The worst excesses of the housing
market bubble and bust are coming back to haunt us. Now is the time to
prepare for another home price collapse, with fresh rounds of
“quantitative easing” sure to follow.
It would be hilarious were it not so tragic. Come to
think of it, it’s hilarious anyway. The country has not yet paid for
the idiotic shenanigans of the late great housing market bubble. The latest
debacle virtually ensures that the U.S. housing market will collapse.
“Wait a minute,” you may ask.
“Hasn’t the housing market ALREADY collapsed?”
Well, yes. But the collapse isn’t over yet.
There is another implosion coming – a crushing leg down that will
pulverize all hopes of recovery into talcum powder. And another tidal wave of
public outrage will likely come with it… all thanks to our wonderful
friends in Washington and on Wall Street.
I wish I were exaggerating here, but I’m not.
We have flat-out Disaster coming with a capital “D.” Follow along
and you’ll understand why.
To first set the stage, let’s briefly cycle
back in time to the glory days of the housing bubble…
How It All Got Started
One of the reasons the housing market bubble
inflated so fast, and so recklessly, was the rising popularity of
“mortgage-backed securities,” or MBS. The embrace of MBS enabled
Wall Street to “securitize” mortgages, bundling up giant packages
of loans and selling them to yield-hungry investors.
This phenomenon, in turn, created what George Soros
identified as “a principal-agent problem,” in which reward and
risk were completely separated.
Mortgage lenders had every incentive to lend to any
homebuyer who could fog a mirror because they were passing the buck on
repayment risk. Instead of keeping the mortgages they wrote, lenders would
pass off the loan in an MBS bundle. A big ratings agency like Moody’s
or S&P would then stamp “triple A” on this bundle, and some
gullible institutional investor would buy it for yield.
This whole process was pump-primed and kick-started
by the flood of liquidity pumped into the system via “Easy Al”
Greenspan, who dropped interest rates below 1% and kept them there for over a
year. Ben “Helicopter” Bernanke then followed in the
Maestro’s footsteps.
And of course, the entire cycle was enhanced and
reinforced by the nimrods who swore housing wasn’t in a bubble because
home prices could never go down. These people should be publicly flogged for
lack of common sense, but I digress.
Point being, at the peak of the greed frenzy, common
sense went out the window. In addition to NINJA loans – no income, no
job, no assets – you had mortgages getting
written up and bundled so fast that it was impossible for human staff to keep
up. Risk protocols and proper documentation procedures were utterly abandoned
in the mad dash for cash.
(By the way, if you’re interested on what else
I had to say about the housing market, sign up for Taipan Daily to receive my investment
commentary.)
The Ugly Truth Arises
It is only now, in the extended aftermath of a boom
turned to bust, that we are getting a handle on the rotten mechanics of the
MBS racket.
Among the big lenders there was such a frenzy to
pump out home loans, the paperwork on hundreds of thousands (millions?) of
such loans has been lost – or perhaps was never created in the first
place.
As a result of this, now that upside-down homeowners
are foreclosing left and right, the major lenders are facing up to a waking
nightmare – the
foreclosures are not legal because the paperwork is not documented.
“Bank of America is delaying foreclosures in
23 states,” the AP reports, “as it examines whether it rushed the
foreclosure process for thousands of homeowners without reading the
documents.”
Nor is it just of Bank of America. Last week, the
Office of the Comptroller of the Currency (OCC) revealed that JPMorgan is
freezing proceedings on 56,000 foreclosures – fifty-six thousand! –
due to potentially false documentation.
According to John Walsh, acting director of the OCC,
“seven of the nation’s largest lenders” are reviewing their
foreclosure procedures.
This is a serious monkey wrench in the gears –
a major-league snafu that threatens to seize up an already vulnerable housing
market.
Learning to Fight Back
Meanwhile, foreclosed homeowners like Israel Machado
are learning to fight back. As The
Wall Street Journal reports,
Israel Machado's foreclosure started out as a
routine affair. In the summer of 2008, as the economy began to soften, Mr.
Machado's pool-cleaning business suffered and like millions of other
Americans, he fell behind on his $400,000 mortgage.
But Mr. Machado's response was unlike most other
Americans'. Instead of handing his home over to the lender, IndyMac Bank FSB, he hired Ice Legal LP in nearby Royal
Palm Beach to fight the foreclosure. The law firm researched the history of
Mr. Machado's loan and found two interesting facts.
First, the affidavits IndyMac
used to file the foreclosure were signed by a so-called robo-signer
named Erica A. Johnson-Seck, who routinely signed
6,000 documents a week related to foreclosures and bankruptcy. That volume,
the court decided, meant Ms. Johnson-Seck couldn't
possibly have thoroughly reviewed the facts of Mr. Machado's case, as
required by law.
Secondly, IndyMac (now
called OneWest Bank) no longer owned the
loan—a group of investors in a securitized trust managed by Deutsche
Bank did. Determining that IndyMac didn't really
have standing to foreclose, a judge threw out the case and ordered IndyMac to pay Mr. Machado's $30,000 legal bill…
The “robo-signer”
scandal is another huge, HUGE problem for the major lenders. As related in
the piece above, robo-signers like Erica Johnson-Seck were signing off on thousands of foreclosure
documents a week – far too many to actually read.
One robo-signer reportedly
averaged ten thousand foreclosure
sign-offs per week. Generously assuming a 60-hour work week (12 hours a day),
that’s 166 documents per hour! Anyone in danger of losing their house
(or who has already lost a house) in such a process can theoretically fight
back for negligence and fraud, and possibly even recoup damages. You think a
jury will buy the speed-read defense? I
don’t.
Buyers Beware
Says Florida attorney Richard Kessler:
“Defective documentation has created millions of blighted titles that
will plague the nation for the next decade.” Kessler estimates that as
many as three-quarters of all filings related to home repossessions may
contain serious errors.
Some Pollyanna optimists have timidly advanced the
theory that this monstrous mess could be bullish for the economy, in that a
whole sea of foreclosure victims will have the ability to stay in their homes
longer, with the heavy burden of the debacle placed on the shoulders of the
lenders.
But the reality is that an inability to sort out who
owns what is the equivalent of a hundred-mile traffic jam in the mortgage and
title markets.
Let’s say a new foreclosed home comes on the
market at an attractive price. How do you buy it if you can’t be sure
the process is legal? What’s more, how do you get mortgage insurance
– typically a necessity for securing the necessary financing – if
the title company can’t be sure there is a right of legal transfer?
“It’s a nightmare scenario,” says
Professor John Vogel of the Tuck School of Business. “There are lots of
land mines related to title issues that may come to light long after we think
we’ve solved the housing problem.”
Solved the problem? Buddy, we haven’t even
wrapped our heads around the problem yet!
Credit Meltdown Redux
As observers are pointing out, there are many
parallels here to the credit meltdown that rocked financial markets in late
2008.
A big contributor to the meltdown was the crazy
profusion of risky derivatives contracts and undocumented counterparty
trading liabilities – Credit Default Swaps, CDOs and CMOs, CDOs
“squared” and the like – with the back offices of the major
players drowned in an impossible deluge of paperwork.
Think of a snarled ball of Christmas tree lights
taller than the Empire State Building. There was no easy fix for the credit
meltdown confusion that ensued, and there will be no easy fix for the same
chaos and confusion that has engulfed the functionality of ownership and
property rights as related to the U.S. housing market.
The bottom line is this: When a market jams up, the
buyers go away. The inability to track ownership adds a huge new risk premium
to the act of buying a foreclosed property. And even if there are buyers
willing and able to step up, mortgage insurance providers may find that the
title-related liabilities are too great.
Plus, on top of that, if the nation’s major
lenders are forced to eat gargantuan losses as a result of this Homerically epic screw-up, what do you think will happen
to their general risk-taking and lending capacity in other areas?
Bye-bye recovery. Hello disaster.
But Wait! It Gets Worse!
In keeping with our “so tragic it’s
comic” theme, it is worthwhile to consider how bleak the housing market
outlook already was WITHOUT the fabulous foreclosure clusterbomb.
(Feel free to substitute “bomb” with a less family-friendly
word.)
One popular measure of the housing market’s
health is the Case Shiller Index, or CS Index. The
overall message of the CS Index has not been good. In fact you could say
it’s been outright gloomy.
But analyst Reggie Middleton points out multiple
reasons why, in spite of the fact that the Case Shiller
Index is forecasting another downturn, things
are even worse than the index suggests:
Much of the foreclosure and distressed inventory
came from investors who walked away from their investment when it became cash
flow negative or sank underwater.
·
Guess what? The CS index doesn’t
capture investment properties, only owner occupied homes.
·
Guess what? The CS index doesn’t
capture multi-family housing, only single family
detached/semi-detached housing.
·
Care to hazard a guess of whether
banked-owned REOs are included in the Case Shiller
index calcuation?
·
Guess what? The Case Shiller index
has a minimum holding period to be included in the index which excludes
practically all of these investor flips, which also tend to double count
sales, when in reality only one real organic sale occurred.
Ah, the Irony
In a classic dose of irony, the horrible reality of
our jammed-up housing market may give Wall
Street short-term reason to cheer. Why? Because the economic pain that is
coming all but guarantees the Federal Reserve will be shoving its chips
“all in” for another round of “QE2” (quantitative
easing revisited).
Yes, just as has been the case for the past few
years, the violent financial bloodletting endured by homeowners and the
middle class may be ample reason for the Federal Reserve to try and juice
risk assets further, in the persistent hope of creating new windstorms to
make turkeys fly.
And thus, as I put the finishing touches on this
note to you, it is really no surprise that a glance at my trading screens
shows gold to be up a whopping $24 per ounce on the day.
The men of Washington and Wall Street are dangerous,
arrogant fools whose stupidity and greed know no bounds. If you have not been
convinced of this by now, you likely will not ever be. These men are bound
and determined to run the U.S. economy aground, like the Titanic headed
straight for an iceberg, in the pig-headed pursuit of their own short-term
interests.
Even if you keep all your money in a mattress
– or perhaps ESPECIALLY if you do that – the powers that be are
fully capable of destroying your financial life, perhaps even your ability to
keep up with the nominal cost of living, for the sake of their own backroom
gain. There are only two options now – fight back or find yourself a
victim. Steel yourself, and prepare.
Justice Litle
Taipan
Publishing Group
Justice Litle is the
Editorial Director of Taipan Publishing Group,
Editor of Justice Litle’s Macro Trader, and
Managing Editor to the free investing and trading e-letter Taipan Daily. His articles have been featured in Futures magazine, he has been quoted in The Wall Street Journal
and has even contributed regular market commentary to Reuters and Dow Jones.
Article brought to you by Taipan Publishing Group.
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