TARP Oversight Panel: Securitization Mess May (Re)Crash the Economy
The TARP Congressional Oversight Panel just released a report dedicated to the foreclosure fraud problem and the securitization mess underlying it. They conclude that the problems may represent a significant problem for the housing market and the financial system more generally.
Here’s a great summary of why:
If documentation problems prove to be pervasive and, more importantly, throw into doubt the ownership of not only foreclosed properties but also pooled mortgages, the consequences could be severe. Clear and uncontested property rights are the foundation of the housing market. If these rights fall into question, that foundation could collapse. Borrowers may be unable to determine whether they are sending their monthly payments to the right people. Judges may block any effort to foreclose, even in cases where borrowers have failed to make regular payments. Multiple banks may attempt to foreclose upon the same property. Borrowers who have already suffered foreclosure may seek to regain title to their homes and force any new owners to move out. Would-be buyers and sellers could find themselves in limbo, unable to know with any certainty whether they can safely buy or sell a home. If such problems were to arise on a large scale, the housing market could experience even greater disruptions than have already occurred, resulting in significant harm to major financial institutions. For example, if a Wall Street bank were to discover that, due to shoddily executed paperwork, it still owns millions of defaulted mortgages that it thought it sold off years ago, it could face billions of dollars in unexpected losses.
[snip]
In addition to documentation concerns, another problem has arisen with securitized mortgage loans that could also threaten financial stability. Investors in mortgage-backed securities typically demanded certain assurances about the quality of the loans they purchased: for instance, that the borrowers had certain minimum credit ratings and income, or that their homes had appraised for at least a minimum value. Allegations have surfaced that banks may have misrepresented the quality of many loans sold for securitization. Banks found to have provided misrepresentations could be required to repurchase any affected mortgages. Because millions of these mortgages are in default or foreclosure, the result could be extensive capital losses if such repurchase risk is not adequately reserved.
To put in perspective the potential problem, one investor action alone could seek to force Bank of America to repurchase and absorb partial losses on up to $47 billion in troubled loans due to alleged misrepresentations of loan quality. Bank of America currently has $230 billion in shareholders‟ equity, so if several similar-sized actions – whether motivated by concerns about underwriting or loan ownership – were to succeed, the company could suffer disabling damage to its regulatory capital. It is possible that widespread challenges along these lines could pose risks to the very financial stability that the Troubled Asset Relief Program was designed to protect. Treasury has claimed that based on evidence to date, mortgage-related problems currently pose no danger to the financial system, but in light of the extensive uncertainties in the market today, Treasury‟s assertions appear premature. Treasury should explain why it sees no danger. Bank regulators should also conduct new stress tests on Wall Street banks to measure their ability to deal with a potential crisis. [my emphasis]
There’s a lot of conditional language here, reflecting a general uncertainty about how deep the shitpile is this time around. But the demand that Treasury conduct another stress test of these obviously insolvent banks is a good start.
IMO, this goes back to what wasn’t done at beginning of this mess.
BushCo, well…
But BO had a chance to change things… the coverups, the bailouts, the empowering of crooks who built this house of cards.
I was a contractor for consortium of banks who attempted to build a system to trace titles. I can’t give details (NDA), but long/short: we went through 3 iterations of this project, each following the previous attempt’s failure. The definition of failure: 1st time, going as much as 7 transactions (eg: sold title, repackaged mortgage bond, rinse repeat) we were able to find around 40% of those titles.
2nd attempt added more system records (MERS, and some others): minimal improvement. 3rd attempt about the same.
They then closed the project.
Point being: everyone involved providing data: 7 primary banking institutions, on 2/3rd attempts a number of brokerage houses’ databases added… they all knew this problem existed and in a big way.
They also knew, at this time, that interest reset for the various ARM(s) was about to hit and blow the thing wide open. It hit, and it did.
Given…
* leverage on these bonds (45-1 by time Paulson became Sec Treas)
* massive marketing worldwide… sold as AAA everywhere, on every continent
* saturation of sale of these bonds to private/state institutional funds (retirement/pension, “college savings” funds, etc etc.)
… given all this, and given evaporation of underlying economy providing wages to even approach support of pre-bubble-burst home prices, one didn’t have to have a super computer in order to comprehend the magnitude of what was to come.
BO and co. did nothing but feed the beast. Nothing… nada, was done to identify malfeasance, separate honest endeavors from crooks, nor make a stand to re-direct investment (eg: America’s wealth) towards what was needed.
To date, we’ve made -0- progress in that regard… ZeeeeeROH!!! None.
Everybody in position to do anything is somewhere between let’s pretend and outright lieing.
It’s a huge mess, the public is entirely mis-informed as to details and causes, and from what I see there’s no help on the way.
Oh well…
What you are leaving out is that they were able to retain those “assets” on their balance sheets and artificially inflate the wealth of their banks. Houses are listed as assets on multiple financial institutions balance sheets, but they haven’t been owned by them for months. It’s flat out securities fraud masquerading as “mistakes” or “process errors”. It’s all about creating a sense of wealth out of paper that doesn’t even exist anymore.
Yes, and it’s even more than that. It’s also an attempt to shift the losses of the rich onto the poor.
Assuming that our big banking institutions are already insolvent, any losses they incur will end up on the taxpayers doorstep. And what are our politicians in DC protecting? Tax breaks for the rich, benefit cuts for the poor.
Well, what I’ve preached for some time is the massively complex nature of this thing. And each step, from it’s inception, was error &/or outright fraud built upon the same, rinse & repeat, over and over and over. Still today, people uncover one aspect of it (like the foreclosure robo signing) of drool over the injustice, but the entire tapestry… the whole process…. a description encapsulating everything…
That is not well formed in public conscience, nor well explained in financial media (a few books, but even then, not comprehensive IMO). WSJ still OpEd’s blaming this on minority loans in a few poor neighborhoods (which BTW performed very well). Issa has said he wants to investigate this very thing.
But nowhere has media, fed. politicians (especially BO) undertaken task of explaining this.
Until public consciousness arises above individual details and their own localized self-interest, I see know way we’re going to get consideration of the kinds of fixes/corrections/prosecutions needed to rebuilt both our economy and (IMO) rescue value of $USD.
One site that has been doing yeoman’s work for years to expose the underbelly of the TBTF institutions is Inner City Press,out of the Bronx.
Their Citigroup Watch and JP Morgan Chase watch are exceptional.
They started out as a community organization involved in addressing community investment issues related to fininacial exploitation of inner city neighborhoods.
Some wonderful ,continuous updated material seldom seen elsewhere.
Marcy, no matter how this is viewed, it is a mess from all directions. The fact that it is a mess, cannot be the reason to refuse or excuse the need to uphold the rule of law.
Regulation, good. (As long as it is enforced.)
Deregulation, one,big,bad,deep,screwed up mess.
Thanks for covering this, EW.
I’ll bet “Treasury” was encouraged by Larry Summers to handle things The Harvard Way– i.e., gather all the smart people in a room, and hammer out how to resolve the crisis without any messy indictments, trials, etc. in a series of backroom deals.
I hope this approach gets trashed by all the parties now waking up and smelling the coffee, and starting their own lawsuits. And there are *lots* of parties who have a dog in this fight– the 50 state AGs, for example, showing that this can line up as a States vs. Fed fight.
Bob in AZ
Isn’t the obvious solution to Nationalize the Banks and pool their assets into a Solvency Fund, to be used to re-negotiate mortgages to fair values at fair rates?
Wouldn’t that be a good way to ‘fix’ the title issues, and jump-start the real-estate market, at the same time?
Not to mention cutting-out the cancerous greed that’s eaten through everyone’s trust, and threatens to take-down the whole financial system…
emptywheel:
Seen Pincus on Bush today?
http://www.washingtonpost.com/wp-dyn/content/article/2010/11/15/AR2010111506015.html
Remember the blank immunity handed out to those that Kidnap, torture, easedrop, and even murder ? What the report is setting up another immunity, this one for any of the ” mistakes ” caused by or having anything to do with the MERs. This is exactly the same thing we did for the Telecoms and their part in Wiretapping America. Should pass this Congress without a blink of the eyes heh.
On topic – For those with an appetite for swimming through cheerleading and self-justification, you might take a gander at Public Intelligence’s copy of the:
Federal Reserve Bank of New York Shadow Banking System Research Report
Thanks for the link. Anyone know what relationship (if any) one of the co-authors of this report, Hayley Boesky, is to Ivan Boesky (sp??)?
Have we lost that Loving Feeling?
… now it’s gone, gone, gone…
Wooo oh ooh…
“But the demand that Treasury conduct another stress test of these obviously insolvent banks is a good start.”
Surely you speak in jest? Serial kabuki. Meta-kabuki!
Marcy,
Do you or any commentators here know whether there is any possibility that GAO could be tasked to do a major audit – and I mean a truly humongous major audit – of the title problem?
Obama has consistently been sleepwalking through this crisis, and when he occasionally opens his eyes he resembles nothing so much as a deer caught in the headlights. He has always been in denial about the scope of the risk, and as more evidence accumulates that the securitization mess is deteriorating, Obama’s response appears to be to sink deeper into DeNial. Every day Obama again proves himself the world’s most prominent example of The Peter Principle (i.e., everyone rises to a position just beyond his level of competence).
Not to worry. As bmaz reported, Congress (especially next year) and Obama may pass a law to hold the Banksters retroactively harmless of fraud. Also, as you know, special judges in Florida agreed that attorneys, as officers of the court, would never bring a fraudulent foreclosure to trial because, well, they are attorneys. The judges will clear the paper work backlog based on that tenet.
Thanks.
Senator Kaufman and the oversight panel certainly give a sober wakeup call to Mr Geithner.
Tim Geithner certainly does have an amazing amount of faith in corporate institutions which appear to depend on Romanian immigrants who say “We don’t do mortgages in my country”.
Regarding the insolvent banks, the oversight panel seems to be throwing around numbers sufficiently large to prevent a TARP II. How many more extend and pretend tricks are there?
Can I go O/T already?
Keith Olbermann’s Special Comment on the state of American journalism last night is not to be missed. One of his best rants in some time.
Link via Rachel Maddow’s website.
Bob in AZ
EPU:
Disbarment?:
http://jacksonville.com/news/florida/2010-11-15/story/foreclosure-firms-facing-action-florida-bar
The amazing thing is how saving financial institutions seems to take precedence over saving legal institutions. Yeah, that’s how far we’ve fallen into the hole…a hole that was begin by doing what financial institutions wanted the government to do by watering down or ignoring the laws and regulations that had kept the American much stabler and less effected by fraudulent business practices and unsound investments and loans for three generations. All gone in a generation…that’s how powerful fraud and greed are and why we need strong enforcement of sound financial regulations, rather than just pandering to banks and their investors.
to ew re Wheres The Note: see comment at link @12:
Actually, I don’t get it — nobody’s actually going to get a wet-ink original note in response to Wheres The Note, are they? I read that and feel my eyes cross