The Mortgage Mess
Oct 15, 2010
Posted by Jody Eisenman | Filed under Uncategorized
Before I speak about the housing situation, I want to briefly comment about the stock market. The market has run up impressively lately. Since the Dow briefly dipped below 10,000 on August 26, it has run up over 1000 points, closing yesterday at 11,096. Most of this gain has been fueled by a very weak dollar, as well as better than expected corporate earnings. The stock market has ignored the high nationwide unemployment rate, and the seeming glacier pace of this economic recovery. In the last two days, the market had a huge inter-day selloffs, yet still managed to close up 70 points Wednesday, and was little changed yesterday. I am pretty cautious at this point. Although the run could continue, it would seem to me that the market needs a breather. I am also somewhat concerned that while the financial stocks led the rally since last year, they are now lagging. Since early September, the financials are little changed. In addition, overall trading volume is off about 30% since earlier this year. I’m not saying we are going to crash, but it would seem to me that the short term risks here may be higher than people realize.
One of the issues affecting the financials is the housing situation, or what I would call the mortgage mess. If you back 30-40 years, the way mortgages were treated was very different from today. First of all, there was a high degree of attention paid to the paperwork. Also, it was tough to get a mortgage unless the borrower was putting down at least 20%. The bank that issued you the mortgage would almost always hold it on their books until you paid it off. However, all this changed with securitization.
Securitization means aggregating assets into a pool. In the 1970s, the securitization of mortgages began. Banks would group mortgages together in order to sell to investors. This later spread to other areas such as credit card and auto debt. Securitization became a huge business. According to the Bond Market Association, the total outstanding debt stood at $1.8 trillion in 2004. In the case of mortgages, they were sold to both individual and institutional investors, who liked the income and the diversity. So far, so good. Then, the roof caved in. Everyone reading this should be relatively familiar with the drop in housing prices and subsequent collapse of derivative security prices. However, now a new issue has arisen. Apparently, in the mad rush to issue these securities (and have the investment banks collect their fees), some of the paperwork was lacking. When banks began to foreclose on delinquent mortgages, they went to court. Many defendants (meaning the homeowners) had attorneys, who asked for every signed piece of paper prior to foreclosure. As it turned out, not only was a lot missing, but there are now state attorney general investigations of falsified document claims. As such, it became very difficult, if not impossible, for banks to foreclose in many cases. Bank of America has suspended all foreclosures pending a complete document review. Last December, a GMAC employee stated in a sworn deposition that his team of 13 people signed over 10,000 documents a month without any review for accuracy. In many cases, banks that are attempting to foreclose found that they did not have legal title to the property in question. This has now snowballed. People who bought homes from bankruptcy sale have found that they may not hold legal title. Institutional investors have brought suit against the original issuers, claiming among other things that there were material inaccuracies in their investment documents as well as improper disclosures. It’s possible that the banks could be on the hook for much of this. In the end, it’s one big mess. As markets hate uncertainty, this may drag on the bank stocks performance for some time.
October 21st, 2010 at 2:11 am
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