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Denninger: ForeclosureGate

05 Oct

Yes, I’ve dubbed it: Foreclosuregate.

I’d love to tell you that I think there’s some reasonable way to get out of this.

There isn’t.

The reality of this is far worse than it appears.  Kudlow is still downplaying it, really, even though I emailed him today with the source documents of a half-dozen Tickers.  Whether they prompted him to spend the time on it tonight I’ll never know.

The real problem isn’t the foreclosures.  It’s the REMICs.

The “loose document standards” of the go-go years were all predicated on this never happening – all the way up to now.  In fact, the entire premise of the last three years of Bernanke, Geithner and everyone else’s actions in the government has been under the (false) belief that they could “re-inflate” house prices.  This would allow everyone to refinance out of the mess, and since nobody would ever see the inside of a court, nobody would be the wiser, other than a few REMIC holders who went after each other when a note was sold twice.

Instead, what we have is a nightmare.  House prices are not going to go back up.  As a direct consequence, we have an intractable problem.

The REMICs – the foundational conduits for all this paper – are to a large degree defective.  I bet some of Fannie and Freddie’s are too.  Many notes were not conveyed, and in the states where recordation is necessary, most of them weren’t recorded either. Many of these original notes are known to be sitting with the originator, never endorsed over and in some cases shipped overseas or deliberately destroyed.  For all intents and purposes they’re gone, because once the MBS closes they can’t be put in later on.

This can’t be fixed because both the offering circulars and IRS regulations set hard cut-offs for these things by which time everything has to be “in” and done.  Further, you can’t put anything in a REMIC that’s defaulted – only good paper.  So a defaulted note can’t be put in, and nothing can be put in now, as the time has lapsed.  Violate either of these and the REMIC’s tax preference is destroyed. Don’t violate it and some of the REMICs are empty boxes with, at best, naked promissory notes (legally a signature loan) and no standing to foreclose.

On Larry’s show they were calling for “emergency legislation.”  It won’t matter.  The REMIC issues are the ones you can’t fix.  If those are defective then attempting to fix it triggers tax liabilities in the hundreds of billions of dollars.  Forget that idea.

Nobody should get a free house.  But the institutions – the big banks – are the ones who did this.  They are the ones who put together these securitizations with defective (or no) assignments.  Whether “by accident” or as a ruse to hide the fact that they were selling crap while representing them as good loans and knew it doesn’t matter in the end analysis.

They effectively sold people an empty box – or one full of dead fish instead of good paper.  Now with it all blowing up the entire “robosigner” thing appears to this author to be nothing more than a ruse to avoid responsibility.

Yet another ruse, just like “mark to myth” along with ”extend and pretend.”

We must not, as a matter of public policy, allow this.  Those who perjured themselves in court or forged documents must stand before Justice and have it meted out on their heads.  If this means that a bunch of attorneys go to prison and get disbarred, so be it.

Those transactions that are legally defective must be stopped, and when possible, unwound.

The MBS holders deserve to know exactly what’s in the box they bought – not what they were sold, but what’s really in there.  If the conveyances happened then there wouldn’t be a “robosigner” problem, as the original wet ink notes would be with the Trustee and we wouldn’t need to “robosign” things and create documents that don’t exist.

Obviously, this is not the case.

All we can do is unwind the transactions and make the MBS holders whole.  Force the banks to eat their own crap.  If this results in them detonating, then resolve them using our newfound Dodd/Frank authority and the FDIC.

And while we’re at it, hold Geithner and Bernanke personally responsible for this.  They both had to know.  Bernanke and Geithner not only had to know, but Bernanke has been buying MBS.  Is there anything in those REMICs or does he have empty boxes at The Fed too?  Either way, as primary regulators over these institutions, these two must be personally held to account for gross malfeasance and dereliction of their respective offices.

This is the right way to handle this.  It preserves the rule of law and protects the myriad investors who did nothing wrong – the pension funds, the individual investors and even government entities that bought these MBS in good faith, at least to the extent we can.

At the same time it puts both the homeowner who can’t pay and the bank who originally played warehouse or originator (and who in either case is the one responsible for lending money to someone who they knew couldn’t pay) in the same room, and says to them “You’re the only two real parties at interest left, as everyone else was paid off.  You figure it out – if you want to modify the loan, forebear part of the principal, or go ahead and foreclose and resell that’s fine.  It’s up to you.”

We also need to get federal criminal involvement in that if, as it appears, these conveyances didn’t happen “en-masse” then each and every investor who purchased believing the pooling and servicing agreements was defrauded.  Those sorts of things cannot be allowed to occur without the people responsible being held to account, and there are laws that were broken.

This mess will take a long time to clear out.  But the best, proper and only way to do it is as I’ve outlined above.  For those MBS/REMIC structures where proper assignment and endorsement is documented, leave ‘em be – they’re valid, and they should be allowed to run.

But for those where there are critical violations of the Pooling and Servicing Agreement or IRS regulations, the only solution that works is to put the notes back on the issuer and hold the bundler to account for what they did, and the harm they’ve done.

If The Federal Government will not step in and do this right here and now, today, then the State Attorneys General must stand up and prevent any and all foreclosure activity until and unless for each one full compliance with all state laws related to these security instrument transfers have been documented.  If a REMIC that is out-of-compliance with IRS regulations is discovered, it must be referred for criminal tax fraud proceedings.

The States need to give the Federal Government a choice – do the right thing (which incidentally gets the states their overdue recording fees!) or all foreclosure actions will be stopped until they do.

 

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