Will The $426 Billion "Second Lien Monster" Require A New Marshall Plan For Housing? Reuters Special Report On Fraudclosure

Tyler Durden's picture

Reuters' Matt Goldstein has completed a special report on foreclosure fraud, asking rhetorically: "foreclosures are rising; lawsuits are flying; banks are beleaguered; there has to be a better way?" Goldstein looks at fraudclosure from the perspective of the fight between junior and senior liens, a topic Zero Hedge discussed a month ago (The Foreclosure Mess MBS Hate Triangle Emerges: Junior Versus Senior Bondholders Versus Servicers) highlighting that $426 billion in loans are second lien, and, as highlighted previously, sit on the balance sheets of BofA, JPM, Wells and Citi in the biggest circle jerk in this whole mortgage crisis fiasco (always remember: one TBTF's mismarked assets always end up being another TBTF's unfudgeable liabilities). As the chart below shows, the banks have no choice but to come up with a compromise: obstinately keeping their heads in the sand is a guaranteed way for the entire financial system to blow up.

Which is why Goldstein asks what are the alternatives to resolve this problem. Six potential proposal have emerged: A Camp David summit, Second lien writedowns, Regulatory easing, Big Refi, Bond investors deal, and a Borrowers compromise. At the end of the day none of these solve all the problems, and all go through the perspective of a TARP 2-type intervention for the banks. Which means that Obama will have to make a decision whether or not to impair the equity and senior debtholders again. And if the president once again sides exclusively with the banks, that will certainly be the tipping point in US populist anger.

At the end of the day, DoubleLine Portfolio Manager Vincent Fiorillo, may be right, and what may be called for is the same type of multilateral bail out costing trillions of dollars in inflation adjusted terms that was the "Marshall Plan."

“No one wants to put the banks in an untenable situation,” said Vincent Fiorillo, a mortgage-backed security trader and portfolio manager with Los Angeles-based DoubleLine Capital. “If the choice is between getting something, I think that as a  fiduciary getting something would be my first choice.” Fiorillo said it may ultimately take some third party to bring all the sides together and hammer out a “Marshall Plan for the mortgage business.”

Perhaps the unwillingness of various  actors who do have much to lose by escalating the issue is one reason why they have so far been unwilling to enjoin de facto monopolists such as Pimco and the New York Fed to pursue aggressive putbacks. Of course, the status quo is most agreeable to all market participants. The problem is what happens when the cash runs completely dry from the simple flesh and blood securities that are at the basis of every MBS. And that's why we soon may truly need a Marshall Plan, the type that is more than a metaphor and is a full fledged wholesale rescue of a crushed entity. Only this time instead of rescuing a continent beleaguered by the ravages of the biggest war in history, it will be the US housing sector, ravaged by what is becoming perceived as the biggest and most pervasive mortgage fraud in history.

Full Reuters must read special report.