• News
  • Celebrities
  • Finance
  • Crypto
  • Travel
  • Entertainment
  • Health
  • Others

Too big to fail rears its head again


A foreclosed home in Winchester, Va. (Jay Mallin/ZUMA Press)

Yesterday, Wall Street giant J.P. Morgan Chase announced a $4.4 billion profit in the third quarter. Wall Street analysts should have cheered. Instead, they golf-clapped, while the bank’s chief executive officer, Jamie Dimon, went on the defensive on an earnings call.

[Economy1] The reason: foreclosures, again threatening everything from homeowners’ security to banks’ bottom lines. In early September, an employee of GMAC Mortgage admitted he had signed as many as 10,000 affidavits, required in 23 states to proceed with foreclosure, a month. The affidavits attested that the employee had personal knowledge of homeowners’ financials before the bank foreclosed. Given that he obviously did not, the paperwork might have constituted fraud and the foreclosures were possibly illegal.

The scandal went big, embroiling mortgage-holding banks like J.P. Morgan Chase in a problem of possibly systemic proportions. Stories of banks lacking required title documentation and evicting the wrong families from homes flooded into the press. Financial companies, including J.P. Morgan Chase, halted foreclosures in the states that require judicial review, and then some halted them everywhere. Members of Congress announced hearings. Finally, yesterday, all 50 state attorneys general announced a probe into systemic problems with mortgage documentation.

On the J.P. Morgan Chase earnings call, Dimon promised that there was “almost no chance we made a mistake” with foreclosures. “We think we should continue and get done and make sure we do the right things for the consumers, the investors and the country. So it obviously will increase our cost a little bit and maybe we’ll have to pay penalties eventually to some of the attorneys general but we really think we should just continue.”

But the financial statement itself proved the lie. The bank said it was carefully checking 115,000 mortgage affidavits. It set aside a whopping $1.3 billion for legal costs. And it put an extra $1 billion into a now $3 billion fund for buying back bunk mortgages and mortgage products.

For banks like J.P. Morgan Chase, the issue is not just the legal headaches. It is the financial blowback. The mortgage-documentation scandal, housing experts warn, runs far and deep — involving not just foreclosure papers, but titles and rights and fiduciary contracts. And it has analysts on Wall Street and politicians on the Hill wondering whether the worst-case scenario might involve not just losses, but bank failures or government bailouts.

The pending mortgage problems resemble those that caused the failure of Lehman Brothers, the credit crunch and the ensuing financial crisis in October 2008: Every bank has problematic mortgage holdings on its books, and each bank is interconnected with every other. Before the bubble burst, investment banks bought up faulty mortgages, many of them subprime loans, from lending banks. Investment banks then bundled the mortgages into mortgage-backed securities, for sale to investors. But just as banks are now foreclosing without proper documentation, they were bundling mortgages without proper documentation — abdicating their fiduciary responsibility to investors and muddying the waters as to who actually owns the loans.

That means the investors who own mortgage-backed securities might argue that the products do not meet the contract standards. If those investors choose to sue the originating investment banks en masse, for breach of contract, they would force the banks to buy back the rotten mortgage-backed securities. That would cost in the hundreds of billions — swamping banks’ profits and sweeping away any cash they might be keeping on hand.

At least one mortgage analyst, Josh Rosner, a managing director at Graham Fisher & Co., has said that if investors force banks to take back the $1.3 trillion of mortgage-backed securities in question, it could create a kind of doomsday scenario pitching the markets back into crisis. Indeed, Rosner believes it could feel very much like 2008 again.

“This is poetic justice,” says Janet Tavakoli, of Tavakoli Structured Finance in Chicago. “The mortgages that seem to be most affected are by predatory lenders, or lenders who engaged in fraudulent practices, like appraising a home for twice its value. The careless investment banks were willing to overlook that fraud. But they just bred fraud into their mortgage-backed securities.”

She does not believe every bank will have face write-downs due to mortgage buy-backs. But she does believe the losses might be substantial. “It’s not clear to me that every mortgage has this problem,” she says. “But there’s no transparency on this issue now. And it is clear that we are dealing with massive, systemic fraud.”

One way or another, some on the Hill are bracing for the worst.

“[Banks will] have to buy back one mortgage at a time,” Rep. Brad Miller (D-N.C.) told The Washington Post. “Someone said there might be a second round of bank insolvencies because of this and there might need to be more TARP. There is no chance that Congress would pass more TARP. It’s hard even to see how it ends. But I’ve got to think it creates more uncertainty about the health of the banks.”

Rep. Alan Grayson (D-Fla.) has gone further, proactively asking the Financial Stability Oversight Council — created by the Dodd-Frank financial regulatory reform law — to step in to stop foreclosures and monitor the banks, just in case.

“There are now trillions of dollars of securitizations of these loans in the hands of investors,” Grayson wrote in a letter (PDF) to the Council, which includes Treasury Secretary Timothy Geithner and Federal Deposit Insurance Corp. Chair Sheila Bair. “The trusts holding these loans are in a legal gray area, as the mortgage titles were never officially transferred to the trusts. The result of this is foreclosure fraud on a massive scale, including foreclosures on people without mortgages or who are on time with their payments. The liability here for the major banks is potentially enormous, and can lead to a systemic risk.”

And it seems the banks — if not J.P. Morgan Chase — are also acknowledging that risk. Josh Levin, an analyst with Citigroup Global Markets, described three potential outcomes to investors, citing work by Georgetown law professor Adam Levitin. The first is that courts consider the erroneous foreclosures technicalities, and the losses are minimal. The second is that banks face significant legislation, but ultimately aren’t forced to buy back mortgage-backed securities.

And the third? “In the worst-case scenario,” he said, “the aforementioned issues become a ‘systemic problem’ which causes the mortgage market to grind to a halt.”

Discussion & Comments (0)

    Recent Articles

    • Things You Should Know about North America

      Things You Should Know about North America

      Get to know more about North America.

    • Eurovision 2010 Paula Seling Unpredictable Contest

      Eurovision 2010 Paula Seling Unpredictable Contest

      Paula Seling's experience on the Eurovision stage led her to declare that "Eurovision is an unpredictable contest". Which may explain the success of the young Lena from Germany, about whom the predictions before the event did not offer much chances for victory.

    • VIPRow.me - The Best Sports Streaming Website Today

      VIPRow.me - The Best Sports Streaming Website Today

      Have you ever contemplated creating a user-friendly site dedicated to sports-related free live streaming channels?

    • Learn How To Download, Install, And Use The Xnxubd 2022 Frame App

      Learn How To Download, Install, And Use The Xnxubd 2022 Frame App

      XNXUBD 2022 Nvidia users are able to watch thousands of videos and other contents online. XNXUBD 2022 Nvidia New is a piece of software that enables people to watch videos online without having to pay for memberships. On a graphics card, the XNXubd also provides some of the best gaming and virtual reality experiences.

    • Xvideostudio Video Editor Apk Free Download For Pc Full Version In 2022

      Xvideostudio Video Editor Apk Free Download For Pc Full Version In 2022

      A new edition of the Video Editor Apk for xVideostudio.Video Studio has all the latest features, including support for multiple video download formats in HD, FHD, and even 4K resolutions.

    • 9 Best Lotion For Masturbation - Popular Choice For 2022

      9 Best Lotion For Masturbation - Popular Choice For 2022

      Masturbation is a common activity for men and women. It's a natural and risk-free way to explore your body, experience pleasure, and release sexual tension.

    • Reasons Why You Need To Stop Watching Movies From Sflix

      Reasons Why You Need To Stop Watching Movies From Sflix

      Without having to sign up or pay anything, you can watch movies online for free with SFlix. It has more than 10,000 movies and television shows.

    • Coi Leray Mom And Dad's Family History & Wife, Explained

      Coi Leray Mom And Dad's Family History & Wife, Explained

      Coi Leray Collins (born May 11, 1997) is a rapper from the United States. Leray started publishing songs to SoundCloud in 2014, and in 2018 she released her breakthrough track "Huddy" as well as her first mixtape, Everythingcoz.

    • Listen And Download Music On MyFreeMP3 For Free

      Listen And Download Music On MyFreeMP3 For Free

      Are you in a bind and looking for a place to obtain free mp3 songs? Never again will you need to bother, since this article has everything necessary to obtain your solution. Download free music from MyfreeMP3.com, one of the world's most popular websites.