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And Now For The Other Side: Jeff Gundlach Expects The Foreclosure Moratorium To Have Negligible Impact On MBS
By now the apocalypse scenario for MBS has been made all too clear: there is a possibility that quite soon all MBS securities may be found worthless due to technicalities, as assignments of securities without due underwritier diligence (there is a reason why underwriter counsel exists in the first place) could easily render the entire stack worthless (the same goes for CMBS) and puttable to the issuer. Yet one person who believes that the fraudclosure's impact on MBS will be "negligible" is DoubleLine's Jeff Gundlach. While we wish we could share's Jeff enthusiasm, we are concerned that his entire argument is premised on the assumption that if an autopilot has worked so far, it is certain to work for the (un)foreseeable future: "The Great Unknown notwithstanding, the risk du jour should come as no great surprise. Since the advent of the credit crisis, a number of states have made fitful attempts at foreclosure moratoria. Even more obvious, a growing part of the mortgage sector has entered quasi-moratorium since 2007. For years, remittance data have shown thebuilding of overhang of non-payers relative to the tardy liquidation of delinquent loans. So tell us something new." While from a technical standpoint Gundlach (whose livelihood depends on the ongoing stability in the multi-trillion MBS arena) is spot on, never before has the very core of the judicial process been not only questioned, but found to be replete with fraud. Which is why now, for the first time, there is a political element. And Jeff knows all too well, that politics is what happens (and impacts the ROI) when one is busy putting together DCF's. Should this scandal continue to escalate to the very top, as it seems set on doing, we would be far less sanguine about the optimistic outlook for the MBS space.
Full DoubleLine response to the Fraudclosure scandal (pdf)
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He is focussed on the foreclosures - not that all title and mortgage assignments through MERScorp are legally void, and the MBS implications of that.
Capitalism, Socialism, and Democracy, Joseph Schumpeter (1942)
Shawn A. Mesaros, Pamria, LLC
I noticed that immediately myself. This is probably an early view of the containment strategy that is being put forward. "It's all about the foreclosures." The subject of the viability of the entire class of assets known as MBS will never be brought up. The vested interests will try their damndest to frame the discussion this way, and keep it about only foreclosures.
I have huge respect for Gundlach, and DBLTX is core holding of mine. But I have to think he may be a bit worried and this is some spin to calm shareholders. I also own FAIRX and have huge respect for Berkowitz, but lately I'm wondering if the gold touch of these guys might be wearing off.
Vulture acquisition of non-agency seems like a good tactic. It reminds me that vultures like to pick through garbage dumps for morsels, but they are also attracted to dead bodies. Dilemma.
http://www.youtube.com/watch?v=Ek3XKF2GcjE
I respect Gundlach as well. But he pulled out of Treasury Debt this past summer calling a peak. How's that been working out for him? The QE2 is about to embark and he's going to miss the boat.
I agree, I detect a little B.S. What can we do, double speak is the new MTV.
I can't believe this country. It's a fucking joke. It's the damn anti-depressents and chardonnay. No one gives a sh*t anymore. Watch out banktas! When the Cobra health insurance runs out and the bottle of Chilean Torreon de Paredes runs dry there's going to be quite a Donkey Dick headed your way. I'll be there with a little spray bottle of Bactine in case you're worried about infection.
"We've got a bleeder!"
http://www.youtube.com/watch?v=Ek3XKF2GcjE
Here's the problem: if the foreclosures are stopped subject to the robosigning by state courts, that is going to have a de facto negative impact on the value of the MBS because the cashflow is stopped and there is no resolution being performed to recover what value continues to exist in a given mortgage. Even if the reps and warranties issue is blown off completely, the bond holders are going to sue the fuck out of the issuers for negligence leading to the dimunition in value of their securities. I don't see how they can lose that argument assuming that janitors were notarizing shit and somebody wiped their asses with all of the notes.
These dogs are going to have to return to their own vomit one way or the other. They skated 2 years ago, but the Feds can't make this go away. This is a 50 state issue with state laws and state courts. They are going to have to repo this shit and take it back onto their books.
Good. Fuck them.
The cash flow doesn't have to stop.... Uncle Ben could see to that with QE2, QE3, QE4.......
From what I've read the servicers still have to pay the MBS holders up until the foreclosure finishes. Of course, this does still mean that Ben can play, he is just going to have to hand out money directly to servicers instead of continuing to invest in MBSes directly.
What I wouldn't give to see Volcker going on the TeeVee and telling Warren and Charlie to "Suck it up!"
As bad as things are getting, I expect a nice new war distraction any day now. October surprise and all that. After all, gotta mobilize those voters.
My point exactly!
Who needs a war for distraction, we have aliens!!!
And that's gonna look really sweet considering all the shit already on their books. The biggest issue with this issue -- there are so many facets of it...and each state and court has it's own rules. Plus not sure where the bondholders sue...state or federal? Pretty much the banks took their get out of jail free card and walking money blew it (well, you know on what...) and really thought they could somehow choke through all these foreclosures with the most broken, fucked up process imaginable before anyone noticed. Have I said lately that they really are not very bright. Personally, I hope it is a death by a 1000 cuts...
"Somewhere in Kenya a Village is Missing its Idiot."
LOL!
This is probably worse than you think, because the title insurers will go under. With minimal revenue, thanks to the moratorium, they must now defend a mountain of lawsuits.
Here's where it gets interesting. Many funds (pension, bond funds, etc.) are prohibited by law or articles of incorporation from holding junk bonds. Forget foreclosure for the moment. We know how much junk, and how much doubt there is about the quality of US mortgage debt. Knowing what we now know, who would write title insurance on the old loans? Exactly, so if the original insurer goes belly up, there is no title insurance.
No title insurance? The rating agencies have little choice but to downgrade, and a mountain of debt is dumped on the market... well, you know the rest.
I've been looking at this from the mortgage insurance perspective. I'm convinced AMBAC and MBIA have been kept around as dead men walking for related reasons, but this is much larger and harder to hide.
Will Obama come to the rescue? Not likely. This is a legal perfect storm. About half the cases are in judicial states. About half are in non-recourse states. There are conflicts of interest and conflicting interests up the wazoo. Worst of all, most of this is controlled by state law but administered at county level. Try telling tenured, circuit judges what to do. Good luck herding cats.
The title companies will be taken out fast. Most of the mortgage brokers are already gone. Who's left to sue? That would be the TBTF crowd.
Happy Trails
House Bill 4502, Creation of Government-Sponsored Enterprise to Provide Title Insurance, "Bank Reserve for National Title Insurance for Mortgages" Association:
aka creation of "Barney Mae" GSE
Saddle U.S. taxpayers with the liability of clouded titles = problem solved!!!
Barney Mae! LOL
Well, it would be funny, if it weren't so true.
Hahahaha......maybe "Barney Mac" works better. Then you can stuff back three pieces of shit into the same asshole.
And global warming will have little affect on Carbon Credits
"ALL IS WELL (with my book)!!!
"ALL IS WELL (with my book), HONEST!!!
"STOP TALKING DOWN MY BOOK YOU FUCKERS~!!!
<signed> The Gund
--------------------------------------
This shit's getting ridiculous--what's next? Warren Buffett posting on ZH on how high Wells Fargo stock is gonna go real soon now?
http://failblog.org/upcoming/?pid=41090&from=recMap3
never before has the very core of the judicial process been not only questioned, but found to be replete with fraud
I beg to differ:
http://www.youtube.com/results?search_type=search_videos&search_query=mi...
I bet if someone would look into the Patriot Act they will find some new law that will give the executive branch a way to make this mortgage crap go away.
And it will be for our own safety of course.
The gravy train is about over. Fed is now exposed for what we always knew it to be. Don't have mercy for these fucks. In several weeks, new MSM plots will be hatched to steer peasants to take sympathy for the FED. When that doesn't work, the hail marry will be thrown on epic proportions, our system is going to collapse if we don't pass this bill into law. Don't be fooled by the repeated fraud attempts.
posting positivity, how unzerohedgesque
This is the second "expert" I've heard today basically say the exact same thing. Almost as if they're programmed to keep fear contained.
Personally, I'm not an "expert" in this field and have limited knowledge of the technicalities involved. However, if the history of a "political element" in regards to any investigation, usually turns into an ego driven circus.
I'm inclined to think the same will happen here.
Are you suggesting this hasn't been an ego driven circus for some time?
Come on, guys.
When you buy this shit, you know it is shit, and you factor loss severities into your valuation. Then you lever it up and make money.
Most people that bought non-agency RMBS paid pennies on the dollar.
So you have squatters. Who the fuck cares? It's priced in.
You might want to go back and obtain some history -- the spreads between agency and non-agencies during the boom years were very small. People paid dearly for these "guaranteed" income streams. Maybe you were being sarcastic?
During the boom years, sure. When it was being dumped right and left how much pricing power you think they had? That's where the pennies on the dollar came in.
As far as loss severities, some buyers I know priced in performance scenarios worse than the Great depression.
Trillions of mortgage dollars -- but also derivatives that have been leveraged up and layered on top of them. The banks are frozen and can't imagine they could unwind if they wanted to.And who's got the mtg. insurance on these low % down foreclosures? -- all AIG?
Even the Chinese complained today -- said Americans just wanted to export their debt away to others with inflation. Nobody said they were dumb, but hey, we in the middle class of American are in the same place as the Chinese
So what happens to MBS used in tri party repo agreements if they're proven to be worthless?
http://www.newyorkfed.org/prc/report_100517.pdf
Also, Fed drains $260 million via reverse repos to BNY and JPM
http://www.businessweek.com/news/2010-10-13/fed-drains-260-million-from-...
The continuing evolution of Wall Street risk management techniques.
2010 - "Just don't look at it and it will eventually go away."
Personally, I think they stole the whole idea from the SEC.
The SEC was looking at it.....oh you mean markets and stuff, never mind
Smell the fear - Grundlach's MBS positions are gonna crater, and he knows it.
Major book-talking above.
I also note he makes no mention of the impact this scandal will have on borrower behavior - namely, that strategic defaults will increase.
Me thinks his loss estimates are too low and he is scrambling.
Yes, he needs a bit more time to get to the exit before anyone thinks about leaving the party.
"Gundlach (whose livelihood depends on the ongoing stability in the multi-trillion MBS arena) "
NEXT!
Propagandist talking his book like Uncle Warren and Senile Munger...
He's almost right on the GSE/agency MBS, except that he's ignoring the likelihood that it will eventually be legislatively restructured, ie defaulted on by act of Congress, which I think will happen by 2013.
His argument on the private MBS is that he bought it cheap enough to absorb losses from delayed foreclosure, but he implicitly assumes that these are only delays and not a total inability to recover.
There's one thing I'm unclear on with these private MBS trust agreements. I know that typically when a loan goes into default, the servicer covers the payments to the MBS holders, and then the servicer pays itself back plus fees out of the foreclosure recovery.
If the servicer sees no hope of recovery, how much wiggle room does it have to refuse to make those payments to MBS holders? It seems like this could be an important question if there's going to be a protracted, widespread or national moratorium on foreclosure. The services won't like being stuck making all those regular payments on behalf of defaulted mortgage borrowers without reasonable assurance they'll be able to recover through foreclosure.
perhaps the one good thing about this whole fraudclosure business is that banks may need to temporarily hire more people to do QA on docs and help with checking etc. Anything to temporarily prop up the economy i suppose. cash for clunkers, first time home buyers credit, census jobs all have created temporary demand and short lived solutions. perhaps the hiring of these workers will do more of the same. expect the government to come forward with some tough talk demanding the problem be resolved in an orderly manner and effeciently. nothing like an oil spill to temporarily window dress the issues. perhaps this is what America has become - nothing more than a smoke and mirrors show to temporarily hide how bad things really are by providing some sort of short term improvement.
Keep rolling this turd in that sugar, boyz!
Really this is a great post from an expert and thank you very much for sharing this valuable information with us.
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