Wednesday, October 6, 2010

Rare post update: US Foreclosure Fraud Crisis

Following up our early morning post on this explosive issue is this afternoon update. If you haven't read the earlier post, I would suggest you read it first before reading this update.

If you read the earlier post from today, don't be fooled by the lack of coverage this issue is getting on the evening news or on Financial TV, it's a HUGE issue which is still in it's earliest stages.

It is getting coverage.

The New York Times has been on the story here.

  • The uproar over bad conduct by mortgage lenders intensified Tuesday, as lawmakers in Washington requested a federal investigation and the attorney general in Texas joined a chorus of state law enforcement figures calling for freezes on all foreclosures...

    Texas Attorney General Greg Abbott, a Republican, sent letters to 30 lenders demanding they stop foreclosures, evictions and the sale of foreclosed properties until they could provide assurances that they were proceeding legally... scarcely two weeks after the country’s fourth-biggest lender, GMAC Mortgage, revealed that it was suspending all foreclosures in the 23 states where the process requires judicial approval, concerns about flawed foreclosures had mushroomed into a nationwide problem.

    Dubious notary practices used by banks to justify foreclosures have come under scrutiny in recent weeks as GMAC and other top lenders suspended homeowner evictions over possible improper procedures.

ABC News is also covering the story here;

  • As millions of Americans struggle under an epidemic of foreclosures, evidence has surfaced suggesting that some of the biggest banks are barely paying attention before signing documents that will push people out of their homes.

    Officials at some big banks now admit that so-called "robo-signers" were signing off on thousands of foreclosures a day without actually looking at the details of any of the cases.

    ABC News obtained a copy of multiple signatures attributed to a Florida lawyer moonlighting as a robo-signer. She had a day job in the Florida Attorney General's office, she somehow managed to vet some 150,000 mortgages in three years. If she worked every day of every year, that would amount to over 130 mortgages a day.

    "It appears that most of the mortgage (companies) in fact did use robo-signers," said Mark Zandi, chief economist for Moody's Analytics. "It was a way to try to facilitate the process. They've been overwhelmed by the foreclosed properties, and this was their way of trying to get through those problems as fast as they could."

The Wall Street Journal is covering it here:

  • For mortgage investors, the recent suspension of foreclosures could potentially cause further losses in the already-battered $2.8 trillion market for residential mortgage-backed securities...

    "It's symptomatic of sloppy servicing and a lack of adherence to contract and property law, which we've seen examples of over and over again in the last two years," said Scott Simon, a managing director at Pacific Investment Management Co., or Pimco, a unit of Allianz SE.

And Market Watch has posted this explosive tidbit:

  • With some of the nations largest banks suspending their judicial foreclosures to figure out their next move now that there is a critical mass of people that have caught on to their fraud, the smoking gun has now been discovered.

    A company by the name of DOCX charged the banks $35.00 to "Create Missing Intervening Assignments". In other words, forge the assignments. A copy of this company's price list is now all over the internet. A link can be found here:

But it's the broader picture which is important.

King World News conducted an interview with Jim Sinclair and Dan Norcini on the unfolding events.

  • Dan Norcini: The primary drivers in gold and silver today had to do with concerns over currency devaluation as well as securitized debt problems and the implications associated with it.

    Jim Sinclair: “Each time that happens an item of collateral on the securitized debt publicly dies. That is why this is dynamite that people will realize very soon. This is one reason gold is up hard today.”

    Norcini: “That collateralized debt obligation is now effectively worthless because the collateral behind the debt can no longer be collected. The banks cannot go and get it. Let’s say you have 10 mortgages at $1 million a piece, the sum total of those mortgages are $10 million.

    So, the banks took the 10 mortgages and bundled them together into a collateralized debt obligation or CDO with a face value of $10 million. They then sold that new entity that they created to an investment group of some sort, a pension fund, hedge fund, etc. promising them a yield of let’s say 7%. The sales pitch would emphasize the fact that this CDO was backed by real collateral.

    In the event of loan defaults by the borrowers, the banks would tell the buyer of the CDO that the collateral behind the loan could be sold to recapture any potential losses on the part of the purchaser. Everything seemed to work fine until the defaults began and the foreclosure process kicked into high gear. The foreclosure process has exposed fatal flaws in the system and the flaw is that the banks cannot prove clear ownership of the mortgage.

    Consequently, they are then barred from foreclosing on the property.
    Because they can no longer foreclose on the properties, the CDO is now effectively worthless.

    The hedge funds and the pension funds cannot now sell these CDO’s on the open market, so how are they going to recover their original investment? Perhaps you may say that won’t be a problem because these instruments were insured. The problem is now the credit default swap or the insurance policy that was purchased to protect against default assumes that the insurer has the financial wherewithal or resources to make good on the claim. If there were only a small number of these problem CDO’s this would not be an issue.

    But as the number of the foreclosures continue to skyrocket, and more and more banks are prohibited from seizing the collateral behind the property, the sheer magnitude of the number of claims presented to the insurer will overwhelm their balance sheet.

    In effect what you have is an insurance company which doesn’t have enough money to pay off the claims. Compounding the problem is the fact that the CDO’s and credit default swaps related to these claims form a mass network of interdependence. This then ripples through the entire system and creates a domino effect which can cause the failure of entities creating the next financial crisis.

    Ultimately the Federal Reserve will be asked to step in and buy up the now worthless CDO’s and put those on its balance sheet. In order to do this the Federal Reserve will have to engage in massive quantitative easing, taking onto its balance sheet the worthless CDO’s in exchange for newly issued treasuries. This of course will have a horrific effect on the US Dollar which is why gold and silver are heading much higher.

Watch this issue very closely gang.

I could be wrong, but this may well be the Black Swan event of the 2008 Financial Crisis.



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  1. Thank you for such an informative post.This is going to blow the doors off of the "recovery".

  2. At risk of sounding like a conspiracy theorist...I want to think that somehow the US government came up with this legal tactic as a ploy to slow banks from adding so much supply to the marketplace. Since the tax credit ploy only temporarily slowed the bleeding this would ultimately serve the same purpose.

  3. Another thought: maybe this will help with the US federal debt?

    Maybe properties with unclearable titles will either end up owned by the feds, or handed back to the owners. Or something.

    Everybody wins! (except the banks, pension plans, big-money investors...)