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The Real Issues Behind the Foreclosure Crisis

Posted by Larry Doyle on October 13, 2010 12:32 PM |

What is really going on in regard to the moratorium on mortgage foreclosures? A lot. Not all of it would qualify as the best of “sense on cents.” My thoughts include the following:

1. Can we now declare the HAMP (Making Home Affordable) program to be totally futile? How is it that everybody on Wall Street and in Washington is now promoting that the economy will be harmed if we forestall the mortgage foreclosure process? What the hell have the wizards in Washington been doing via HAMP and through Freddie and Fannie for the last 18 months? The simple fact is our policy makers have done everything in their power to inhibit the markets from working. Now, all of a sudden, they become proponents of free market principles? Were we born yesterday? Not here at Sense on Cents.

I have continually harangued our Washington politicos for not allowing the housing market to clear, and highlighted how forestalling that process would only prolong our economic pain. We’re feeling that pain now and will be for the foreseeable future.

2. Where are we going with this moratorium?

Do the banks, mortgage servicers, and originators run significant  litigation risks for improperly foreclosing on selected mortgages? Perhaps, BUT I personally believe the smokescreen created by this process is a precursor to having Uncle Sam impose mortgage principal forgiveness as the price for settling the potential legal fiasco of improper mortgage foreclosures. Am I being overly cynical, if not outright conspiratorial, in my line of reasoning? The fact is I believe the White House has always wanted to write down mortgage principal as the mechanism to support housing. Does crafting principal forgiveness as the ‘settlement’ for alleged improprieties by the aforementioned mortgage originators become a convenient way to subvert the courts on the issue of contract law? I am not an attorney, but my gut instincts tell me we are headed in this direction. Who gets hurt under this scenario? Mortgage investors who hold the mortgages which will have some form of principal forgiven. On that note, let’s navigate further.

3. The imposition of principal forgiveness may actually be less expensive for banks and servicers than addressing the real root problem behind many mortgages. What is that problem? The fact that a lot of mortgages in our nation today were fraudulently underwritten from point of origination and were then fraudulently conveyed via mortgage securitizations. A handful of investors (including some FHLBS and Freddie/Fannie) have pursued legal actions to have these frauds unearthed and adjudicated in their favor. How would that work? The banks and originators would have to purchase the fraudulently underwritten mortgages back at par. That cost would be enormous. Forgiving principal on an original fraud will not necessarily cure the problem, BUT it does become a means of buying time or ‘kicking the can down the road.’ That, my friends, is all we have been doing for the last few years anyway, so why stop now?

In less polite terms, Wall Street and Washington have been and continue to be hard at work to continue to disguise the massive Ponzi scheme that was our nation’s economy. The moratorium on foreclosures may seem like the principals are trying to be good citizens. I view it in a decidedly different light. The principals on Wall Street and their cronies in Washington are looking for a means to write off the stranglehold of massive mortgage debt that continues to cripple our economy. These developments are merely the next leg in the great financial experiment playing out on our national stage and economic landscape.

Navigate accordingly.

Thoughts, comments, color, constructive criticisms always appreciated.

Larry Doyle

Related Sense on Cents Commentary
Sense on Cents/Mortgage Foreclosures

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I have no affiliation or business interest with any entity referenced in this commentary. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • fred

    With writedowns and workouts all but assured, please tell me why the Fed is buying $billions of mtg securities at par and sticking it on the tab of the taxpayer?

    LD, there’s no way it’s (indirectly) being used to pay banker bonuses, is there?

  • LD

    Well, the Obama economic program has all been about redistribution. The fact is Wall Street is once again projecting another record year of bonus payments. The channels of redistribution would seem to be running both ways, with neither benefiting ordinary Americans.

    • fred

      LD, On a more positive note, have you noticed which countries planning, technology and emergency personel are being used to save the trapped Chilean minors?

      • LD

        I have seen reference to some Americans involved in this effort but I have not seen the entire operation designated as American. Is that in fact the case?

        • fred

          I can’t be certain, but I do know that “made in the U.S.A.” is playing a prominent role.

  • Dan

    Bloomberg is reporting,

    “Since this issue affects people’s homes and has clear economic implications, this probe and its outcome need to be fair both to homeowners and also to lenders,” Miller said.

    The group’s initial goals include stopping improper foreclosures, reviewing past and present practices by mortgage servicers, evaluating potential remedies and establishing a mechanism for more effective independent monitoring of future mortgage foreclosure practices, Miller’s office said in its statement.

    “These are starting points, and it’s possible this group may limit, expand or change its objective,” Miller said.

    “This is not simply about a glitch in paperwork,” he said. “It’s also about some companies violating the law and many people losing their homes.”

    No mention of impact on investors.

  • Bruce

    Maybe it is time for another PPIP plan to keep the game of musical chairs going? That plan worked so well the last time, why can’t we ramp it up again.

    OK, boys and girls, we will start the music in a minute.

    What a joke…

  • Matt

    Larry –

    Thank you very much for the synopsis and your commentary. Just the thought of a government bailout of delinquent and/or upside down homeowners is very stomach churning. Do you think we will see widespread lawsuits from MBS holders/investors such as pension funds that sue the major banks because they were sold fraudulent MBS?


    • LD


      I have asked that very question of many market participants. The consistenet response has been that the pension funds, money managers, insurance companies et al can not truly afford to sue the banks. When I say afford it is not that they can not underwrite the actual expense BUT that they can not afford to jeopardise their relationships with the few liquidity providers left. This reality is another result of the oligopoly on Wall Street.

      Amazing stuff.

      • Matt

        WOW Larry – are you kidding me? WOW – that is shocking and unbelievable. So the major banks are above the law because of the current oligopoly they have? Basically the pension funds all just have to bend over and take it up the — from Wall Street banks? Wall Street banks are basically saying “Yea, we screwed you over. What are you going to do about it?” That really reinforces to me Larry that we all really do have to “navigate accordingly” as you say when it comes to anything that these banks have to do with.

        • LD


          The fact is in the few lawsuits that have been filed the Wall Street banks have pointed to the exceptionally small print buried deep in the body of the prospectus that says that investors are responsible for performing their own due diligence and that the banks can not necessarily represent the creditworthiness of the underlying loans.

          This is not the language verbatim BUT there are words to this effect.

          Not unlike many ARS cases, judges often have ruled CAVEAT EMPTOR…

          Why don’t people trust Wall Street? Well when those who structure deals and transactions utilize this sort of chicanery, would you trust them? The fact is there are many very good people on Wall Street but management is so driven by the bottom line and the lawyers know how to draft protective covenants that largely protect the institutions at the expense of investors.

          As a result, now people are choosing not to play the game.

          Wall Street is reaping what they sowed.

          Hope you are doing well.

  • divvytrader

    look at who banks hired to do the foreclosures ….and now they seem only too eager to abandon their employer and become state evidence gfor the 50 AG’s that are gonna sue …. oh , and LD …… you catch that leetle JPM blurb late today on them abandoning the MERS system ? thats a smoking gun that all the reps and warrantiers in all the CDO’s that got sold just went out the window and look for the guys who bought this crap to see an excuse to sue their asses off

  • divvytrader

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