So keep these in mind as you read about the servicers here. There have been worries that they, as a designed institution, were simply not qualified for this job going back a decade. They have massive conflicts with the investors they are supposed to be working for. They profit when homeowners collapse and lose money when they are brought up to a normal payment schedule (made current). And if the instruments don’t have the notes necessary to bring standing to carry out the foreclosures they have to take a massive tax hit in order to take the note into the trust. And regulation to handle this isn’t in place.
And the straw teetering precariously on the camel’s back is this: Nobody has any confidence that Wall Street will have to pay for any of this.
This scandal is just one more major piece of evidence that the deck is stacked against regular folks in favor of the financial interests. And people are already highly pissed off. They wonder why they haven’t been able to get their mortgages modified while Wall Street has lined its pockets with public money. They wonder why homeowners got a pitiful, bank-friendly $75 billion bailout program (most of which hasn’t been used) while the banks got $750 billion, plus a few trillion dollars worth of guarantees, direct and indirect subsidies, and other benefits.
But, of course, the biggest problem here is the systemic financial risk that smart folks say may be looming. Carney, to his credit, was on to this (as he’s on to the WSJ’s foolishness, too) in his primer. McArdle, who thinks that the “real scandal of the foreclosure mess” is our “antiquated title system”—and, oh, and in case that didn’t work, hey, look over there: Fannie and Freddie!—doesn’t mention it.
The Washington Post, which has done as good or better a job covering the foreclosure scandal than any other paper, had this on page one today:
Beyond sloppy documents, the foreclosure debacle has exposed one of Wall Street’s little-known practices: For more than a decade, big lenders sold millions of mortgages around the globe at lightning speed without properly transferring the physical documents that prove who legally owned the loans.
Now, some of the pension systems, hedge funds and other investors that took big losses on the loans are seeking to use this flaw to force banks to compensate them or even invalidate the mortgage trades themselves.
Their collective actions, if successful, could blow a hole through the balance sheets of big banks and raise fundamental questions about the financial system, financial analysts and a lawmaker said.
If judges rule in favor of such lawsuits, “it could be 2008 all over again,” said Josh Rosner, managing director at Graham Fisher & Co., referring to the Wall Street meltdown that occurred after Lehman Brothers collapsed.
Bloomberg’s on the same track:
The extent to which there’s a documentation problem is unknown to investors, Jeffrey Gundlach, chief executive officer of DoubleLine Capital LP in Los Angeles, said in an interview. If widespread flaws are found in the paperwork for mortgage- backed securities, it could roil a housing market already struggling with a freeze in foreclosures prompted by legal challenges to the documents mortgage servicers used to seize homes of delinquent borrowers, he said.
“If people say that you cannot prove that you own the loan, it could be really cumbersome to untangle,” said Gundlach, whose firm manages $5.5 billion in investments, mostly mortgage-backed securities. “It has the potential to spiral into much, much more. There have been many twists and turns to the foreclosure process since the credit crisis started and this is one more turn of the wheel, and it can spin out of control.”
The banks have dug themselves a really big hole here. Whether they’ll be buried in it remains to be seen, but these cats may be on life No. 9 if the worst-case scenario arises here.
TARP II just ain’t gonna happen.