Sorry!! The article you are trying to read is not available now.

The Consequences of Mortgage Irregularities for Financial Stability... in Plain English

Print comment Post Comments
Here is the Congressional Oversight Panel report examining the consequences of mortgage irregularities for financial stability... all 127 pages of it. Enjoy! Or, if you are pressed for time, and who isn't!, here is the summary decoded in plain English.

The crucial points from the Executive Summary, and what they mean in plain English:
  • In the best-case scenario, concerns about mortgage documentation irregularities may prove overblown. Foreclosures could proceed as soon as the invalid affidavits are replaced with properly executed paperwork.
This is the view of financial industry participants, banks, mortgage-servicers, etc. This simply takes the stand that the overwhelming majority of foreclosures are proper and that irregularities will be cleared by either manual, hand-discovery or either retroactive legislation or
  • The worst-case scenario is considerably grimmer. In this view, which has been articulated by academics and homeowner advocates, the “robo-signing” of affidavits served to cover up the fact that loan servicers cannot demonstrate the facts required to conduct a lawful foreclosure. In essence, banks may be unable to prove that they own the mortgage loans they claim to own.
This is the view of the academics - economists, professors, real estate attorneys, homeowners and basically everyone who is not a financial market participant... except hedge funds who have a financial stake in taking down the parties in the opposing view (that is, hedge funds who have bet against banks, or who have already absorbed losses in securities due to foreclosures).
  • If documentation problems prove to be pervasive and, more importantly, throw into doubt the ownership of not only foreclosed properties but also pooled mortgages, the consequences could be severe. Clear and uncontested property rights are the foundation of the housing market. If these rights fall into question, that foundation could collapse.
In other words, we may not be able to legally determine who is the rightful owner of a property, and because only the rightful owner is legally entitled to foreclose on the property, there may be no legal grounds to foreclose. While this may seem like a "win" for the people living in the home in question, what it really means is that we face a lose-lose scenario where the family in the home is not entitled to be there, nor is the bank entitled to take the property back. Even worse, we now have a situation where not only are there massive numbers of homes whose owners are unclear, existing inventories of homes for sale may be unable to find buyers because, Hey, who really owns this thing?
  • In addition to documentation concerns, another problem has arisen with securitized mortgage loans that could also threaten financial stability. Investors in mortgage-backed securities typically demanded certain assurances about the quality of the loans they purchased: for instance, that the borrowers had certain minimum credit ratings and income, or that their homes had appraised for at least a minimum value. Allegations have surfaced that banks may have misrepresented the quality of many loans sold for securitization.
This is where things start to really boom for the attorneys... and basically no one else. Investors in mortgage-backed securities believed, at least in some cases, that they were purchasing loans of a certain quality. The reality, of course, is slightly askew; toward the end of the housing boom, demand for mortgage-backed securities was so intense that the investors were a bit like people buying tickets from scalpers for a sold-out show. Maybe the tickets are real? Who knows for sure? But that's the risk you take when you buy tickets from a guy outside the venue. Anyway, the next bullet point shows how things can go off the rails quickly.

  • To put in perspective the potential problem, one investor action alone could seek to force Bank of America to repurchase and absorb partial losses on up to $47 billion in troubled loans due to alleged misrepresentations of loan quality. Bank of America currently has $230 billion in shareholders‟ equity, so if several similar-sized actions – whether motivated by concerns about underwriting or loan ownership – were to succeed, the company could suffer disabling damage to its regulatory capital.
In other words, if BAC is forced to repurchase and absorb partial losses on the loans, the bank could become insolvent.
  • Treasury‟s authority to support the financial system through the Troubled Asset Relief Program has expired, and the resolution authority created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 remains untested. The housing market and the broader economy remain troubled and thus vulnerable to future shocks. In short, even as the government‟s response to the financial crisis is drawing to a close, severe threats remain that have the potential to damage financial stability.
Ah, the money shot. Read that paragraph carefully because it is everything you need to know about the outcome. It is actually explicit. What it means is that, because the financial system is in a precarious place, and because financial stability is not yet guaranteed, and because the entities that formally had full charge of maintaining financial stability have, in the case of Treasury expired, or in the case of legislation are untested, lawmakers will choose the winners and the losers in the "mortgage irregularity" cases. Take a look again at the two sides. Consider which side spends more money on politicians. Now, who do you think is going to wind up emerging from this in better shape?
POSITION:  No positions in stocks mentioned.