Are We on the Eve of the Next Bank Crisis?

During the height of the real estate bubble, mortgage lenders threw underwriting standards to the wind and made all kinds of irresponsible loans. Worse yet, Wall Street assisted them by packaging toxic loans into "securitized investments" and sold the poisonous investments worldwide, making a financial killing in the process - all the while displaying no apparent concern for the potential consequences when borrowers were unable to pay loans ridiculously above their financial means. Now, based on what one is seeing in foreclosure litigation, the bottom may be about to fall out yet again. Why? Because mortgage lenders attempting to foreclose on properties often don't hold the mortgage note and sometimes the notes cannot even be found due to sloppy transfers of documents. The question is one of whether there will be any real consequences for those on Wall Street who helped create the nightmare. Based on what we've seen so far, likely not and the taxpayer will be the one to get stuck holding the bag yet again. Moreover, until housing recovers, don't expect any real economic recovery. West Law News & Insight has details on the forces in motion that could take down Bank of America and other huge lenders: Here are disturbing highlights:
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An important but little-understood player in the home foreclosure process, the Mortgage Electronic Registration Systems Inc., has been buffeted by a growing number of class-action lawsuits and unfavorable court rulings, a Reuters Legal review of Westlaw data shows. In addition, according to three sources, the company is under scrutiny by state attorneys general. The legal onslaught could prove to be a new drag on the still-sputtering U.S. housing market.
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The company, known as MERS, is an electronic registry of more than 66 million mortgage loans. Created in 1995 by major banks to facilitate mortgage securitization, MERS records the transfer of deeds and promissory notes and often acts as a representative, or "nominee," for financial institutions during public auctions of foreclosed properties. Its members include the largest U.S. mortgage providers and servicers.
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Since September, lawyers have filed class-action lawsuits against MERS on behalf of homeowners in Georgia, Florida, New York and Kentucky. The lawsuits allege that MERS did not have legitimate title to the foreclosed properties, so the foreclosures were fraudulent. Besides seeking damages, many of the lawsuits are asking for court orders to vacate all foreclosures in the states where MERS was involved. And in the last six months, judges in at least six states have halted foreclosures because they found that MERS either lacked standing to be an agent for mortgage firms or had improperly transferred ownership rights.
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The legal assault on MERS casts doubt on the ownership rights of countless foreclosed properties. And because foreclosed properties represent such a significant segment of the current housing market -- a full quarter of all homes sold in the U.S. during the second quarter were in foreclosure, according to RealtyTrac -- the broader housing market is exposed. "A lot of people who have bought homes or are looking to buy homes are going to have a lot of problems because of MERS," said Alan White, an associate professor at Valparaiso University School of Law in Indiana who has written extensively about foreclosures.
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In May, Kings County, New York, Supreme Court Judge Arthur Schack ruled that MERS had improperly transferred a mortgage to HSBC, when its own records indicated the party with a right to foreclose was Wells Fargo. MERS creates a "mortgage twilight zone," Schack said, calling arguments that the foreclosure in question was legitimate "incredible, outrageous, ludicrous and disingenuous." He dismissed the foreclosure and ruled that it could not be resubmitted.
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A class-action lawsuit filed Oct. 23 in Fulton County, Ga., claims MERS has no standing to initiate foreclosure proceedings. The lawsuit seeks damages and asks the court to invalidate foreclosures in Georgia where MERS was a party. Class-action complaints filed in federal courts in New York and Florida in September make similar claims.

How Bush and the GOP Helped Stoke the Mortgage Bust

I have had a number of Republicans - many of whom are in reality the most concerned only about what they pay in taxes and to Hell with the best interests of the country - try to blame Bill Clinton, Congressional Democrats and many others for the mortgage industry collapse and accompanying credit market melt down. An article in the New York Times that I bookmarked a while back helps reveal the lack of substance of these arguments made by GOP apologists and shows that the Chimperator's policies (which were rubber stamped by the GOP controlled Congress) helped set the stage for the residential mortgage market collapse. Here are some highlights:

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The global financial system was teetering on the edge of collapse when President Bush and his economics team huddled in the Roosevelt Room of the White House for a briefing that, in the words of one participant, “scared the hell out of everybody.”

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[H]is Treasury secretary, Henry M. Paulson Jr., told him [Bush] that to stave off disaster, he would have to sign off on the biggest government bailout in history. Mr. Bush, according to several people in the room, paused for a single, stunned moment to take it all in. “How,” he wondered aloud, “did we get here?”

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There are plenty of culprits, like lenders who peddled easy credit, consumers who took on mortgages they could not afford and Wall Street chieftains who loaded up on mortgage-backed securities without regard to the risk. But the story of how we got here is partly one of Mr. Bush’s own making, according to a review of his tenure that included interviews with dozens of current and former administration officials.

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[H]is housing policies and hands-off approach to regulation encouraged lax lending standards. Mr. Bush did foresee the danger posed by Fannie Mae and Freddie Mac, the government-sponsored mortgage finance giants. . . . And the regulator Mr. Bush chose to oversee them — an old prep school buddy — pronounced the companies sound even as they headed toward insolvency.

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As early as 2006, top advisers to Mr. Bush dismissed warnings from people inside and outside the White House that housing prices were inflated and that a foreclosure crisis was looming. And when the economy deteriorated, Mr. Bush and his team misdiagnosed the reasons and scope of the downturn; . . . The result was a series of piecemeal policy prescriptions that lagged behind the escalating crisis.

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For much of the Bush presidency, the White House was preoccupied by terrorism and war; on the economic front, its pressing concerns were cutting taxes and privatizing Social Security. The housing market was a bright spot: ever-rising home values kept the economy humming, as owners drew down on their equity to buy consumer goods and pack their children off to college. *

But for much of Mr. Bush’s tenure, government statistics show, incomes for most families remained relatively stagnant while housing prices skyrocketed. That put homeownership increasingly out of reach for first-time buyers . . . . So Mr. Bush had to, in his words, “use the mighty muscle of the federal government” to meet his goal. He proposed affordable housing tax incentives. He insisted that Fannie Mae and Freddie Mac meet ambitious new goals for low-income lending. . . . And he pushed to allow first-time buyers to qualify for federally insured mortgages with no money down.

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The president also leaned on mortgage brokers and lenders to devise their own innovations. “Corporate America,” he said, “has a responsibility to work to make America a compassionate place.” And corporate America, eyeing a lucrative market, delivered in ways Mr. Bush might not have expected, with a proliferation of too-good-to-be-true teaser rates and interest-only loans that were sold to investors in a loosely regulated environment.

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Mr. Bush populated the financial system’s alphabet soup of oversight agencies with people who, like him, wanted fewer rules, not more. As for Mr. Bush’s banking regulators, they once brandished a chain saw over a 9,000-page pile of regulations as they promised to ease burdens on the industry. When states tried to use consumer protection laws to crack down on predatory lending, the comptroller of the currency blocked the effort, asserting that states had no authority over national banks.

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The bottom line is that for all the GOP efforts to blame others for the current financial crisis, they and the half-wit Chimperator are largely to blame for the crisis in which the country now finds itself.