FedUpUSA

After wasting three hours watching the self-servicing masturbatory fantasies put forward by both the GSE and banking regulators yesterday in the “Foreclosure” hearing in The Senate’s banking committee, I have to say I’m underwhelmed – and that’s being polite.

The Washington Post, of course, had to write on this:

Speaking to the Senate Banking Committee at a hearing on the national foreclosure debacle, Fannie and Freddie executives emphasized that they are not responsible for managing payments by borrowers on home loans or foreclosing on homeowners when they default.

These tasks, executives say, are the responsibility of mortgage servicers and law firms with which the companies contract.

Right.  It’s just a matter of contract.  Of course these same enterprises don’t pull their servicing when contracts are violated, even though they have a monstrous bully position in that regard.  Nor do they take any responsibility for the bottom line when it comes to HAMP, even though they are now fully-owned government enterprises – that is, they’re under government conservatorship.

The fantasy games played yesterday in that hearing were truly amazing.  Nobody took responsibility, even though everyone was at the table – OCC, the FDIC and of course the GSEs.

The problem of course is that the inherent conflicts of interest when it comes to the banks are not being dealt with honestly.  That’s no surprise.  The banks have surmised (correctly so) that we will allow them to rob us, and they have. Repeatedly.  They have determined (again correctly) that we will not indict or shut them down even when they engage in blatantly criminal conduct such as money-laundering for drug gangs in Mexico, bid-rigging in municipal debt auctions and other similar schemes.  Oh, and let’s not forget the banks that intentionally altered international money transfer instructions to hide the fact that they were going to and from prohibited entities – yet they still have their US banking licenses.  All of this The Ticker has reported on over the last couple of years.

So it should not surprise anyone that as the desperation level increases they would reach for more and more ways to bilk people.  Indeed, as I pointed out yesterday there’s a very valid question that was raised by The Fed’s “data dump” (and which explains why they tried like hell to hide it and evade a full audit): The Fed took a hell of a lot of collateral for loans during the crisis that they valued at 10 to 20% of it’s claimed “face” value, and yet these were all taken for short-term loans – a “repo” in effect – and thus was “given back” to these banks.

WHERE ARE THOSE ASSETS NOW AND AT WHAT VALUE ARE THEY BEING CARRIED?

What we do know is this: The banks have not taken these hundreds of billions (each) of “claimed” assets and written them down by 90%.

In fact at no meaningful time during or after this crunch did the banks ever declare provisions – that is, loss reserves – amounting to these haircuts or any reasonably-defensible percentage thereof. 

The reason for this is clear: Had they done so they would have been instantaneously declared insolvent.

Unfortunately our so-called “regulators” have never answered the question to this day about what happened to those boxes of dog-crap.  Since nobody has taken and written them off it can only be presumed that they’re still on the banks’ balance sheets and being carried at some ridiculous valuation compared to how The Fed saw their worth.

One of the arguments over “mark-to-market” accounting is that an asset intended to be held to maturity shouldn’t be subject to market risk on any given day.  That may or may not be fair but once that asset is exposed to market risk by being pledged as security this argument falls apart.

That is, if you don’t like the mark that someone (including The Fed) gives you on an asset in a security pledge you might be permitted to not pledge that security, but if you do continue with the repo transaction there is no defensible argument against being forced to recognize that as the current value for book purposes, since that is a market price – thus, the argument that these are “impossible to value” has just been voided by your own voluntary act!

Everyone who wants to argue that we’re “recovering” has to answer the key question: Where are these assets and what’s the current market price?

See, I can make all sorts of “recovery” claims for an economy, or for any firm and institution within an economy, if I never have to recognize losses.  But that’s not how reality works.  Cash flow always wins, and the distortions that we’re seeing now in various market segments, including loan servicing, are blatantly about covering losses somewhere that haven’t been admitted to.

Unfortunately what this does is exactly what it did in Japan.  It serves as an excess tax yet is not funneled to government to provide social program spending, but rather is used to cover up previous frauds and schemes – to fill holes that were created and maintained by bogus accounting practices.  Since the cash flow always ultimately wins these fights the demand for such schemes increases as the cash flow deficit rises. 

Three hours yesterday were spent without one hard question being asked of these people.  The key question is in fact not about loan servicing at all – it is about the fact that there are obviously monstrous fees and costs being larded into these servicing programs that are inuring to the benefit of these banks – and they’re using that money for something. 

The question goes back to the value of these so-called “assets” and where those assets are now.

Sorry Dodd, but three hours of masturbation behind the dias did exactly nothing to bring enlightenment to this question, and further, the weasels I saw behind the witless table in the form of the FDIC and OCC, not to mention the GSE representatives, served only to further obfuscate reality.

Unfortunately for The Senate and our economy the mathematics of cash flow do not abide Senatorial whitewash endeavors.  They’re just a cold, hard calculation of the amount of cash required every month to cover all the current liabilities that must be cleared by a contemporary cash flow from somewhere.

The crisis is not over and will not be until reality is faced and the disposition of these securities is both determined and the damage from their deterioration in value admitted to and absorbed.

You have to be kidding me…..

The Federal Housing Finance Agency, which in July issued 64 subpoenas to issuers of mortgage securities, bank servicing companies and other entities, is working with Quinn Emanuel Urquhart & Sullivan LLP, a Los Angeles-based firm that specializes in business litigation, to coordinate its investigations.

Subpoenas….. why do you need to subpoena something you are supposed to already have – specifically, the original “wet signature” note, endorsed over and through to you for inclusion in the pools?

“There’s going to be much more incentive to negotiate seriously and quickly than if they had done this seven months ago, when people were blithely ignoring the fraud,” says William K. Black, a former federal bank regulator who is now an associate professor at the University of Missouri-Kansas City School of Law.

Oh darn, there’s that “F” word again.

Which fraud are we referring to this time?  Are we referring to tendering garbage loans in violation of representations and warranties (on purpose) or the larger issue – not tendering the notes at all, leaving MBS investors holding an empty box, a REMIC structure that cannot take in the paper later, and nobody with actual legal standing to foreclose?

The mortgage giants are sorting through their growing pile of delinquent loans to find sloppy or fraudulent loan underwriting that constitutes a violation of representations and warranties.

Oh, the former.

Still no comment on the latter issue, even though, once again, if you listen to the second link here at 8:25 in, you will hear two foreclosure defense lawyers tell you that they have never seen an actual properly-conveyed note.

Again – where is the damn paperwork that under State Law in about half the states, you must possess complete with all intervening endorsements, in order have an actual security interest in the property – that is, the right to foreclose?

If this is true, it’s deadly-serious.

I have here a record of a note that was open (and unpaid) during a bankruptcy. It was held by one of the big mortgage joints that was swallowed   The debt was not reconfirmed, and it was a second.

The first is underwater.  That makes the second uncollectable.  Oh sure, they can sue to foreclose, but that just throws more money after what’s already been lost: Foreclosure throws the person out of the house but you not only get nothing, you have to spend the legal funds to prosecute the foreclosure!

The reasonable expectation would be that this loan is a zero – that is, it has no actual value, as the home is worth less than the first (which was reconfirmed) and thus there is no collateral behind it. 

Now this note shows that it is owned by Fannie.

So when was it sold and more importantly, for how much?

This leads to the following questions:

• Are the banks knowingly dumping worthless paper on Fannie (and perhaps Freddie) – and if so are they fairly-disclosing the impairments?  Gee, one has to wonder why Fannie would be interested in buying a long-delinquent second with no collateral behind it.  Realistically, what’s that note worth?  Are the banks being paid anywhere near face?  Realistic recovery value?  Is this a back-door bailout of the banks that are holding hundreds of billions of worthless second lines and HELOCs?
• If Fannie is knowingly buying these notes, is that even legal?  I thought Fannie couldn’t buy impaired paper and their reps and warranties required the note be current?  Has that changed?  Since when has Fannie been an investor in distressed paper?
• If Fannie is knowingly buying these notes, what are their intentions?  Are we about to witness the jackboot of government descend on homeowners who have underwater seconds that there is no possible way for them to pay with the full force of “collections”, including perhaps some “interesting” tie-ins with Treasury?  Remember, Treasury effectively owns Fannie and Freddie now!  Are we about to see tax refund seizures and similar now – for a delinquent second mortgage?

I’m sure I’ll come up with more interesting questions, but those will do for a start.

The Market-Ticker

I ain’t taking this bet…

Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages – one in five – are underwater with negative equity of some $800 billion.

 Uh huh.  Ok, let’s do a bit of thought on this.

First, 30% of the people in this country own their homes outright – no mortgage at all.  Of the remaining homes, about 30% are underwater.

So that’s 30% of 70%, or 21% of the total.

Now subtract all those who are not paying (maybe half of the underwater loans?) and you get somewhere around 10% – perhaps 15% at best – of the homeowners.

The other 85% won’t get “helped”.

Politically, this is suicidal.  It is especially suicidal among older voters (who vote more often!) as they’re more likely to have paid-off houses (or houses where they’ve been paying for a decade or more) than younger people.  This wouldn’t help Obama and the Democrats, it would utterly decimate them both come November.  Count on it.

Second, this would trash the hedging that is currently used in the mortgage security market.  That market would become dramatically overhedged, which could lead to an instantaneous and nasty dislocation.

Third, it won’t do anything for prices – in fact, it likely would push them downward, as it would permit “clearing” of homes that currently can’t be sold (and thus do not establish a market-price mark) due to being underwater. 

Finally, where ‘ya gonna get the $800 billion?  We’re already into the bond market for $926 billion this year.  Treasury comes to market with that much again (roughly) and we might see some “interesting” effects in the Treasury market as well – none of them good either.

I don’t buy it.

Yeah, I know, Turbo Timmy allegedly “can” due to his pronouncement and capacity to take “unlimited” losses in Fannie and Freddie through the end of next year.  But he’s still constrained by Treasury’s ability to fund their activity, which means selling bonds.

Now on the back of an equity market crash (and I do mean crash – as in straight down, 25% or more) that scares the living bejeezus out of everyone and drives them into the Treasury curve?  That might give him the room to do it, but there’s a problem with that too – he’s only going to get one more bite at this apple, and I bet he wants it to go after the 401k money as a means of temporarily stabilizing government funding (for a year or two anyway.)  If he squanders that opportunity here he’d be precluded from doing it again.

This sounds like one of those rumors that people start when they smell smoke and are looking for an exit door.

The Market-Ticker