Okay, even if you don't glue your eyeballs to all the geek/nerd sites like I do, you know that housing started to go to hell in 2007... and went really bad in 2008... and you know about Lehman Brothers, and the actual "ohnosecond" our Federal Reserve, Treasury, and overall administration had when it looked like our TBTF's (too big to fail's) looked to "sneeze, and give the world a cold". More like pneumonia, or MRSA, but either way, the PTB (powers that be) got mighty cold feet.
There are many, many programs in place at this point to "help" Americans stay in their homes... HAMP comes to mind, though it is plagued with problems. What it boils down to is this: the big banks were up to their ears in leverage. When some of that leverage - NINE PERCENT of subprime loans, to be exact, at the start of this mess - started to go bad, a lot of dominos started to fall:
Consider this scenario: you own a Cadillac Seville. It's in great shape; it's a honey. You decide you will sell it to your friend, Joe. Joe's a nice enough guy, and you're pretty sure Joe can make the payments and make it all work. You give Joe a two year note on the car; you give him the keys. He drives off, and you won't hear from him for 30 days, when you expect a payment.
After Joe's gone, you get cold feet. What if he doesn't pay? You call up your friendly OTC (over-the-counter) CDS broker (that's Credit Default Swap) and you say, I'm not sure about Joe... my car's worth... say, $25,000.00 - even though you just sold it to Joe for $15,000.00 - can you get me a policy just in case Joe gets hit by a truck or something?
Sure he can... and for a small premium, you're now insured in case... whatever. You sleep easy. Life is good. Meanwhile, Joe's been on the phone to his auto insurance agency... he calls in, says, "I just bought this Caddy, for $15,000.00; I'm gonna need comprehensive for a couple years till I pay it off, can you help me?" Sure, for a premium. Done and done, and that Caddy is now insured for $40,000.00, depending on outcome. That's a lot, but let's put another wrinkle into the plan:
You buy a house for $100k. So do 10 other folks, we'll assume the same lender for ease of math. There's a hunger out there for debt instruments; I'll get to that in another post. Assuming that, you, the broker, have $1Million in loans you can easily offload, but how? Why, what safer investment than loan service on a house? Nobody ever defaults on a house! Jeez! So, I, the broker, bundle up these 10 loans, and I've created the first ever MBS (Mortgage Backed Security), and off I go... oh, I get a little cream off the top, but basically, it's "Guaranteed" income for the investor! What could be easier?
Except, as the investor, I'm not so sure that Moody's, Fitch, Standard & Poor's have read all the documents... so I call up my friendly OTC dealer, and I buy a Credit Default Swap as insurance... so now that $1 Million is insured, cuz I might have exaggerated a "leetle bit", for maybe $1.5 million... and on, and on, and on...
So, now you can see how an asset might become over-invested enough to cause a mere 9% default rate to create pure havoc in the money markets. Back in 2007, the first court case of its kind, originating in Baltimore, gave birth to the "show me the note" defense. When you've sliced and diced a thousand mortgages, in progressive tranches, to a hundred different investor groups, who actually HOLDS the note on your house?
So, "show me the note" becomes a more resounding refrain in the states that (there are 23 - sound familiar, Ally (GMAC), BOA, JPM?) require an actual court proceeding to foreclose. The three above-mentioned companies have instituted self-prescribed moratoria on foreclosures, for the nonce. Unfortunately for every OTHER servicing agency seeking foreclosure, two states have already BANNED foreclosures outright (Connecticut and Texas as of this morning, with many others soon to follow, according to my geek sources). California's on this train, as well, with Jerry Brown leading the way...
As of today, the rumors have started about a Federal Moratorium on foreclosures... here's why this is important, and there are two outcomes that I can see...
1. IF the Federal government institutes a ban on foreclosures for the short-term future - which will have to be extended and renewed lest the TBTF's actually have to use MTM - that's Mark to Market, which was suspended during the 2008 crisis - you may very well be looking at the mother of all class wars in America's future... think of it this way: you pay your mortgage, taxes, insurance, the whole bit. They guy next door has a brand new H3 in the driveway, and hasn't made a mortgage payment in 2 years, and no one is coming after him... would that make you a leeeeeetle mad?
2. The "Law of Diminishing Returns" takes hold, and there's no profit in it for the banks or servicers (a major one of which is the Federal Government) of the loans to come get the house... what does that do for Mark to Market? It trashes it, that's what! Now that asset, marked at $250k, that's really worth $100k, has come to light, and you - the bank - are stuck with capitalizing the difference for the sake of safety, and instead of flushing a bunch of bad debt out of the system, it bites you in your "I was gonna get a $25 million bonus this year, now I'm f###ed" rear end. Bank failures abound, and we're back to the TBTF's threatening to collapse. Welcome back to 2008, everyone.
Well, around my ass to get to my elbow: yesterday, Huffington Post posted an article about title insurance - you'll need it to get a mortgage, you'll want it if you're a cash buyer - and the big players: Old Republic, National, Stuart, et. al., are opting out, especially on foreclosed or short-sold properties. The only other option, prior to closing, is to go to court, file for what's called "quiet title", and wait (and pay; it's your dime, and it's expensive). Hope for the best. Never mind that this action is KILLING the title insurance companies' business model, they're not stupid... if they're already exposed in the area, and underwriting is down, why in the world would they up their exposure?
I see this as a shot across the bow of the TBTF's... I'll keep you posted as to how they respond to this action, and the consequences for you, the homeowner/homebuyer.
Brutal Truth
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