Contributed by Chris Kitze
Foreclosure-gate is heating up and the mad scramble for what's left of $45 trillion in real estate is guaranteed to leave homeowners homeless, pension funds unable to pay their pensions and even some of the biggest banks insolvent. A great housing goat rodeo was created when some of the 65 million mortgages on U.S. homes didn't follow proper legal procedures;
- Fraud by homeowners who lied on their loan applications
- Fraud by banks who didn't follow proper legal procedures around the notarization and processing of mortgage documents
- Fraud by investment banks who packaged this junk and resold it to unsuspecting pension funds
- Pension funds promised returns to their pensioners they could never achieve
Lies, lies, lies and more lies. In this jockeying for position, the only thing guaranteed is Leona Helmsley's Law i.e. "Laws and taxes are for the little people". But the little people are starting to fight back in the U.S. and we'll get to that after we do a quick review of the situation at hand and how we got there.
In the old days, that would be pre-1980's, banks and savings and loans actually knew their customers and wrote and maintained loans on property themselves. Something similar to this scene from "It's a Wonderful Life" where George explains to his depositors, who came to withdraw their money, where it all went:
In those days, the corner bank knew the customer, the house, the depositors, they kept the records in a file cabinet at the bank -- it was where you went in to make your payment. Everyone knew that If you didn't keep up with the payments, the banker would foreclose on your property. That part hasn't changed.
In the 1980's, financial geniuses came up with a new product, a way for the investment banks to make money from a market they couldn't previously tap into in a big way -- the home lending business. As you can imagine, it's a huge market, in the trillions, and the way they approached this market was to convince the originating banks, those who process and write the loans, that they could get more access to cheaper money. This would let them write more loans, generate more fees and make more money by reselling the mortgage. It also eliminated a lot of the risk of the loan, since it was almost immediately resold. But buying an individual mortgage of several hundred thousand dollars wouldn't make sense for the large investors with billions to invest or the investment banks, so they packaged them together in bundles of millions of dollars worth of mortgages.
One problem they had to solve was that many funds have rules on the quality of investment they could invest in; some funds can only invest in AA rated investments or better, others may have more flexibility. The investment banks then carved up these large packages of mortgages into tranches based on the pecking order of who got paid back first and they rated them based on credit score. As an example, the first 20% repaid would be rated AAA, then next 20% might be rated BB and so on. Each tranche represented a claim on the cashflow of the mortgages. The mortgages were supposedly scrutinized and the packaging was complete -- it was called a Mortgage Backed Security (MBS).
[ . . . ]
Today, there are almost $9 trillion worth of mortgage related securities.
Everyone got in a lather when the housing market completely tanked because the value of the MBS plunged.
[ . . . ]IF THE CHAIN OF TITLE OF THE NOTE IS BROKEN, THEY WON'T BE ABLE TO FORECLOSE.
The sheriff for Cook County, Illinois, which includes the city of Chicago, said on Tuesday he will not enforce foreclosure evictions for Bank of America Corp, JPMorgan Chase and Co. and GMAC Mortgage/Ally Financial until they prove those foreclosures were handled "properly and legally."
and this...
"I can't possibly be expected to evict people from their homes when the banks themselves can't say for sure everything was done properly," Dart said in the statement.
"I need some kind of assurance that we aren't evicting families based on fraudulent behavior by the banks. Until that happens, I can't in good conscience keep carrying out evictions involving these banks," he added.
Now that the sheriff won't do the foreclosures, will the banks hire Blackwater (Xe) to breakdown the doors and throw the mortgage deadbeats out on the street.
Today, almost anything is possible, but they have a bigger problem...the middle class is waking up and realizing that all the laws passed by Congress are essentially written by and to protect the monied interests, at their expense. They are starting to fight back...and take the law into their own hands. More from Doug Ross:
"People still haven't figured out what all this means. But I'll tell you: if enough mortgage-paying homeowners realize that they may be able to get out of their mortgage loans and keep their houses, scott-free? That's basically a license to halt payments right now, thank you. That's basically a license to tell the banks to take a hike.
"What are the banks going to do...try to foreclose and then evict you? Show me the paper, Mr. Banker, will be all you need to say.
"This is a major, major crisis. The Lehman bankruptcy could be a spring rain compared to this hurricane. And if this isn't handled right...and handled right quick, in the next couple of weeks at the outside...this crisis could also spell the end of the mortgage business altogether. Of banking altogether. Hell, of civil society. What do you think happens in a country when the citizens realize they don't need to pay their debts?"
Watch this interview for a flavor of what's next - Banks breaking into homes to repo them and homeowners fighting back by taking possession (this is an excellent video):
The money quote (at about 8:50 in the video)...
"Nobody in this country knows for sure who owns any real estate, residential or commercial."
This is just the beginning. Expect to see more people take the law into their own hands and uncertainty of title causing massive damage to the real estate market, the banks and anyone else with their fingers in this tainted pot.
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