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And in doing so, create economic distortions.

Like create financial instruments that have no connection to the underlying asset (ostensibly) being securitized.

The really absurd thing is being the extent to which this is literally true in the sense that the rush to bet on the derivativee meant that the conveyance of the underlying asset was never even properly recorded.

But while investors tally the losses that were generated by loose lending so far, the impact of another lax practice is only beginning to be seen. That is the big banks' minimalist approach to meeting legal requirements -- bookkeeping matters, really -- when pooling thousands of loans into securitization trusts.

Stated simply, the notes that underlie mortgages placed in securitization trusts must be assigned to those trusts soon after the firms create them. And any transfers of these notes must also be recorded.

But this seems not to have been a priority with many big banks. The result is that bankruptcy judges are finding that institutions claiming to hold the notes that back specific mortgages often cannot prove it.

On Feb. 11, a circuit court judge in Miami-Dade County in Florida set aside a judgment against Ana L. Fernandez, a borrower whose home had been foreclosed and repurchased on Jan. 21 by Chevy Chase Bank, the institution claiming to hold the note. But the bank had been unable to produce evidence that the original lender had assigned the note, which was in the amount of $225,000, to Chevy Chase.

Yet another argument for nationalization. If the government owns all the banks that can't provide proof that they own mortgages, then the simple fact of the government owning them all means that question is cleared up.


And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Mon Mar 2nd, 2009 at 10:13:51 AM EST
[ Parent ]
MFM
If the government owns all the banks that can't provide proof that they own mortgages, then the simple fact of the government owning them all means that question is cleared up.
Logically this would seem to be true.  However, I am not so sure that it would hold up in court if "creditors" still couldn't produce the document.  However, that might be the leverage to get some useful mortgage reform through Congress.  But that would require that Congress not give the banks everything for nothing first.


"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Mar 2nd, 2009 at 01:07:11 PM EST
[ Parent ]
As I understand it, the problem wasn't with documentation at the originating bank.  It was that there was never a proper record made of conveyance of the note from the originating bank to the "trust" used in securitizing the mortgages.

I could be wrong.  But, if you have a limited number of banks that are swapping these notes around as part of deals, going in and merging them into a single, federal bank, (Bank of the United States, anyone?) means that the issue of balancing accounts between them largely goes away.

The government eats the overall loss, but because the derivative deals are wiped out, the size of this loss is much smaller.

It's been the damned derivatives that have made this so difficult. The answer, I think, is to go through and unwind the majority of these deals. A nationalization would allow information to flow freely.  I assume that, at least in part, the "stress test" is about getting a grip on how badly interwined these things are.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Mon Mar 2nd, 2009 at 01:21:30 PM EST
[ Parent ]
On the other hand, one could transfer all the properties to a Custodian, rent them to the former owners at an affordable index-linked rental, "unitise" the resulting rental pool, and sell the Units to risk averse investors.

The bank replaces a dated obligation to repay a secured loan with an undated (quasi-Equity) obligation to pay a "Capital Rental" and so the credit event insured against (default) disappears with the secured loan.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Mar 2nd, 2009 at 02:12:17 PM EST
[ Parent ]
MFM.  I think that the problem is a technicality of the law.  When asked for proof that they are the entitled to bring legal action against the holder of a mortgage, the entity bringing suit must be able to produce the original document.  Else they have no standing in court.  I.E. someone else may have the original and have a better claim.  The laws apparently have not been updated to accommodate all of the fancy "move it around electronically" modus operandi of the present financial system.

Fixing this could get interesting if anyone stands up for the mortgagees.  No one thinks that real estate values are going back to even 2005 levels any time soon.  There is considerable sentiment that mortgages need to be written down to something closer to the true market value of the houses at present, if only to reduce the incentive for "jingle mail."  A price for so doing could be extracted.  This could take the form of Chris Cook's solution or others that have been proposed.  

Dealing with the slice and dice Mortgage Backed Securities situation with different parties holding different "tranches" of these MBSs is a different matter.  Clearly the high risk, high return bottom tranches should be wiped out.  But the decline has put at risk even the top tranches.  And when four different classes of investors all have a stake in the returns from a pool of mortgages the question arrises, "Who has the right to sue?"  And when no one can come up with the original document, when the mortgage broker who arranged the loan is long out of business....

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Mar 2nd, 2009 at 03:18:28 PM EST
[ Parent ]
I want to see if you can clear this up.

Are you saying then that the originating bank doesn't even have a the note underlying the mortgage?

That's insane. I understand that there is slicing and dicing, but I'd think that the originating bank actually has the note.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Mon Mar 2nd, 2009 at 03:47:18 PM EST
[ Parent ]
It would appear that the banks have not only been criminally insane but insanely incompetent.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Mon Mar 2nd, 2009 at 03:54:36 PM EST
[ Parent ]
I'm reminded of some apocryphal comments from the airport cabby on the way home from Spain - who also runs an estate agency.

I'm not going to vouch for the reliability of any of this, but he seemed a sensible sort. According to him the banks don't want people to hand their keys because it costs them a fortune to sort out the paperwork.

Legally, if there's any charge on a property - which there is in the case of slicing and dicing - the bank does not own it. At best it owns a share in it.

And it's actually possible for a bank to be in the equivalent of negative equity. If a foreclosed property sells for much less than the loan book mortgage cost, the bank is still on the hook for  for the difference in somewhat the same way that the original buyer was.

So if the original buyer moves out of the country and can't be chased for the debt, the bank is left holding - something - of indeterminate value and ownership, which it can't necessarily sell.

He also said he knew of at least one case where someone handed their keys in, and a few rounds of financial pinball later a holding company contacted the owner and said he could have the keys back for a nominal sum.

Effectively the holding company either needed a quick cash sum or didn't think it was worth trying to sell in a dead market - or possibly it was hoping that the former owner wasn't going to ask any hard questions, and his house is still co-owned by most of the financial industry.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Mar 2nd, 2009 at 04:12:34 PM EST
[ Parent ]
Is this about the Spanish British or American banks?

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Tue Mar 3rd, 2009 at 02:20:01 AM EST
[ Parent ]
It's worth looking at experienced bank regulator William Black:

naked capitalism: William Black: "There Are No Real Stress Tests Going On"

My nightmare scenario which I fear is often true is that A) because the biggest originators of nonprime loans were mortgage bankers, B) because every large mortgage banker that specialized in nonprime loans went bankrups, C) because many of them went into Chapter 7 liquidations and even those that went into Chapter 11's had little incentive to hang on to files on mortgage loans they had sold to other entities -- the loan files on many nonprime loans may no longer exist. (My fervent prayer is that the loan servicers have tapes with copies of the underlying loan files, but I fear that this prayer will not be answered.) Under this nightmare scenario it will be extraordinarily hard to determine loan quality and losses and very hard to foreclose against borrowers that can afford attorneys (admittedly a minority) and that claim fraud in the inducement.
by afew (afew(a in a circle)eurotrib_dot_com) on Mon Mar 2nd, 2009 at 04:04:38 PM EST
[ Parent ]
Under this nightmare scenario it will be extraordinarily hard to determine loan quality and losses and very hard to foreclose against borrowers that can afford attorneys (admittedly a minority) and that claim fraud in the inducement.

and how is that a nightmare for the majority of people involved?

Any idiot can face a crisis - it's day to day living that wears you out.

by ceebs (ceebs (at) eurotrib (dot) com) on Mon Mar 2nd, 2009 at 04:15:33 PM EST
[ Parent ]
Because we will end up paying the bill for it all.

Nationalization is the answer, but there's an idiot streak that runs through the US when it comes to the government being involved in the economy.

I just had someone challenge me today to give one case where nationalization solved anything, and I look em in the eye, and say, Sweden 1995.

And they get flustered, and argue that the government made things worse there.

These days, I feel like we are repeating all the mistakes of the Great Depression. i.e. a belief in self regulating markets was popped by reality, and now the lingering of free market ideology has created the equivalent of the Bavarian redoubt who are damned if they won't trash the whole economy before pragmatic solutions like nationalization get in the way of the way they think that the world works.

And so the crisis grows deeper.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Mon Mar 2nd, 2009 at 04:24:55 PM EST
[ Parent ]
I think he means a nightmare from the point of view of a bank regulator who knows a whole heap of "securitised" assets may never be evaluated, not from the POV of mortgage holders faced with foreclosure.
by afew (afew(a in a circle)eurotrib_dot_com) on Mon Mar 2nd, 2009 at 04:32:22 PM EST
[ Parent ]
I can see a thriving business for law firms that offer to work on a contingency basis for homeowners.  They could stipulate that their fees would come out of a new, much smaller loan against the property where they prevail or where the mortgage is reduced by, say, half or more.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Mar 2nd, 2009 at 04:26:16 PM EST
[ Parent ]
Are you saying then that the originating bank doesn't even have a the note underlying the mortgage?
In some cases it was mortgage brokers.  They were so busy making money that they didn't have time for all of that pesky paperwork.  What could possibly go wrong, anyway.  No one will ever ask for that.  One thing is certain.  We don't have a good handle on just what proportion of loans have been thus mishandled, nor are the banks likely to tell us.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Mar 2nd, 2009 at 04:20:46 PM EST
[ Parent ]
I just realized that.  Shit...

Not good, not good at at all.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Mon Mar 2nd, 2009 at 04:25:36 PM EST
[ Parent ]
MfM--  

Don't worry:  This is a problem only for the investment banks who were stupid enough to go in at the second tier of this ponzi scheme.  

This won't affect the taxpayers at all, unless they are stupid enough to try to keep the banks afloat by bailing out their bad paper . . .

Doh.  

The Fates are kind.

by Gaianne on Tue Mar 3rd, 2009 at 06:49:18 AM EST
[ Parent ]
Unfortunately, it's not just investment banks.  It's real banks, and a major part of the problem, as I understand it (and others can correct me if I'm wrong), is that a lot of people have their 401(k)s tied in with these companies, too, in the form of preferred stock and so on.  It's not nearly as simple as the folks on dKos would like us to believe.

Now maybe the answer is to nationalize -- or alternatively to simply let them fail -- and wipe them out anyway.  (I think that's what I would do.)  But it seems there's a major problem sitting there that isn't being talked about that might help to explain why the government is so hesitant to make a serious move.

Just something to consider.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Tue Mar 3rd, 2009 at 08:07:55 AM EST
[ Parent ]
There is nothing wrong with letting private pension plans collapse that higher public pensions cannot solve.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Mar 3rd, 2009 at 08:12:19 AM EST
[ Parent ]
Maybe Americans need to have their collective 401(k) investment cleaned so they realise that the "state pension insolvency crisis" was a bogus argument to convince them to divest from Social Security and into a stock market ponzi scheme, and after realising that they won't do it again.

Social Security was invented during the Great Depression for a reason.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Tue Mar 3rd, 2009 at 08:13:44 AM EST
[ Parent ]
Which is all well and good strictly from the perspective of economics, but you want to run for reelection as POTUS or a congresscritter after you've wiped out a big chunk of your constituents retirement accounts?

It's not so clean when you add the political consideration.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Tue Mar 3rd, 2009 at 08:19:59 AM EST
[ Parent ]
It's not clean it's messy. But as JakeS says
There is nothing wrong with letting private pension plans collapse that higher public pensions cannot solve.


Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Tue Mar 3rd, 2009 at 08:40:35 AM EST
[ Parent ]
I don't disagree.  I'm just saying.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Tue Mar 3rd, 2009 at 08:41:53 AM EST
[ Parent ]
Mig
Maybe Americans need to have their collective 401(k) investment cleaned so they realise that the "state pension insolvency crisis" was a bogus argument...
The markets are in the process of administering that lesson as we blog, but the "realize" part is in doubt.  We have the RW bloviating on steroids at the moment and much of the MSM is too timid or too reluctant to engage in forceful reporting for me to have any confidence in the outcome.  The longer this runs and the greater the amount of public obligations that are poured down black holes such as AIG the greater the danger that the Obama Administration will effectively be discredited.  

Obama is now playing Hamlet.  I fear he will become Tony Blair and that the Democrats will become NuLab.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Mar 3rd, 2009 at 12:38:20 PM EST
[ Parent ]
Well, you need someone with a bully pulpit to deconstruct the "public pension insolvency crisis" arguement now that people are paying attention. Like Krugman, for instance. But I don't think he (or anyone else) is likely to do it...

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Tue Mar 3rd, 2009 at 12:43:49 PM EST
[ Parent ]
What is the public pension insolvency crisis? Last time I checked, sovereigns cannot be insolvent against liabilities denominated in their own currencies.

For that matter, last time I checked, sovereigns presiding over even remotely functioning economies cannot be insolvent, full stop. And if the economy isn't even remotely functioning, what's the chance that private pension plans are solvent anyway?

Now, here's an idea: What about y'all confiscate all the 401(k)s and all future revenues going into them, and set up an equitable public pension scheme instead? If that's insolvent, then sure as Hell the 401(k)s are insolvent. And if it's not, then what's all the squealing about public pension plan insolvency about?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Mar 3rd, 2009 at 12:49:56 PM EST
[ Parent ]
What is the public pension insolvency crisis?
A right wing meme straight out of the "Think tanks," the last time I checked.  As J. Edgar Hoover used to say: "The wish is father of the thought." The wealthy conservatives were only too happy to let their budget deficits be papered over by excess contributions to SS and Medicare starting in the early 80s, but now they fear that these programs might start costing them some small pittance.  

I fear that too many of the Democrats are unwilling to take it on because they need contributions from the same people who are financing and benefiting from the work of these "think tanks."  That is why campaign finance reform needs to be rammed through before they start on the really difficult stuff.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Mar 3rd, 2009 at 02:13:03 PM EST
[ Parent ]
I fear he will become Tony Blair and that the Democrats will become NuLab.

I (unfortunately) refer you to many similar comments made by UK posters before the election.

Any idiot can face a crisis - it's day to day living that wears you out.

by ceebs (ceebs (at) eurotrib (dot) com) on Tue Mar 3rd, 2009 at 12:48:07 PM EST
[ Parent ]
Well, hopefully sans the creepy, fundagelical messiah complex... We've had quite enough such POTUSes for the time being, thankyouverymuch.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Mar 3rd, 2009 at 12:51:26 PM EST
[ Parent ]
I believe ET had come to this consensus before I started following it almost exactly a year ago.  Someone else acquainted me with some aspect of that discussion last summer.  There seems to be a real danger that our mutual fears will be realized.  The greatest countervailing factor is the simple fact that going along with the Wall Street consensus, or continuing to be guided by those subject to Krugman's "regulatory cognitive disfunction" is taking us over the falls in a barrel.  There is at least some hope that Obama will pull back before it is too late, but....  

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Mar 3rd, 2009 at 02:04:37 PM EST
[ Parent ]
well as long as the financial crisis isn't his equivalent of Blairs 'Iraq moment'

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Tue Mar 3rd, 2009 at 03:29:20 PM EST
[ Parent ]
What I hope for is the inverse, a "big banks=black holes and lets pull back before we cross the event horizon" moment.  Blair underwent a conversion to the dark side, Obama is currently a captive of the dark and needs a conversion to the light.  (Might as well go full-on Manichean Mode here!)

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Mar 3rd, 2009 at 03:53:53 PM EST
[ Parent ]
I would suggest a policy of intervention a la FDIC plus a "bad bank" to work out vehicles that may in time recover.  For individuals with IRA and 401k investments in impaired institutions that are to be dissolved, offer a reimbursement with a limit, of say $30K-$50K, that will not be paid until they have reached 65 years of age.  People have been repeatedly told to diversify their investments to protect against institution risk and there should be some consequence for their decisions to do otherwise.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Mar 3rd, 2009 at 12:28:19 PM EST
[ Parent ]
You really have to step back and almost admire the level of stupid.  "Impressive" isn't even the right word, because it was so much more than that.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Tue Mar 3rd, 2009 at 07:53:21 AM EST
[ Parent ]
Are you saying then that the originating bank doesn't even have a the note underlying the mortgage?

The note has been sold half a billion times, and, in the process, a lot of these notes have been lost or even destroyed.

I understand that there is slicing and dicing, but I'd think that the originating bank actually has the note.

But the actual banks -- as Krugman calls them, the "big marble buildings that we think of when we say 'bank'" -- had very little to do with giving out mortgages.  They were buying and selling mortgage-backed securities, but I believe the money for the actual mortgages, especially the high-risk ones, was coming from investors, brokers and other elements of the shadow banking system.

After all, who needs real banks when you have Angelo Mozilo?

(facepalm)

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Tue Mar 3rd, 2009 at 07:45:46 AM EST
[ Parent ]
Who taught these people about banking???

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Tue Mar 3rd, 2009 at 08:04:08 AM EST
[ Parent ]
People who believe that The Market Is Always Right, that the business cycle has been arbitraged away, that this time it's different and that it's OK to gamble as long as you only do it with other people's money.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Mar 3rd, 2009 at 08:09:20 AM EST
[ Parent ]
You're surprised by this after Katrina and Iraq?

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Tue Mar 3rd, 2009 at 08:09:51 AM EST
[ Parent ]
...the bank had been unable to produce evidence that the original lender had assigned the note,....

I like that one.  Maybe everyone should take the banks to court and make them prove ownership of the mortgage note.

I can swear there ain't no heaven but I pray there ain't no hell. _ Blood Sweat & Tears

by Gringo (stargazing camel at aoldotcom) on Mon Mar 2nd, 2009 at 01:56:42 PM EST
[ Parent ]
 
Maybe everyone should take the banks to court and make them prove ownership of the mortgage note.
That is exactly what Dr. Ellen Brown of Global Research has been advising.  Seems that that approach works.  Oh, what to do now?!

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Mar 2nd, 2009 at 03:33:11 PM EST
[ Parent ]

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