See Capital Account's interview of Dr Lan T Pham here. The article below was originally posted on the Options21 website in 2010 (here).
Confidence in the US system of real estate property rights is collapsing rapidly. Mortgage applications for new US purchases declined by 7 per cent in the week ending 23 October, 2010, after a decline of 8.5 per cent in the preceding week. [AH] People have stopped applying for mortgages. No one can really be sure any longer of who legally owns which real estate in the US. [DR, especially from 8:30] Property titles can no longer be trusted. [HC] It is no longer possible to be sure whether vendors possess legal title over properties for sale after foreclosure.
Some banks have no reliable record of ownership of mortgages over properties. One home had two foreclosure suits brought against it - by two separate banks, because the banks themselves did not know who had title to the mortgage. [AG, 1:45] Legally required documentation relating to mortgage and property ownership does not exist. Some banks have acted fraudulently to forge non-existent paperwork required to foreclose. In at least one case a major bank wrongly foreclosed on a property which had been paid for with cash. [AG] [HJB] The owner lost the home even though no mortgage existed. Banks are failing to account properly for individuals’ mortgage repayments and wrongfully evicting people, unable to prove ownership of property. [DR]
Turning Lead into Gold
Banks aggregated sub-prime and “NINJA” (no income, no job and no assets) mortgages into “mortgage backed security” (MBS) investment products. Investment banks “sliced and diced” MBSs to create AAA rated investment products for investors around the world, from Norway to Australia, for pension funds, local governments and others. Those investment products were known as collateralized debt obligations (CDOs) and structured investment vehicles (SIVs).
Pension funds, and government and municipal agencies, are permitted only to invest in top quality investments with very high credit risk ratings. The slicing and dicing process was to rearrange and spread about the levels of risk of default to achieve high credit ratings for those investment products. Clever young business mathematicians calculated statistical risk profiles which convinced rating agencies of the very low likelihood of collective failure across an investment. Ratings agencies did not adequately fulfil their obligations in providing risk assessments of some mortgage investment products. [EG] A simplified four minute explanation of how AAA rated investments were created from sub-prime mortgages by “slicing and dicing” is available at [SL].
Mortgage documentation was not processed and registered as required by law. Legal titles and mortgage documentation became dissociated from the underlying real estate properties and mortgage owners on a very large scale, in the process of creating “mortgage backed” investment products.
Why Property Documentation Does not Exist
It is not clear why the mortgage and property title documentation was not processed and registered in accordance with law and regulations. It is possible that documentation was not properly tended to because of the statistical nature of the aggregated investment products. The investment banks knew that a certain percentage of the mortgages in the CDO investments would fail. But, they could not know in advance exactly which mortgages would fail. So maybe they thought that they could assign failed mortgages to lower grade investments after default. That meant they could not assign individual properties to individual investors. Therefore they would have to hold properties somehow indefinitely in transfer.
Another reason for failing to maintain legally required documentation might have been to save legal, registration and record keeping costs.
Or, maybe the banks were simply lax.
Moreover, the banks may have assumed that the problem would not materialise. The problem may not have become evident had the US housing price bubble not burst. The performance of the investments assumed that house prices would only continue to rise, and that the rate of foreclosures would be low.
Whatever the reason, the impaired documentation is not simply a minor matter of the banks having failed to “dot the ‘i’s and cross the ‘t’s”, as has been reported widely. The problem is far more serious, and unbelievable. Some contend that the flawed paperwork is “concealing a massive fraud”. [EB] [AG] It is not clear exactly where ownership of the individual mortgages is held.
Sixty million US properties (about 60% of US mortgages) are managed under “Mortgage Electronic Registration Systems” (MERS), an electronic system which tracks property ownership and rights. Some reports hold that ownership of many mortgages and properties has been transferred into MERS. Other reports suggest that MERS is not legally permitted to own those rights. The purpose of MERS is to track ownership, not to own. The value of questionable mortgages is potentially trillions of dollars.
The mortgage rights should have been transferred to the end investors who purchased CDOs, SIVs and other aggregated investment products. It appears rights to many mortgages and properties have not been legally assigned to those end investors.
By definition MERS is paperless. Many US states require real paper property documentation. Hence banks’ requirement to fabricate documentation for foreclosure.
The banks have used “foreclosure mills” to create and to “robo-sign” large quantities of missing or non-existent documents needed to initiate foreclosure on hundreds of thousands of homes. [AG] [EB] The creation of false legal documentation, the forging of signatures, and the illegal back-dating of documentation means that no property buyer in the US can safely offer to buy real estate. A systematised method exists for banks to generate fraudulent documentation. [AG, 5:40].
MERS and the banks are being sued. [USDC] [EPPH] [KS] The Bank of America (BoA) has suspended foreclosures in all 50 US states, including those states which do not have strict paper documentation requirements. That the BoA has suspended foreclosures in states which do not have stringent documentation requirements indicates that something is more wrong than minor paperwork.
The consequences are serious, and, because of US financial dominance, threaten the global financial system.
The US real estate market is likely to further deteriorate, rapidly, and for a long time. Real estate sales will seize up. It will probably take many years of legal dispute to identify who are the rightful owners of properties, including those purchased as a result of foreclosure. Japanese real estate has experienced deflation for two decades, without losing trust in their system of property rights.
Some very big US banks may go bankrupt. Investors are suing banks to make good on their mortgage backed investments, or to buy them back. Bank balance sheet assets may not fully exist.
Interbank lending will continue to be difficult, as banks mistrust one another on mutual suspicion that all have acted in similarly risky fashion. [NM]
The problem may drive banks to adopt even more financially and legally risky practices in desperation to survive. Banks perpetuate the problem and persist in risky practice by again repackaging distressed mortgage bonds to somehow regain high investment grade ratings. [MWDM]
The political climate is unripe for further bank bailouts by the US government, after trillions of dollars worth of financial institution bail out so far. The bail outs so far, and the notion that the larger banks are “too big to be allowed to fail”, seem to have eliminated the banks’ fear of failure, and aversion to risk. This is contrary to the principles of free enterprise, ironic for the USA.
Many banks are already in very poor financial shape since being permitted to mark asset values “to model” (theoretical or fictional prices) instead of “to market” (real prices). Regulators such as the Financial Accounting Standards Board (FASB) should not have relaxed accounting standards in response to the global financial crisis, and they should have required assets to be valued at market prices, the prices at which foreclosed houses can be sold at in reality.
Credit might further seize up. Property rights and credit are fundamental to the US financial system and economy. Credit relies upon trust in the system of property ownership. The inability to trust property titles makes it difficult for lenders to lend and borrowers to borrow. US economic recovery is now even more difficult and will take longer.
US pension funds will lose money, as the value of mortgage related investments plummet. Potential buyers of those investments will probably now be very scarce. US retirees will retire poorer than expected.
The US taxpayer will lose, again. Many mortgage backed investments have been bought by US government agencies.
There might be widespread social upheaval and personal cost, with political consequences. US property rights appear to be approaching those of undeveloped nations in which property ownership, rights, theft and confiscation are arbitrary, unjust and unpredictable.
As foreseen in 2008 [NM], it is probably not a good time to invest in US retail banks, investment banks, and financial insurers. And for those considering investing in ‘bargain’ US real estate, it is probably still not a good time to be buying US real estate.
[AG] Alan Grayson, “Fraud Factories, MERS, LPS, Forgeries: Rep. Alan Grayson Explains the Foreclosure Fraud Crisis“, YouTube, Sep 30, 2010, http://www.youtube.com/watch?v=ruEeuskrAE0&feature=player_embedded
[AH] Anthony Hughes, “Yes there are bargains but there’s also a fear that worse is yet to come”, p22-23, Australian Financial Review, Oct 23-24, 2010.
[DR] Dylan Ratigan, “Fighting Fraudclosure: Fed-Up Families Are Fighting Back“, YouTube, Oct 14, 2010, http://www.youtube.com/watch?v=1EF1sPx2Ni8&feature=player_embedded#!
[EB] Ellen Brown, “Foreclosuregate”, The Web of Debt, Oct 7, 2010, http://www.webofdebt.com/articles/foreclosuregate.php
[EG] Emmanual Goldstein, “Foreclosuregate - Originated from Rampant "Control Fraud"? “, YouTube, Oct 17 2010, http://www.youtube.com/watch?v=O3JTPzW3xmg&feature=player_embedded#!
[EPPH] Edvard Pettersson and Patricia Hurtado, “Goldman Sachs Sued Over German Bank's $37 Million Loss on CDO“, Bloomberg, Oct 5, 2010, http://www.bloomberg.com/news/2010-10-04/goldman-sachs-tcw-sued-by-landesbank-over-37-million-in-losses-from-cdo.html
[GH] Greg Hunter, “Could Foreclosure Fraud Cause Another Banking Meltdown?“, USA Watchdog, Oct 4, 2010, http://usawatchdog.com/could-foreclosure-fraud-cause-another-banking-meltdown/
[GL] Gonzalo Lira, “The Second Leg Down of America’s Death Spiral“ Oct 12, 2010, http://gonzalolira.blogspot.com/2010/10/second-leg-down-of-americas-death.html
[GSR] Goldseek.com Radio http://radio.goldseek.com/
[HC] Helen Chernikoff, “U.S. foreclosure mess chills investors, clouds market”, Reuters, Oct 18, 2010, http://www.reuters.com/article/idUSTRE69J6AX20101022
[HJB] Harriet Johnson Brackey, “Lauderdale man's home sold out from under him in foreclosure mistake“,Sun Sentinel, Sep 23, 2010, http://articles.sun-sentinel.com/2010-09-23/business/fl-wrongful-foreclosure-0922-20100921_1_foreclosure-defense-attorney-foreclosure-case-jumana-bauwens
[JS] Jim Sinclair’s Mineset http://jsmineset.com/
[KS] Kenneth Shortgen Jr., “Class action lawsuit against the MERS system for mortgage holding”, Examiner.com, Oct 14, 2010, http://www.examiner.com/finance-examiner-in-national/class-action-lawsuit-against-the-mers-system-for-mortgage-holding
[MWDM] Miles Weiss and David Mildenberg, “Bank of America Re-Remics Cut Mortgage Debt as Basel Rules Loom”, Bloomberg, Oct 14, 2010, http://www.bloomberg.com/news/2010-10-14/bank-of-america-re-remics-reduce-mortgage-debt-as-basel-capital-rules-loom.html
[NM] Nils Marchant, “A Fundamental Overview of the US Financial Sector”, July, 2008, http://options21.com/2008/07/a-fundamental-overview-of-the-us-financial-sector/
[SL] Steve Liesman, “Subprine Derivatives”, YouTube, Oct 17, 2010, http://www.youtube.com/watch?v=0YNyn1XGyWg
[USDC] Class Action Complaint, http://www.scribd.com/doc/38654717/Class-Action-vs-Mortgage-Electronic-Registration-Systems-Gmac-Deutsche-Bank-Nation-Star-Aurora-Bac-Citi-Us-Bank-Lps-Et-Al