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dwot (99.50)

Subprime: Liquidity crunch again...

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October 17, 2010 – Comments (11)

I had a read of John Mauldin's latest letter on BP. 

I have stated before that I thought with the losses from mortgages without the socialized recapitalization of the banks I believed that you could end up going to your bank and just not be able to get your money because the banks gave it to someone who could not pay it back, and they did this to everyone's money.  There is no ability to cover the losses from people who are actually pay their loans back because the losses exceed the ability many times over.

Well, I thought the recapitalization was going to be enough to muddle through the mess, but this newest twist on stopping the foreclosures really changes that.  And then on top of this the commercial real estate issues are basically where the mortgages were 2-3 years ago, and they further undermine the bank's solvency, to rather increase the bank's insolvency.

11 Comments – Post Your Own

#1) On October 17, 2010 at 12:52 PM, BillyTG (32.21) wrote:

That's the thing I think so much of the public believes---that each of these issues is independent and containable. Yeah, we have the commercial real estate dump due to happen, ALT-A and Option ARMs, the foreclosure fraud by some accounts has already put a halt to sales, unemployment continues to increase with no sign of improving. All of these are interconnected, compounding problems, some of which have yet to reach the surface. Is it really much of stretch to think that this could all lead to a grinding halt of the economy?

Thanks for the post and link to Mauldin's letter

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#2) On October 17, 2010 at 12:58 PM, starbucks4ever (99.56) wrote:

A fantastic post, dwot. 

I don't think we should force GS and others to buy back the crap they sold. Rather, I think we should tell the institutional fools who bought mortgage-backed securities without a title to suck it up. That will teach them a good lesson.

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#3) On October 17, 2010 at 2:19 PM, sawchain (< 20) wrote:

This letter is alarmist garbage.  It's based on the notion that if the chain of holdership of a mortgage is broken, the homeowner automatically owns the home, free and clear.  That's just stupid.  If there's a breakdown in the chain of note holdership, it'll simply revert to the last valid note holder.

The homeowner (if you can call him that) signed a contract to pay back a loan.  There is no automatic "get out of mortgage free" card.

Granted, it will be a costly exercise to clear up cloudy mortgages, but that's a much different assessment than Mauldin's hyperbolic hand-wringing.

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#4) On October 17, 2010 at 2:26 PM, Option1307 (30.51) wrote:

Great article, thanks for posting. +1.

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#5) On October 17, 2010 at 2:31 PM, Option1307 (30.51) wrote:

sawchain

Did you even read the article?

The part I think you were refering to was NOT written by Mauldin. This is what he wrote about the subject:

If you took out a mortgage and now the title is in some doubt because the investment banks and mortgage banks and all the middle guys screwed up (big-time!) because they wanted to save some bucks and make some commissions, you did not win the lottery. That is not America as I know it. You can’t pay the mortgage, I am sorry. But you do not get to keep the house. The people who (thought) they bought the mortgage in a fair deal need to end up with that mortgage.

and his solution:

He says that real trained people (lawyers and paralegals) need to look at each mortgage and figure it out, and that it can get resolved. It is expensive to the banks; but I agree, if it is just dollars I don’t care. Fix it.

You basically said the exact same thing as Mauldin already proposed.

 

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#6) On October 17, 2010 at 2:50 PM, starbucks4ever (99.56) wrote:

It's not that simple. As far as I can see, the judge will tell the defaulting homeowner: "You evil deadbeat SOB, you must pay your balance to your REMIC!". And then he will tell the REMIC: "And you, undocumented moron without the note, don't ever try to seize the house if he doesn't pay". The end result is that the homeowner will not have a clear title to the house (hence he will have trouble selling or HELOCing it) but he will continue to live in it rent-free. And then 20 years later he will get the clear title because he will have used the house openly for 20 years without anyone else filing a legitimate claim to the property. So homeowners won the lottery again as they always do.

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#7) On October 17, 2010 at 3:12 PM, dwot (99.50) wrote:

zloj,

I think if those who bought the junk can show misrepresentation then they have a claim against the banks for a refund.  I think there was gross misrepresentation...

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#8) On October 17, 2010 at 3:29 PM, sawchain (< 20) wrote:

@Option1307

I think you should re-read the letter.

Here's the solution you attribute to Mauldin in the context you omitted:

"I had a very spirited conversation with good friend Barry Ritholtz today (of The Big Picture). Barry runs money but is also a lawyer and has a somewhat different perspective. He thinks we do not need any legislation and there is a legal cure."

The thing you call Mauldin's solution isn't.  It's something Barry Ritholtz suggests.  Mauldin himself says Barry "has a different perspective."  Mauldin's suggested solution is:

"Let’s be very clear. If we cannot securitize mortgages, there is no mortgage market. We cannot go back to where lenders warehoused the notes. It would take a decade to build that infrastructure. In the meantime, housing prices are devastated. Whatever wealth effect remains from housing gets worse, and the economy rolls over.

This is beyond my pay grade, but there have to be some adults who can make everyone play nice in the sandbox. Ideally, someone in authority at the Treasury, with bipartisan support steps in and says everyone follow these rules, whatever these rules need to be."

 

So Mauldin wants to use someone in authority at the Treasury to protect the practice of packaging mortgage backed securities.  Hello?!  MBS's are what caused this mess in the first place.

The basis for my discontent with Mauldin is here:

"Maine fishing buddy David Kotok sent me this email on the mortgage foreclosure crisis just as I was getting ready to write much the same thing. It is about the best thing I have read on the topic. Saves me some time and you get a better explanation. From Kotok:

...

“If for whatever reason any of these signatures is skipped, then the chain of title is said to be broken. Therefore, legally, the mortgage note is no longer valid. That is, the person who took out the mortgage loan to pay for the house no longer owes the loan, because he no longer knows whom to pay.

“To repeat: if the chain of title of the note is broken, then the borrower no longer owes any money on the loan.

“Read that last sentence again, please. Don’t worry, I’ll wait.

“You read it again? Good: Now you see the can of worms that’s opening up."

Mauldin says Kotok has written the best thing he's read on the topic.  At the heart of the "best thing" Mauldin's read on the subject is the assertion that if a chain of title is broken, the borrower owes nothing.  That is absurd.  Mauldin and Kotok are blowing the problem out of proportion, and proposing Big Government roll in to fix it.  No thanks!  Big Government caused the problem by pushing mortgages onto people who could not afford them.

It's a crappy situation, but not unresolvable.  FIRST, vote out the idiot politicians who caused the problem (I'm looking at you Frank and Dodd).  Second, do exactly as Ritholtz suggets.  Let the legal system do its job and resolve disputes between lenders and borrowers.  And no, that doesn't include cancelling a borrowers debt*.

(*One caveat there at the end.  I would support cancellation of debt for situations where lenders committed fraud.)

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#9) On October 17, 2010 at 3:32 PM, starbucks4ever (99.56) wrote:

dwot,

Yes, IF these institutional investors can prove that they were mentally challenged or that they hired robo-buyers who never bothered to read the boilerplate, or that the big bad Goldman and Sachs have deliberately forged the chain of title...Then yes, they may have a claim. If, however, the court finds that they were in their right mind, had attorneys to review the papers, knew they wouldn't have any legal claim on the houses, but bought the MBS junk anyway in order to get double bonuses for the executives, then I don't see what the courts can do for them. Sorry, fellas, your CEO goofed up and put your money in bonds secured by the debtor's good will only. Your investment dollars were basically spent to give away houses for free. Next time you will elect a more shareholder-friendly CEO. 

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#10) On October 17, 2010 at 4:44 PM, Option1307 (30.51) wrote:

Mauldin says Kotok has written the best thing he's read on the topic.  At the heart of the "best thing" Mauldin's read on the subject is the assertion that if a chain of title is broken, the borrower owes nothing.  That is absurd.  Mauldin and Kotok are blowing the problem out of proportion, and proposing Big Government roll in to fix it.  No thanks!  Big Government caused the problem by pushing mortgages onto people who could not afford them.

I agree, that is absurd. But as I pointed out, Mauldin agrees with your statement,

If you took out a mortgage and now the title is in some doubt because the investment banks and mortgage banks and all the middle guys screwed up (big-time!) because they wanted to save some bucks and make some commissions, you did not win the lottery. That is not America as I know it. You can’t pay the mortgage, I am sorry. But you do not get to keep the house. The people who (thought) they bought the mortgage in a fair deal need to end up with that mortgage.

I realize the email he posted said other things, but Mauldin basically agrees with your assertion that it is absurd for people to remain in their houses etc. so I'm not sure why you are saying otherwise. 

Whateves, enjoy the rest of your weekend.

 

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#11) On October 19, 2010 at 4:18 PM, mtf00l (47.94) wrote:

The solution which is no longer possible would have been to let the gamblers fail, GS, JP, AIG et.al. Then, after the dust settled those "mortgages" in question would have gone to the Government agency that creditor of last resort and they would have sold them on the "market" which we no longer have.

Flame on!

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