Financial

Foreclosure-Gate

If you work in the mortgage industry or for a title insurer, you might not want to make any plans for the next six months.  Foreclosure-Gate is about to explode.  It is being alleged that many prominent mortgage lenders have been using materially flawed paperwork to evict homeowners.  Apparently officials at quite a few of these firms have been signing thousands upon thousands of foreclosure documents without even looking at them.  In addition, it is being alleged that much of the documentation for these mortgages that are being foreclosed upon is either “improper” or is actually “missing”.  As lawyers start to smell blood in the water, lawsuits challenging these foreclosures have already started springing up from coast to coast.  In fact, some are already calling Foreclosure-Gate the biggest fraud in the history of the capital markets.  JPMorgan Chase, Ally Bank’s GMAC Mortgage and PNC Financial have all suspended foreclosures in the 23 U.S. states where foreclosures must be approved by a judge.  Bank of America has actually suspended foreclosures in all 50 states.  Now, law enforcement authorities from coast to coast are calling for investigations into this controversy and it could be years before this thing gets unraveled.

This thing just seems to escalate with each passing day.  It is being reported that the attorneys general of up to 40 U.S. states will be working together on a joint investigation into this foreclosure crisis.  Lawmakers in both houses of the U.S. Congress, including Nancy Pelosi and Christopher Dodd, have called for an investigation to begin on the national level.  U.S. Attorney General Eric Holder said last week that he is looking into the issue.  Things are certainly getting very serious out there.  Never before has there ever been such a national focus on foreclosure paperwork.

But apparently there are good reasons for such scrutiny….

*One GMAC Mortgage official admitted during a December 2009 deposition that his team of 13 people signed approximately 10,000 foreclosure documents a month without reading them.

*One Bank of America employee confessed during a Massachusetts bankruptcy case that she signed up to 8,000 foreclosure documents a month and typically did not look them over “because of the volume”.

But the “robo-signing” aspect of Foreclosure-Gate is just the tip of the iceberg.  Apparently there is a whole lot more going on than just a bunch of bad signatures. 

Peter J. Henning, a professor at Wayne State University Law School in Detroit, was recently quoted by MSNBC as saying the following about Foreclosure-Gate….

“You’ve got so many potential avenues of liability. You don’t even know the parameters of this yet.”

The sad truth is that potentially millions of foreclosures across the United States could potentially be invalid because the securitization process has muddied the chain of ownership.  In fact, an increasing number of judges from coast to coast have been ruling that the “owners” of the mortgage have no right to foreclose on a property because they lack clear title.

At the core of this title controversy is MERS – Mortgage Electronic Registration Systems.  MERS is based in Reston, Virginia and it was created by the mortgage industry to enable that big financial firms to securitize and swap mortgages at high speed.  MERS allowed these big financial firms to largely avoid the hassle of filling out more forms and submitting new filing fees every time that a mortgage was traded.

But now MERS is facing some very serious legal challenges.  A recent article in Businessweek described the situation this way….

A lawsuit filed on September 28th in federal court in Louisville on behalf of all Kentucky homeowners claims that MERS was part of a conspiracy to create false promissory notes, affidavits, and mortgage assignments to be used in mortgage foreclosures. Similar class actions have been filed on behalf of homeowners in Florida and New York. Karmela Lejarde, a MERS spokeswoman, declined to comment on any pending litigation.

The reality is that as millions of U.S. mortgages have been bunched together and traded around the globe at lightning speed, it has become increasingly unclear who actually has title to them and who actually has the right to foreclose on these properties.

Title insurers have backed the titles of millions of these foreclosed properties and now potentially find themselves in a heap of trouble.  Some of the biggest title insurers have already begun circling the wagons in an attempt at damage control.  For example, one of the biggest title insurance companies in the United States, Old Republic National Title Insurance, has already declared that it will no longer write new policies for homes that have been foreclosed on by JPMorgan Chase and GMAC Mortgage.

So what happens if nearly all title insurers start avoiding foreclosed properties? 

Won’t that make it much more difficult for the banks to sell the massive backlog of foreclosed properties that they have accumulated?

In addition, Americans that have purchased foreclosed homes may now be facing some serious problems themselves.  Millions of Americans may now “own” homes that they do not have clear title for.  When it comes times to sell those homes, many Americans may find themselves unable to do so. 

Needless to say, this is a complete and total mess.

Already, U.S. banks have a record number of foreclosed properties that they need to clear out, and now all of this scrutiny on foreclosure paperwork and all of these lawsuits are going to grind the process of getting these homes sold off to a standstill.

In fact, the true legacy of Foreclosure-Gate may be the massive amount of bank failures that it causes.

It would be difficult to understate how much of a nightmare Foreclosure-Gate is going to be for U.S. mortgage lenders.  Having to go back through the paperwork of millions of old mortgages is going to be a complete and total disaster.  If banks end up being unable to foreclose on a large number of bad mortgages, it could potentially be enough to put many banks out of commission for good.  Not only that, but the legal fees that many of these banks will accumulate defending lawsuits related to Foreclosure-Gate will be astronomical.

The U.S. mortgage industry was already on the verge of death, and Foreclosure-Gate may just be the straw that broke the camel’s back.

The reality is that U.S. banks are drowning in foreclosures and this current crisis is just going to make things a lot worse.  Back in 2005, there were approximately 100,000 home repossessions in the United States.  In 2009, there were approximately 1 million home repossessions in the U.S. and RealtyTrac is now projecting that there will be an all-time record of 1.2 million home repossessions in the United States this year.

For the U.S. mortgage industry, Foreclosure-Gate must feel like someone has dropped a bomb on them after they have already been beaten up and doused with gasoline.

Attorney Richard Kessler, who recently conducted a study that found serious errors in approximately three-fourths of court filings related to home repossessions, says that Foreclosure-Gate could haunt the U.S. mortgage industry for the next ten years….

“Defective documentation has created millions of blighted titles that will plague the nation for the next decade.”

While it may be easy to beat up U.S. mortgage lenders and say that they deserve all this, let us not forget that this is going to impact a whole lot of other people too.

It is going to become much harder to get a mortgage.  It is going to become much harder to buy a home.  It is going to become much harder to sell a home.  The U.S. housing industry is likely to suffer a significant downturn due to all of this.  There is even a good chance that the entire U.S. economy could be dragged down for an extended period of time.

So no, Foreclosure-Gate is not good news for anyone. 

Well, except maybe for lawyers. 

But for virtually everyone else this is really bad news.  Any hope that the U.S. housing industry would experience a quick recovery is completely and totally gone.

The Horrific Derivatives Bubble That Could One Day Destroy The Entire World Financial System

Today there is a horrific derivatives bubble that threatens to destroy not only the U.S. economy but the entire world financial system as well, but unfortunately the vast majority of people do not understand it.  When you say the word “derivatives” to most Americans, they have no idea what you are talking about.  In fact, even most members of the U.S. Congress don’t really seem to understand them.  But you don’t have to get into all the technicalities to understand the bigger picture.  Basically, derivatives are financial instruments whose value depends upon or is derived from the price of something else.  A derivative has no underlying value of its own.  It is essentially a side bet.  Originally, derivatives were mostly used to hedge risk and to offset the possibility of taking losses.  But today it has gone way, way beyond that.  Today the world financial system has become a gigantic casino where insanely large bets are made on anything and everything that you can possibly imagine. 

The derivatives market is almost entirely unregulated and in recent years it has ballooned to such enormous proportions that it is almost hard to believe.  Today, the worldwide derivatives market is approximately 20 times the size of the entire global economy.

Because derivatives are so unregulated, nobody knows for certain exactly what the total value of all the derivatives worldwide is, but low estimates put it around 600 trillion dollars and high estimates put it at around 1.5 quadrillion dollars. 

Do you know how large one quadrillion is?

Counting at one dollar per second, it would take 32 million years to count to one quadrillion.

If you want to attempt it, you might want to get started right now.

To put that in perspective, the gross domestic product of the United States is only about 14 trillion dollars.

In fact, the total market cap of all major global stock markets is only about 30 trillion dollars.

So when you are talking about 1.5 quadrillion dollars, you are talking about an amount of money that is almost inconceivable.

So what is going to happen when this insanely large derivatives bubble pops?

Well, the truth is that the danger that we face from derivatives is so great that Warren Buffet has called them “financial weapons of mass destruction”.

Unfortunately, he is not exaggerating.

It would be hard to understate the financial devastation that we could potentially be facing. 

A number of years back, French President Jacques Chirac referred to derivatives as “financial AIDS”.

The reality is that when this bubble pops there won’t be enough money in the entire world to fix it.

But ignorance is bliss, and most people simply do not understand these complex financial instruments enough to be worried about them.

Unfortunately, just because most of us do not understand the danger does not mean that the danger has been eliminated.

In a recent column, Dr. Jerome Corsi of WorldNetDaily noted that even many institutional investors have gotten sucked into investing in derivatives without even understanding the incredible risk they were facing….

A key problem with derivatives is that in the attempt to reduce costs or prevent losses, institutional investors typically accepted complex risks that carried little-understood liabilities widely disproportionate to any potential savings the derivatives contract may have initially obtained.

The hedge-fund and derivatives markets are so highly complex and technical that even many top economists and investment-banking professionals don’t fully understand them.

Moreover, both the hedge-fund and the derivatives markets are almost totally unregulated, either by the U.S. government or by any other government worldwide.

Most Americans don’t realize it, but derivatives played a major role in the financial crisis of 2007 and 2008.

Do you remember how AIG was constantly in the news for a while there?

Well, they weren’t in financial trouble because they had written a bunch of bad insurance policies.

What had happened is that a subsidiary of AIG had lost more than $18 billion on Credit Default Swaps (derivatives) it had written, and additional losses from derivatives were on the way which could have caused the complete collapse of the insurance giant.

So the U.S. government stepped in and bailed them out – all at U.S. taxpayer expense of course.

But the AIG incident was actually quite small compared to what could be coming.  The derivatives market has become so monolithic that even a relatively minor imbalance in the global economy could set off a chain reaction that would have devastating consequences. 

In his recent article on derivatives, Webster Tarpley described the central role that derivatives now play in our financial system….

Far from being some arcane or marginal activity, financial derivatives have come to represent the principal business of the financier oligarchy in Wall Street, the City of London, Frankfurt, and other money centers. A concerted effort has been made by politicians and the news media to hide and camouflage the central role played by derivative speculation in the economic disasters of recent years. Journalists and public relations types have done everything possible to avoid even mentioning derivatives, coining phrases like “toxic assets,” “exotic instruments,” and – most notably – “troubled assets,” as in Troubled Assets Relief Program or TARP, aka the monstrous $800 billion bailout of Wall Street speculators which was enacted in October 2008 with the support of Bush, Henry Paulson, John McCain, Sarah Palin, and the Obama Democrats.

But wasn’t the financial reform law that Congress just passed supposed to fix all this?

Well, the truth is that you simply cannot “fix” a 1.5 quadrillion dollar problem, but yes, the financial reform law was supposed to put some new restrictions on derivatives.

And initially, there were some somewhat significant reforms contained in the bill.  But after the vast horde of Wall Street lobbyists in Washington got done doing their thing, the derivatives reforms were almost completely and totally neutered.

So the rampant casino gambling continues and everybody on Wall Street is happy.

For now.

One day some event will happen which will cause a sudden shift in world financial markets and trillions of dollars of losses in derivatives will create a tsunami that will bring the entire house of cards down.

All of the money in the world will not be enough to bail out the financial system when that day arrives.

The truth is that we should have never allowed world financial markets to become a giant casino. 

But we did.

Soon enough we will all pay the price, and when that disastrous day comes, most Americans will still not understand what is happening.

Look What Surprises They Snuck Into The Financial Reform Bill

Even just a decade ago, major pieces of legislation in the U.S. Congress would be just a few dozen pages long.  But today, it seems like every time Congress passes an important bill it ends up being over a thousand pages long.  In fact, the final version of the new financial reform law was over 2,300 pages.  Overall, as we wrote about extensively in a previous article, this much-ballyhooed new law does a whole lot of nothing, but it turns out that lobbyists and special interests were able to insert a few nasty surprises that we are just now finding out about.  But it was the same thing with the health care reform law.  It was only after it was passed that most of us learned that it contained a provision that will force U.S. small businesses to collectively produce millions more 1099 tax forms each year.  Now small businesses from coast to coast are screaming bloody murder about that provision but it is too late – the law has already passed.  Unfortunately, there are some surprises in the recently passed financial reform law that are nearly just as bad.

So just what are those surprises?

Well, first let’s talk about what the financial reform law does not do.  The financial reform bill was supposed to “fix” Wall Street and the financial system, but it did not do much of anything….        

-It does nothing to address the problems with Fannie Mae and Freddie Mac.

-It does not eliminate “too big to fail”.

-It does absolutely nothing to eliminate the horrific bubble in the derivatives market.

-It does nothing to reform the organization most responsible for the recent financial crisis – the Federal Reserve.  In fact, this new law actually gives the Federal Reserve even more power.

But it does create a ton of new paperwork and a bunch of new government organizations.

Oh goody!

But was there any major law that Congress has passed over the last several years that did not increase the size and scope of government?

That is a good question.

In any event, let’s get to some of the nasty surprises contained in the new financial reform law….

*Barack Obama has been running around touting how this new law will “increase transparency” in the financial world, but it turns out that a little-noticed provision of the new law exempts the Securities and Exchange Commission from virtually all requests for information by the public, including those filed under the Freedom of Information Act.

Not that the SEC was doing much good anyway.

But now the SEC’s incompetence and the nefarious actions of those they are investigating will be hidden from public view.

So what makes the SEC so special that they get to block the public from seeing their records while other government agencies still have to comply with FOIA?

Talk about ridiculous.

But there is actually another little surprise contained in the new law that is even more nasty….

*Another little-noticed section deeply embedded in the financial reform law actually gives the federal government the authority to terminate government contracts with any “financial firm” that fails to ensure the “fair inclusion” of women and minorities in its workforce.

This section of the law, written by U.S. Representative Maxine Waters, is 1,261 words long and it establishes “Offices of Minority and Women Inclusion” in the Treasury Department, the Federal Reserve, the Securities and Exchange Commission and more than a dozen other finance-related agencies.

The directors of these new departments are tasked with developing standards that “ensure, to the maximum extent possible, the fair inclusion and utilization of minorities, women, and minority-owned and women-owned businesses in all business and activities of the agency at all levels, including in procurement, insurance, and all types of contracts.”

The maximum extent possible?

That sounds pretty strong.

 So what kind of firms does this section apply to?

Well, according to Politico, this section is going to apply to just about anyone who has anything to do with the financial industry….

This applies to “services of any kind,” including investment firms, mortgage banking firms, asset management firms, brokers, dealers, underwriters, accountants, consultants and law firms, the legislation states. Every contractor and subcontractor must now certify that their workforces reflect a “fair inclusion” of women and minorities.

The truth is that this small section of the law represents a fundamental change in employment law in the United States.

And it is written so vaguely that firms are going to be tempted to go above and beyond in complying with it just so they are safe.  In fact, many analysts are already saying that it could lead to an unofficial quota system.

In any event, hundreds of new federal government bureaucrats will be watching to make certain that these vague new regulations are fully implemented.

*It also looks like the new financial reform law is going to end the era of free checking accounts.

Why?

Well, it turns out that the new law really limits the amount of fees that banks can charge and the way that they charge them.

So banks have got to make their money somewhere.  Wells Fargo and Bank of America have already announced new fees on checking accounts, and other banks are expected to follow their lead shortly.

What a mess.

Can’t Congress do anything right these days?

At this point Congress is so incompetent that if they would just sit there and do nothing that would be a vast improvement.

But that isn’t going to happen.

So what do you all think about this new financial reform law?  Feel free to leave a comment with your opinion below….

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