The Real Danger From the Foreclosure Crisis

George Washington's picture

Washington’s Blog

People were told that the investment in their house was as solid as a rock:

Unfortunately, millions are now upside down, because the housing bubble - fed to a large extent by fraud - has burst:

And the people who supposedly verified the accuracy of mortgage documents never did so, and - in many cases - weren't who they said there were:

The foreclosure scandal will likely depress the real estate market, as clear title for millions of homeowners comes into question.

This is obviously a huge problem.

But the largest problem for the economy could be - not from mortgages themselves - but from the securitizations of those mortgages:

Joshua Rosner - noted bond analyst, and Managing Director at independent research consultancy Graham Fisher & Co - told his clients Tuesday, that the impact from foreclosure gate on the securitized market could be huge.

As Shahien Nasiripour reports:

[Rosner] said he believes the paperwork problems regarding foreclosed properties will ultimately be resolved, he wrote that "We have a larger and more significant concern, which, if proved out, could call into question the validity of nearly all securitizations."


Rosner said, the current scandal "may give investors an opening to challenge the legality of deals, threatening to unnerve financial markets."


Those challenges, which would result from the revelations unearthed during the foreclosure process, could then be used to investigate the documentation practices that occurred when these mortgages were first given to borrowers. Inflated income levels, fake home appraisals and other lies inserted into mortgage documents -- something Wall Street and Washington have long suspected, but never truly investigated -- could then be used to force big banks to buy back the garbage they peddled in the first place to unwitting investors.

Another possibility is that trustees, who oversee the flow of documents from the originator of the mortgage to the vehicle that holds those documents for investors, may not have properly performed their role, either.




Just four firms dominate the trustee market for mortgage-backed securities in which the mortgages aren't guaranteed by Uncle Sam: Deutsche Bank, U.S. Bancorp, Bank of New York Mellon, and HSBC serve as trustees for 70.5 percent of all such issuance since 2005, according to Asset-Backed Alert, an industry newsletter and data provider. An additional four firms -- Wells Fargo, Bank of America, JPMorgan Chase, and Citigroup -- control 29.1 percent, Asset-Backed Alert data show.


All told, these eight firms have served as trustees for 99.6 percent of all private-label mortgage-backed securities issued since 2005.


Were the document errors now cropping up in a handful of cases "to be found to have resulted from [the] widespread failure of issuers and trusts" to properly handle and transfer documents, "there would ... appear to be a strong legal basis for the calling into question [of] securitizations," Rosner wrote.



Joshua Rosner On Foreclosure Fraud

As David Faber notes:

The worry centers on the mortgage loan pools created by many of the big banks as they fed the seemingly endless desire for mortgage-backed securities and CDO's (collateralized debt obligations) made from them.


It appears the mortgage content of many of those pools—created when the banks were dominating the mortgage securitization market in 2005, 2006 and 2007—may have been misrepresented. For example, an underwriter may have maintained that 80 percent of the mortgages in the pool were for primary residences when in fact far fewer were for that purpose. Or the underwriter stated that only 10 percent of the pool would be made of of "no-doc" loans—those that include less documentation about the borrower—when in fact the percentage was far higher.


That could be fraud, and if so, the creator of the mortgage pool could be liable. Given that the market for private label RMBS (residential mortgage-backed securities) was $1.5 trillion, the potential liability may be considerable. And while most of the originators of these mortgages are long gone, the securitizers are not.

Joshua Rosner agrees.

Rosner told Elliot Spitzer, the banks and rating agencies knew that 28% of the loans which the banks securitized and sold to pension funds and other investors didn't meet underwriting standards. And yet they turned around and processed them into sausage (securitized them) and sold them to investors, representing that they did meet underwriting standards.

Rosner said that the rating agencies apparently intentionally avoided looking into this, since the more deals they approved, the more profits the rating agencies got. [For background on the financial incentive of rating agencies to give high ratings to literally anything, see this.]

And Rosner points out that - knowing about the high percentage mortgages which failed to meet underwriting standards - the big banks then bet against the housing market. Spitzer called that trading on inside information:

The potential securitization problem is why bank stocks are now in trouble. See this, this and this.

And as former Managing Director of Goldman Sachs Nomi Prins points out, the Bernanke and Geithner are terrified of a meltdown in the securitization market as well:


The free-market, let the banks do what they do mentality was what allowed them to create a $14 trillion mountain of securities backed by precarious mortgages to begin with.




But the real reason for Geithner’s reluctance about a foreclosure moratorium is that he’s scared stiff about those securities – because even if he won’t admit it, he knows that the bailout wasn’t just about TARP and Bernanke isn’t just an economic savior.




If foreclosed homes couldn’t be sold because of fraudulent paperwork or had to wait for more detailed inspections, you can imagine how difficult selling assets stuffed with faulty loans might be. If it’s tough to find a title for a foreclosed home, think how tough it is to back the related loan out of a pyramid of securities sitting on top of it.


See, the loan that might be analyzed in a foreclosure situation could be part of a chain connecting the underlying home to 20 or 50 different securitized assets, all depending on it for either the interest payments the loan was supposed to provide, or the value of the foreclosure property if those payments stopped (in Wall Street speak, the "recovery value"). If a foreclosed property isn’t selling, it’s not recovering any money back to any asset waiting for it. Think what that can do to the value of toxic assets living at the Fed and the Treasury Department. Kill it.


The reason TARP and all the other subsidies happened was that Hank Paulson, Ben Bernanke, Tim Geithner (the pillage gang) and the most powerful Wall Street CEOs were scared. Banks had stopped trusting each other (no one cared about the person who couldn’t pay their mortgage, or had their home taken, whatever the reason). When there is no confidence in the market, there is no bid for securities, no matter what the reason.


The banks couldn’t pay for all their leverage and they were facing bankruptcy if the system remained seized up. So the gang paid to keep the securitization market going, by finding a home or back-up home for the assets. They did not propose any remotely effective plan to help individuals at the loan level .... They merely enabled the worst practices and excesses to keep going in the name of saving the country from a greater depression, by shifting them to Washington and providing the illusion of demand for them.


Foreclosure fraud is not new. Many sane people and organizations have been talking about fraud for years -- you don’t manufacture $14 trillion worth of mortgage-backed securities and all their permutations and mega leverage out of $1.4 trillion worth of subprime loans in five years without cutting a lot of corners. Banks knew that. But when the value of their assets plummeted, unlike individual borrowers, they got to dump them on the Fed and the Treasury department, while receiving cash injections and guarantees, and cheap money subsidies in return.


See this for more information on the government's ill-conceived effort to prop up the prices of securitized assets.

As Congressman Brad Miller told Dylan Ratigan, failure to use subpoena power to audit the quality of the mortgages in the securitized pools held by Fannie and Freddie and to pursue all available legal rights to protect taxpayers from getting stuck with the bill for toxic securitized assets would constitute yet another stealth bailout of the big banks:

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MsCreant's picture


I have a student asking a lot of questions. I sent him to this article on your blog to get started. Thanks.

web bot's picture

Does the whole system make any sense any longer?<just wondering outloud in my sock puppet way of thinking...>

f16hoser's picture

Uncle Sam couldn't wait to nationalize FNM/FRE. Where do you think the Plunge Protection Team gets it's money? 1.5 trillion worth and climbing. Their not about to open-up their books for the world to see but we know better.

What a vicious web we weave, when we first learn to decieve.



The Alarmist's picture

The rich shall rule over the poor, and the borrower is a slave to the lender.


Buck Johnson's picture

The securitization is the scare and they are scared.  By opening up this pandora box, people are waking up and also the bond holders are seeing an opening to getting their money back and/or making a profit from buying the toxic junk.  The lawyers see billion dollar legal fees for helping people keep their homes and also helping the bond holders.  The banks got a open stomach wound in an ocean of sharks and the sharks smell blood big time.  The federal govt. would essentially have to declare ad hoc law in order to protect their bank buddies, because this is crossing so many different laws in the states and financial contracts that for them to do anything they would have to go against their own laws and essentially be like a third world economy.  You know where the govt. and leaders can arbitrarily change the rules to their liking.

sbenard's picture

I'm convinced that this could be the scandal that sinks the entire ship. We must keep our eyes on this!

But Wall Street is still basking in the bullish sun. There is no worry there! They should be worried!

the not so mighty maximiza's picture

Holder will probably Ruby Ridge all 50 AGs asses.

Sudden Debt's picture

I wonder is the BAC shorters will be able to cash in today.

No way the gov. will let BAC go down again like last time.

MrBoompi's picture

When you've made the same move 100 times in a row, chances are you'll make the same move next time.


The powers at be will rescue themselves like they always do.



Panafrican Funktron Robot's picture

By the way, if any of you finding yourself giving advice on career or education direction, suggest anything in the legal profession.  Paralegals in particular are going to experience a hiring boom of epic proportions, fraud examiners are going to be in particularly high demand as well.  This will completely dwarf the scale of even the tobacco lawsuits. 

lamont cranston's picture

I received my conveyance within 2 weeks of paying Chase off 4 years ago. My 30 yr loan originated in 1988 with Watauga S&L (NC), who was absorbed by Old Stone due to the 8% cap requirement (they did not sell their paper and got screwed), who was bought by some dam bank, who was then eaten by Chase.

Husk-Erzulie's picture

Spitzer "What has the SEC been doing for the past three years?"

erm...We all know what the ZH answer is of course.

Boxed Merlot's picture

Pretty soon the only pictures on milk cartons will be those of encumbant politicians and professing bankers.

Walt Whitman's picture

Only when payment due is more than funny money will TPTB get the picture.


Got Milk!

gwar5's picture

Exactly. The derivatives dark market represents more layers of Ponzi and leverage that have been conjured as alternative mediums of exchange among investors. They dwarf the underlying assets.

The derivatives market is > $600 Trillion. Fiat derivatives.



moneymutt's picture

they should just cancel out all derivatives, done, reset move on...

thanks for the mentions, derivatives is way way bigger than US stock market, US housing market but no one talks about, and it is the whole reason for TARP, QE etc..

ChanceIs's picture

Hmmmmm.  Hmmmmmmmmmmm.  It seems that we have finally come "a cropper."

What to do?  What to do?

Can home prices fall if nobody bids because they know that they can never be confident of title or get title insurance?  How then do we price those illiquid SIVs, or Maiden Lane, or whever the toxic crap is stashed?  We already had Mark-to-Model I.  Does this mean Mark-to-Model II - to match QEII?  Why jump through the hoops and upset our Manderan feudal masters with all of this money printing?


Why is nobody asking the question of the ages?  Can the Chinese prove chain of ownership (title) on the US paper they hold???


Wait.  What's that you say?  That paper is and has been held at the FED so that problem never could have existed!?!?!  The horror, the horror.  What a time for Benie and Timmie to do something in a competent fashion!!!!!  How are we going to squirm our way out of this, because squirm we must?

Wyndtunnel's picture

Not to be inflammatory or anything but I think that only The Holocaust can be held up as more tragic example of so many people at all levels of society being so stupid and so blind as to what was going on. So the next time an American asks how the Germans could be so oblivious to what their State and its offices were up to a simple look in the mirror should be the first place he or she looks for an answer. Let’s hope that America can get its act together before the pathological narcissism that is gnawing away at it’s core is unleashed in a wave of pent up collective madness.


CustomersMan's picture

The same people holocaust-ed are the ones who put this disaster together, and nearly every other one, bar none.


Where do you think Blankfein,Weill,Bernake and Wolfowitz came from.


And they're also the same perpetrators of 9/11, and Madoff etc.


Wake up please.

Wyndtunnel's picture

God works in mysterious ways!

DaveyJones's picture

I think about that too. It's so blatant now. We always talk about "the tip of the iceberg" in the financial collapse arena but we are on the same tip for unconstitutional government response.

mrcmmm's picture

I posted this link elsewhere, but it is most appropriate to add to this article:

It repeats Rosner's point that the banks knew that a large percentage of loans did not meet underwritings standards, but did not disclose this information to RMBS investors, and that the information was offered to the rating agencies, who, unbelievably, refused it.  The systemic fraud is so evident at this point I cannot believe large scale litigation by RMBS investors -- states, unions, sovereign wealth funds, other banks -- against the originating, sponsor and trustee banks and the rating agencies, will not follow in short course.  And last forever.   Hello, Mr. Jarndyce.

Bob's picture

Hey, I was just about to post your link and give you credit!  Glad you're on the ball, mrcmmm. 

This is a frickin' jackpot. 


mrcmmm's picture

Why, thanks, Bob.  Just turning over rocks.  Hell of a lot of rocks to turn over these days. I don't think we should be surprised by this (particularly the ratings agency part, since they have long been known to have been on the take from the sponsor banks). It just further confirms our suspicions and provides more ammo for the lawsuits.

Bob's picture

A whole lot more ammo. 

ChanceIs's picture

Riddle me this:


All 50 states' Attorneys General have jointly filed a suit which somehoe addresses "ForeclosureGate."


What is holding-up Holder???  Why no action at the federal level??


Please don't answer.  I really can't handle the truth.


One also shouldn't observe (before dinner) that the AGs are more concerned with J6P getting tossed out w/o due process than with the fraud in the paperwork from day one.....more concerned with the foreclosure fradulence than that in the origination.  I guess that the ultimate baghlders might be the foreclosure mills...and you, the Chinese, and me.

sgt_doom's picture

"What is holding-up Holder???"

Well, one might assume it is the same exact thing that UNLEASHED Holder to act on behalf of those oil companies and agro corps which he represented when they were sued by the relatives of murdered union organizers of South America and West Africa!

But, more to the point, it was the feds, under the Bush Administration which intervened via the OCC under the Bank Act of 1863, I believe, to supercede the states' AGs when they acted to try to prevent the preceding predatory lending and violation of consumer protection laws at the state level (that would have been just prior to Spitzer getting outed).

Pituary Retard's picture

In spite of your request to not answer...

The Federal Government doesn't have legal standing. The states still control something, but I am guessing the hopey-changy unicorn will poop it's rainbow of encroachment on this issue by the time it is all said and done.

ChanceIs's picture

LOL.  Hopey changy unicorn poop.....

You made a good answwer - that foreclosure is a state gig.  But....where there is smoke there is fire.  I am not an attorney, but I would be very surprised that if I were sitting on the south side of the Mason-Dicon line, and you on the north, and I said....'buy these securitized loans, all the paper work is done and Moodys has them at AAA'....and you took them and handed me money, then Mr. Holder might have a good reason to call me in for an interview.


Methinks that Mr. Blankfein would really rather not have Mr Holder make that call.   A waste of God's precious works.

Precious's picture

[ Home Sweet Home ]

Iam_Silverman's picture

Glad my place is paid off.  No electronic MERS in our title history either.  All good, clean wet-ink type history - and easily traceable for free at our local county clerks office.


Of course, being totally, 100% debt-free at this stage is starting to seem pretty stupid.  I could have over-leveraged myself and had a lot nicer home (and maybe more than 45 acres too) and then just stop paying for it, like others apparently have.  All of those payments could have bought iPads and big-screen TVs!

moneymutt's picture

in a deflationary depression, being debt free is best way to be...yes, some people will also do well by defaulting, just as there can be bankrupcty abuse, but you have clean credit, are foot loose and fancy free...I wish I were you...

Mercury's picture

But in an inflationary depression where the government goes around waving it's wand and forgiving debts...just the opposite.

Pituary Retard's picture

All of those payments could have bought PMs too.

yabyum's picture

I paid off my house from WF last year. I always thought they would send me a deed or? Wells said no problem you own it, it's all cool. I hope taht is true.

kayl's picture

Immediately get a Letter of Reconveyance from the bank. The deed is already yours.

FEDbuster's picture

You should have received a release, and it should be recorded with the County Clerks (Recorders) office.  A title company can help you make sure it is recorded properly.

yabyum's picture

Thanks I will give 'em a call.

Kina's picture

knowing about the high percentage mortgages which failed to meet underwriting standards - the big banks then bet against the housing market. Spitzer called that trading on inside information:

I gather we all sort of knew this, it was pretty obvious, but no proof. And we knew that the powers would do nothing about it anyway.

The banksters better watch out, they will make the perfect focus of everybody's anger when things turn to shit, and politicians will gladly seel their former masters down the drain to save their own skins.

Banksters, regulators, all facing a truth commission, long prison terms.

FEDbuster's picture

The "chump" investors who bought the MBSs (and are still bagholders) will hire the best sharks out there to take a bite out of the originators and securitizers.  Forced buybacks will bankrupt these companies.  Of course the FED may step up to "save" the banksters and buyback the shitty MBSs they don't already own?  Just a few more wafer thin MBSs, Mr. Bernanke.  Bon appatite....

Widowmaker's picture

No chance the Fed will help, they already looked away and then when the problem surfaced foisted it on your citizen back.  It's the people's problem now -- failure rewarded, laws be damned, bonuses on Christmas.

RichardENixon's picture

"Of course the FED  will step up to "save" the banksters and buyback the shitty MBSs they don't already own"  Fixed your typo for you.

Edmon Plume's picture

You lost me at "People were told that the investment in their house was as solid as a rock"

Fools, all.

Advice from just about every adult I ever knew is echoing in my head:

"...if your friends asked you to jump off a bridge..."

Miles Kendig's picture

"...if your friends asked you to jump off a bridge..."

Does that go for sovereigns?  Especially when cost reductions (short term as it turns out) in socialism lead to ninja arms?

Time to streamline and reduce the print, especially the fine print.  (I suspect I'll be hitting this theme again)  After all, it is supposedly in our best interest to expand capital to everyone and overcome barriers to educating the public in the reality that the security of the nation depends on their buying a home, and everything else.

Gotta give credit where it is due for furthering the premise of faith based governance.  Now we know the real Committee of Faith Based Initiatives for the Bush administration was actually the FOMC in conjunction with SecTreas and their supporting cast of "independent agencies'.

Madcow's picture

"Capital must protect itself in every way...Debts must be collected and loans and mortgages ?foreclosed as soon as possible. When through a process of law the common people have lost their ?homes, they will be more tractable and more easily governed by the strong arm of the law applied ?by the central power of leading financiers. People without homes will not quarrel with their leaders. This is well known among our principal men now engaged in forming an imperialism of capitalism to govern the world. By dividing the people we can get them to expend their energies in fighting over questions of no importance to us except as teachers of the common herd."

- Taken from the Civil Servants' Year Book, "The Organizer" January 1934

Yophat's picture

There's no danger! Just a roll up strategy in the midst of implementation stages...

obtaining absolute power and control over the economy with their printing press (bank credit).

By breaking the fundamental valuation of money (credit) by destroying the faith and integrity of the IOU/title.....the whole economic system is in utter panic desperation for the iron fist of government to step in and guarantee payment of IOU's and the creation of new credit (money) to keep the system alive and functioning......and whatever they have to do to make this happen!

Whether that means garnishment of wages, garnishment of IRS tax return, debtor's prison, etc.....along with complete control over all transfer of property (taxed of course). Not to mention health care and all other aspects of our lives. They are nearly there.....just a few final steps that could easily take place within the next 6 months.

How ironic would it be to have that blockade of Iran's ports go into effect in the next 6 weeks.....which would then compel Iran to attack the US or face utter economic destruction (no imported gasoline to keep economy alive)......and obviously North Korea would attack South Korea shortly there after for similar economic reasons (and thus spread what's left of the military to the breaking point).....and all of this would provide cover during the next 6 months.

Imagine if available credit disappeared tomorrow - cash, check, debit card only.....

What's the cash value of a house? a new car? something from the classifieds? something from the grocery store? What changes and what doesn't? What sections of the local super Walmart would sell out.....and which ones would the shelves be full despite the clearance tags?

Which businesses survive and which ones promptly fold up?

How much power would a bank hold if it were the only one offering new lines of credit? What percentage of the population would flock to them in order to buy a property/asset, sell a property/asset, keep a paycheck coming, keep a business alive, put bread on the table, etc?

As pointed out in that first video (economics - flow of money - power of money) our money is created by debt. We've hit the debt saturation point and thus a downhill slide. Money will get harder and harder to come by as new money (new debt) contracts and interest costs continue to suck money out (not touching the evaporation of existing debt/money through write-offs)......and consequently the printing press will get more and more powerful.

With each developing crisis government power expands 10 fold. We see that with 9/11, with 2008 economic collapse, 2010 economic collapse?, 2011 economic collapse?, 2011 wars?, etc. Every facet of our lives is governed/controlled by the government.....and that control is growing in power daily. Its also non-linear and in fact exponential.....thus greater power is gained in less and less time. All of it comes from the fundamental basic control over money....and the availability there of.

So while gold/silver looks enticing...I think its a short term bubble. That said, in the long term it may pay off.....but there is a gap to be bridged (all consuming government power prior to the collapse) and a hedge based on the future value proposition (asphalt replacement?).

Put yourself in the shoes of the NWO. Do you destroy the power of your printing press or increase it? Keeping in mind that its the fundamental source of all of their power.

Once you've answered that question....everything else becomes a facade for that basic control feature. You may use it a little here or there to assist in transferring power (its a tool right?) from private to government, from states to federal, for military/law enforcement, for bribes, for control......but you definitely don't destroy it. And when the fundamental result of currency created by debt is just inject a little here or there for power while the deflationary effect grinds down the opposition.

Hence the need for a little cash for rainy days. Cash is in short supply.....and will most certainly be if they completely halt new credit (new money) which would bring about hyper-deflation and the great willingness of the people to turn over all their now worthless assets to the government (or government bank) in exchange for daily bread (credit & ultimately, survival).

If credit was completely cut off today....what's the cash value of all of your assets?

So we have massive crisis (potential for bringing credit to zero - massive hyper-deflation) begging for government intervention (QE#2 acquisition of large banks, QE#3 aquisition of all banks) which could wind up with the government being the sole source of credit (new money) in our banking system. That would mean they've conquered health care, finance, and property. Last step would be 12 to 18 months down the road....the fraud solution for problems with government bank credit cards.....also called the chip!