Morgage Fraud For Dummies

Commentary By Ron Beasley

Felix Salmon explains why all the big investment banks may and should be in serious trouble.

Note

Just how f**ked up is it?  I was talking to my neighbor this morning and he has been trying to pay his morgage off for nearly two months.  He can't because the bank is unable to find all the paperwork.

Daniel Indiviglio explains in a bit more detail:

The documentation problems surrounding mortgages originated during the housing boom just get uglier and uglier. One of the most recently surfaced worries is also one of the most serious. Bank analyst Josh Rosner envisions a doomsday scenario where banks would have to stand behind most private label mortgage-backed securities (MBS) that they had believed they had no exposure to. This would be disastrous.

The background here gets complicated, so I'll try to simplify. Basically, when creating a MBS, the bank who originally provides the mortgages to borrowers sells those mortgages to a trust through a legal process called a "true sale." The trust then sells bonds to investors, which are secured by those mortgages. Due to sloppiness, that true sale may never have been legally executed in most cases.

Why is this so bad? The investors who hold that MBS might be able to claim that the bonds they hold were not created properly, contracts were breached, and the bank that originated the mortgages needs to buy back the bonds. This, of course, would require many billions of dollars in capital in excess of that banks have lying around. And remember these aren't pretty bonds. They are mostly toxic and full of losses. Those losses would then be passed on to the banks.

Rosner imagines this leading to a Lehman-type weekend, where the financial industry again nears collapse. That might be a little melodramatic, but it isn't impossible. If these investors have the legal standing that Rosner thinks, they would be sort of crazy not to force banks to take back these bad deals. After all, it's better for the investors that they force these losses back to the banks who wrote the mortgages.

Bottom line is that all of the banks we bailed out will be insolvent again.  People have known about this for some time but there has been an attempt to keep it quiet so they could fix it by trampling all over contract law.  This is what the "stealth bank bailout bill" that Obama pocket vetoed after word got out.  Have little doubt, if it had not been exposed Obama would have signed it.  Now lawmakers, the administration and the Federal Reserve  will want to save the banks but that may not be politicaly possible.  Rep. Brad Miller:

Someone said there might be a second round of bank insolvencies because of this and there might need to be more TARP. There is no chance that Congress would pass more TARP.

..............

At the least, we now have resolution authority that we can take out for a spin.

Update

The story has made The Washington Post.  It's not a secret anymore.

Update II

Digby says It's Time For Jail Terms, I agree and so does the rest of the country.