Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Mortgage Mess Comes Back to Haunt Bankers … Again

Housing-Market / US Housing Oct 22, 2010 - 09:11 AM GMT

By: Mike_Larson

Housing-Market

Best Financial Markets Analysis ArticleHalloween is right around the corner. So it’s only appropriate that — just like some bad horror movie character — the mortgage monster keeps coming back to haunt bankers. Indeed, major financial institutions like Bank of America got pummeled this week amid fear of even MORE losses tied to the mortgage debacle.

What’s at stake? How will this impact the markets? Why do these home loan zombies refuse to die?


Take my hand and I’ll escort you through the graveyard …

Sloppy Work, Securitization Boom Leads to Mortgage Questions

Right now, two major issues are plaguing the banking industry. The first stems from just plain sloppy work and the securitization boom.

You see, the mortgage system that evolved in the 1980s, 1990s, and 2000s is a lot different from the one you see in the movie “It’s a Wonderful Life.” There’s no Bailey Building and Loan Association giving you a mortgage, then holding it in its portfolio for 30 years while you slowly pay it off.

Instead, borrowers typically get loans from mortgage brokers or banks. Those parties turn around and flip those loans to larger institutions. And those institutions package those loans together into mortgage backed securities (MBS), which are then bought by pension funds, mutual funds, and other big money investors. They get the cash flows from your monthly mortgage payments.

Bottom line: The “securitization” process is the means by which lenders raise money to give you and I mortgage loans. It started off slowly many years ago. But at the height of the housing boom, hundreds of billions of dollars of loans were funded this way.

As business ramped up, lenders realized they needed to come up with an easier way to facilitate the transfer and processing of loans. Their solution? Mortgage Electronic Registration Systems or MERS. It acts as an agent for the companies that own the underlying loan. Parties can also use the MERS system to track the transfer of interests in that loan between parties.

So what’s the problem? Many attorneys are now challenging foreclosures on the grounds that MERS doesn’t have the right to do what it does. Without getting bogged down in all the nitty-gritty details, suffice it to say that some people are claiming that mortgages may actually be invalidated because of sloppy work by banks or legal technicalities involving MERS. Others are claiming that even lenders who didn’t use MERS failed to properly establish a paper trail that puts them in position to foreclose.

My take? There is no way that state courts are going to start willy-nilly invalidating loans. Or that the federal government and the banking industry will just sit by as the whole multi-trillion dollar lending and borrowing business is basically declared illegal because of technicalities involving paperwork.

Fines will be paid. Some cases will be lost here and there. It’ll be like Congress passed the “Full Employment Act for Lawyers of 2010.” But a collapse in the mortgage market stemming from MERS or other sloppy paperwork errors? Not likely.

“Put Backs”: The Real Ghoulish Problem Plaguing the Banking Industry

No, the REAL ghoulish mortgage problem plaguing the banking industry is “put backs.” They have bank investors quaking in their boots.

Here’s the crux of the issue: Lenders that bundle loans into MBS make certain representations and warranties about those loans. They might say that no more than 30 percent of the loans in a given pool are to non-owner occupants (think real estate investors rather than traditional homeowners). Or they’ll tell investors that the average debt-to-income ratio of the borrowers in the loan pool is 35 percent.

As a MBS investor, this is valuable information. The more investor loans in a mortgage security, or the higher the debt-to-income ratio of the borrowers whose loans are in that security, the riskier it is. Investor-owners are more likely to walk away from their obligations in a tough economy than primary homeowners, while borrowers with higher debt ratios have less financial flexibility.

During the bubble, bond investors happily bought up just about anything and everything the banks sold them. And if those securities kept performing as expected, everybody would’ve made money and there’d be no scandal.

But as we all know, the markets imploded. MBS investors have lost untold billions of dollars as result. So now they’re acting like casino gamblers who bet more than they could afford to lose, and trying to find someone else to blame for their bad investment decisions.

That’s where institutions like Bank of America come in. Investors have hired expensive, high-powered attorneys to go after them. They’re claiming that the banks misrepresented the quality of the loans in the pools, or that they should have known borrowers were lying about their residential status, income, or other things.

In short, they’re trying to “put” those loans back to the banks — make them buy the loans back out of the MBS. That can be expensive because the banks would have to pay far more for those loans than they’re currently worth.

Bank of America grabbed headlines over the issue this week because it’s being pushed to buy back loans by none other than the Federal Reserve Bank of New York! The regional Fed bank owns interests in bum loans by virtue of the Bear Stearns bailout, and it’s working with large MBS owners such as Pimco and BlackRock to recover money.

You have to appreciate the irony here. The Fed is trying to extract money from Bank of America … a bank that received tens of billions of bailout dollars from the federal government and that has been artificially propped up by the Fed’s easy money policy! And the money management firm that’s going after Bank of America, BlackRock? It’s 34 percent owned by Merrill Lynch, which is … you guessed it … a Bank of America subsidiary! You can’t make this stuff up.

There’s no telling what the ultimate cost will be to BofA or its big bank brethren. BofA is currently being forced to buy back about $500 million in loans every quarter. JPMorgan Chase recently forecast buy back costs at $1 billion per year. Outside estimates for the industry as a whole range from a few billion dollars to tens of billions of dollars, spread out over the next few years.

What it Means for the Markets

Clearly, the mortgage monster is still stalking the lending industry. The total dollars involved here aren’t enough to sink the entire banking sector, or cause massive banking failures on their own. But we’re not talking about chump change either.

The cost of sorting this whole mess out is already adding up — and will continue to do so. That’s just one more reason not to buy and hold most major bank stocks. If you’re going to invest in the sector, stick with institutions that aren’t going to face huge claims related to put backs.

Oh and just one historical footnote: Many of Bank of America’s problems stem from its acquisition of Countrywide Financial a few years back. Martin and I warned several times that the company was on a collision course with bankruptcy — and that buying Countrywide was one of the stupidest things BofA ever did. BofA claimed it was getting great assets at a bargain price. I think it’s pretty clear who has ultimately been proven right.

Until next time,

Mike

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules