unlawful you say? Find me a law which says that the US Secretary of the Treasury can call all the big bank CEOs to a meeting inside a government building and FORCE them to sign a piece of paper agreeing to take a government loan! That ain’t in the US Constitution, baby. But it happened. The rule of law only goes so far in a National crisis. When push comes to shove, it is like Stalin said (or maybe it was Mao) “Power comes from the barrel of a gun.”
It is like in New Orleans after Katrina. The cops went house to house asking people if they had any firearms. Those who foolishly answered, “yes” had them seized. Most were never returned. So much for the Second Amendment to the US Constitution, the right to keep and bare arms. Remember that with any gold you may have, should things get really bad. I doubt the government will go over every property with metal detectors, should you wish to hide wealth until things hopefully get better.
So, where is the flaw in my theory that the temporary foreclosure freeze could be good?
Ed Note: because it completely undermines the balance sheets of the banks, investors panick, bank stocks crash bringing down the rest of the stock market, then the bond market breaks, interest rates shoot up, etc. Sorry you cannot halt payments on large loans without consequences…
45Tx3%=1.35T.
So _worst case_ the whole thing can be propped up for another 12mo with a mere 1.35T of 10 year notes. This is how to kick the can down the road.
Oh and the other 150B goes to the POMO intervention team.
Ed Note: yes simple as that – markets will always go up and we all become billionaires but in hyperinflation that means paupers… Actually I believe in markets and it will respond very soon!
Another great commentary, Peter!
Oops, I didn’t notice this commentary until after I posted a response in your commentary about Jim Rogers and his predictions . . . since my response there is highly relevant to this commentary, I’ll repeat most of it here . . . and ironically, I came to the same conclusion as you did, that we can do very well by shorting the banks (though I am hesitant to recommend leveraged ETFs, since this fiasco could cause wild stock price swings … which are not good for leveraged ETFs).
My Response, from that Other Commentary:
1. The Foreclosure Mess in the US:
The foreclosure situation here in the US is rapidly deteriorating with each passing day. Every day, more and more homeowners are making the decision to withhold their monthly mortgage payment. For the homes that have already foreclosed, the banks are now in a panic mode, since many former homeowners are demanding to see the paperwork that authorized the bank to foreclose. Of course, the banks don’t have this paperwork; hence lawsuits will be flying left and right. For an absolutely great read on this topic, go here: http://www.frontlinethoughts.com/article.asp?id=mwo101510
In that commentary, John Mauldin cites some astonishing quotes from the experts in the mortgage business; a summary is below:
“If for whatever reason any of these signatures is skipped, then the chain of title is said to be broken. Therefore, legally, the mortgage note is no longer valid. That is, the person who took out the mortgage loan to pay for the house no longer owes the loan …”
Time to Go Short Against the Banks Again:
It’s a “no-brainer” at this point to short the bank stocks, since they will lose hundreds of billions because of it. JPM today announced that they expect to “lose” $55 billion (which will be paid back to them, via sales of fraudulent MBS to the FED, from newly printed money!). Even with the FED acting as the wealthy grandpa, bank stocks will plummet; an easy way to bet against the banks is to buy the inverse ETFs, namely KRS and SEF
@ Peter: It’s so ironic that you also quoted from John Mauldin.
Disclaimer:recent owner of KRS and SEF
For those who are thinking of shorting the bank stocks:
I forgot to say that the FED’s POMO actions for this week (week of 18 October) will occur on Monday, Wednesday, and Friday of this week. These POMO actions start at 10:00AM New York time, and are completed by 11:00AM.
So What Does This Mean?
It means two things to me.
1. It simply means that we can expect the FED’s actions to temporarily “pump up” the bank stocks on those days and at those times. So if you’re contemplating a purchase of one of the inverse ETFs identified above, try to time it when the bank stocks are rising; that way, you can get a much better buy price.
2. This continuous POMO action will definitely drive the bank stocks up, and then down again on successive days. This type of action tends to diminish any gains for those ETFs that are leveraged.
If you’re patient, the bank stocks will fall in the long run. The key here is to be patient.
After that ugly story about the Japanese deflation in the Sunday New York Times that was reprinted in papers all over the USA, get ready for Ben to create however much money he needs to get inflation going. That hedge fund big wig, Tepper, on CNBC was right. It will FORCE the price of stocks and gold up. They are desperate. They don’t care about the possibility of inflation getting out of control sometime in the future.
Next year we could easily see a dollar or bond problem, but for now, I stand by my forecast of 11,800 for the year end Dow.
Keep in mind that the US Government has said that the big banks are too big to fail. Should they need it, they will get all the money they need from the US Government to keep them from going under. The millionairs in Congress will never let the big banks be nationalized. Their rich friends will lose too much money.
If anyone is interested in ALL the details of the foreclosure mess story, the ‘Big Picture’ website, http://www.ritholtz.com.us has a series of articles starting today, Monday, explaining the whole thing in great detail. Next year could be interesting. Larry Kudlow talked to him on his CNBC TV show today. It doesn’t look good, as they say. Someone claimed Bear Sterns sold the same notes more than once! OUCH!
Bill is right, Tepper is right, bulls will roar 2010. Good time to own a Manhattan Ferrari dealership!
All shorts must die.
Ed Note: an odd comment after the short rally last night.
@ Nigel:
Yesterday, 19 Oct, was not a POMO day; so the market sank.
Today, 20 Oct, is a POMO day; so the market is soaring.
Tomorrow, 21 Oct, is not a POMO day. So the market will sink.
Friday, 22 Oct, is a POMO day; so the market will soar.
Come on people. Dont you get it. The banks have those loans insured for 6 times the amount loaned. Watch inside job. They where loaning money to people with liars loans knowing the people where getting in over their heads so they could collect from AIG big. We own that Ins comp. So we are getting ripped off coming and going. Watch Inside job. We need a class action law suit against the Government who havent done their job protecting the tax payers and the banks for setting people up to fail. It is that simple people. We have been taken by all in charge and we need to say enough.I call for a class action law suit.
@sheri, reckon most folk agree with you however it is all about timing. since this article was posted equities rallied, shorts were killed and huge amounts of dollars have been sloshed into the system through the big 4. QE3 is now looking unlikely so the next 90 days will be the litmus test for the “recovery”. Note, this is not good for silver, gold, oil or equities. rewind to march 09 and look what happened to everything.
Ed Note: Yes and we all know that, so will it not be different?