If you still doubt that the burgeoning foreclosure scandal is going to have nasty consequences for the economy and the financial system, take a look at this New York Times story this morning.
It reports from the center of the foreclosure mess, finding that sales of foreclosed houses are already being delayed.
Amanda Ducksworth was supposed to move in to her new home this week, a three-bedroom steal here in central Florida with a horse farm across the road. Instead, she is camped out with her 7-year-old son at her boss’s house….
Fannie Mae, the giant mortgage holding company that buys loans from commercial lenders, is pulling back sales of homes that might have been foreclosed in bad faith.
Yves Smith points to a letter from Congressman Alan Grayson and says:
… the banks’ failure to adhere to contractual and legal requirements in the residential mortgage backed securities market are so extensive and widespread as to constitute systemic risk.
Although the data points we have seen so far could be considered anecdotal, we have evidence that strongly suggests that major RMBS originators, the investment bank packagers, and the bank trustees failed to convey the notes (the borrower IOU, which is critical to having the legal standing to foreclose in 45 states) to the RMBS trusts starting in 2005, perhaps even earlier. And comments from industry insiders suggest this problem is pervasive.
That puts a cloud over the entire US RMBS market, the biggest asset class in the world. This paper was sold as secured; the ability to offset the cost of borrower defaults by seizing and selling his house is critical to the value of the instruments. And if no assets were conveyed to a particular trust by closing, an even uglier possibility exists: under New York law, which was elected by RMBS as governing law for the trust, it would be considered to be “unfunded”, which means it does not exist.
Felix Salmon also isn’t mincing words about how enormous the impact could be. He calls the scandal “an absolutely monster legal mess” that “‘threatens not only a large chunk of the financial system but also venerable civic institutions, like the courts.”
Argentina’s sovereign default has been called “the slowest trainwreck in history”, but this one might turn out to be slower, bigger, and much less fair. Millions of people have already lost their houses to lenders who didn’t have the proper paperwork, and it’s unlikely they will ever get any redress. For people who haven’t yet been foreclosed upon, however, it could now be a very long time before they lose their house.
The Washington Post writes about this not unlikely scenario:
For big banks, “there’s a possible nightmare scenario here that no foreclosure is valid,” said Nancy Bush, a banking analyst from NAB Research. If millions of foreclosures past and present were invalidated because of the way the hurried securitization process muddied the chain of ownership, banks could face lawsuits from homeowners and from investors who bought stakes in the mortgage securities - an expensive and potentially crippling proposition.
For the fragile housing market, already clogged with foreclosure cases, it could mean gridlock and confusion for years. And there is concern in Washington that if the real estate market and financial institutions suffer harm, it could force the government to step in again.
MIchael Hudson notes that fraud has been a way of life for a good part of the mortgage industry for the last decade or so. He calls the fake documents, forged signatures, and rocket dockets
Shocking stuff. But surprising? Not for anyone who’s been tracking the recent history of the mortgage machine. Just about every corner of America’s mortgage industry has been blemished by significant levels of fraud over the past decade.
Reuters’s Scot J. Paltrow reports on a conveniently timed bill that sailed through Congress and would help give the financial industry “cover” for its misconduct.
After languishing for months in the Senate Judiciary Committee, the bill passed the Senate with lightning speed and with hardly any public awareness of the bill’s existence on September 27, the day before the Senate recessed for midterm election campaign.