This page has been archived and commenting is disabled.
Is the US Government About to Forgive Mortgage Debt? Let’s Crowdsource Our Way Through a Scenario or Two!
Note: This is a long post, so I have bifurcated it - placing part two with the heavy graphics and the financial stuff on by blog. The intro and legal theory suggested by readers is here in part one. I would suggest one read it in its entirety before dismissing any one part of it, though.
Is it possible for the US Government to choose to forgive mortgage
debt? Sounds outrageous? Read on for the legal theory behind this claim
and let me know what you think? I thought it was little esoteric as
well, but as I looked deeper… Well, I’ll let you be the judge.
A lot of attention accrued to Representative Grayson’s calling out of
foreclosure fraud, and for good reason. The story is absolutely
amazing, and kudos to a member of congress that defends his
constituency.
It’s not as if other entities have failed to take notice. ZeroHedge has its usual witty commentary regarding the possibility of foreclosure transactions potentially being unwound due to fraudulent foreclosure activity. The NYT
ran an article stating that Fitch will look into lowering the credit
rating of companies that participated in the submission of inappropriate
foreclosure paperwork, which apparently seems to include an awful lot
of companies. It goes on to state (as excerpted by Zerohedge):
Fitch Ratings said that Wednesday
it was asking mortgage companies about their internal processes for
executing foreclosure affidavits. If it finds the processes lacking,
Fitch will consider downgrading the company’s rating.
The agency also said if the
issue is widespread, the resulting delays and extra costs to
foreclose could increase losses related to residential mortgage-backed
securities.
Here’s the twist. A lawyer who happens to have
followed my writings over the years has suggested that most are missing
the big picture in focusing on fraudulent foreclosure documents. He
contends (and I’m paraphrasing here, these are not my words, per se) “that
since the U.S. has ownership interest in many (if not most) delinquent
and distressed mortgages, this fact will be counted as policy in
litigation. As a consequence it matters A LOT if you can
say that your client has a Fifth Amendment Due Process right (or third
party beneficiary Federal common law right) to a HAMP modification
which is in FACT a minimization of the risk of default (not that flaky
31% number) BECAUSE, among other things, the U.S. has no economic
incentive to foreclose”. Now, I am no lawyer and thus the legal
issues are beyond my domain, but I must admit I found the theory
interesting. So, I’ve decided to crowdsource this one in anticipation
that some of the more astute legal minds can shed some light on the
validity of the theory. I’ll supply the financial stuff in this post,
and I’ll rely on the legal eagles to peer review the theory.
This all stemmed from a chart and “what if”
scenario I post on the 23rd of September in which showed the increasing
decline in recoveries from gross charge-offs from banks.
As a matter of fact, things are so
bad that I believe banks will have a perverse incentive to actually
walk away. Now wouldn’t that be something??? Next, we take a look into
the home builder that makes more money doing distressed investing
than it does building and selling homes.
The legal argument from the BoomBustBlogger in question is as follows:
Things are
moving pretty fast now, especially since so many states are moving to
ban home foreclosures, and since your comments on the lack of economic
incentive to foreclose is coming to the fore. It’s becoming
a question of, Hey Uncle Sam, what is your policy? This may result in
actions to quiet title, against the banks and the United States. The basis will be that in fact, the United States has forgiven home mortgage indebtedness. Your own observation of the economics of foreclosure is part of the mix. But the entire argument that the U.S., has in FACT (no matter what it CLAIMS) forgiven home mortgage indebtedness, is this:
Through its
1. ownership
stake in banks (creating Fifth Amendment Due Process rights to what is
in FACT–not the arbitrary 31%–minimization of the risk of housing loss:
see Huxtable v. Geithner Order on this (not the Order to Dismiss, sounds
like a settlement was reached since Huxtable filed no opposition); 2.
contracts with servicers (creating third party contract rights in
borrowers–see Marques v. Wells Fargo); 3. mortgage principal reduction; 4. adjustments to gross income for principal reduction; and 5. loss of economic incentive to foreclose,
the United States has in fact forgiven home mortgage indebtedness.
And here is more on the topic…
The
big divide in the United States District Courts, with regard to HAMP,
is the language of HAMP which seems to give the Government discretion as
to whether to modify or not. Here is typical language from a court
decision saying there is no right to a modification:
“Notably, the statute provides that loans may be modified “where
appropriate” – a phrase that limits the Secretary’s obligation and
evinces a Congressional intent to afford discretion in the decision
whether to modify loans in certain circumstances.”
The way
to defeat this (as was done in Huxtable v. Geithner, before the case was
settled or abandoned) is to show FACTS which demonstrate that the
Government is actually enforcing a different policy. In that case, it
doesn’t matter what the enabling language says, what decides the policy
is what the government is DOING. What OTHER facts show that the
Government is pursuing this different policy? That is where your
observation comes in.
One of
those facts is the factual conclusions the government ITSELF has come
to. What has it really concluded in the secret, back rooms?
This is
why I was interested in your analysis of the returns on taking title to
defaulting properties (the link being the Government ownership stake in
these properties). If the Government ITSELF has decided there is no
further economic incentive to foreclose, then its policy can ONLY be to
prevent foreclosures, because economics shows no facts in favor of going
forward with foreclosing and taking title. Government policy must be
based on facts–if it is not, then the policy is simply prejudice, and
the courts will not uphold factless prejudice. It’s a matter of
determining what policy the Government is pursuing, as a process of
eliminating all those policy options for which there is no factual
basis. Weeding out one prejudice after another. One such prejudice, I
submit, is the idea that there is an economic incentive for the
Government NOT to grant HAMP modification. If there is no economic
incentive to foreclose, then this supposed economic incentive is
revealed to be a prejudice, and unenforceable. A right to HAMP
modification follows as a matter of elimination of other options.
That is
where you come in. It would greatly help if, on your site, you would
give an estimate of the month/year on which the data clearly show that
the economic incentive to foreclose is ZERO. Once it became clear that
the U.S. had no further economic incentive to foreclose, it would be
very clear that the U.S. has in FACT forgiven home mortgage debt. That
is what zero incentive to foreclose, means. It means that, in FACT, the
debt has been forgiven.
I get
the feeling that, privately, the U.S. is racing ahead based on this
knowledge. I would not be at all surprised to see Obama simply ban home
foreclosures nationwide.
But we are still in limbo, because there is still this notion that
robo-affidavits are the only problem with foreclosure documents, and
once that is “cleared up” it’s full speed ahead with foreclosures.
That
is certainly not the case, and people need to realize that that is not
the case. Above all, their lawyers need more ammo, and the best ammo
would be a detailed examination of the rapidly declining economic
incentive to foreclose.
By the
way, if you assume that the Government already knows we are fast
approaching zero incentive to take title, what signs tell you that the
Government is already acting on the idea that there is zero incentive to
take title? That is, what actions of the U.S. Government tell you that
it has in FACT forgiven home mortgage debt, that it has ALREADY written
it all off as a loss, and is now acting in the AFTERMATH of that
writeoff. Because I think that’s where we are. The United States is
ahead of ALL of us on this. They know how bad. What I’m asking you is,
where is evidence that they know there is nothing to be gained from
foreclosure, and have moved ahead and have IMPLEMENTED that conclusion?
So if you
could deal with that in some big public way, that would be best… That
would attract the attention of every lawyer, judge and investor in the
country–it would immediately resolve every legal question surrounding
home foreclosures, and it would provide an opportunity to get more of
the truth into court cases. Even from the analysis you provided on
9/23, it is clear to me that it’s game over for home mortgages. They
are simply not a part of the economy any more–they’re social policy and
the U.S. is dealing with them as social policy: but what IS the
Government’s new policy? Well, what do the FACTS show it is?
Since you’re not a lawyer, you greatly underestimate the importance of this observation. When the United States has a stake in a matter, facts relating to that matter are imputed to it as United States POLICY.
Well, he’s right. I am not a lawyer. Actually
far from it, but it does appear he is on to some creative legal theory. I
invite any and all competent legal type to weigh in on this. There is
even more on this topic, which at first sounds a bit far fetched, but
actually congeals into a cogent argument as you read on…
It is a BIG mistake to read this as just a matter of cleaning up a few documents. These phony affidavits [as referenced above]
were part of an effort to hide bad debt on banks’ books. It is also
hiding something else, which is that the United States has forgiven home
mortgage indebtedness. Look:
1. ownership
stake in banks (creating Fifth Amendment Due Process rights to what is
in FACT–not the arbitrary 31%–minimization of the risk of housing
loss(on this prong, please see online the Huxtable v. Geithner Order
(not the Order to Dismiss–sounds like a settlement was reached since
Huxtable filed no opposition). The reasoning of Huxtable is sound and is
pretty generally accepted now. There IS a Fifth Amendment Due Process
right based on U.S. ownership of banks, and this Due Process right is a
right to a modification based on what is in FACT the minimization of
risk of default–this means that the 31% is simply the Government’s
assertion on this point–it is LITIGABLE;
2. contracts
with servicers (creating the same rights as above, but on a third party
beneficiary theory–see Marques v. Wells Fargo–online). The reasoning of
Judge Lorenz is also sound and is simply another basis for claiming a
factual minimization of the risk of default, rather than simply
accepting the Government’s 31%. Again, the 31% is going to be litigated.
People have to get used to that–it’s not off limits anymore;
3. mortgage principal reduction through HAMP;
4. adjustments to gross income for principal reduction through HAMP; and
5. loss of
economic incentive to foreclose (this is Reggie Middleton’s analysis on
his blog). The Middleton analysis is new (it’s at www.boombustblog.com, the September 23 story on housing prices). The return/chargeoff is rapidly hitting 0.
Litigants in
HAMP will certainly have the right to civil discovery as to what the
United States has concluded with respect to the economics of
foreclosure.
It will
probably turn out to be just what the facts show: that the policy is in
FACT to minimize the risk of default because there is no economic
incentive to foreclose.
Of course this
seems impossible, unacceptable, blah blah blah. But if the economic
facts bear it out, then the economic facts bear it out and you just have
to wrap your head around it. What will happen next/is happening now:
1. litigants
will sue to quiet title (among other causes of action such as fraud,
conspiracy, Civil Rights violations, etc., naming Tiny Tim, the IRS
commissioner and the United States, among others); and
2. the U.S. is
scrambling right now to decide what to do if people who have a gazillion
dollars and are sitting in a house which is soaring in value,
nevertheless decide to simply stop paying on their mortgages.
Of course, the
first instinct of Uncle Sam will be some sort of coercion. When that
fails in court, the next gambit will be to try to provide some incentive
to people to keep paying those damned mortgages. Who knows how this
will end?
In any event,
it’s Reggie Middleton’s analysis which broke the back of this. Indeed,
I’m sure his analysis was already made in the dark of night at the
Treasury Department.
| The following charts of charge-off recoveries was sourced from the subscription document available to all Paying Subscribers (any who are interested in this extensive data set and analysis can subscribe here): Historical Bank Charge-offs and Recoveries 2Q10. There is also a more comprehensive mortgage, loss, demographic and credit template that was used in the original US (Don’t) Stress (US) tests, otherwise known as SCAP . We have taken the liberty to update the template on a periodic basis for the government, since it appears they are not forcing the banks to do so  , and it is available here: SCAP Assumptions Updated_09082010 Web Version.This model shows a weakness in the Case Shiller method of following prices (which I will illustrate in graphic detail at 4:30 pm on Bloomberg TV and in my blog later on today) in that the CS doesn’t include investment properties (usually the first to go into foreclosure), new construction, and REOs. As a matter of fact, Case Shiller actually looked slightly rosy as of late compared to the facts on the ground (see Why the Case Shiller Index, Although Showing Another Downturn Coming, is Overly Optimistic and Quite Misleading!). |
That’s been the
entire tendency of this mortgage mess: to separate out what is in FACT
the policy of the U.S., as opposed to what the U.S. SAYS its policy is.
If you believe the latter, you don’t get your day in court. But if you
assert the facts in court, then your house is free.
As this
unrolls, it will sink the dollar. This will entirely change rights in
housing in the United States. Among other things, it means that Lindsey
v. Normet minimum scrutiny for housing is out the window, because the
United States’ policy is a higher level of scrutiny for housing.
Of course, all of this prompted me to look a bit deeper into the
economics of foreclosure from the lender’s perspective in the near to
intermediate future. For those thatdon’t know, the US is the owner or at
least underwriter of risk for the biggest lenders in the country. We
outright own Fannie and Freddie, who process the bulk of conforming
mortgages, and we underwote the risk of Bear Stearn’s rotting assets
directly as a condition of their sale to Jamie Dimon/JP Morgan as well
as partial ownership of Citi and AIG and the underwriting of untold risk
through Fannie and Freddie insurance programs. There is no telling how
much is underwritten indirectly. For a hint, see More Doom and Gloom: Homebuilders Making Better Money as Hedge Funds than Home Builders as well as Reggie Middleton’s Overview of the Public-Private Investment Program and I’m headed back to DC, with blogger’s opinions in hand! for examples of the government giving out 0%, non-recourse loans to buy failed assets.
This is the chart that originally sparked the conversation. It is a
rough chart that is annual and encompasses several loan categories.
So, I decided to dig back in and make the charts more granular in
both loan categories (concentrating on residential housing, as per the
legal theory above) and the time periods in question. As you can see,
the charge-offs on 1-4 family residential housing skyrocketed nearly
1,500% (yes, that is a lot) from the bursting of the bubble in '06.
Both recoveries have increased and the charge-offs decrease, giving
us an increase in recovery rates over the last two quarters though. Now,
before we get all giddy about the improvement in the credit situation
in residential real estate finance and blow out all of our provisions,
let’s take a more careful look at the chart. For one, although the
recoveries have increased very slightly, it is the drop in the
charge-offs that has served to boost the recovery rate. So, that leads
us to ask “What has changed so positively in the market to cause such a
drop in charge-offs?” Well, for one the Case Shiller Index has shown a
rise in prices. Of course, BoomBustBloggers don’t really go for that,
because the Case Shiller Index rise fails to capture many of the
elements that are causing aggregate housing values sold to fall on an
economic basis. See Why the Case Shiller Index, Although Showing Another Downturn Coming, is Overly Optimistic and Quite Misleading! then reference this chart below.
Those who are interested in reading the rest of this article can find it in its entirety on BoomBustBlog.com, here.
»
- advertisements -
Why isn't the best solution to convert debt to equity as often happens in other default-type situations?
If there's no way a homeowner is ever going to pay back the mortgage on his McMansion and the government now owns that bad loan, don't let the guy off the hook at taxpayer expense, and don't bother with the hassle of foreclosure. Instead, convert the bad debt into equity. Now the government is owner of the home minus whatever equity the home owner had up until that point. Maybe the government could extract some rent and if the property ever goes up in value, so does the government's stake and the taxpayer doesn't get screwed quite as badly. The government doesn't look like it's simply giving houses away (so we may actually avoid a revolution) and it's a fair deal in the sense that there is plenty of precedent in other, somewhat similar situations plus all interested parties now have a stake in the ultimate outcome and no one is getting a free ride.
Win-fucking-win I say.
After the fall of the Soviet Block we sent the IMF, the World Bank, US AID and various economic hit men to go in there and lecture everyone about modern title recording methods, the supremacy of private rights of property ownership, judicial rights of contractual enforcement, the fallacies of central planning, fiscal responsibility etc.
Now look what has happened, we have allowed our government and Wall Street to construct an insoluble edifice that would make any two bit Soviet nomenklatura proud.
How insoluble? I have read Reggie's post and all of the comments. I have also been reading the rest of the commentary surfacing in the MSM. I challenge anyone here to provide a coherent explanation of what is supposed to happen or what is going to happen. Solving this problem is surely a matter of public urgency, however, handing out gimmes and rewriting private contracts is not going to happen just because Dorothy wants to go home ASAP. If Dorothy gets it, Leo, Tin man and Scare Crow along with all the munchkins will want it as well.
I for one do not believe the morons in the Treasury Department and the rest of the supreme bureaucracy that facilitated this mother of all FUBARs have a clue of what is happening here. Geithner never read a contract in his life. He is surrounded with people who know how to draft 2 page TARP bills for emergency Congressional approval. Moreover, his boss is a constitutional law professor who also never read a real live contract or closed a real estate financing in his life.
Hiring some unemployed securitization legal jerk offs is not going to solve anything either, because they are all experts in financialization and derivatization, nothing more. They never dreamed anyone would have to read the reams of theoretical nonsense they manufactured to get around State laws.
I don't underestimate the magnitude of the paper snafu for one minute. The same principles that drove the "liar loan" origination model are now resurfacing in the title/foreclosure process. Who cares about the title papers and original notes, they are not important! Wrong.
Having the government suddenly declare that outstanding mortgages are going to be automatically forgiven would create years of litigation. Moreover, having the GSE's do this is sure to be please our loving and understanding Chinese "creditors."
The opportunity to really try to do something about this was lost last year when the government had Wall Street by the short hairs. Now that everyone in the struggling real estate and class action bar realizes that this is the new big legal kahuna, that is exactly what it is going to be. Meanwhile, the banks are going to hunker down over write offs unless TARP II is unveiled (which will never happen).
Obama's former Acorn gnomes are also gonna be out there busy stirring the pot: "Don't pay your mortgage or the IRS until this is solved. Buy an IPAD and relax instead." Sadly, this is now sound advice if you are in a marginal financial situation.
Welcome to the Subprime Circus of 2010, it never left town.
But don't worry, the good news is the FBI just cracked a $70 million internet scamming ring. We can all sleep soundly.
Good point on the net recovery, Reggie, but this won't happen on a large scale. The cost would quickly run to the trillions, it creates moral hazard up the wazoo, and the populace is already in rebellion mode, in case you hadn't noticed. The whole idea of debt forgiveness just doesn't compute with any banker I've ever known.
On the other hand, we do need some triage, here. Property in San Fran or Manhattan will not go begging, even though much of it should. The real bite is in condos and remote vacation property. Some of the new construction along the Carolina shore doesn't have adequate infrastructure in place, much less any plausible job market. The answer, I think, is in a 2 or 3 percent bonus to the "owner" for not trashing the property. It will then sell for next to nothing, but why in the cornbread hell do we need more government? That's how we got into this mess. The trend has to be away from statist solutions, or I'm moving to Costa Rica. Fuck the mud season. I'll stock up on rum and chicas, and see you next year.
Even from the analysis you provided on 9/23, it is clear to me that it’s game over for home mortgages. They are simply not a part of the economy any more–they’re social policy and the U.S. is dealing with them as social policy: but what IS the Government’s new policy? Well, what do the FACTS show it is?
You don't really have to do much fancy financial or legal analysis here. Forgiving mortgage debt is a wealth-transfer wet dream for the Obama Administration and now that they are actually in a position to do it there isn't a chance in hell of any other outcome. All on your dime of course.
Here's a much simpler homework assignment (and you don't even have to be a lawyer!) - Find the legal authority in the constitution for your government to do the following:
1) Print money 2) pay full value for bad, private debt 3) throw away the bill.
*Ta-da* So much easier and less messy than arguing over taxes and housing policy in the public arena and you know, voting and stuff.
Buying a home with no/next to no money down and a mortgage you could never hope to pay back is going to end up being the trade of the century for millions of people. Oh, that wasn't you? Thought you were doing the prudent, responsible thing? Ha-ha, sorry. By the way, that's a nice net-worth you've built up for yourself there...be a shame if anything happened to it.
The only silver lining here is that this pisses off a lot of people who aren't in on this lottery and who realize that their wealth is being/will be destroyed by it.
Spread the word.
+1 The government always subsidizes irresponsible behavior, which is one more reason for less government.
The banks always win. The banks get what they want. Ask yourself: what is best thing for banks? and that is what the govt will do.
It would take movement greater than anti-Vietnam war or civil rights movement to put the financial sector back in its place. Even financial collapses and things getting so bad people are out with pitchforks and torches is not a guarantee we would get necessary reforms, as people would direct their action towards simpler things first, like immigrants, govt employee pensions, spending on social programs, culturally divisive issues (see Tea Party anger) while controlling banksters and spending on police and military will be the last thing touched, if ever.
I see us ending up as a poor country with a very few rich, owning our govt (see Citizens United) and we poor folks will idolize those rich folks and cheer on more wars (we're in a fighting mood after all), and not question why there is no longer a middle class.
No doubt you're right. Distract, divide, and defeat.
Take a look at the post immediately above yours. Already the defining envy and resentment of the self-righteous middle class is being stoked against insolvent homeowners--the symptoms and victims of the problem--rather than the banks that created the global meltdown/Con economy. It seems like child's play . . . and is, given the childish passions of so many.
Sad.
Never happen, makes for interesting Saturday a.m. reading but think about the consequences... Remember, for every dead beat in this country, there's 2 responsible people (gun owners I may add) that aren't going to stand for BS.
Paulson may be on to something..."if you rent, buy a home, if you own 1 home, buy a second, if you have 2 homes, buy a third"...
Perhaps Johnny's thinking you might as well pile up if the debts will be forgiven...wow, nice leverage!
A land grant! A massive transfer of wealth to the middle class. It might be the fastest way out of the realestate mess.
My reading, conversations, have involved an automatic Re-Fi of Mortages to somewhere around 3%, across the board.
I think I mentioned it here at ZH, was this something you read from me?
If so that is what I heard and still expect, although what you say may be the ultimate outcome after all the numbers get crunched and the ability to pay the mortage is calculated in real-time. Also the ability to buy a home, credit score, downpayment and all the other expenses, is way beyond most peoples means. So what would the government do sell the homes to overseas buyers (who exactly).
No new buyers, sellers without a home and still U.S. Citizens living on the street, what?
Assholes like the Chicago Commodity Manager saying people bought homes they couldn't afford, as a explanation of the disaster, etc.
Not a pretty sight,by any means, but a inspirational solution may now appear.
Ok, so if the Govt has, as claimed, come to view no ecomomic benefit to foreclosure, and puts a moratorium on forclosures, does not the banks insolvency come glaringly above the waterline?
The govt has only one option here - wholesale nationalisation of the banking sector, which can only be 'justified' I presume by an orchestrated stockmarket collapse
or is that too reductionist?
Look at this latest complete lie. Fannie Mae and Freddie Mae have already forgiven home mortgage debt, and have joined with the United States to do so. The only purpose of this statement is to hide bad debt on bank books:
NEW YORK (Reuters) - Fannie Mae <FNMA.OB> andFreddie Mac <FMCC.OB>, the largest providers of funding forU.S. residential mortgages, on Friday said they are takingsteps with their regulator to strengthen oversight of thousandsof loan servicers.
The moves to reinforce contractual obligations come afterGMAC Mortgage and the mortgage servicing unit of JPMorgan Chase& Co <JPM.N> have had to review how they handle foreclosures,in light of some employees saying they authorized the practiceswithout proper reviews.
GMAC, a unit of Ally Financial, has endured a firestorm ofcriticism in the past two weeks as its faulty practices came tolight. Its errors, and those of JPMorgan, have raised concernsof an industry-wide problem given the volume of foreclosuresplaguing the nation.
Bank of America Corp <BAC.N> on Friday said it is assessingexisting foreclosure processes and is delaying some to amendaffidavits in the 23 states where courts have jurisdiction.
Fannie Mae and Freddie Mac asked their servicers toimmediately undertake a review of policies and procedures asthey relate to affidavits. Freddie Mac placed an Oct. 18deadline for its 2,000 servicers to complete their reviews.
Fannie Mae underscored it has a variety of remedies,including charging fees to compensate for damages. (Reporting by Al Yoon; Editing by Leslie Adler)
This mess can easily and constitutionally be cleaned up with national legislation, if CONgress gets enough guff from banks taking a hit.
Think Natinal Foreclosure Standards Act and federal magistrate courts with exclusive jurisdicion over foreclosures, under "cut to the chase" provisions of the Act.
Please don't mention that name!!! Sorta like Voldemort. Yes, John Ryscamp was his name. He was 50% bright and 50% idiot. His cry was for eminany domain, and he regularly sighted a case (i believe hotel affiliated) that was non applicable.
I gave him the benifit of the doubt, and read through a lot of his crap. Had Wife (bancruptsy lawyer) and and other legal friends read through and they shared my opinion.
To me, he was pushing his book. He theorized. Then wrote a book. ...and then hoped it would come true so his book would look prophetic. ...and then he trolled every blog in the world spreading his eminant domain theory.
God to hear from you.
All the best, MA/RH
This pipe dream will never happen whilst the current economic system is intact. But if the current system collapses, in order to ensure political stability, the Gov't would rush to forgive every dime on every homesteaded properties. Destroying the economy, the currency, and then throwing 125mm people out of their homes is what revolutions are made of. Just my $.02
WAS HANK PAULSON RIGHT?
At the onset of the housing bubble burst, the initial focus of the TARP was to purchase so-called Toxic Assets. Most of these TA's were CDO's and other real estate backed derivatives. The insurmountable obstacle to the outright purchase of the TA's was placing a reasonable valuation on them. Remember, at that time FASB had not relaxed the Mark To Market rules. The few tests of the market showed about 22 cents on the dollar return. If the US Treasury had purchased the TA's from the stricken banks at those valuations, two things would have occurred - one; the banks would have been proven as truly insolvent, and two; the banks were worried that the Government would profit on these "investments" when sold at a later date (when the markets "recovered") - thus depriving the banksters and their stockholders of deserved gains.
Once the above scenario became apparent, things changed in a hurry. It was decided to just give the money to the banks in exchange for warrants, and then the FASB was pressured to allow Mark To Model accounting for the TA's. Both problems solved, and the banks appeared flush with reserves - so, another round of bonus checks to be printed!
Now, the TA's are bubbling back to the surface, and no amount of Mark To Model will cover their true value. With all of the recent happy talk about repayment of the TARP funds, profits already earned and to be earned by the "investment" in AIG, maybe they are attempting to prove a winning track record with their TARP program. The next move would be to extend the program (since several regional banks have not repaid their funds), and then redirect the money in the account. This time Paulson's original plan could be enacted - the TA's purchased outright and transferred to the Government GSE's for safekeeping. Now, the sticky questions re-arises, how to assign a fair valuation for these TA's? Some folks have been saying that the RE market bubbled up by 10% to 20% above its current level. If this is also believed by the FED and UST, then that is the haircut the TA owners will have to take.
Once the government has all of the TA's on the books of the already defunct GSE's, the rest is just a series of steps that must be taken. To prove that their goal is to be a benevolent master, they will reduce the principle of all the owned loans by the corresponding amount of the haircut given to the TA's sellers. This would essentially be HAMP for everyone who's loans were non-performing (and hence a TA). Lots of happy folks - see the gubment be makin' my house payments fo me!
Now, is there moral hazard for the government to hold your loan after a forced modification of its terms? Ask yourself - would you want to be making payments to the IRS? They could ultimately be THE collection agency for this mess. They know where you live, how much you make, and they can put you in prison!
Here is where I start to lose the trail of the ultimate plan, and could use some input. Once the UST has the TA's on their books, then wouldn't they be the sole owner (not 100 others) and then could have the IRS act as an agency on their behalf and then foreclose on any defaulted properties? Those could then all become Section 8 rental units, or sold as necessary to lower the deficit. Of course, this could only occur after all of the CDO's and other derivatives are aggregated in a few places (the TBTF vaults). There is already a move afoot to force them to repurchase those "investments".
For those of you dreaming of Debt Forgiveness (Jubilee), just keep smokin' that crack. The banks will unload all of these faulty mortgages, the taxpayer will backstop the home ownership "right" of Americans, and those of you that had nonperforming loans will be living under the whip of a cruel mistress.
Wow - this was a long post for me. I hope it all makes sense.
You may be right, the govt. isn't going to let you the consumer bring down the dollar and get away scott free. They may do exactly what you say, or even make you pay rent or lease. The will first make it federal law (federal law I believe outranks state law) that any mortgages owned by the Federal govt. you can't walk away from. Then your stuck, and as you said having the IRS being the collection agent will be the killer. They can do what they want, any collection agent would dream to have the powers the IRS have. If it comes out you can only pay 200 a month on the mortgage that is what you will pay and the IRS will know how much you make. And heaven help you if you are making money under the table and they find out.
The start of the police state is at hand.
Quick question: Do you think the results will be "Daily" rioting until the Economy improves or the Great Implosion? (God I'm glad I live in a rural area!)
"The floggings will increase until the moral improves."
The MBS rush has made a sausage out of determining who the lienholder is. You can't make a pig out of sausage. While there is a defaulting homeowner as one party, there is no counterparty, only a big legal sausage. A sausage with no standing.
Hey reggie can you produce some more redundant stories copied from ZH/CNBC themes or are you too busy renting your mouthgina out in the meat packing district in order to pay your rent?
Yea! BustBlogBoom!
BAC stops foreclosures in 23 states. Just in time for the elections. Weeeee
Of course the debt will be forgiven. Doesn't cost the gubermint anything, the banks get paid but... YOU, yes you will get to pay for this largest fraud in history.
I gotta remember not to drink before reading one of Reggie's posts.
My brain turned to oatmeal:-(
This is in no way an insult. Quite the contrary. His analysis is as thorough and provocative as it gets...it just doesn't mix well with Scotch.
Great post Reggie!
http://www.glorecords.blm.gov/PatentSearch/
One more thing, banks have concluded that where the owner of a commercial property is honest and diligent in operating the property, the bank is better off having the owner operate the asset rather than foreclosing and taking the asset back and starting from scratch. Why should residential owners be treated differently than commercial owners? When the shadow inventory of distressed homes gets to a certian point, the market will dive and banks will recover only a fraction of the current value of the asset. We are at the point where mass principal writedowns would be cheaper than a continuation of the downward cycle caused by astronomical numbers of foreclosures.
Isn't this debt as money or debt slavery system in violation of the 13th Amendment? How can a banking cartel print money at zero cost and charge citizens interest on their own money?
Fascism or feudalism is what the US has adopted and the Republic died in 1913.
http://en.wikipedia.org/wiki/Thirteenth_Amendment_to_the_United_States_Constitution
Section 1. Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction.
Section 2. Congress shall have power to enforce this article by appropriate legislation.[
This is truly amazing....first the banksters fuck the economy by lowering standards on loan originations so that even my horse could bget a loan, then they sell the shit to dupes on wall street and double fuck the little people, and now they are caught breaking the law (again) and th eresult could be the biggest meltdown in the history of real estate. Is somebody going to jail for blatant criminal activity? Probably not. Will Congress bail out the banks again to 'save the rest of us'? Probably. I say let the chips fall and then watch as the justly affected get their guns and extract justice on the criminal banksters! I hear the black helicopters again....gotta go!
The government is not allowed to own property under the Constitution of the United States except for army bases, depots, post offices, and such. The Corporation of the US government has even less standing, since it is bankrupt and has been bankrupt since 1933, only exists in a foreign jurisdiction, and it has no security interest. Nothing can be purchased with debt notes and credit! And that is true for the fake US government as well.
Most houses are located on land grants awarded by Congress and in law to landowners during the 1800s. This land was given into perpetuity to the people of the US, its families, and assigns. There is a continuous record of who bought and paid for property since the 1800s. We hold title to the land through Allodial rights that are documented at the BLM.
My rental house in downtown Sacramento is located on a land grant awarded to a Winston Marshall in 1861.
We are going to make their eyes bleed when they see the paper work.
Screw the banking system. Screw the lawyers. And screw anyone who thinks they can get away with this all time fraud!
"The government is not allowed to own property under the Constitution of the United States except for army bases, depots, post offices, and such."
This is an interesting approach. How does it wash with the failed GSE's (i.e. Fannie & Freddie)? Unltimately, if they can be proven as the lienholders for the loans they have underwritten or just plain acquired - how can they ever hope to foreclose if your postulation is correct?
hand fannie and freddy over to the fed--then the fed will own it and kick back table scraps to our treasonous leaders.
Fannie and Freddie MBS securities and such were illegally sold to the Federal Reserve, which cannot accept these securities under its charter.
Interesting read from Denninger includes all the references:
http://www.market-ticker.org/akcs-www?singlepost=2138649
The Federal Reserve is the acting conservator of a US Bankruptcy dating from 1933. They are trying to collect all real property as the holders in due course. They are just starting with the low hanging fruit. Once the inflation hits, and high middle class can´t pay their inflated property taxes going from $3,000 to $30,000, they´ll bankrupt homeowners and take the property of a whole new class of people, and so on.
These people are thieves after all. But until TSHTF, I filed a UCC1 as a secured party creditor of my own property and person, discharging debt, and filing my own new deeds of trust at the country recorder´s office.
Possession is 9/10th of the law.
I forgot about the constitution! Had I remembered that, I would have remembered how our leaders respect it so much.
Which is why the federal government owns 51 % of the state I live in, Oregon. It is also why they now own General Motors, and why they respected the property rights of all those bond and stock holders prior to their take over. It is also their deep respect for my rights that they will shortly take over my decisions regarding my health care.
My bad.
Ain't Realpolitik a bitch?
I am for zero percent refinances. They need to make this bailout even handed. It is ridiculous how far we are bending over to help the banks. All they do is squirm to get up behind us while we are doing it and start looking for an orafice to hump.
This would spark the complete collapse of what little is left of this society. All that would be left to do would be to apply the government's fairness doctrine: No reason to pay other bills if one doesn't have to pay the mortgage. No reason for renters to pay to rent when they can own for free. No reason for issuers to pay interest on bonds. The logical extension of this "policy" is that there would be no reason for anyone to pay for anything. Instead of causing confusion with nutty ideas like this why does't Bernanke just give every person in the country one trillion dollars? But don't print the "money"; that would be a waste of paper. The president should just go on TV, tell everyone that money is an out-of-date, unprogressive, notion and that under his leadership we have risen to an new level of economy understanding and trust. IT WILL TRULY BE DIFFERENT THIS TIME -- but not in the way you envision. Welcome to 20,000 BC on a bad day.
It's comments like these that distract attention from what we want to know. The question on the table is:
has the government ALREADY forgiven mortgage debt?
I read a lot of comments on whether the government SHOULD HAVE done this, or SHOULDN'T HAVE done this, or SHOULD NOT do this, or CANNOT do this.
Those are not question. The question is, HAS the government IN FACT done this? What is EVIDENCE, behind your answer if it is Yes, or your answer if it is NO. Reply to this and NOTHING ELSE.
Are you Ryscamp?
The trap is indeed being set, and there is no way out at this point. I predict something along these lines:
1. Uncle Sam buys all mortgage paper in the residential real estate market whether good or bad. It's in the interest of national security!
2. As sugar to help the medicine go down, they agree to either write down the loans to current market levels, or to allow the residents to make payments based on their income. Thus you get to stay in your home, make much smaller payments regardless of how much you owe and use the balance of your income to stimulate the rest of the economy.
3. The law would include wording that any profits from the sell of the home would go towards the original contract price.
4. The law would also include wording that the debt would be indexed for inflation as the government is not in the investment risk business.
5. They turn on the printing presses and end up owning 80% of the real estate in the U.S. and since they were going to turn on the printing presses anyway, it costs them nothing in the long run to turn us back into serfs.
And not a bullet fired, not a riot quelled.
One thing that keeps coming to the forefront of my mind is the idea that the banks almost certainly booked a portion, if not the majority, of the future interest income on these loans, into present day profits.
It is well understood that banks don't want loans repaid but rolled over ad infinitum, as with govt. debt. Why wouldn't they try the same thing here?
For a legal precendent to be handed down literally absolving mortgage debt all together would completely destroy the banking system once and for all as they would have to write down the future interest income as well as principal.
Am I wrong about this?
No no! Don't short-circuit your own insights here. You are on to something. Tell me how the banks already having booked "a portion, if not the majority, of the future interest income on these loans, into present day profits," shows us that the U.S. government has already forgiven mortgage debt.
Please put this 2 and 2 together. This will give us yet another insight as to what is actually going on in the Government. THAT'S what we want to know, NOT what is our opinion of what the Government is doing. We already know that.
No more sermons. Just insights. That's the only thing that's useful at this point.
But still, very good. You are thinking.
Mr. Smith: perhaps an over simplification...debt was forgiven 'indirectly' by the gov't backstops during the melt down of ML, BS, AIG, etc. 'Official' or balance sheet forgiveness hasn't arrived yet. TBTF may be good at forward looking 1 or 2 chess moves, I find this one hard to believe to be planned. One thinks they got lucky picking a winning lottery ticket and are seizing the 'moment'. Or, as been said many times on ZH, 'never let a crisis go to waste'
Right or wrong?
Just to do a little math. Let's say a bank books a $400k, 30yr fixed rate mortgage with the anticipation of earning something on the order of $600k in interest over the period of the loan. Then said bank reports a percentage of the future income, let's say 40% of the $600k, as present day profit. Well, when faced with a total write-off via mortgage forgiveness, then the bank would lose $640k on the deal.
I guess what I am saying is that mortgage forgiveness would almost certainly do more damage to the banks than rolling over the loans.
Since when does our govt. make decisions that HURT banks?
Better forgive commercial mortgages, too. Have 2 1031's in the toilet, thanks to these klowns.
Sorry, the number of voters who own or have a commercial mortgage are no where near the numbers needed to vote themselves some free $$ from the treasury.
Nice try because all roads now lead to Rome!
duplicate
No, all roads lead to the courthouse!
Reggie,
I cannot fathom that under any remotely plausible theory of the law that homeowners throughout the land will be the beneficiaries of golden lottery tickets through no rewardable effort of their own. What no one wants to talk about is that, ultimately, you've got a defaulting homeowner on one end of the transaction. A cause of action exists for some party to oust the homeowner and take possession of the property... the trick is finding that person.
I fail to see how a defaulting homeowner gets to take refuge and benefit from discrepantcies in the recording of mortgage instruments... This is something that is lost on many people, but here goes anyway, even if the mortgage is not recorded, it is still good as between the executing party and the mortgagee. I'll say that again... An unrecorded mortgage is still good as between the parties to the original transaction and their assigns. Recording is only used to determine priority.
As I see it, the big issue here is that if the first priority lienholders can't get their shit together in time, the seconds and thirds should institute foreclosure actions asserting top priority... my guess is the way out of the money liens may actually have a shot at being in the money now... and, if they're reading, I'd strike while the iron is hot.
Homeowners are best served to use these cases as shields to defend against improper foreclosure proceedings and not swords to clear title. Homeowners are not going to institute quiet title actions for a myriad of reasons, most notably cost, but also burden of proof, fact they're in default, and the real clincher, THE FACT THERE IS NO DISPUTE AS TO WHO OWNS THE LAND. A quiet title action is an action to determine the true owner of the land... this would be the defaulting/squatting homeowner... until a proceeding is implemented to divest the homeowner of his/her ownership, he or she is king of the castle... a quiet title action to prove something that is not in dispute would be a waste of paper, money, and the court... further, slander of title is only going to be determined when a lien was filed...
Essentially, the theory presented is that the federal government has volunteered to pay for the loans of americans? If so, why not just pay off the notes instead of purchase the liens on the properties? Further, if so, why would you implement foreclosure proceedings to assert a right you voluntarily relinquished? Doesn't make any sense... further, presuming it was a gift, that gift or offer would need to somehow be conveyed/consented to by the homeowner... given the homeowner is completely in the dark about subsequent proceedings with his/her mortgage, no such consent could ever be given. Again, just doesn't make sense. Likewise, the gifting party would need to INTEND to gift the property... clearly this is not the case... also, equitably speaking, a defaulting homeowner is not going to get to take solace in any equities... the only thing that can save homeowners from inevitable foreclosure is a fraud upon the court by the foreclosing party...
What is going to happen is that there will be infighting between the assignors and assignees of these mortgage instruments... eventually they will determine the proper owner... this person will get his documentation in order... make the necessary filings... and foreclose upon the property... simple as that. I think a lot of people are overthinking the issue... if you want a brain teaser, try and figure out what this will do to priority, not whether or not homeowners are going to get off scott free.
I fully agree with the part that I don't find it particularly likely that the "little people" of America are going to get lottery tickets with the payout being a free house...however there are a few things:
1. Will any of these banks remain solvent for long enough while they sort this out -- probably not without "help"
2. What happens to banks that are already choking on the volume of REO inventory when they can't sell it until they sort out the previous foreclosure mess.
3. Once they decided to slice these mortgage up every which way and then some did they compromise the note ownership in a way that negatively impacts their legal rights in foreclosure -- remember they thought they would never lose so they certainly weren't thinking about what was going to happen when they had a watershed of foreclosures to deal with.
4. Is this issue why some, like Wells, has been quietly completing second lien foreclosures while letting the first lapse? For example, they "own" the first and second, the second remained in their portfolio the first got sliced up -- even though they still control the firs, they don't initiate foreclosure on it they initiate it only on the second. There is a reason why, the question is what is it?
5. And finally, the question is really not that the govt wants to give everyone their house for free, it is have they and the banks with the ill-planned TARP created a situation of unintended consequences for which they will now be desperately trying to unwind. You had to know that a damn "bazooka" shot off over a weekend was not well thought out in terms of consequences and whether we like it or not our Country is a web of interrelated laws, programs, government programs, private interests and when you go ape shit on one segment you might well get yourself in a situation you didn't anticipate.
Just my thoughts and further questions for discussion.
One of the issues that the "economicalnessless" theory fails to grasp is that a mortgage instrument and/or note can be assigned for significant haircuts... these things can trade hands like HFT wopr... each taking a little haircut along the way. In other words, regardless of the solvency of the lienholder, there exists a legal right, somewhere, somehow to either: (a) foreclose or (b) force the person who defaulted on the note to pay and if not, then obtain a judgment, and then if not paid in full within the requisite time, foreclose.... whether they're in bankruptcy or what.... the instruments are out there... regardless of their present form.... and have SOME value, albeit vastly smaller than likely originally contemplated.
Also, what I don't hear anything about is the possibility of cure... so you're telling me that the people who technically own the mortgage instruments would not gladly sign a piece of paper that recognizes they are the true owner or sign a piece of paper allowing someone else to foreclose on their behalf? We're going to get in a situation where some money is better than none... right now the FASB has a pulp fiction apple in its mouth and uncle sugar is playing with money like the models on zoolander play with gasoline... but like all good things...
If nothing else, sue in equity... nothing preventing that... and you'd have a helluva argument.