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)