Doctor Cleveland's picture

    Bailout II: The Sequel

    So, the story about bad mortgages, by which I mean not simply ill-conceived loans on houses that have hemorrhaged value but loan transfers with forged or non-existent paperwork, is beginning to make it into the daily news. We're going to hear much more about it, I'm afraid. As of today, all 50 state attorney generals are beginning to investigate fraudulent foreclosures and mortgage filings by the banks.

    One obvious and huge problem is that people are losing their homes without due process. That is obviously unjust, and bad for the economy while we're at it. A second problem is that an outright moratorium on all foreclosures will, in fact, do destructive things to the economy. That is a sobering problem.

    But there's a third problem, just beginning to creep into view: most of those mortgages have been sliced, diced and pureed into the infamous mortgage-backed securities we all remember so fondly from 2008. That securitization, the process of turning individual mortgages into the various bonds, CDOs, and other derivatives that they were turned into, means that the titles to the underlying mortgages were transferred several times between various financial entities. But if the transfers of the mortgages themselves were never legal, and it's becoming clear that illegal transfers were routine, then there it becomes unclear if these mortgages were ever legally sold, or who owns them. And most of these securities have clauses that force the original sellers to buy back the loans if too many of the underlying mortgages turn out to be bad.

    Now, if this sounds like a recipe for everybody in the financial world to sue everybody else, it is. But it's worse, because it becomes quite unclear who owns any of those mortgages at all.

    Are you excited yet?

    Remember all those big financial firms who almost went under during the financial crisis two years back? Remember how they were in danger of going bankrupt because they were holding all of these complicated securities backed by crappy mortgages, and when those became, ahem, "distressed assets" by losing most of their alleged face value the banks were no longer actually solvent? How could we forget, right? Well, imagine that all of those terrible securities have now officially become hot potatoes that the banks can legally attempt to foist back on one another. The new game is about to become You never legally sold us this, so here. It's still yours.

    And before you say that this is all about technicalities, ask this: what lawyer is going to let a client lose tens of millions of dollars when a "mere legal technicality" would prevent that loss? Which megabank is going to go under by voluntarily overlooking such technicalities while all of the other megabanks use them to wriggle toward survival? I think we all know the answers to those questions.

    Back when those crappy securities were merely "distressed assets," the Federal government bailed out the owners of those companies so they could stay in business pretending to be solvent. Now those assets are likely ownerless, meaning more huge write-offs on balance sheets, and various huge firms are going to be trying to stick one another with massive losses. Meanwhile, no one is going to be ready to trust any of those firms, because no one knows who is going to come out a winner and who is suddenly going to end up eating a $2 billion loss. Basically, there's a real danger of repeating 2008: massive financial firms in danger of collapsing, and taking large chunks of the real economy down with them when they go, and a general financial panic in which uncertainty about who is about to go down makes everybody unwilling to do business and thus leads to even more firms actually going down.

    Oh, and by the way, the TARP money that the Administration could use to bail out huge firms in a jam? Just expired. Isn't it ironic?

    And here's the thing: we can't repeat the bailout process from two years ago. We also shouldn't, but more importantly we can't. It was massively unpopular then, and it's only grown more unpopular. The Republicans are currently building their entire program around their alleged loathing of the first bailout and trying to stick the Democrats with the blame for it. And no voter in the world could stomach the same firms coming back with their hats in their hands again, not so soon.

    So our national leaders may face a stark choice sometime over the next year. TARP II will be out of the question. Letting big companies fail, which the Tea Party Republicans will insist on, will likely make TARP I look sensible by decimating our economy for the next thirty years, but if we make that mistake it won't be reversible. The only way to intervene to save the financial sector will have to be punitive: Obama would need to nationalize large financial firms, cut executive pay, send a couple of people Wall Street reveres to prison. The Republican opposition will of course try to prevent anything even remotely like that, and most of what will need doing will require Congressional approval. But if Obama tries anything else, he's done for. The only way to build popular support for a second intervention in the financial sector is to go in as the sheriff cleaning up town.

    I have no idea what will happen if push comes to shove again. But what Obama does will be about the choices he perceives himself as having. He would never do anything resembling this except to avoid disaster. But disaster may be coming.


    [UPDATE: Here's Annie Lowrey's worst-case-scenario and Daniel Indiviglio's write-up which actually speculates baaout "some kind of TARP II." h/t Ezra Klein and Atrios]


    To be fair, I'm no Tea Partier but I'd insist on letting banks fail too.  Excellent post, by the way.

    We're definitely not dealing in technicalities here.  The whole system of transferable private land and physical property depends on having clear rules for how to tell who owns what, when and why.  You might have seen that JPMorgan actually pulled out of the industry-standard MERS system today.  That would be like Charles Schwab saying "You know what?  The New York Stock Exchange is not actually facilitating stock transactions, we're out!"

    And Dr. Cleveland is right on that in most cases if the seller of these obligations doesn't meet the documentation requirements, the securities can be put back to the seller.  In some cases these obligations could even be put back to bankrupt corporate estates like Lehman Bros. Interesting times ahead.

    It is possible that some of the financially stronger companies will be able to resist having the securities put to them for either a long time or forever.  Also that some will take them, immediately write them down and sell what's left for pennies.

    But none of this is good.

    Thanks for the kind words, Destor.

    I believe that letting the large firms fail in a strictly passive way would, in fact, bring large chunks of the economy down with it. I may loathe Goldman Sachs and Citigroup, but if Goldman Sachs and Citigroup filed for bankrsuptcy tomorrow, a lot of people would suffer. And I don't want to see 20% unemployment in this country, ever.

    I'm seizing failed banks ... dissolving their ownership and restructuring their management's contracts, but gradually winding down their functions so that the bank's 600 counterparties don't go bankrupt the next week. And I'd be happy for seized banks to eventually be dissolved outright, broken up into smaller units and sold off into private hands, or simply sold outright.

    I think we mean the same thing by failure.  We really mean "unwound in a timely manner" the same way any corporation goes through bankruptcy.  I actually suspect that some of Goldman's parts are worth way more than they are in the whole.  But take that opinion for what it's worth.  It is okay for equity holders and management to be wiped out and for bondholders to take haircuts.  When I say "let them fail" what I really mean is that we take care of the public first.


    Hmmm. Last weekend I bought a paper copy of the Wall Street Journal, and there was an article advising readers that paying off an underwater mortgage was just dumb. It wasn't the first time I had heard that advice, but before it had been from goldbug and peak oil sites. I was wondering why the WSJ suddenly got on board, and I think you've answered that question. I've read lots of stories of people fending off foreclosure by asking the lawyers to, "produce the note," and others of people getting paid to stay in foreclosed homes just to keep them from being ransacked, but I chalked some of that up to urban legends.

    I think that the urban legend part is that you can not pay and still keep the house.  Yes, you can stave off foreclosure by saying "produce the note" though it's also the case that a lot of judges in foreclosure heavy areas will let the foreclosure go through anyway.  Your appeal or financial ability to wage war, is not an issue for them.  Remember also that many of these foreclosure judges are retired judges just making a part time buck.  You have no recourse against them.  We've actually seen one guy without a mortgage (he owned his home free and clear) nearly lose his home despite a lack of documents because, ultimately, a foreclosure is an act of force.  A judge signs off and the sherriff evicts you.  It's a bit like claiming your civil rights were violated during an arrest after a routine traffic stop.  That might well be so.  Someday you might even get a day in court to prove it.  But it won't help you much while you're getting arrested, booked, held and arraigned.  At that point you're subject not so much to the force of law but the law of force.

    No doubt the government, the Fed and the financial system have a vested interest in sorting this out but we've gotten no signal from any of them that they will try to help people avoid foreclosure while they do it.  That is simply not the goal.  I hope that troubled homeowners aren't fooled again into thinking that anyone is on their side.

    Paying off an underwater mortgage is dumb, if we're going to be all about economic rationalism. (Maybe it's the moral thing to do, but that wasn't the question the WSJ was trying to answer.)

    If you bought, say, a $750,000 house in Phoenix at the height of the boom and still owe let's say $500,000 dollars on it, but the sales value of that house is now only $300,000 dollars, paying that mortgage means losing hundreds of thousands of dollars. The market it not going to return to boom-and-bubble prices, so you're looking at spending half million dollars to get fifty grand, or maybe eventually a hundred and fifty, in equity.

    Naturally, defaulting on a mortgage will destroy your credit rating, but if you're hundreds of thousands of dollars underwater on your mortgage that six figuures of pure loss outweighs access to credit. To stick with my example, would you pay $450,000 only for the ability to borrow more money and pay it back at market interest? You're better off keeping the 450 grand.

    I'm not saying that's right. I'm saying that's where the incentives are in our current system. If bankruptcy judges were allowed to modify mortgage principals (so that both homebuyer and mortgage lender shared the loss from the collapse of housing prices), the incentives would look very different.

    But I agree, it's shocking that the WSJ is admitting this.

    I actually don't see a moral component to paying off the debt.  The bank knew what it was getting into.  Indeed, the bank had immense capacity that the buyer did not, to evaluate the sale price of the asset they were using to guaranty the loan and to evaluate its potential future value.  If the bank priced the loan correctly then the bank adequately protected itself by charging a premium that would cover, partically or in total, potential losses from a severe drop in the home's value.  If the bank did not do that, the bank knowingly did not do that.

    I keep seeing people say "people were so strupid to pay that much for a house that was obviously overvalued."

    What I don't see so much is the more accurate assessment: "the banks willingly used overvalued assets to secure loans used to purchase those assets, in effect betting that the assets would remain overvalued for the duration of the mortgage."

    So there's no moral component here, just an economic one.

    I'd go further than that: I believe many lending banks lent to borrowers who they suspected would default because the lenders figured the underlying asset, the overpriced house, would secure the loan. I suspect the thinking was that if a bunch of borrowers paid for a few years and then lost the house to the bank, the bank would still profit. And as you say, the banks had more information and more power and they choose to make extremely reckless business decisions.

    So no, I don't believe that moral judgment should be reserved for borrowers and not lenders. I just didn't want my short response to be misread as an endorsement of defaulting on loans as a general practice.

    Good call.  It's a risky financial strategy.  As a moral conundrum?  Not much of one.

    The Great Mortgage Mystery

    The big question from the mortgage meltdown isn't why so many distressed homeowners are defaulting on their loans.

    It's why any of them are still making payments.

    In the worst-hit areas millions have no equity left, and little hope of seeing any anytime soon. The market value of their homes is far below the size of the mortgage.

    If they just stop paying, what is going to happen to them? In many cases they may get to live in the home rent-free for months, even years, until the bank gets around to seizing it.


    Nice link. Thanks.

    I can't possibly overstate how much I agree with your comment.  The willingness of people to ignore the asymmetry of information here is nothing short of astonishing.  Also,

    "people were so strupid to pay that much for a house that was obviously overvalued."

    is nothing but pure Monday morning quarterbacking.  Yes, it is fully obvious, with the benefit of hindsight, that the assets were overvalued.  However, you usually read crap like this from trolls on Internet forums who are spending their time writing such comments precisely because they had absolutely no idea what was going on when it actually mattered.  If they had really been so damned good at doing securities analysis, they would have been fabulously short on mortgage-backed securities when it would have made them rich.  Goldman sure as hell was, but then you don't hear them complaining about buyer stupidity, do you?

    Well, the Fed has a lot implicit leeway to intervene if Congress and the Executive are paralyzed. They'll just transfer the toxic assets to their balance sheet in some way.

    Maybe. But harder to do with paper that has no clear legal ownership.

    As if you need it, I still must render unto you the Dayly Line of the Day Award for this here Dagblog Site given to all of you from all of me for this gem:

    Obama would need to nationalize large financial firms, cut executive pay, send a couple of people Wall Street reveres to prison. The Republican opposition will of course try to prevent anything even remotely like that, and most of what will need doing will require Congressional approval. But if Obama tries anything else, he's done for.


    I would just change the last sentence. Anything else and we are done for.


    Thanks, Richard.

    Great post as usual, Dr C.  I'd like to add Felix Salmon via Brad DeLong to the list of links you provided.

    And it's worth pointing out that this was one of the major objections to the top-down approach of TARP and PPIP.  The underlying factor, the housing market, was never seriously addressed.  Now it won't be ignored.

    With people like Larry Summers advising, you had to know it was going to be top down, any other way, and the screams would have been it's Socialism.

    To these fat cats, it would have been a moral hazard to have assisted the poor and the least amongst us.

    My father used to tell me a guy in a three piece suit could steal more from a bank than a farmer in Bib overalls, yet the farmer was so scrutinized just to get seed money.

    Prepare for the worse

    (1 Timothy 6:7-10) 7 For we have brought nothing into the world, and neither can we carry anything out. 8 So, having sustenance and covering, we shall be content with these things.

    9 However, those who are determined to be rich fall into temptation and a snare and many senseless and hurtful desires,

    which plunge men into destruction and ruin.

    10 For the love of money is a root of all sorts of injurious things, and by reaching out for this love some have been led astray from the faith and have stabbed themselves all over with many pains. . .



    Thanks for the link which largely concurs with the premise of Dr. Cleveland here, if not going so far in his predictions of the consequences.

    Is there any doubt, that whatever happens, Goldman Sachs and Wall Street will make billions more out of this mess?

    I heard (or read), today, that many pension funds are heavily invested in those questionable mortgage-backed securities.  The future appears bleak to me.

    I'd like to see some discussion of this point, and how concerns for the little guy whose retirement is dwindling fits with a let them fail narrative.  But I'm not counting on it. 

    You don't have to save insolvent and woefully irresponsible firms to keep pension funds whole.  That's how it fits.

    Thanks for the post, Doctor.  Firedoglake has been keeping track of the fraud for quite awhile; don't know if any of Kouril or Dayens columns would be of interest to you, but here's the page:

    It just seems that much of it has been evident for quite a long time now, and not much of the jumping up and down has gotten much attention or action until now.  A lot of people lost their houses who might not have needed to; it's so very sad.  And depressing.

    Haven't read all the liks at FDL, but here's an interesting article from McClatchy about how the mortgage frauds have been brought to light by a couple of citizen investigators:

    Looks great, Miguelito.  I'm working on something, and will read it better later.  The two FDLers have been working it, too.  Lots of new pieces up yesterday, too.  the link is more the archives... 

    This does seem like a mess if the highest order.  I have not only not owned a home, I have not even contemplated owning one.  The world of mortgages just from the main street home owner point of view is over my head. Which is to say I don't know much about the nuances of this issue. So let me say thanks for this post, and also to Destor, for bringing some clarity at what is at stake and the variables involved.  But just thoughts and ponderings on this:

    1) Isn't much of the "fraud" have to do with the person who signed under affidavit that that they reviewed the details just signing it and deferring to the actual person who reviewed it?  In other words, the fraud in many cases has to do with a technicality and not with the actual validity of the foreclosures.   

    2) Given the power of the federal government, including emminent domain, what would stop the feds from just grabbing all of the property and then awarding it to the owner who had it at last look? All done in the name of stability.

    3) The Obama administration, and specifically Obama, will work to head off a total meltdown.  Which is what we should all want.  If some make "billions" off it because of the system is set up the way it is, so be it.  I would rather some of the rich get richer if it means that we don't suffer an economic meltdown that would make what any of us here in this country have gone through seem like a walk in the park.

    4) Some of the properties that are now being brought under question because of the fraud now have people who have bought legitimately the home.  Are we willing to throw them to the street in order to get a sense of justice by punishing the banks and other institutions involved in this mess.

    5) Which brings me to the final pondering: should our top priority be getting to a stable economy or punishing the institutions and individuals who brought us to this point? Of course we would like to keep our cake and eat it, too.  But if one has to choose, which will it be?

    1)  It was the government's intention, through HAMP, that many of these foreclosures never happen and that the loans be modified instead.  Many states, including California, have laws that require banks to make good faith modification attempts.  The document fraud at work here has sped up the foreclosure process so that it outpaces negotiations with banks.  In that sense, people who should have their terms changed and see payments reduced are losing their homes instead.

    We also don't know that people are in legitimate default of their loan terms, that the people foreclosing have the right to foreclose or that the people being foreclosed upon were properly and legally notified in a timely fashion.  Those are not technicalities.  We have already seen one example of somebody with no mortgage having their home foreclosed upon.

    2) Eminent domain is for "public purposes."  I don't know if that would apply here. Can see arguments for and against.

    3)  The rich always get richer but the government shouldn't ignore the rights of borrowers and homeowners, which are clear and have been violated, to "prevent a meltdown" that we're not even sure will occur.

    4) Legitimate buyers of foreclosed properties have title insurance which will make them whole if it turns out that their purchases were not properly documented or executed.  That's what title insurers do.  Those actuaries, had they been doing their jobs, would have uncovered this widespread fraud a long time ago.  I suspect they did and ignored it.  But that's who is on the hook.  They were legitimately hired for this purpose.

    5) Seems like we've been having this "punish or heal" debate ever since the housing and stock markets peaked in 2007.  Since we never get around to punishing anyone or, more importantly, compensating the legitimate victims, we wind up back here again and again.  I don't think we necessarily have to choose.  If we must save institutions like Goldman Sachs then by all means.  We don't have to also save Lloyd Blankfein. Save the castle (it's nice) but drag the royals out (they're not).

    Special warranty deed puts a limit on seller's liability

    Under a general warranty deed, the seller warrants that the title being transferred to the buyer is valid and free of any title defects back to the beginning of time. A special warranty deed warrants title only for the time period in which the seller owned the real property.

    Read more:

    One more thing, to your first point, via Atrios:

    Here you have an example of a homeowner clearly in default to the owner of her mortgage, which is Fannie Mae.  But Citigroup is foreclosing.  The homeowner doesn't owe any money to Citigroup.  The homeowner has no obligations to Citigroup whatsoever.  If Fannie Mae wants to foreclose then Fannie Mae should.  But as Atrios says, Citigroup can't treat you like one of its debtors just because it wants to say you're one of its debtors.

    Think about this in terms of civil law.  What if I decided that you did something bad to commenter Richard Day and sued you for it?  The court would say that I have to standing.  It's up to Richard to hire a lawyer or not.  It's up to Richard to act or not.  Not only can I not act on his behalf, he can't ask me to act on his behalf.  He can't say, "I'm not so pissed about it but if you are, sue him."

    Why is this important?  Because our homeowner here might want to strike a deal with Fannie Mae, which is impossible if Citi is running an aggressive foreclosure process against her.

    Whatever he does, he needs to do a much better job of explaining it tis time around, and building support for it.

    A very thoughtful post and the basis of a framework to discuss the next two very thorny years for Obama--the legalities of ownership and fraud of the securitized instruments cross layered with the pure mechanics of "working out" nonpaying mortgages. If the mortgages are not worked out, the instruments are worthless. If the mortgages are worked out on terms the home owners can actually meet, the value of the instruments drops drastically, but perhaps less than no workouts at all. 

    I agree that bailout II is not going to happen. And (Summers) and Geithner have pretty well run out of "top down" ideas, top down, imo, being the crux of the problem, and mostly resulting in sins of omission. I think what should have happened is a Rosy the Riveter approach to work outs out in the field, not excessive macro lever pushing from Washington. Is this banking crisis any less than Enonomic WWII? I think we need massive hiring and training of intelligent workers, spread out in empty shopping centers across the country, perhaps special legislation to cut red tape, get these mortgages on a paying basis at some level, whatever that is. It seems to me that in the least, Obama could be in the bully pulpit instead of under it. 

    This is the ultimate velvet revolution. Everyone knows someone who has stopped paying their mortgage and is essentially living free of payments and free of foreclosure. Multiply that by 10, and you have some serious economic stimulus - a free rent dividend to America, from all of me to all of you.

    I'm with A-trope. Outside of the present group of raving commies, pretty much everyone loves Wall Street and considers them upstanding corporate citizens, respectable and ethical social actors. So although they clearly have no legal claim on these 500'000 houses they are foreclosing on, they thought they did, and they thought so in good faith. or in some sort of faith at least. So they systematically forged documents presented to the courts, but who doesn't? right? I mean, think of all the great things they have done for America...

    Clearly the only politically viable thing is to find some way to help these banks foreclose on all the houses they think they need to foreclose on. Otherwise the people will revolt. Because just look at the consequences if nothing is done for the banks. A moratorium on their (tecnically illegal) expulsions will cost them an estimated 6 billion dollars per month. Which is catastrophic. To put that number in context, Wall Street bankers collective bonus pool was 150 billion this year. So if the moratorium lasts until New Year, Wall Street's bonus - boni? - will be reduced ten percent.

    Reduced ten percent!!

    That will be traumatic for the economy. And by the 'economy' I of course mean ... Wall Street.

    Hear!  Hear!  ;)

    Well said.

    Also, I believe that I have legal title to your car, so I'm repossessing it. Let's not get hung up on details like paperwork and registrations and loan paperwork. I definitely heard someone at work say one time that I own your car. What more can you ask of me?

    Ouch + Zing.  The End.


    The thing I notice about you is your tendency to never heed the old axiom:  When you find yourself in an uncomfortable hole of your own making: Stop Digging.  Last words from holes don't always get you where you want to be in a discussion.

    I've been wrong more times than I can count in discussions on the boards; it's not a failure, IMO, unless we fail to learn from persuasive arguments ofr facts. I'd been considering blogging about Nietzsche's quote about 'convictions being more dangerous enemies of the truth than lies'.  I may not understand the full context as well as some of you scholars, but I can picture him meaning that if we consider our own positions and beliefs unassailable, let no new facts or arguments in, we can never get to the truth.  You're smart; I wish you could relax into some of these discussions more.  That's all. 

    Relax.  Are you kidding me? With the amount of coffee I drink?

    But if you can point out where I am wrong - go for it.  As the Doctor post up thread, there is no proof that there is much more than anything the fraud of who signed the documents.  No argument that this is not a good thing. No argument that this isn't fraud.  But if the underlying facts of the foreclosures are sound (as far as the evidence goes the documentation overall was researched for soundness prior to the signing), then the question is - and this seems to be where the debate rages - whatever prosecutions that can come from this worth the upheaval to housing market, which will ripple out into the still weak economy.  My personal opinion is that this country and all the unemployed needs stability more right now.  Just as any DA makes a deal with someone even when they have someone over a barrel because it is in the best interest of the system because the resources are better used elsewhere (no one likes it, except the criminal, but that is the way it is).

    And I agree we need to investigate.  No argument there. There may serious and systematic fraud on a whole another level.  And if there is, then that should be dealth with severely. And the laws need to be increased and tightened up. More resources thrown at the problem of dealing with those who engage in illegal lending practices.   As well as a bail out of the homeowners who are struggling.  So there I am basically in agreement with all the others around here. 

    LOL!  Decaf!  Decaf!  Decaf!!!  The pleas for 'stability' is how we got the TARP program with zero strings.  I am bone-tired of surrendering moral and legal principles in the name of 'stability'.  Fraud has been alleged in many of these mortgages for over a year, yet the subject is just now reaching some critical mass.  What a shame.

    Can we pursue moral and legal imperatives while stabiliizing the economy - both now and in the future?  Yes, we can.

    Obey. Obey. Obey.  What to do with you.  This hyperbolic screed is so unbecoming of you.  The next thing you'll be asking for is a revolution while reducing unemployment to 4% overnight.   Currently the evidence that is there indicates that the underlying facts of the majority of the foreclosures are legit and the only thing was the signing of the documentation. But that doesn't stop you. No siree.  Now all of the foreclosures had no merit.  And instead of dealing with the reality of the situation, such as how tied in the housing market is to the overall economy, and thus tied into the ability of the country to get that unemployment number down, you need to make some harharhar joke about everybody loving wall street,  You are so funny.  Who cares about the unemployed.  You sure don't.

    And speaking of politically viable thing to do - that would be find some solution that is a win-win for everyone.  But you want blood don't you.  Even if it means creating more economic chaos and potentially more loss of jobs.  Personally I would love a massive socialist government to step and intervene, nationalize the whole lot of it.  But the last time I looked this country isn't ready for that.

    "Hyperbolic screed"?  Sounded like satire to me.

    There are many kinds of satire.  Satire works when there is an underlying assumption or premise that counters the target of the satire.  In this case, in my opinion Obey's satire needed to be based on the assumption that underlying facts of the foreclosures were fraudulent rather than the signing process of the documentation of that foreclosure.  Moreover, it needed to be based on the idea that I want those in foreclosure to be thrown out of their homes which is not the case.  Since so many of the foreclosures are a result of people losing one's job, one would think that he would like them to have an opportunity for a job.  Yet he directs his derision at someone who looking to keep the current economy stabilized, whereas he seems to be supporting throwing a wrench into the housing market over something like a signing process, thereby threatening those who unemployed from finding work and those who employed with the loss of their job. 

    Perhaps there may be "many kinds of satire".  Are thre as many characterizations of "hyperbole" that one might suit your usage? 

    Unbecoming? How highly you think of me, A-trope. ;0)

    It's big of you to respond to my little 'screed'. In a more serious response to some of what you say, (i) we differ on the evidence regarding the legality of the foreclosures. As far as I can see there is a systematic failure on behalf of lenders to convey the note - the borrower IOU - to the legal entity entrusted with holding the notes for investors as specified in the pooling and servicing agreement. And by 'systematic' I mean all the private issue securitized mortgages. So they have no claim on the properties in question. Beyond that there is fraud and forgery marbled throughout the system beyond the minor issue of fraudulent affidavits which you - rightly - regard in and of itself as not a huge issue. But (ii) the general point, and the point where I was a bit ticked off by your perspective and that of the Obama administration on the situation, is that we will see whether or not these warranted suspicions are borne out as the facts come to light. You and the administration seem concerned with the urgency of continuing these legally dubious expulsions even while recognizing that they very well may be illegal. There is no convincing economic argument for this urgency, and the short-term cost is minor. (iii) On the more forward-looking side, I think the best solution involves not so much 'blood' as it does incentivizing banks to agree to principal reductions on loans to underwater borrowers who are still viable, and their shaky legal claim on these mortgages is an 'opportunity' in that sense: it will nudge the industry away from the economically destructive foreclosure tsunami they are currently creating towards a more beneficial mortgage modification program. Also Freddie and Fannie could be a good conduit to offload these toxic loans - the agencies could be used to offer refinancing at 80 cents on the dollar, or something like that, recapitalizing the lender if that is needed, and leaving borrowers with a manageable loan. But (iv) in general I find this whole foreclosure issue as a crisis for the banks to be overblown. Suspiciously overblown. There are only 150 billion in loans at issue, and even if the big NY banks take a hit, they have the capital buffer to handle it. It's not going to hit the broader economy.



    You and the administration seem concerned with the urgency of continuing these legally dubious expulsions even while recognizing that they very well may be illegal.

    I am not calling for the continuation of these expulsions.  I have said a number of times I believe the investigations should go on.  Which, I guess i need to spell this out, I am for the mortitorium on these processes while the investigations by the AGs are carried out.  If there are more serious accusations of fraud being committed, then appropriate action, consequences and all, need to be taken. But if what is discovered that it is a procedural issue which by law is fraud, then it is not in the best interest to create one more ding to the economy. 

    There are two kinds of foreclosures involved here. One is the foreclosure in process. In this case the moratorium gives the homeowners some time to maybe deal with the issue as well as the government time to set up some kind of bailout.

    The other kind is the foreclosure that has already gone through.  In some cases the houses have been resold.  This is where it gets messy messy.  The general chaos that would come from that based on the issue that researcher and the signee were the not same is my opinion not worth it.  In these cases, it was a situation where the individual legitimately was in default, and the only thing one could say is as Destor pointed out that maybe they would have been able to get a renegotiated mortgage had the process been slower.  But that is a maybe, and definitely not the case for the homes.

    I agree with you on your third point.

    It is the first point that I find interesting.  I attempt to try to understand the general process but it is still a bit over my head.  So regarding your first point - given the system of how mortgages are dealt with, is there a clear cut legal case about ownership, or is more of hair-splitting situation in which two lawyers could go at for years on who had the right to the properties? 

    What worries me, Trope is that the "Forces of Capitalism," by which I mean the usual suspects over at CNBC (where corporatations get bailouts when they default while individuals are "losers") want to say this is all just a minor technicality.  The banks will ultimately want to argue that yes, mistakes were made.  How about we set up an industry standard with our own money to prevent it from ever happening again?  As for the people being foreclosed upon, we'll be told they are basically getting what they deserved and that they should no sooner get a reprieve than a serial killer who was undone by an illegal traffic stop.

    I know your argument is more nuanced than that.  You're really talking about appropriate response particularly where the response might have larger implications.  I think those concerns are somewhat misplaced if only because... well... nobody at Treasury has shown any inclination to overreact in favor of people being foreclosed on.  Quite the opposite, really.

    A very sizable majority of Americans believe we should bail these people out of their foreclosures (although the country seems to be split over whether they are ultimately derserving of it).  I think Congress can put something together that would have the buy-in from the people without much trouble at all.  Because even without any fraud, there are a lot of people who can't afford their mortgages and without assistance will lose their homes.  And in reading various articles today on this there seems to be a problem with changing rules from the feds on the re-negotiation process which has hampered things even more than they really are.  As well as the fact that the banks aren't staffing the foreclosure offices enough or with highly qualified people because they're still trying to turn a profit with the mortgages.  So the government should step in and provide assistance to speed up the process and provide greater quality control - which is of course intervention and a number of people would get their hackles up over that, some from the right over the intervention and some from the left because we're not forcing the banks to eat into their profits.  And so on and so on.

    I think some temporary fedral control of both the foreclosure and modification processes, if only to bring everything onto the same timetable and to represent interests of both borrower and lender, under clear rules, would solve this.

    But the servicers will lose out.  Problem is, all the lenders have servicing units.


    Ah well, something must give.  Why not the obviously deficient middle-men?

    From what I've learned I think it is legally clearcut. The note needs to be properly conveyed. But up until now many judges have been giving the banks the benefit of the doubt - i.e. they show up with lost-note affidavits, yeah, those signed by the wrong person, affidavits declaring pretty much 'trust us we had the note and our dog ate it, sorry'. And lost-note affidavits have become so pervasive, and the general pattern of fraud has become so apparent, that judges are becoming less willing to trust banks when they say they have or had the note. Relatedly MERS the electronic mortgage registry is a mess so that many states no longer recognize its assignations. And most if not all the notes were endorsed in blank and that pretty much invalidates them for foreclosure purposes.

    As far as I understand it, if judges decide to be sticklers, and demand to see the note itself or a copy of it, there are a few possibilities - maybe the banks can go back and at great cost get the whole chain of paperwork (remember all these mortgages were reassigned many many times) back into order. Or maybe they can be granted an 'equitable mortgage' as a substitute for the invalidated lien (see this study - Two Faces: Demystifying the Mortgage Electronic Registration System’s Land Title Theory) which apparently gives the borrower much more leverage, as I mentioned above in the previous response. Or, of course, if the judge is feeling pissy, and the bank has clearly been deliberately screwing with the paperwork, he or she can just invalidate the lien. But I'm no lawyer. So take all this with a bucket of salt.

    Thanks for the link.

    Or MAYBE they might consider that because they cannot prove that they own the loan, they might be willing to work with the homeowner to start over, do the paperwork again, work out a price the homeowner can afford, and make it a win-win, instead of trashing our legal system.

    Yes, in the vast majority of cases, this is probably just a case of losing paperwork, but if the paperwork were not incredibly important, why would we all have to fill it out to begin with? If you lose your paperwork, you don't get to forge replacements. If the police lose the evidence against you, even if you committed the crime, you get to go free. That's the way the law works. Do you really want the cops to be able to forge evidence if they lose it? Then why would you let the banks?


    "in the vast majority of cases, this is probably just a case of losing paperwork"

    Hi Stilli. Sorry if I wasn't clear. The evidence points to a system where the documents were as a rule not filled out properly. At least for all the mortgage pools that were bundled and tranched by the Wall Street investment banks. And if the servicers lack the documentation, when it comes to foreclosure they have no legal claim on the home. Period. All of which would explain the forgeries and fraud. It is not that paperwork was correctly done and then subsequently lost.

    Of course you and A-Trope may disagree on this , but you seem to think I assume this is all just 'the dog ate my deeds'. Which I don't.

    Worse, it's the replacement documents that were being forged by the "robo-signers."

    When banks were missing documents, they could submit sworn affidavits saying that they've checked the underlying paperwork. What banks actually did was employee a bunch of entry-level people to sign documents saying "we have the paperwork." But the people signing those affidavits didn't actually see the underlying documents they were swearing that they had checked out. They just signed the statements, hundreds at a time.

    The question isn't even whether they were right or wrong. The question is whether banks are required to prove anything at all. If courts accept affidavits signed by bank employees who are lying, because "it's only a technicality," then the banks are also free to make stuff up. If you're just going to assume they're telling the truth, you give them permission to lie.

    When a bank can claim your home just by asserting that it owns it, without providing any documentation but its own perjured say-so, we're done with actual capitalism and moving on to feudalism with neckties.

    Obviously the overall system of how bank handled mortgages and the documentation was something on the level of a tragic slapstick comedy.  And needs to be addressed through comprehensive legislation.  The question, however, that will come out in the investigation is whether the banks were asserting ownership willy-nilly, the deep fraud, or asserting ownership of legitimate claims with fradulent documentation, the shallow fraud.  Of course, I realize there are some here that say fraud is fraud. That point has been made clear.  All I would argue is that this legitimate debate.  But then again I'm just a fop so what do I know.

    I'm going to throw in my 2 cents worth here, because our family is right smack in the middle of this mess.

    Between my husband and I and our two kids, we own 3 homes in the same area. My daughter bought hers 1st, just as the crisis was beginning. They made a lot of money on the sale of their home in one area, and put most of the proceeds down on next one, making in the neighborhood of a 40% down payment. They are in the process of refinancing now to capture the new lower interest rates, and their house appaised at $160K less than what they paid for it, but they still have enough equity for an 80% loan. Sucks, but they are not underwater because they put so much down initially.

    We bought about 1 1/2 years later, with eyes wide open that we were not making a good financial decision, but rather buying a home we plan to live in for the rest of our lives. Even knowing that, it has been hard to watch the value plumet about $150K. We are not upside down, but cannot refinance with an 80% loan w/o putting in a substancial amount of cash. Again, sucks, but we're fine.

    Our son is the tough one. They bought 6 months after we did, when everyone thought the bottom was in sight. They were both working, had a baby, he was in his last year in college, and he opted to quit his job (a low paying one, but nonetheless a job) and go to school full-time to finish up his last semester. Between his GI Bill money and savings, they were confident they could weather the lower wages, but just in case decided to list the house to get out from under the mortgage. The house sold, and the day they were to close escrow, the buyers pulled out. Now he has completed his degree, the mortgage has gone underwater big-time, he cannot find a job, they cannot sell the house. They have applied for a modification that they were told they qualified for, and would take 30 days. After 90 days of getting jerked around, they quit paying their mortgage, and the day it went past due they began getting upwards of 5 calls a day asking where the lenders money was...interesting that they have enough people to call so much for past due money, but not enough to people to process modifications.

    So far they have not been notified that foreclosure proceedings have started. If the modification comes through, they may stay in the home, but are wondering if a strategic default might be a better way to proceed. We're wondering if they can even prove they have title to the house, and have standing to foreclose...

    The thing that concerns me the most about this whole situation is that we are slowly but surely, a bit here, and a bit there, getting away from the law that is supposedly the foundation of our system. If we are going to overlook "technicalities" here, where else are we going to overlook them? Would the banks overlook technicalities if the shoe were on the other foot, and it was the homeowner being screwed by the technicality? Are we actually being asked to choose between following the law and our bankins system going down in flames, or is this another case of the banks screaming for help so they continue living like fat cats? Or are they REALLY in trouble this time (Crying wolf comes to mind!) And why the hell should we care. I've had enough. They caused this with their fancy "selling air over and over for ginormous profits" scam. It's time for them to feel some real pain. I want to see people in prison for this mess. And I want to see politicians with enough intestinal fortitude to do the right thing for a change. I AM PISSED!




    Further upthread, Obey makes a very reasonable point that this may not end up becoming a threat to the large banks, as I fear. That's fair enough, and I'd say two things in response:

    First, I posted without being entirely clear on the overall amount of mortgages and mortgage-backed paper out there. So I have no way of predicting the actual scale of the problem. If the aftershocks are manageable, that's all for the good. And certainly, I understand that many of these mortgages and mortgage-backed-securities (especially the latter) have already lost much of their value, so that the loss of remaining value might not be as serious a hit.

    Second, one of my concerns is that the already lost value of the MBS could be returned to play. Since these securities were originally sold at much, much higher prices than their current value, and backed by mortgages that now seem not to have been legally conveyed, their is a real possibility that various corporations can demand those original deals be undone, for refunds of the original price. And that is where the enormous mischief could take place, with the hundreds of billions in paper losses being passed around again.

    Hi doc, I'm just working with Yves Smith's numbers from here: Banks Looking Further Than Robo Signers; “Lost Note” Affidavits a Point of Failure

    "A few analysts have tried to quantify the magnitude of the problem. Paul Miller, an analyst at FBR Group Inc., said foreclosure delays will cost at least $6 billion, or roughly $1,000 per loan for every month that a foreclosure is delayed. Laurie Goodman, a senior managing director at Amherst Securities Group LP, has estimated that $154 billion of nonperforming loans are affected by the current moratoriums…."

    If those figures are in the right ball-park, then in my opinion the moratorium - which the administration is up in arms about - is a non-event. There is no immediate danger. That was the only point I intended to make. Of course you're right that there are huge looming losses down the road with investor claw-backs, SEC investigations, etc. But if they slow down proceedings enough we're talking five, ten years down the line, which gives them some time to digest the losses.

    great blog, and great discussion btw!

    Thanks, Obey.

    In this climate the $6 billion looks low. But the math seems to check out if you figure a million foreclosures a year with a six month average delay. In any case, compared to a $1.4 T total US portfolio a few billion seems like chump change. So it must be that the administration is thinking of the systemic fear of institutions putting these mortgages to each other and causing the kind of chain reaction that sank Lehman Bros.


    I am totally pissed off that I missed a fight with FOP!!!1 in it. Doesn't seem right somehow.

    I got called a "cad" once though. Just remembering it almost makes me feel better. "Cad," she said.

    "At least I'm not a fop," quoth I. 


    Upthread, a couple of posters made the excellent point that many mortgage-backed-securities are owned by pension funds.

    Here's the deal: to the extent that pension funds own actual mortgages, they're in trouble. But mostly they don't. They generally own securities backed by mortgages.

    To the extent that they own mortgage-backed securities, as many many other investment entities do, they likely have an opportunity to make lost money back by forcing the issuing banks to buy back the improperly-constructed securities for the original purchase price. But this only happens in the Second Financial Crisis scenario, in which someone is on the hook to make good on a trillion dollars of mortgage-backed paper instead of $150 billion in actual mortgages.

    Pension funds can sue for massive refunds, but only in a scenario in which hedge funds and other investment firms are doing the same, and the whole system becomes dangerously unstable. Sounds like fun, doesn't it?

    From where I sit, AT's been pretty surrounded generally.  But I guess from where you sit, you see things differently. 

    From where I sit, your taking of AT to task wasn't simply calling him out on a bad argument either.  You seemed to veer a bit more ad hominem than that, quite a bit offended by AT's tone and approach.  I'm sure he doesn't need me to speak for him on this issue, and I'm not trying to.  I just bring it up because it struck me that, while you can get pretty heavy duty about a basically really nice guy's tone, stuff like kgb's commentary under this post the other week, just went right by you. No comment there.  Not even a brief hiatus in the swinging from the chandeliers.

    Nice to have things in perspective.  Lovely lovely to you too, Quinn.

    Anna. Two weeks ago I sold the 1st house I ever owned, left a city of colleagues and friends, moved 1,300 miles to Toronto, and joined up with my long lost and now-reunited sweetheart... after a brief, 30 year, "cooling off" period. One week ago, a truck arrived here with my stuff. Meanwhile, I've had to keep working, as well as get started on all the little things that need disconnecting and reconnecting. Oh. And day before I left, the confused Canadian IRS equivalent called me and thought they needed a few tens of thousands of dollars under some tax I don't actually have to pay.

    Shorter? I'm not keeping track or playing cop on DagBlog's threads this past while. Rereading your link, KGB was pulling tails, but he's a big boy, and you all sorted it out. No damage to A-Trope that I could see. I admit, the whole episode rather passed me by.

    As for when I did drop in on A-Trope, the reason was simple. His argument was appalling, and his tone was worse. You can dislike it, but I asked him straight up to stop lecturing us like retarded children.

    Why did I say this? As follows: A big chunk of those on DagBlog log are international - me, Orlando, Wolfrum, acanuck, etc. Many others are well-educated, cosmopolitan, veterans and Jewish. And please note, many of those he talks with are to the LEFT of AT, arguing for more "progressive" positions.

    So what does AT say to us? "Quite frankly the magic pony in the room is that somehow if the US just ignored the world, peace would suddenly break out...."

    Now. Is there anyone here you'd like to name who appears to believe that the world who go all peaceful & hallelujah if the US withdrew? Whaddya think? Any of us living in other nations who think all would be peaceful and easy if the US went home? Any Jews who'd think that the US is the root of all world evil? etc.

    In short, he was either being an incredibly lofty fuck with us, and talking to us like children... "magic pony" and all... or he was in some personal mood which left him not paying full attention. I argued the first, and then eventually stepped out of the fray by pointing to the second possibility.

    His other arguments were - in my books - of equal virtue. Obama's failure to prosecute anyone for anything was translated into the grand peace-making measure of Mandela, which I have to say I found staggeringly offensive. The comparison is utterly ludicrous, and - I think - can only be made if one is primarily thinking in terms of race. 

    He then accused me of not providing enough substance, this after I linked him to a whole blog I'd done on it, which he showed no signs of having bothered reading. 

    And further down, he argued for the basic unimportance of so-called large-scale historic change, as exemplified in the American Revolution, Civil War, New Deal, etc. Blah.

    So from that, you've decided I'm picking on him? When I locked antlers with him the once?? And ad hominem? Things like that "magic pony" line aren't speaking down to people? Or pompous - but utterly empty - lines like "politically viable?"

    Get serious Anna. If I argued with you and said your ideas were the equivalent of wanting a magic pony, you'd feel fairly talked down to. And then if I started in with demanding that you outline, in full detail, your views - and please make sure they're "politically viable" - how pompous would you think I was?

    He had a bad week, and was being a twit. And I wasn't piling on in this blog, as you can see.

    And I hope he's happier and cheerier in the future, because he said he was hellaciously down. As I hope you have a good evening and a great weekend. 

    I'm off to watch some hockey, so goodnight to all. q

    Well, my ears are burning...And my personal response since I am being detailed here...

    First off I would like to point out that "magic pony" was first rolled out as a way to mock my position, so I returned the flippant use of the pony.  So to hold it against me is to say that pony mockery can only be used by those whom you agree with. So it would seem still you believe that is was okay to mock me, to talk down to me in a pompous manner, to treat me like a retarded child who had wandered onto the thread.

    And as such, since it was obvious (to those reading the whole thread) that i was returning the volley, the point about believing world peace breaking out was to be taken as hyperbolic tounge in cheek.  And then you stated later on, you didn't believe I believed in what I was positing and was doing it to just be antagonistic or whatever.   But for this little remark suddenly I am making deeply sincere remark about how I see others believing.

    And since we can agree it seems that the US should have some presence in the world, I fail to understand why it is so appalling to discuss the exact nature of that presence and the timelines around the movements of that presence.  That I throw into the mix political considerations, and place some of the onerous onto the left for coming up with a well-articulated foreign policy in order to facilitate a more progressive foregin policy ultimately in the US, only leads to reactions of horror is still a bit of a mystery.  But obviously many have a traumatic-like response to the phrase "politically viable" so I will consider strongly before using it again.  But maybe that is part of the problem with the left: whether there is actual collective buy-in to views is irrelevant and not worthy of considering in the development of strategies of how we can in the long run implement a progressive agenda.

    And of course, SA and the US are not apples to apples.  But the fundamental concept of allowing those guilty of crimes committed while acting as agents of a government in order for the greater good is a valid argument.  It is an argument, and therefore one can disagree, but to say that the only way on can approach it is through race is, well, lame.  Basically it would seem to be a response of someone who doesn't want to have to consider the larger context of going after prosecutions and wants to merely view the issue in isolation.

    And I wasn't discounting the importance of large-scale historic change, but rather pointing out that may not have the level of actual change that the impression of the myth creates in our consciousness.  For example, aside from the carnage and misery the civil war created, it still took generations before we could as a nation, after a long intense fight that left more suffering and carnage sign something as simple as the Civil Right Act.  The reason was although there was a victory on the battlefield, the paradigms of the individuals that make up the collective consciousness are relatively unchanged, or in some cases made worse because of the trauma of the conflict.  In the case of the Civil War, the wounds of the loss still resonate throughout the South.

    So there for the record my perspective on how this all went down.

    Peace and Love.

    Oh, good; you're here.  I won't have to talk to you in absentia. 

    I began to make some assumptions about your politics when you asked me about a Jack-bauer-esque scenario.  Now I spent a good hour responding to your direct question to me.  Just asking the question showed me a lot about how your mind seems to work, and I tried to address two possiblilities, then answer the question fully, in the best way I knew how.  And yet you never came back to respond; I lost a bit of respect for you, to tell the truth.  It was a time that you might have shown me where I was wrong, or ceded a point ot two, in other words, abandoned a conviction you hold dearly, even a bit...

    I really dislike your take on Afghanistan; by and large, all you spoke about was the politics of Obama's choices, and I think that's a very wrong  way to think about it, especially given that our behaviors around the globe seem to be aggravating far too many others on the planet.  And I have been piqued that you seem to want to present a more adult position; others too, but they are not here right now, so I won't mention them by name. 

    And yes, reliance on the theme of 'political viability' to me seems weak, and negates any possibility that good leaders step up when the time is right, and articulate a message that involves the citizenry to help them push for positive change: it's not simple math, counting votes in Congress.


    Dude. I can't argue this stuff anymore. I think the particular arguments you took up were... absurd. The Mandela comparison. The discounting of historic moments. The idea that it's the LEFT that somehow hasn't done a strong enough intellectual articulation. I guess I just think these ideas are like... turnips off the truck. They're not of enough value to pursue further.

    So... you're welcome to them, and welcome to broadcast them.

    That's my perspective. Signing off. Hockey calls.

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