Sunday, October 17, 2010

The Next Shoe to Drop?

Happiness, is so hard to find
Hey baby, tell me what is on your mind
--Nu Shooz

The more I read into the 'fraudclosure' situation, the more it seems to me that mainstream media is under-reporting it, and that market participants are not discounting it properly. See here and here for a couple of 'non mainstream' takes on what is going on and what the consequences might be (be sure to read the comments at the end of both to get a more well rounded view).

This assessment is likely to change as I learn more, but right now it seems to me that there are two primary problems. One issue is that the chain of title has been broken in many properties due to systemic fraud in the transfer process. The other issue is that, because of the vagaries of the securitization process (e.g., the Mortgage Electronic Registration System or MERS), it may be unclear as to exactly who does or has held the title to a property.

Thought processes like this one imply that homeowners in default are actually entitled to their homes free and clear if their chain of title has been broken.

In his preface to a version of the above piece posted on his blog, Barry Ritholtz suggests that such a perverse outcome is unlikely. Courts have long had the authority to apply principles of equity in order to prevent outcomes that unjustly enrich wrongdoers. In foreclosure fraud cases, both sides have committed wrong: homeowners who are in foreclosure and banks/securitizers that failed to manage the title process correctly.

As such, a mountain of court cases are likely. Among other things, these cases must determine: who back in the chain legally holds title, any monies owed those title holders, how to resolve cases where mortgage payers are in default and cannot/have not paid the rightful title holders.

It also seems highly likely that criminal fraud cases will be brought against many operators in the title supply chain.

Fast forwarding to end game outcomes suggests a couple of scenarios that must be considered as possessing decent probability: a) the likelihood that lots of financial service firms ranging from big banks to mortgage insurers are insolvent and candidates for failure, and b) the likelihood that the Fed will be printing gargantuan amounts of money to keep the system from imploding.

Consistent w/ the bipolar world we live in, a) is extremely deflationary while b) is extremely inflationary. BOTH situations, however, suggest the chance of extreme disorder.

Which has me thinking about upping my ante in gold and silver once again...

Meanwhile, the shorter term consequence seems to be that any progress in working off problems in residential real estate has been stalled--perhaps for a very long period of time. Foreclosures are dead in the water for now. New mortgage originations are also likely to slow dramtically. If I'm a potential home buyer, it would be hard for me to be confident in the closing process right now.

Heck, it even has me wondering right now whether I truly own my home free and clear. And whether I would have been better off never making a single mortgage payment at all (see moral hazard).

In any case, this story is rapidly gaining mindshare with me as the Next Shoe To Drop on our fragile system.

positions in gold, silver

1 comment:

dgeorge12358 said...

Any informed borrower is simply less vulnerable to fraud and abuse.
~Alan Greenspan