Friday, November 11, 2011

The Multistate Foreclosure Settlement - Credit Slips

The Multistate Foreclosure Settlement - Credit Slips
The housing market is too-big-to-fail. It's true. The problem is that it has failed, and the proposed multi-state deal doesn't fix the market. The deal simply isn't broad enough to put all the housing market concerns to rest. The deal doesn't buy peace for the banks or stability for the US housing market. It just blows the government's last wad on a sideshow issue, robosigning. Consider all the critical issues the settlement does not (and cannot) address:

The $700B in negative equity in the US.
Clouded title from MERS
Clouded title from wrongful foreclosrues
Billions in investor putback and securities fraud claims
Investor suits against trustee banks
Disposal of the REO inventory and the shadow REO inventory

I think this is about right. Here is one example of a major unresolved issue that is now in the courts. The putback litigation is practically unknown to the public, but it has been described by knowledgeable insiders as a "systemic risk" to Bank of America, the other major banks, and by extension the entire financial system. I have read some of the complaints in the putback cases and the facts and the numbers are stunning. How big is the risk? Bank of America's entire market capitalization is $63 billion. In other words, with that much money you could buy every single share of their stock. But BOA bought Countrywide Mortgage, once upon a time the nation's leading subprime lender, and a company that appears to have committed systematic, serious violations of their securitization agreements. The institutional investors (Fannie and Freddie, pension funds, unions, hedge funds, whoever) who bought those mortgage backed securities (much of which is utterly worthless) have sued BOA and other big banks to force them to buy back those securities at full value (hence the term "putback"). That could end up costing hundreds of billions of dollars. I could go, but the point is that the housing market is a disaster area, not just at the bottom where we little folks have seen our equity vanish and watched our neighbors get foreclosed on, but at the very top where the "too big to fail" institutions roam. There are policies all over the place that smart people have come up with to fix things, but they aren't on the radar screen of Congress or the President, it seems.

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