Helen & Harry Highwater's cranky weblog of news and opinion.
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"News that's not known, or not known enough." Helen & Harry Highwater's cranky weblog of news and opinion. |
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Who owns your mortgage? by Marie K. Still wondering about all of those "illiquid assets" and the foreclosed homes too, I found some more interesting articles. I've also discovered that I've probably been too "classic" in my
These two 2007 articles help to explain the situation: (1) Foreclosure-proof homes? Mortgage-backed securities have made many homes legal and financial mazes that put ultimate ownership in limbo and (2) Judge's ruling may slow foreclosures nationwide. Both articles cover the same story. On Oct. 31, 2007 there was an important ruling by a US District Court judge in Cleveland, Ohio. He "tossed out 14 foreclosure cases." A German bank was suing to repossess the properties, but the judge declared that they didn't actually own them. The bank said they had securities, mortgage-backed securities (MBS), linked to the mortgage loans on the properties. The judge said that a "security backed by a mortgage is not the same as a mortgage." In other words, he said that "homeowners can't be foreclosed unless loan owners actually go to court." Perhaps this decision indicates why Merkel & Sarkozy are pointing to the need for stronger regulation in the US. What happens these days is that the actual lenders can sell their loans to "issuers" who package them to create MBSs. Thus, the banks can replenish their capital with the money they get from these sales and make more loans. SO, it seems that those credit default swaps (CDSs) have been related to these MBSs that are sold to investors worldwide. The judge rightly noted that the original lenders, whose names still appeared in the official records, were NOT the ones now in court. In other words, the official records said nothing about the German bank. As article (2) points out, the banking "system changed with the development of the 'secondary' [their derivatives] market." It also indicates that Fannie Mae and Freddie Mac got into this market by buying up local loans that met certain standards and by packaging them. So MBSs that "conformed" to their requirements were called "conforming" mortgages, and "since Fannie Mae and Freddie Mac were 'government-sponsored enterprises' that could borrow directly from the US Treasury" many investors viewed MBSs as risk-free. So where did Fannie Mae and Freddie Mac go wrong? What bankrupted them? They weren't packaging sub-prime loans -- or were they? What about all of those CDSs related to MBSs -- did Fannie and Freddie get heavily involved in them? What about the CDSs related to the conservatorships/"credit events" of Fannie and Freddie themselves? Then, "Wall Street firms got into the act and began accepting loans that did not [NOT] meet conforming loan standards," and they created their own MBSs based on "non-traditional" loans. I assume this means these were the sub-prime loans -- was packaging them criminal behavior/lack of regulation? What the owners of MBSs get is "the interest from the mortgage payments and a return of their capital when the loan is sold, paid off or foreclosed." So why did that German bank want to repossess those homes if it got paid off? OR, didn't it get paid off? As for the judge's decision, it "could be stayed or over-turned by higher courts. It may have no standing in other districts. It could also be voided with new laws from Congress." You can COUNT ON Congress to do their worst. Article (2) also says that if the decision "spreads to other districts and courtrooms, then issuers will have to tie specific loans to particular [MBSs]." This would enable this info. to be added to the official records. Of course, we have another "super-structure" that seems totally UNNECESSARY to me -- more waving money around. Their supposed usefulness as article (1) gloats over is that MBSs "enable lenders to spread the risk so one institution isn't on the hook when a few people can't make their monthly payments." Geez, what is the risk here when the bank (lender) can repossess the houses? Article (1), the LA TIMES, also says that MBSs have "been a boon for Americans." Their logic -- "by reducing the risk of writing mortgages, lenders have been encouraged to offer more loans." I'd have to say that the lenders got greedy, but NOT just from those sub-prime loans. More importantly, it seems to me, there have been those huge loans to the derivative people -- does providing them amount to criminal behavior/lack of regulation? Article (1) also describes how the number of mortgage securities have increased along with their "complexity." So now we have such things as "pass-through securities," "collateralized mortgage obligation securities," and "stripped mortgage securities." They involve payments of varying sorts depending on the package -- packages that seem more and more likely to be risky. The article says that "mortgage-related securities account for nearly a quarter of today's total US bond market, more than any other debt sector, including Treasuries and corporate bonds." Also, the article notes that Ohio judges have thrown out 50 more foreclosure cases and that by 2009 there could be as many as 2 million foreclosures. It also sees MBSs as "far too valuable to banks, investors, and homeowners for the entire class to be legislated out of business." I beg to differ -- DUMP THEM. The solution offered is that "the structure of these securities needs to be re-examined so investors can get a clearer understanding of what they're buying." So, what are they going to do -- designate particular rooms in the house to all of the different "investors"? There is this question, too -- what good are investors who don't invest in something that actually produces something? Finally and importantly article (1) offers this advice for homeowners in trouble -- "you might want to do a little digging and see who actually owns your home. ... [I]t may turn out to be no-one." Actually, as is pretty clear, the story does NOT end here. There are all of those questions above that are still unanswered. By the way, just what DOES "stronger regulation" involve? Marie K. PERMANENT LINK
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