There is Only One Way Out of the Foreclosure Crisis

We're the fish.

The giant "too big to fail" banks are the bird. They've got their talons in the American consumer and the economy.

The only way out for us - the fish - is if someone "shoots" the bird ... or at least captures it and removes its talons from our hide.

In other words: Unless the mega-banks are broken up and reined in, we're in quite a pickle.

As I've previously noted, virtually all leading independent economists have said that the too big to fails must be broken up, or the economy won't be able to recover, and that smaller banks actually lend more into the economy than the mega-banks (and see this).

Unless we break up the mega-banks:

• Competition will remain impaired, there will be less loans extended to Main Street and larger banker bonuses, our debt problem will worsen, markets will be rigged and derivatives will never be reined in

• Unemployment will keep rising

• The big banks will continue to dominate American politics, destroying any chance of restoring a representative form of government

And now there's the foreclosure crisis.

You've probably heard about it. Even Jon Stewart is talking about it:

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Foreclosure Crisis
www.thedailyshow.com
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We're in a tough spot, alright.

As Yves Smith notes:

The problems facing deals where the notes were not properly conveyed (which we think are pervasive) are not easily remedied. As we have discussed, the “fixes” for the note conflict both with the provisions of the pooling and servicing agreement and New York Trust law.

And as Diana Olick notes:

A source of mine pointed me to a recent conference call Citigroup had with investors/clients. It featured Adam Levitin, a Georgetown University Law professor who specializes in, among many other financial regulatory issues, mortgage finance. Levitin says the documentation problems involved in the mortgage mess have the potential "to cloud title on not just foreclosed mortgages but on performing mortgages."

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With the chain of documentation now in question, and trustee ownership in question, here is one legal scenario, according to Prof. Levitin:

The mortgage is still owed, but there's going to be a problem figuring out who actually holds the mortgage, and they would be the ones bringing the foreclosure. You have a trust that has been getting payments from borrowers for years that it has no right to receive. So you might see borrowers suing the trusts saying give me my money back, you're stealing my money. You're going to then have trusts that don't have any assets that have been issuing securities that say they're backed by a whole bunch of assets, and you're going to have investors suing the trustees for failing to inspect the collateral files, which the trustees say they're going to do, and you're going to have trustees suing the securitization sponsors for violating their representations and warrantees about what they were transferring.

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Josh Rosner, of Graham-Fisher, put the following out in a note today, claiming violations of pooling and servicing agreements on mortgages could dwarf the Lehman weekend:

Nearly all Pooling and Servicing Agreements require that “On the Closing Date, the Purchaser will assign to the Trustee pursuant to the Pooling and Servicing Agreement all of its right, title and interest in and to the Mortgage Loans and its rights under this Agreement (to the extent set forth in Section 15), and the Trustee shall succeed to such right, title and interest in and to the Mortgage Loans and the Purchaser's rights under this Agreement (to the extent set forth in Section 15)”. Also, an Assignment of Mortgage must accompany each note and this almost never happens.

We believe nearly every single loan transferred was transferred to the Trust in “blank” name. That is to say the actual loans were apparently not, as of either the cut-off or closing dates, assigned to the Trust as required by the PSA.

Rather than continue to fight for the “put-back” of individual loans the investors may be able to sue for and argue that the “true sale” was never achieved.

Quite the can of worms. Anyone who says that the banks will fix all this in a few months is seriously delusional.

While there are short-term solutions, breaking up the giant banks is the only way out for the economy long term.

As Congressman Grayson wrote to Geithner, Bernanke, the SEC, FDIC, and the rest of the financial overseers:

The liability here for the major banks is potentially enormous, and can lead to a systemic risk. Fortunately, the Dodd-Frank financial reform legislation includes a resolution process for these banks.

The Dodd-Frank legislation is the recently-passed "financial reform legislation" that lets regulators force insolvent banks - no matter how big - into bankruptcy.

As economist Robert Kuttner notes:

The Dodd-Frank Act (PDF) gives the Treasury the tools to do an honest accounting of the big banks, and shut down or break up zombie banks that are insolvent -- so that successor banks can get on with the business of lending. With a serious strategy for both the banks and the mortgage mess, we could remove two of the main drags on the economy.

Banking analyst Chris Whalen wrote on Thursday:

The U.S. banking industry is entering a new period of crisis where operating costs are rising dramatically due to foreclosures and defaults. We are less than ¼ of the way through the foreclosure process.

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The largest U.S. banks remain insolvent and must continue to shrink. Failure by the Obama Administration to restructure the largest banks during 2007‐2009 period only means that this process is going to occur over next three to five years –whether we like it or not.

The issue is recognizing existing losses ‐‐ not if a loss occurred. Impending operational collapse of some of the largest U.S. banks will serve as the catalyst for re‐creation of RFC‐type liquidation vehicle(s) to handle the operational task of finally deflating the subprime bubble.

He also said that the next three to six months is when things are going to get out of control, and agrees that Dodd-Frank legislation - the "financial reform legislation" that lets regulators force insolvent international banks into bankruptcy - may be used to restructure banks:


Similarly, Janet Tavakoli says:

This is the biggest fraud in the history of the capital markets.

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When we had the financial crisis, the first thing the banks did was run to Congress and ask for accounting relief. They asked to be able to avoid pricing this stuff at the price where people would buy them. So no one can tell you the size of the hole in these balance sheets. We’ve thrown a lot of money at it. TARP was just the tip of the iceberg. We’ve given them guarantees on debts, low-cost funding from the Fed. But a lot of these mortgages just cannot be saved. Had we acknowledged this problem in 2005, we could’ve cleaned it up for a few hundred billion dollars. But we didn’t. Banks were lying and committing fraud, and our regulators were covering them and so a bad problem has become a hellacious one.

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In order to make the financial system healthy, we need to recognize the extent of our losses and begin facing the fraud. Then the market will be trustworthy again and people will start to participate.

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This can be done with a resolution trust corporation, the way we cleaned up the S&Ls.

And Ellen Brown points out:

Karl Denninger ... writes:

Those who bought MBS from institutions that improperly securitized this paper can and should sue the securitizers to well beyond the orbit of Mars... [I]f this bankrupts one or more large banking institutions, so be it. We now have "resolution authority," let's see it used.

The resolution authority Denninger is referring to is in the new Banking Reform Bill, which gives federal regulators the power and responsibility to break up big banks when they pose a "grave risk" to the financial system - which is what we have here.

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Financial analyst Marshall Auerback ... writes:

Most major banks are insolvent and cannot (and should not) be saved. The best approach is something like a banking holiday for the largest 19 banks and shadow banks in which institutions are closed for a relatively brief period. Supervisors move in to assess problems. It is essential that all big banks be examined during the "holiday" to uncover claims on one another. It is highly likely that supervisors will find that several trillions of dollars of bad assets will turn out to be claims big financial institutions have on one another (that is exactly what was found when AIG was examined--which is why the government bail-out of AIG led to side payments to the big banks and shadow banks)... By taking over and resolving the biggest 19 banks and netting claims, the collateral damage in the form of losses for other banks and shadow banks will be relatively small.

What we need to avoid at all costs is "TARP II" - another bank bailout by the taxpayers. No bank is too big to fail. The giant banks can be broken up and replaced with a network of publicly-owned banks and community banks, which could do a substantially better job of serving consumers and businesses than Wall Street is doing now.

Either the giant banks' talons are removed from us, or the economy is not going to make it.

For details on the foreclosure crisis, see this, this, this and this.