Friday, October 1, 2010

Mortgage Market Breakdown

The fraudulent practices and obscene degradation of underwriting practices that metastisized during the mortgage markets during the Housing Bubble powered by the delusional positive mood from 2002 - 2008 are unraveling, just as mood is unraveling:

Foreclosures Slow as Document Flaws Emerge
The foreclosure machinery that has forced millions of Americans out of their homes is beginning to seize up as some lenders and their lawyers are accused of cutting corners in their pursuit of rapid home repossessions...

...[O]ne of the major title insurance companies, Old Republic National Title, has sent a bulletin to agents saying that “until further notice” it would not insure title to properties foreclosed upon by GMAC Mortgage, the country’s fourth-largest home lender and one of the two big lenders at the center of the current controversy.

GMAC declined to comment, and Old Republic representatives did not return calls.

GMAC has acknowledged legal missteps in processing mortgages, and JPMorgan Chase has acknowledged the possibility of missteps, and both have suspended all foreclosures in the 23 states where they need a court’s approval. That’s 56,000 in the case of Chase alone; GMAC declined to provide a number...

If title insurance dries up and stays that way, we will have ourselves one hell of a trainwreck on our hands.

Bull Market Heroes get eaten by the Bear. The stock market. Warren Buffett his ownself. Computers. Now Housing (back for another round in the meatgrinder). Note the common thread - fraud and corruption leading to mistrust and the breakdown of the complex systems that are founded on trust and an assumption that the rule of law is in force and that the playing field is level. This Great Bear market will trash the concept of trust, gut the happy unicorns of the belief that "the authorities are not corrupt" and blacken the rainbows of naive gullibility in "modern" underwriting practices.

This is almost as sadly funny as the report the SEC just released, blaming the flash crash on Waddell & Reed for selling a block of 75,000 e-minis. They need to have a coupon for a bottle of Crown Royal on the front of that report, so that anyone reading it can get tanked before getting to far in - that is the only way you could possibly believe the story the SEC is telling there.

These are signs of a schizophrenic system. Crazy systems, like crazy people, can be dangerous to those in the general area. Be aware.


David said...

Can you imagine a sharper dagger to point at that bastion of middle class wealth, the single family home? [Also pointed, obviously, at the banking system in general.]

If as seems prudent title insurance companies wisely eschew exposing their businesses to future court battles over actual ownership of properties caught up in the securitization maelstrom and its foreclosure-debacle aftermath, a huge percentage of properties could see (once again) a massive discount applied to their value.

Denninger has blogged at length about this. It looks like lots of properties that went into MBS no longer have clear title histories. When we add it into the EW forecast for banking system impairment, we see (what I think is) the main mechanism by which banks will inevitably fail en masse.

We knew it had to happen, we just didn't know (until now) the specific mechanism by which it would occur.

Flagg707 said...

I'm with you on this. Even though this should only affect a small number of titles, the cloud this is going to cast over the entire residential property market will be vast. This will also gum up the works in getting the inventory overhang worked off via foreclosures.

Just another brick in the wall.

David said...

Regarding the scope of this debacle, I may be reading too much into it, but I get the impression that it could metastasize into tainting nearly ever mortgage that was bundled and split into MBS tranches. The whole idea of splitting ownership across separate MBS's strikes me as irreconcilable with clear title transfers (which require County Recorder involvement at EVERY assignment, or so I'd think).

I guess we'll see how it plays out, but if this is what we see this close to the Top, what will it look like half way to the bottom?

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