Foreclosuregate Forecasts: Bring the Jubilee?


If you've been following the foreclosuregate story, you've probably encountered some explosive forecasts of how the mess will play out, from Wall Street bears preparing for the collapse of the country's biggest banks to populists predicting a sort of a Homeowners' Jubilee, with the residents of disputed properties acquiring their houses mortgage-free. John Carney expects a more familiar phenomenon: another bailout.

Bank of America's recent decline—down almost 10% this week—is driven by fears that the bank could be hit with huge liabilities for faulty mortgage pools. And I'm pretty sure that is not going to happen.

Why not?

artist's rendition

Because the politicians will not let the financial stability of the largest bank in the nation be threatened by contractual rights. Not when there's an easy fix available that won't cost taxpayers a dime.

Here's what is going to happen: Congress will pass a law called something like "The Financial Modernization and Stability Act of 2010" that will retroactively grant mortgage pools the rights in the underlying mortgages that people are worried about. All the screwed up paperwork, lost notes, unassigned security interests will be forgiven by a legislative act.

There's a big difference between the financial crisis of 2008 and the new crisis. In 2008, banks were destabilized by the growing realization that they were over-exposed to the real estate market. Huge portions of their balance sheets were committed to mortgage-linked investments that were no longer generating the expected revenues or producing losses. That was a problem of economics that could only be solved by recapitalizing banks or letting some of the biggest banks in the U.S. fail.

The put-back crisis is not driven by economics. It is driven by legal rights. And there's simply zero probability that the politicians in Washington are going to let Bank of America or Citigroup or JP Morgan Chase fail because of a legal issue.

So here's what I expect will happen. The lame duck session of Congress will pass a bill that essentially papers over the misdeeds of the banks that originated mortgage securities. Every member of Congress and every Senator who has been voted out of office will cast a vote for the bill. And the President will sign it.

Will the public be outraged? Probably. Financial bloggers will scream from the high heavens against another bailout of the banksters. Congress may try to create some cost for banks in exchange for the forgiveness, perhaps requiring more mortgage modifications.

But the much feared put-back apocalypse will be laid to rest.

[Hat tip: Bryan Alexander.]

NEXT: D.A.R.E.: Ripping Families Apart Since 1983

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  1. Better prediction.

    First this:

    “Wall Street bears preparing for the collapse of the country’s biggest bank”

    which precipitates a stock market correction, which gives congress a ‘mandate’ to do this:

    “The Financial Modernization and Stability Act of 20102011”

    Or possibly, december 2010. Nice christmas present.

    1. “Nice christmas present.”
      Or not.

      1. A jubilee will never happen because a jubilee is deflationary.

    2. moncler jackets definitely understands your need to impress during those cold cover-up months. This season, though, moncler jackets gives you the chance to go with the warmer option while still looking perfectly put together.

  2. I there some reason these banks shouldn’t be wound down, their assets sold to those who will manage them better? Because it seems to me we’re really rewarding a lot of bad, stupid behavior.

    1. Of course there’s a reason: millions of dollars of campaign contributions, silly!

    2. Technically, that’s what was supposed to be happening. The TARP money was supposed to buy time for the banks, so they could unwind the mess of mortgage securities. Apparently, they haven’t been doing that. Instead, they have been buying US Treasuries, and leveraging them to pay back the TARP money, but we don’t really know that for sure.

      There is no plan to actually wind down the big zombie banks. If you check the Financial Reform Bill, you find that there is no Resolution Trust Authority. The Congress simply skipped that question, and left it blank.

      1. Who will Congress be able to bail out if there aren’t any “too big to fail” banks out there?

        And then who can they hit up for campaign contributions?

      2. All I read in the papers at the beginning of October is that TARP not only worked, but was going to cost us less than projected. In other words, a stunning success. Are you telling me that the mainstream media got the narrative wrong?

        1. Nah, I’d never do that, and they never get anything wrong. Besides, it was much more than TARP alone. I think it was something like $12.2 trillion that was committed to banks.

          This is a little old, but you get the picture:


  3. Here’s what is going to happen: Congress will pass a law called something like “The Financial Modernization and Stability Act of 2010” that will retroactively grant mortgage pools the rights in the underlying mortgages that people are worried about. All the screwed up paperwork, lost notes, unassigned security interests will be forgiven by a legislative act.

    Except that property law is handled at the state level and has been since colonial times. The imagined law would pretty much be the last nail in the coffin of federalism and it will be a huge political deal. Not to mention that it would instantly be challenged in court.

    1. Commerce Clause, bitches!!!

    2. What Josh said.

    3. No state can receive federal funds for ______ unless they revise their property laws to address _____, ______, and _____, by December 31, 2010.

      Fixed. And consistent with all of the other “we can’t do this because of federalism” solutions that have been exacted in the past.

      (not that I agree with it, however)

      1. West Texas Boys are smart and possess foresight.

  4. I’m not so cynical as to completely ignore the political backlash the last round of bailouts for deadbeat homeowners provoked–especially considering that reaction still hasn’t taken the Senate yet, much less the House.

    But the kind of thing being projected here is exactly the kind of thing that sent Santelli off on his infamous rant. The rant was about Obama bailing out deadbeat homeowners, who bought more house than they could afford and are now sticking the rest of us with the bill. …and I don’t think the politicians who will have so recently either won office or almost lost office because of those bailouts will be so quick to make the mistake again. So soon? Unlikely.

    That being said, no, I don’t think the Obama Administration has the brains or know how to do the smart thing here. I think the best predictor for what the Obama Administration will do is to look at the Obama Administration’s reaction to the Gulf Oil Spill.

    Except for making some blowhard speeches about who was to blame and “whose ass to kick”, Obama sat around and basically waited for the problem to fix itself.

    That actually may play into the best solution for all of this. …which is for the banks to negotiate in good faith. With their stock prices under pressure, they’re under pretty intense pressure to inject some certainty into their portfolios, and believe it or not, the Obama Administration sitting on its hands while making empty threats might be exactly what’s called for in this situation.

  5. “sitting on its hands while making empty threats might be exactly what’s called for in this situation.”

    FINALLY! A crisis that plays to our core competencies!

    1. Well, it had to be the right strategy eventually…

      And by the way, everybody should rewatch the Santelli Rant before they vote. And especially with talk of another bailout to solve the foreclosure crisis–this is exactly what his rant was all about.

      If you don’t mind me throwing it into the suggestion hat, Mr. Walker, you should consider embedding Santelli’s Rant up yonder. It was all about how working Americans shouldn’t have to pay for their deadbeat neighbor’s mortgages. It was full of challenges to the newly elected President Obama–and it’s just as relevant today as it was in February of 2008.

      …especially now that people are seriously talking about bailing out the deadbeats again.

      1. I assume you’re talking about something separate from this article? This is about letting banks off the hook for paperwork that was not done correctly. It would not bail out your deadbeat neighbor, it would instead make it easier for the bank to foreclose on them.

        1. Not always. BOA et al are very quick to foreclose on those who have equity in their homes, they’re not very motivated to foreclose on those that are underwater.

        2. “If you’ve been following the foreclosuregate story, you’ve probably encountered some explosive forecasts of how the mess will play out, from Wall Street bears preparing for the collapse of the country’s biggest banks to populists predicting a sort of a Homeowners’ Jubilee, with the residents of disputed properties acquiring their houses mortgage-free.”

          First sentence, dude!

          And if you see homeowners who borrowed money and are stickin’ the taxpayers with the bill because of a technicality as “letting banks off the hook”?!

          …then I’m gonna question your objectivity.

          1. Yeah, I signed onto the mortgage, but because the bank didn’t follow some technicality, I get to keep the house for free–and the money has to come out of Ken Shultz’s paycheck?!

            Like I said, that’s a prescription for an uptick in vigilante justice. …and not directed at banks either.

  6. I’m just banging my head against a wall over the use of the fucking -gate suffix….

    1. Just be glad you don’t live in the timeline where we name scandals by adding the prefix Water-.

      1. Stealing my jokes without even a hat tip?

        Who do you think you are, Dane Cook?

        1. “Stealing” a joke would imply intellectual property. There’s no such thing in Anarchotopia. But you knew that.

          1. No such thing as intellectual property? Says who? Why wouldn’t there be – unless you think there wouldn’t be any kind of property at all?

            1. No such thing as intellectual property? Says who?

              98% of the people who comment here. But not me. I’m a libertarian, not an anarchist.

          2. A. Im not an anarchist. Libertarian != Anarchist

            B. See any IP thread, I oppose it. Doesnt mean I cant criticize someone for legalling stealing from me.

        2. I didn’t see your joke, Rob. Looks like a case of simultaneous invention, and possibly of “too obvious a joke to have been worth making in the first place.”

    2. hoe about “Fraudclosure”?

      1. Foreclosurelypse

    3. The real irony is that Watergate wasn’t about water.

      1. Or even a gate…

  7. I guess the squeaky wheel gets the grease! Better late than never, Reason.

    1. You need to read the site more regularly. Cavanaugh put up at least two posts about the scandal last week. I linked to one of them in the post above.

      1. A heluva lot has happened since then, Mr. Walker. You gotta keep up.

        1. doom

          *Inspired by Warren

      1. I read this as “cocktopus” and now I won’t be able to sleep tonight.

        1. In soviet russia, cocktopus sucks YOU!

  8. So far it’s been the holders of secured debt that have taken it in the teeth and there is no reason for that to change. If congress acts at all it will be to protect originating banks who lost paperwork from lawsuits from the SPEs that they assured the paperwork was in order.

    1. And *that’s* interstate commerce. Hell yeah.

  9. What’s really gonna make people like me wanna go vigilante?

    Is if they give these deadbeat homeowners their homes for free, and then the homeowners turn around and refi them with government guaranteed loans.

    And if they bail these deadbeats out? That will happen.

    Why wouldn’t it?

    The government forgives the balance on your home, so you refi it–and lease it out to someone with a job!

    That’s a home run of an investment.

    And you can go rent something.

  10. This was predictable. I’m surprised it took this long for it to come to head though. Probably all those mortgage mods delayed the inevitable.

    1. This was predictable. I’m surprised it took this long for it to come to head though.

      I think you’re missing a word there, although if you want to come to head with me, that’s fine. :-p

      1. My brain runs faster than my hands can type.

  11. Doesn’t anybody purchase title insurance?

    If I was a real estate investor, I’d be scared as shit to purchase any foreclosed property. It’s bad enough that banks want the full price of the note because they have no down payment from the original sale, and they don’t have to actually show the loss until the property is sold. So, the banks foreclose, and nobody wants to pay full price for the property, and the banks don’t need to sell, so the houses sit empty for years deteriorating. Eventually, the value of these homes will be the cost of demolition.

    If you ask me, this is all just a scam to keep housing prices artificially elevated.

    1. I’ll say it again, BOA and their friends are foreclosing first on those with equity. The underwater mortgages are continuing to age.

      1. Tell that to my friend and client, who owns a real estate company, who is trying to buy 3 properties to rehab. He’s got the money, the financing, and the appraisal, but the bank won’t take the hit. They want the full cost of the note, even though the property is valued at about 70% of the note.

        Then there’s the commercial market. Don’t even think about that. Just look at the LTVs of the properties of these REITs. Practically every one is over the high water mark of 80%, with many as high as 250%. Want to buy the Pier One shops at Caesars in AC? The note is $135 mil, and the property is valued at about $52 mil. BoA holds the note. What do you think they’ll be willing to let it go for?

        1. How much of that is a function of regulation…?

          Since July of ’08 (probably before that, actually, but since at least when regulators seized Washington Mutual–not for being out of its reserve requirements, but for trending as though it might?)…

          The regulators have been nutso over reserve requirements. I wish Timothy were here to explain this better than I am, but banks hold loans as assets.

          If they take a loss on those assets, then those “assets” aren’t just written down, they’re gone for regulatory purposes. This goes back to the stress test and mark to market debates.

          If a bank can’t sell underwater “assets” and take real losses because the regulators won’t let them? Then, again, I’m not blaming the bank.

          BofA has been treated especially, famously, harsh by regulators.

          If banks can’t replace underwater loans for cash, then that’s all the evidence anybody needs that regulation is an enormous part of the problem here.

          I think the Obama Adminsitration sees it as part of the problem. The political calculation is that foreclosing on thousands and thousands of families will blow back hard in the election this November. I don’t think anybody in Washington DC really cares what the best thing is to do here beyond the political calculation for the moment…

          Another excellent reason why elected politicians shouldn’t be trusted to make economic decisions.

          1. *Edit*

            I think the Obama Adminsitration sees it as part of the problem solution.

    2. Doesn’t anybody purchase title insurance?

      Yes, but this has cast a cloud of doubt on the title insurance companies. Who knows what can be trusted anymore?

      1. They do stand to take a big hit on this, depending on how it plays out.

      2. Are we really talking about title insurance here?

        Insuring against whether the title is exactly as written and insuring against how I service my own loan would seem to be two completely different things.

    3. Doesn’t anybody purchase title insurance?

      Look up “Intercounty Title” and “fraud” on teh googles.

    4. If you ask me, this is all just a scam to keep housing prices artificially elevated.

      Which in itself is a scam to keep the banks from having to take their losses.

  12. This is about letting banks off the hook for paperwork that was not done correctly fraud.

    Assuming there are bad/non-existent paperwork problems, those mortgage-backed securities are fraudulent.. Crimes have been committed.

    I’m not sure the Congress can simply wave its hand and make this go away.

    1. They can get the President to pardon the fraudsters (assuming it’s interstate crime).

    2. It’s fraud like the S&L scandal or like Enron, but on a scale hundreds of times larger. And for the most part they’ll get away with it. They own the frigging economy – if they go down, they could cause a hit to the entire world’s economy, not just the US. There ain’t no way the government won’t let them get away it.

    3. I think it’s more an issue of nobody having figured out what to do if some of the mortgages in a “basket” are forclosed. As in, how much does the holder of an MBS get when the mortgage is unravelled and the property is resold.

      These things were set up to give the holders a share of the interest payments. But what do you do when half of the people in the basket stop paying their mortgages entirely?

      Who gets the money when the forclosed home is sold?

      This is really the original problem, which still hasn’t been resolved. Nobody can figure out how to value the MBS paper, so they won’t trade it, so it’s value is zero.

  13. Congress will pass a law called something like “The Financial Modernization Family Home, Hearth and Stability Pie Act of 2010.”

  14. I’m just banging my head against a wall over the use of the fucking -gate suffix.


    And obviously the solution is to simply have the government pay off everyone’s mortgage. No political fallout from bailing out banks. A new realm of stability.

  15. I don’t think people will be that p-o-ed, assuming Congress passes a reasonable law.

    AFAICT, most people think that if you borrowed the money and didn’t pay it back, you’re out of luck. (They also think the banks should get it right, but that’s much lower on the list of priorities).

    If Congress passes some kind of holder in good faith law for holders of mortgage notes and subsequent buyers of the property, I doubt many people will be mad.

  16. Here’s the problem:

    Say Congress actually voids all those contract provisions that require bad loans to be put back to the originator, and that it stands up at SCOTUS (which I’m not so sure of).

    Now those mortgage-backed securities are stuffed with bad mortgages that can’t be dumped. Their value is considerably less than it would have been if the mortgages had been as promised.

    There’s a cash flow problem here. Those bonds are backed by non-performing loans, that are feeding cash to pay the bondholders. If the cash doesn’t come in from monthly payments, the loans are supposed to be foreclosed, and the money raised in foreclosure goes to keep the bonds current. Those foreclosures aren’t happening, regardless of the whether there are problems with the paperwork. Where’s the money coming from? The bond insurance (read: AIG)? Really?

    So, who takes the hit?

    The (innocent) owner of the securities? Many of which are pension funds that are under water already?

    The bond insurer? That we bailed out once already? The one with a defense to paying insurance because the pools it was insuring weren’t as promised?

    The taxpayer, being hit up for another trillion-dollar bailout? Of the exact same problem that he’s already been hit up for, but the money went elsewhere?

    The investment banking operations who put this crap together and failed to do their jobs?

    Seems to me like it ought to be the latter.

    1. You are on the right track here. But I say yeah, the bond holders need to take a hit. We can’t just hand granny a bunch of money because we feel sorry for her.

      But, what you’ve just illustrated is precisely the problem with the CDO/CDS insurance system. And the reason why the bailout of AIG was a horrific mistake.

      What they’ve set up, if we keep bailing out AIG, is a system where you can’t lose money. All you have to do is “insure” the value of your assets at the top of the market, and then collect the insurance when it drops.

      Which is exactly the scam that many claim Goldman Sachs was running with the naked credit swaps. They would sell people a bunch of securities they knew were shit, then take out a naked CDO, then short them, then collect the insurance. Like in double indemnity. Take out an insurance policy on someone, then off him, and collect the money.

      Now, the reality is that the insurance prices would have been sky high on this shit if it weren’t for the erroneous AAA ratings on all thise bad paper. You simply charge a lot more to insure a high-risk security than a low-risk one. But the one part of the story that the new documentary “Inside Job” gets wrong, is that the ratings agencies didn’t do it deliberately. They were asleep at the switch and just kept plugging numbers into some shitty risk models. And the idiots at AIG took those ratings at face value and priced their insurance accordingly.

      The way this would normally play out in a free market is that THE INSURANCE COMPANY WOULD GO BANKRUPT. Thus staunching the flow of money to the bullshit artists behind the scheme.

      But, no, the US government gave the largest bailout of all to AIG, the originator of all that retarded insurance policies. And CONTINUES to give money to AIG. This ensuring that the worst actors in the whiole drama continue to make out like bandits.

      The other way it would play out normally is that the RATINGS AGENCIES WOULD GO BANKRUPT. But there, again, the US government protects the market positions of Moody’s, Fitch and S&P, making them quasi-regulatory agencies so they don’t have to face competition. Where if they had actually had competition, they might not have been snoring at their consoles while they were rating subprime NINJA loans AAA.

  17. “Will the public be outraged? Probably.”

    Should the public be outraged? No.

    Because when you set aside all the populist rhetoric, the fact remains… when one borrows money, one must repay it. If one defaults on a mortgage, one should expect to lose title to the property.

    1. The question isn’t whether someone is losing the property, the question is who’s getting it.

  18. I’m having trouble understanding the outrage here. The problem appears to be that banks are having paperwork issues with the process of foreclosing on people who aren’t paying the mortgages.

    And the paperwork was screwed up by a third party some years ago?

    What is the horrific precedent being set by not letting the letter of a business transaction get in the way of the spirit of this transaction?

    Pay your mortgage, keep your house.

    I also don’t see how this is some sort of payoff, either. It’s not like BofA doesn’t already have more foreclosed properties than it can dispose of.

    If anything, it seems like this legislation would just tidy up the aftermath of what’s already happening: a private moratorium while BofA (and everyone else) finds their homework.

    1. What is the horrific precedent being set by not letting the letter of a business transaction get in the way of the spirit of this transaction?

      The sheer volume of bad paperwork means a few percent of titles will be transferred to entities that have no legal claim to them. Sounds like a dangerous precedent to me.

  19. One thing they should do is void all of the “naked” CDO/CDS instruments.
    That would help simplify things.

  20. gsd hdfNice post.It’s all in the eyes and where they are looking~

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