American banks can't foreclose on houses

[basilio]

The last few days have seen all American states stop property foreclosures by financial institutions. Short story is the processes of recording loans properly, keeping the paperwork right and finally foreclosing on delinquent loans have been shown to be hopelessly mismanaged.

The consequences could be catastrophic for the banks profitability. Unfortunately that would have the obvious impact on the rest of the American economy and of course the knock on effects for Australia and the rest of the world.

There are a couple of good stories which outline what has happened. Worth a read.

http://www.nytimes.com/2010/10/15/business/15maine.html?pagewanted=1&ref=general&src=me
Details how this mess was brought to the public's attention and how long it has been happening

http://www.nytimes.com/2010/10/15/opinion/15krugman.html?src=ISMR_AP_LO_MST_FB
Bigger picture story. What the implications could be.

 

[basilio]

Follow up on this story. It has become clear that the investment banks that packaged and onsold the millions of rotten property loans to other investors were well aware of the failures in the documentation.In fact they specifically hired a company to examine the loans to make sure they were credit worthy.

And this is where it becomes very interesting. Seems like when they discovered the errors they didn't throw them back to the originators but simply ignored them.(but they did squeeze the loan originators for a discount for relieving them of their dodgy deeds..)

Let's remember who bought these poisonous packages. The pension funds, local authorities, superannuation funds all the bodies that invest our savings for our future into supposedly gilt edged, housing backed securities.

And do you know what is even more interesting? The company that analyzed these loans offered to make it's information available to the 3 ratings agencies that rubber stamped these securities. Their offer was rebuffed because the agencies did not want to lose the business of the big investment houses who were marketing these loans.

I like to reopen Sing Sing, repopulate it with most of these miscreants and throw away the keys..

http://opinionator.blogs.nytimes.com/2010/10/14/how-wall-street-hid-its-mortgage-mess/

Part of the hearing focused on the role that Clayton Holdings, a firm that reviews loan files on behalf of investment banks, played in the mortgage securitization process by which one home mortgage after another got packaged up into mortgage-backed securities by Wall Street and sold to investors all over the world. The banks hired Clayton to do some forensics — to examine the mortgages that went into the securities and determine if they complied with some basic level of credit underwriting guidelines and “client risk tolerances,” as well as with state and local laws. If a loan met the underwriting “guidelines,” Clayton would rate the loan “Event 1”; other ratings meant that the loan did not meet the guidelines, with varying degrees of flaws.

According to Vicki Beal, a senior vice president at Clayton who testified at the Sacramento hearing, one of the main services Wall Street paid Clayton for was a detailed examination of the loans that deviate “from seller underwriting guidelines and client tolerances.”

This is where things got interesting. Clayton provided the inquiry commission with documents that summarized its findings for the six quarters between January 2006 and June 2007, when mortgage-underwriting standards were arguably at their worst and the housing bubble was inflating rapidly. Of the 911,039 mortgages Clayton examined for its Wall Street clients — a sample of about 10 percent of the total mortgages that the banks intended to package into securities — only 54 percent were found to meet the underwriting guidelines. Standards deteriorated over time, with only 47 percent of the mortgages Clayton examined meeting the guidelines by the second quarter of 2007.

So, did Wall Street throw all those mortgages back into the pond as being too risky for securities they were going to sell to clients? Of course not — many were packaged right into their product. There were degrees of nefariousness: Some Wall Street firms were better about including higher-quality mortgages in their mortgage-backed securities than others. For instance, at Goldman Sachs, 77 percent of the nearly 112,000 mortgages reviewed met the guidelines, while at Citigroup only 58 percent did. At Lehman Brothers, which later filed for bankruptcy, 74 percent of the mortgages sampled and then packaged up as securities met underwriting guidelines.

In fact, the banks probably weren’t disappointed at all by the shaky status of many of these loans: in part because they could use the information that some of the mortgages were rotten to get a discount from the mortgage originators on the price paid for the entire portfolio. The people who should have been concerned were the investors who bought the securities from the Wall Street firms. But the amazing revelation of the Sacramento hearing was that the investment banks did not pass this very valuable information on to their customers.

“Investors were not given sufficient information to make the decisions that they needed to make to see if they were going to buy these securities,” testified Kurt Eggert, a professor at Chapman University School of Law in Orange, Calif. “They should have been given loan-level detail for every pool for which securities were issued. Current loan-level detail, not what was true weeks ago or a month ago. Instead, they got vague, boilerplate language about ‘underwriting,’ and that there were ‘substantial exceptions,’ whatever that means. They should have gotten the due diligence reports that we just heard described. Those reports existed. The exceptions were described and defined. Why weren’t investors given that information which was in the hands of the people that were selling the securities? Why weren’t they given the underwriting reports by the originators who knew what exceptions were given and why?”

These are very good questions. And while we await the Financial Crisis Inquiry Commission’s answers, the good news is that the news media have begun to pick up on the outrageous behavior its hearing revealed. The Times’ Gretchen Morgenson reported on that Clayton Holdings had in fact offered to make its data available to the three ratings agencies that rated mortgage-backed securities, but that each rejected Clayton’s offer. It seems they feared that if they revealed the flaws in the underwriting of the mortgages, they would lose other business from the investment banks that put the mortgage-backed securities together.

On Monday, Eliot Spitzer, the former New York governor turned talk-show host, called the inquiry commission’s revelations “fraud, plain and simple,” and said there is “a basis without any question for the most rigorous examination” of why Wall Street failed to disclose this valuable information to investors. His guest on CNN’s “Parker Spitzer”show that night was Joshua Rosner, a managing director at Graham Fisher & Co., an independent research firm. Mr. Rosner agreed with Spitzer’s assessment and said, “This is what happens when the children are in charge.” On Wednesday, Felix Salmon, a business columnist at Reuters, wrote that “if I was one of the investors in one of these pools, I’d be inclined to sue for my money back. Prosecutors, too, are reportedly looking at these deals, and I can’t imagine they’ll like what they find.”

So far, not a soul on Wall Street has been found to be criminally liable for the practices that led to the financial crisis. But thanks, in part, to the Financial Crisis Inquiry Commission, we are getting closer than ever to the day when the culprits will pay for what they did.

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Additional article on this presentation. Far more detail.

http://www.hot-bytes.info/32762/wha...tandards-firms-sold-them-to-investors-anyway/