Guest Post: Banks Face Renewed Headwinds

Tyler Durden's picture

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Banks Face Renewed Headwinds

In the fall of 2010, there was no shortage of news regarding faulty foreclosure processes, aka "robo-signing."  Bank stocks took a hit and the threat of a nationwide foreclosure moratorium appeared imminent.  Then came  the concept of put back risk to the big banks claiming violations of reps and warranty agreements or pooling and servicing agreements (PSAs). Since that time the media has gone rather quiet on the subject and the price action in the bank stocks would imply all is well.  BAC settled for pennies on the dollar with one of the GSEs and the stock rocketed that very day as investors were no longer "worried about the uncertainty." 

The story may have gone cold but the lawsuits, court rulings, class actions, investigations have only heated up and continue to grow.  In fact they have grown to the point where keeping up with all of it was next to impossible.  Banks have tried to downplay any of these threats in their most recent earnings releases and conference calls but suddenly things seem to have changed.  Recent SEC filings by JPM, earnings restatements by BAC, a quick departure of Howard Atkins from WFC and regulators investigating CDO transactions by C have begun to turn the spotlight back to the banks and the balance sheet risk they face.

MERS was recently sued by a small county in Massachusetts for $22 million for failure to pay recording fees.  This is just one small county in one state.  The warning shot has been fired. States face hundreds of billions in budget gaps.  States have been defrauded of legal recording fees by MERS who will argue their electronic system of registration was a more efficient process in a fast moving mortgage market.  MERS was created by the real estate finance industry (per their website) and should these floodgates open, the banks who used MERS to transfer mortgages may ultimately be liable.

"Citigroup, the third-largest U.S. bank by assets, also said U.S. regulators are examining how it structured and sold collateralized debt obligations as part of an investigation into mortgage-related businesses." - Bloomberg

The Obama administration as part of the ongoing 50 attorneys general investigation of robo signing is proposing a $20 billion settlement whereas proceeds will be used for principal reductions for those underwater in their mortgages.  The banks / servicers involved in the suit will not be able to push those writedowns to the holder of the RMBS and will also have to adjust their second tier liens.  So this settlement has three strikes.  Strike 1, homeowners will still default.  Strike 2, banks will take an immediate $20 billion hit to their balance sheet. Strike 3, the second tier lien writedowns will force additional capital raises.

Bank of America is in the largest class action suit right now.  It started at $46 billion when PIMCO, NY Fed, etc claimed reps and warranty violations.  That has now grown to $84 billion as more investors have joined a clearing house to overcome the 25% threshold level required to initiate such a request.  Months back when this first surfaced, CEO Brian Moynihan argued the process of resolving put backs would be long and litigious.  He said BAC would fight loan by loan.  He was wrong.  A recent ruling has set precedence for put back requests to now use statistical sampling to simplify the process of declaring judgment.

Of all these headwinds two by far still stand out, not for their sheer size but for their outcome does not involve a government agency where a slap on the wrist, pennies on the dollar fine is awarded.  The private label put back and falling home prices in the face of a rising interest rate environment and rising unemployment (that's if you include the growing list of those disgusted and leaving the work force) are as close to a free market as we have in our society today.

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steve from virginia's picture

Add a rising interest rate environment as Peak Oil driven prices suck credit out of the system and you have something to worry about when you go to sleep.

Just think ... the Fed cannot bail anymore ... when the next deleverage 'event' takes place. There is nothing between 100s of trillion$ of excess leverage and oblivion.

pyite's picture

the Fed cannot bail anymore

??? There is quite a bit more bailing to be done, IMO.

Also, Jim Sinclair ( has been spot on with this prediction as well - "What OTC derivatives do not do to the international banking firms, litigation will."


Bansters-in-my- feces's picture

Look out Taxpayers......

Go long Vasaline.

Michael's picture

The seeds of "Project BLS Mayhem" I planted this past week are now sprouting.

CNBC World tonight is continually talking about the broader unemployment rate in the US of 16%.

I also saw earlier today Ali Velshi of CNN talking about the unemployment rate of 8.9% and he immediately said," Before you go crazy Twittering me the real unemployment rate is double, We do acknowledge the real unemployment rate is 16%.  8.9% is the government number and that's the number we report. "

Go "Project BLS Mayhem"!

StychoKiller's picture

" Before you go crazy Twittering me the real unemployment rate is double, We do acknowledge the real unemployment rate is 16%.  8.9% is the government number and that's the number we report. "

Guess propaganda from the Govt is more important than the TRUTH to these nim-nulls!

barliman's picture

I keep wondering at what point does the tipping point take hold. I expect BAC to be the first to fail but ....

...maybe C, the market's whore, will be offered up as a sacrifice like Bear Stearns and BAC will await its own Lehman Moment this summer.


Timmay's picture

"Property" will not be settled through "law", it will be settled through force.



IrishSamurai's picture

Bingo.  As it always has been ... "law" is just the prima facie progressive approach to raw, unmitigated Darwinism.

Lock and load.  Its going to be a bumpy ride.


glenlloyd's picture

Any more bailouts for the privileged classes and I expect the pitchfork market to sky rocket. I'm thinking of going long pitchforks.

Misean's picture

I'm going long on the Pitchfork Backed Securities necessary for said people to buy pitchforks.

Long torches and long-pig most assuredly.

let-them-eat-cake's picture

I can insure you against any Pitchfork Backed Security loss if you want?

And there's no worries about me going out of business if lots of people lose, I'm AAA and so are my backers, plus I'll put your insurance payments in a big pot, split it up into little amounts and sell the opportunity of owning someone elses equally spread AAA risk, while you make a very safe amount of interest. My partners, will then offer to re-insure you on the risk you've just taken and and/or god forbid you don't get the amount of interes..........I've lost you haven't I?

I'll get my coat...

cranky-old-geezer's picture

Well done.  One of the most succinct descriptions of 3rd & 4th generation (fraudulent) risk-flipping I've seen in a while.

Laid out this clearly it's easy to see why there's $1.5 quadrillion in derivatives exposure out there.

... which Bernokio stands ready to make good on of course. 

Creating $1,500 trillion dollars out of thin air? No problem, just a few keystrokes, first $23 trillion was a piece of cake.

AbandonShip's picture

Bern-occhio,  lol.  Classic!  WBanzai should draw that one for us.

JW n FL's picture


The Government will settle its suit... there by blowing out all the individual(s) who are fighting the lies the best they can?

fantastic, and all of the foreclosures that have been rubber stamped this far will stand...

The Government looking out for number 1... not "We the People" but of course... number 1 is the beltway lobby dollars..

Main Street or the American People get FUCKED for $20 billion... I guess the put backs that JP set aside were a lil heavy.. that's kool, they can convert those put back dollars (those un-used now due to the Lying Government Settlement) for new Bonus Monies!!! YAYYYYY!!!!!!!

RockyRacoon's picture

I raised the question of county filing fees many months ago and wondered where all the County Clerks were.  Asleep at the wheel?   Some of them should be hung out to dry for letting all those filing fees go unpaid.   How the hell did ANY property get transferred with the being in existence?   Voters should start at the LOCAL level and demand some answers before indicting some public sector attorneys.

hidingfromhelis's picture

Herein lies part of the problem.  In the old days, each transfer of the mortgage/promissory note was recorded.  When the financial institutions created their shell corp, MERSCorp, the counties weren't receiving any notice of anything any more.  As far as their records show, the original mortgage/note is the current one despite the fact that the promissory note had been securitized and transferred multiple times.

MERSCorp simply declared that they were doing everything the counties were but so much more efficiently.  To save money and time (mostly money,) they stopped recording or notifying counties.  It will be interesting to see how the cases work out.  In some counties, there is no law or regulation requiring recording, while in others, I'm sure there are requirements. 

cranky-old-geezer's picture

In some counties, there is no law or regulation requiring recording, while in others, I'm sure there are requirements. 

It really doesn't matter if recording at the county courthouse is required by law or not. 

If a foreclosure case ends up in county court, the county judge wants to see the courthouse-recorded note/mortgage chain of assignment to determine if plaintiff has legal right to foreclose.  If it ain't there, or was fraudulently thrown together after the fact, plaintiff loses, end of story.

Why?  Because it's legal precedent to have note/mortgage assignment recorded at the courthouse, and judges follow legal precedent, a legal cocept otherwise known as "stare decisis".

MERS is not legal precedent.  Most county judges don't recognize it. Let's hope all county judges don't recognize it.

RockyRacoon's picture

In light of your comment, which is a very good input, how do we explain the plethora of successful foreclosures?   The "system" got lazy and set their own precedents unfortunately.

hidingfromhelis's picture

Remember, in most judicial foreclosure cases, the defendant/homeowner doesn't even show up.  From what I've seen in numerous posts on here and heard elswhere, when one party doesn't show, the other party generally gets whatever they're asking for.  The fact that the judges aren't even verifying legal standing of the party foreclosing does indicate a degree of laziness and disregard for law itself in the system.  It could also be that the judges are more sympathetic to the attorneys representing the banks, with whom they're familiar with vs. the "deadbeat" borrowers.  Not all judges check their prejudices at the courthouse door.

Previously, I'd responded to the comment on counties not keeping up on recording fees owed and intentionally limited my comment to the fact that the counties have no way of knowing when a note is reassigned.  MERSCorp gave themselves the power to do away with any sort of public notice whatsoever, and in the process, completely FUBAR-ed the chain of title.

The assessor's office/county clerk's office is separate from the judicial system, where a completely different set of problems exist.

chunga's picture

I sometimes wonder if it's even worse when these alleged lenders don't even bother to pretend making valid assignments in the MERS "make believe" database.

b_thunder's picture

If Madoff is doing 150 years for his crimes, then if Obama's $20Billion "plan" is enacted, everyone involved in it should get 300 years!

First, why those who are underwater, i.e. most irresponsible borrowers, get free money?  What about responsible homeowners?  What about renters?  So if you're under water on your mortgage you get a Christmas bonus from Obama?  Why not give every taxpayer small tax cut?   This is clearly designed to be a pre-election year BRIBE to potential voters!

And Second, if the so-called "fine" paid by the banks goes to pay down the principal - where will this money eventually end up?  That "pricipal reduction" - what exactly is that?   Well, it seems to me that Obama intends to funnel that $20Billion right back to the banks as "principal reductions!"   Bansk will pay $20B, and will get it right back as payment for mortgages! Not only $20B is totally inadequate fine considering the size of the mortgage fraud committed by the banks, but most of this $20B will go right back to the banks.  And since the principal writedown will only postpone the inevitable foreclosure, the only punishment (if you can call that punishment at all) is that instead of foreclosing immediately, the will foreclose on the same houses later. 


StychoKiller's picture

I have very little sympathy for those that were gaming the mortgage industry and using equity as an ATM; however, according to Michael Lewis:

                   Excerpt(s) from "The Big Short":

"In Bakersfield, CA., a Mexican strawberry picker with an income of $14,000/yr and no English was lent every penny he needed to buy a house for $724,000."


"By May 2007, however, there was a growing dispute between Howie Hubler and Morgan Stanley.  Amazingly, it had nothing to do with the wisdom of owning $16 Billion in complex securities whose value ultimately turned on the ability of a Las Vegas stripper with five investment properties, or a Mexican strawberry picker with a single $750,000 home, to make rapidly rising interest payments."


"'Who takes out a home loan and doesn't make the first payment?' asked Danny Moses, putting the matter one way.  'Who the fsck lends money to people who can't make the first payment?' asked Eisman, putting it another."


cranky-old-geezer's picture

This may be far-fetched, but I suspect the federal government and Fed might be the real  mortgage industry gamers here.

What if the entire housing bubble was an elaborate plan to have banks owning as much foreclosed real estate as possible?

That premise explains everything that's happened, inflating the price bubble, getting people to obligate themselves way over their head so banks can foreclose later on, destroying clain of title via MERS so title companies won't insure title preventing people from buying foreclosed properties at any price, Fed providing on-going cash-flow support so banks stay in business, pay bonuses, keep playing along with the scheme. 

If you accept that premise, everything falls into place, everything makes sense.

Diogenes's picture

They don't want the real estate. They just want the money. Seriously, the last thing any bank wants is to be responsible for a bunch of houses.

There was a whole series of scams based on collecting fees and palming the risk off on someone else. Then it all blew up. Then the government bailed them out. Every move was with the intent of getting the money while dodging all responsibility.


Caviar Emptor's picture

Banks are now just a combination middleman for the flow of cash from the Fed  and hedge fund playing with Fed money. Easier if each citizen just had one debit account at the Fed and an Uncle Sam debit card. No more middlemen.

gwar5's picture

The banks would face some real headwinds if the officers were defending pending litigation from prison doing 5-10 yr. stretches.

JW n FL's picture

The line for the White House Hanging Tree is so very long and filled with Investment Bankers!

dick cheneys ghost's picture

jon stewarts defense of teachers..........truth in humor

Elmer T Pudd's picture

YouTube - The Cramps - Bikini Girls With Machine Guns

Almost time for CNBC...a pink pill and tea; and then a nice day being a productive citizen trying to help my economy.  What a wonderful country; please try to help - Form Instance

I know Mondays are tough, but it will be worse for those who follow.  So keep the faith and perserve...




tony bonn's picture

every single one of these fraudulent arrogant banks should be bankrupted into the stone age...their leaders, management, and personnel are lying scum. they can't make a living honestly because they are iq-deficient losers who bought degrees to get a fake job. what a bunch of losers.

StychoKiller's picture

MERS was recently sued by a small county in Massachusetts for $22 million for failure to pay recording fees.  This is just one small county in one state. 
The Obama administration as part of the ongoing 50 attorneys general investigation of robo signing is proposing a $20 billion settlement whereas proceeds will be used for principal reductions for those underwater in their mortgages.


There are currently 3,143 Counties in the USA.  If ALL of them were to sue for just a paltry $22 Million (and Win!), the total would be over $69Billion!

Guess Obamatron is either braindead, or working for someone other than the American People!


Confused's picture

Guess Obamatron is either braindead, or working for someone other than the American People!


Has any Politician worked for the American People? Of course there have been some, but you and I both know they aren't beholden to us. 

Jake3463's picture

Politicians are whores.  Doesn't really matter which country you are living in, they are whores.  The entire democratic process is one of a whore.


The campaign finance situation, and the basic complacency of the masses ensures who the whore works for.

To get elected, you need money to tell everyone what a great person you are and what a scoundrel your opponent is.  In order to get that money you need to hand out money from the government to people who already have money.


Now every few years or so, your political party comes out of favor for all the whoring you did when in office and many of your friends and maybe yourself get thrown out on your ass.  It all depends on how good the propaganda operation is in your district and how stupid your constituents are.  You know the parts of the country where there is either always a republican or a democrat elected no matter what, those are epicenters of stupidity.


So to your answer has there ever been a politician that worked on behalf of the American people, no.  It is almost asking whether there is a Priest or Pastor or Reverend out there actually working for God.


Franken_Stein's picture

Hello World !


c2 = a2 + b2 - 2*a*b*cos(gamma)

Jake3463's picture

The banks were insolvent yesterday, the banks are insolvent today, the banks will be insolvent tomorrow.  When the insolvency is recognized again we will all get treated to another shit show in congress with Obama or is his successor begging on his knees on TV, threatening tanks on the street if we don't hand the oligarchs more printed fiat, and a congress of people whose campaigns were funded from the stolen loot of the past decade making angry noises than passing the bill in the dead of the night by a 70% margin and handshakes that the world was saved, yet again.


This will be followed up with the sale of state assets to the assholes who were just bailed out, tax cuts to the oligarchs help the economy and the hopes that the new fiat trickles down to the unwashed masses, and cuts to social programs because bailing out reckless bankers is expensive.


1-2 years of extreme pain where the reckless bankers and America learns its lesson would avert 10 years of a slow degredation of society to a 3rd world country, but than again some of Obama's/Bush/Clinton/Insert next name of President friends would either have to go bankrupt and actually work producing something of value or spend time in Prison, and frankly if they are doing that, they don't have the ability to hand their friends in government gifts for being such good friends.


The only hope for the country is that the next time this shit is pulled, the US Citizenry react like the Egyptians.


If I were the President in this situation, the most important issue is the potential of a football strike.  Frankly another banking crisis mixed with no meatheads hitting each other for 60 minutes on a Sunday is a dangerous recipe. 

bunkermeatheadprogeny's picture

Banks are praying for another oil spill, war, or any thing else that would keep them out of the news.

Jake3463's picture

They will get their wish, mostly because the Bernank has pretty much wreaked worldwide havoc this time instead of just wreaking domestic havoc. 

tom's picture

In addition to the owners of private-label MBS seeking putbacks, there's also the monolines, which have been doing a lot of discovery work. That Ambac vs JPM (as successor of Bear and Emigrant) case that was posted here on ZH is just an extreme example of the widespread fraud which the government is choosing not to prosecute but injured parties are prosecuting privately in civil courts.

The most damaging thing about the government bail-outs and kid-gloves treatment of the banks is that it forestalled the recent widespread fad of short-termist investing from ending in natural and inevitable mass failure. The housing bubble was just one aspect of the short-termist investment fad, and there are many, many, many other ways that money managers of all varieties, company managers and individual investors are frantically grabbing for short-term profits with little regard for how and where the long-term risks will play out. The failure of the majority of major financial sector companies, many non-financial companies that played the same game and vast numbers of individual investors who either played the game or blithely let their money manager play it would have been a fitting end to the short-termist fad, from which we could have been truly, healthily recovering by now. Instead politics has rushed to the rescue and declared an extra inning. Sorry folks, the game still must end.

slewie the pi-rat's picture

yes, the nefarious banks face a little "headwind" here, but i'm pushing my unicorns and rainbow skittles all-in for Fanny and Freddy, the two most resilient old hookers, ever!

how can counterparty risk be a problem?  i still have checks.  don't you?

jeeeez!  let's look at the record, here, too, 'k?  even when hanky panky, the doe-eyed pelosi, and turbo-prop push-button batmanke looted the Treasury to (etc. etc.), they SAID they were "buying time", didn't they?  huh?

well, the insiders are now outsiders, and guess what?  time's up, kiddies!

try not to get any on you, ok?

Bitch Tits's picture

Follow the money - and it always leads to the same place.

A nation should own its own money and resources, and its government should have very, very, very effective, efficient, and transparent means of following the money and the dispensation and accrued benefits of the resources in question.

Warren "If the U.S. has a Resource, It's My Resource" Buffett and his ilk support the Fed because it allows them to rape and pillage the country to their own personal benefit - and to the deficit of every other citizen.

I read an article not too long ago about a small town whose only real resource was an abundance of water. The town council sold the rights to the water to a private investor. The private investor raised the cost of the abundant water until the citizens could no longer afford it. Those who tried to steal their own water were beaten and imprisoned. The town and its people sat in the midst of plenty and eventually died from want.

The investor, however, was able to sell the water elsewhere. Where the same scenario will play out again, eventually.

Everything we ever needed to know we learned from the Golden Rule.

Screwball's picture

I would love to read about that, do you have a link by any chance?  Thanks.

Fearless Rick's picture

Anyone notice how the $20 billion in fines was floated as a solution to the housing problem but not spoke of since? There's a good reason for that: it won't work.

And the reason it work work is because neither the federal government nor the banks can force homeowners to accept principal write downs.

While some of you people still think people are getting "free" homes, the truth is far different. There are still property taxes to pay and a good deal of litigation and negotiation that's going to take place because the majority of those NINJA and subprime loans have already been foreclosed upon and the banks are holding that shitbag of defaults in their REO.

The bulk of the underwater and defaulting mortgages are of higher grade, and the homeowners aren't your typical subprime buyers. They have, as a group, withstood the onslaught thus far, are loaded with legal arguments and lawyers and will scoff or laugh at principal write downs that still leave them underwater and only serve the banks' interests in getting their wet ink signatures on new notes that will push all the MERS-related title issues deep under the rug.

It's simply not going to happen. I'm one of those underwater, delinquent homeowners via inheritance. The original loan was through CW, now BAC, and the documentation is so full of holes I have ample evidence for recision or suit via TILA and/or RESPA.

If BAC came to me today and said they'd write down my loan by $20K (it's $81K now), I'd politely decline, saying I'd rather take my chances in court, which will be long and costly and potentially, the bank, if I'm successful, would have to pay back all of the payments already made, and face potential treble damages for fraud.

So, you see, once you peer under the veil, the banks are truly in an ugly position. The Obama administration would love to resolve this, but $20 billion isn't going to do it. Maybe $200 billion might, but there's no way they're going that deep, even though the banks are easily on the hook for that much and probably three to four times the amount.

The banks are already insolvent. Another $20 billion in fines can be easily ginned up via the Fed's money-pumping machine but it still doesn't get hundreds of thousands of hard core, legally-armed homeowners to sign on the dotted line.

That's the problem and they all know it.

Meanwhile, the federal government is having trouble keeping its doors open, much less do anything of substance and the banks would rather continue litigating one by one in court or not at all, walking away from some lower-hanging mortgages and homes, because time is healing their bottom lines.

The government "deal" is a total non-starter. And then there's the put-backs, but that's a discussion for another day. Meanwhile, a slew of Alt-A and other flavors of ARMs are defaulting TODAY, tomorrow, next week, next month and the banks are in even more serious trouble.

The final solution is the bankruptcy filings of BAC, JPM, WFC and C. They're all frauds and eventually must pay the piper. That day is coming, maybe before the end of this year. In fact, I'd say probably before the end of this year, but I don't want to get my or anybody else's hopes up.

Anyone with knowledge of this situation knows the banks must be liquidated before any recovery can take place. The elites are grasping at straws.

SwingForce's picture

Great point! Besides the money coming back to the banks from the homeowners, thay get to rewrite the notes! That's the secret plan! Those bastidz....WTSHTF?

Problem Is's picture

+5... Tyler: Excellent Guest Post
More Macro Story, less Commander McBragg aka madhedgefundtrader please...

jmc8888's picture

They're using sampling? ROFL.  Do we always have to use bullshit for legal rulings? Would they even be fair? NO. 

Of course, the banksters get off with pennies on the dollar, and we'll still bail them out again.  (with the rest adding to our fraudulent....need to be Glass-Steagal-ed debt)



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