Following the Foreclosure Money

[william the wie]

With at least three major agents, GMAC/Ally, Morgan Chase and BOA, halting foreclosures some questions arise:

Who owns the most senior tranches of the mortgages involved? Purportedly Far Eastern Sovereign Wealth Funds and EU insurance companies and pension funds but no one knows for sure because of the CDO E N problem. CDSs made possible CDOs squared, cubed and who knows how high.

Why did this happen now? A CDO to the nth means that the income received by a bond holder is actually a CDS premium that returns nothing at foreclosure. That means a lot of unhappy bondholders are in for an extremely rude awakening come foreclosure time. So the agents may have deliberately lost paperwork and turned themselves in to avoid both bankruptcy and prison time. Owing full foreclosure yields to multiple recipients is fraud if they can't be paid. (I went over this with a lawyer I know to double check. If the house is sold, refinanced, paid off or the paperwork is inadequate for foreclosure no one goes to jail but successful foreclosure can lead to all sorts of unpleasant consequences for the agent. But loss of title simply means taking the principle paid to the bondholder minus the compound interest it has been accumulating and paying off the CDS.)

Why only 23 states? Best guess, these are the states with the most stringent real estate laws.

What about lawsuits for negligence? It depends on the state but since European and Far Eastern financial institutions would be the major plaintiffs and the legal fees are generally prohibitive it looks like most of the mortgage mess has been exported. Nolo contendre pleas and similar ploys can clear up the internal mess but the foreign mess is about to get huge.

This could set off a trade war.

 

[loosecannon]

I will have to brush up on the technicalities but my understanding was that CDO's were bundles of collateralized debt(mortgages), whereas CDS were pure synthetic derivatives which could be duplicated infinitely based on underlying assets, including but not limited to CDOs.

Is that correct?

So who does own these and how will it effect them, really? It seems like the net effect is just to slow the whole financial sector dealing with rebundled mortgages to a halt while costly, tedious work is done to straighten out the paperwork.

This may kill all future interest in CDOs and mortgage securities. Which might even be a good thing. Esp the synthetic markets which were really scams.

 

[loosecannon]

Why only 23 states? Best guess, these are the states with the most stringent real estate laws.

It turns out that only 23 states require a court order to foreclose on a default mortgage. Which is itself a troubling nuance. 27 states suffer the same lack of due diligence but apparently don't have a recourse to address it.

 

[loosecannon]

oh shit!

A major title insurance company has stopped insuring homes foreclosed by JPMorgan Chase, another sign that the controversy over the legal practices of the big lenders is starting to influence the housing market.

The company, Old Republic National Title Insurance, told its agents Friday that it would not write policies on foreclosed Chase properties until “the objectionable issues have been resolved,” according to a memorandum sent out by the firm’s underwriting department.

A Chase spokesman declined to comment. Old Republic executives did not return calls for comment. The title insurer, which is based in Minneapolis, said earlier in the week that it would not write policies for properties that had been foreclosed by another big lender, GMAC Mortgage.

http://www.nytimes.com/2010/10/03/business/economy/03foreclose.html?src=busln

 

[william the wie]

I will have to brush up on the technicalities but my understanding was that CDO's were bundles of collateralized debt(mortgages), whereas CDS were pure synthetic derivatives which could be duplicated infinitely based on underlying assets, including but not limited to CDOs.

Is that correct?

for primary CDOs yes but not higher order CDOs. All the money for a primary CDO is accounted for therefore the only money to fund the annuity on a CDO squared or cubed came from CDS premiums.

So who does own these and how will it effect them, really? It seems like the net effect is just to slow the whole financial sector dealing with rebundled mortgages to a halt while costly, tedious work is done to straighten out the paperwork.

This may kill all future interest in CDOs and mortgage securities. Which might even be a good thing. Esp the synthetic markets which were really scams.

I have to confess to some embarassment. When I was explaining CDOs squared to Jim, my lawyer friend, he pointed out this problem. Because of currency swaps (A way of preventing fluctuations in say Yen returns on a dollar denominated annuity funded by a Euro denominated CDS) the accounting is quite complicated. Everyone was betting on low or no defaults in which case the return of collateral as everything unwinds is covered. But with defaults the lack of notes and deeds become a serious problem. The CDS issuers, a lot of whom were in Dussledorf, might not understand that they have issued insurance to a Singapore broker on a mortgage bundle straight out of Compton but instead thought they were buying mortgage money.

 

[william the wie]

Why only 23 states? Best guess, these are the states with the most stringent real estate laws.

It turns out that only 23 states require a court order to foreclose on a default mortgage. Which is itself a troubling nuance. 27 states suffer the same lack of due diligence but apparently don't have a recourse to address it.

OOh! As I gaze into my crystal I see many lawyers worldwide getting rich.

 

[loosecannon]

I see the caped crusader (Obama) brewing up some illegal "solution" that delights the unions and the left while letting everybody important off the hook. Bend the law, break the law, make a whore out of the law. Whatever the prez does is legal!

Meanwhile a LOT of people get to stay in their homes free.

Those 27 states should pitch a bloody fit, maybe heads will roll.

 

[william the wie]

I see the caped crusader (Obama) brewing up some illegal "solution" that delights the unions and the left while letting everybody important off the hook. Bend the law, break the law, make a whore out of the law. Whatever the prez does is legal!

Meanwhile a LOT of people get to stay in their homes free.

Those 27 states should pitch a bloody fit, maybe heads will roll.

I doubt Obama will touch this mess with a ten foot pole. The Fed with its total disregard for the law created this mess. The state and federal courts are going to take the Fed behind the woodshed on this one. Paulson, Geithner and Bernancke are unlikely to do time for contempt at least in federal court but the wings of the two still in office are likely to be severely clipped publicly and with extreme prejudice. And Geithner can claim federal privilege to stay out of state jails but if Bernancke gets high and mighty the supremes can and just might rule that as the federally appointed head of a private company he is not exempt. Should be interesting to watch if nothing else.