Posted 8th Jan 2011

How A Massachusetts Court May Have Set Off Another Housing And Banking Catastrophe

Banks got hammered yesterday after the Massachusetts Supreme Court essentially ruled that two foreclosures in the state were illegal because in the process of securitizing the loan, the foreclosing bank lost control of the actual note, and thus didn't have the standing to foreclosure.

Felix Salmon, who nobody would accuse of being pro-bank, sees a real possibility here of a systemic housing market and banking system catastrophe if this ruling is repeated in other states.

Just about everyone who has ever been foreclosed on in Massachusetts will want to confirm that the foreclosure was legal. The Supreme Court ruled that the plaintiffs should actually get their homes back, which should also strike terror into the heart of anyone who bought a foreclosed home at any point.

It just doesn't take much imagination to wargame out a disastrous situation. As Felix notes, if you got this ruling in California, then that would be endgame right there, perhaps.

While the banks may have failed to satisfy the letter of the law, this is deeply problematic justice, since from an economic standpoint, the foreclosing banks were certainly within their rights (there have been a few cases of improper foreclosures, but very few, and it's not obvious that these improper foreclosures are the same side of that coin).

With this ruling, you're left with the problem that people who didn't pay their mortgages get to keep their houses because of paperwork mistakes, which is an unjust remedy.

In December and the first four days of this year, the financial sector was smoking hot. It may have just hit a huge brick wall. [Read more]

Click here to see where foreclosures are still surging >

Automatic Earth article & links re above
Ilargi: Let’s just follow the news today, and cut out main parts too, there's so much going on from where I’m standing. I mean, interesting things are coming from Europe, "Europe unveils sweeping plans to govern reckless banks", and"European nations begin seizing private pensions", but I'm going to have to leave Europe for another day, or before I finish this it will actually already be another day.

And there's plenty of things afloat in the US of A today to fill a book. Or 10. Thom Weidlich has this gem for Bloomberg, which plays into the Randall Wray piece I talked about earlier this week, which claims that most if not all US mortgages and foreclosures and mortgage backed securities are just simply and plainly illegal. Here’s the Supreme Court of Massachusetts:
Foreclosures May Be Undone by Massachusetts Ruling on Mortgage Transfers
Massachusetts’s highest court is poised to rule on whether foreclosures in the state should be undone because securitization-industry practices violate real- estate law governing how mortgages may be transferred.

The fight between homeowners and banks before the Supreme Judicial Court in Boston turns on whether a mortgage can be transferred without naming the recipient, a common securitization practice. Also at issue is whether the right to a mortgage follows the promissory note it secures when the note is sold, as the industry argues. A victory for the homeowners may invalidate some foreclosures and force loan originators to buy back mortgages wrongly transferred into loan pools. Such a ruling may also be cited in other state courts handling litigation related to the foreclosure crisis. [..]

The banks had initially filed the state-court lawsuits to obtain judicial approval of the use of the Boston Globe to announce auctions in Springfield, Massachusetts. Massachusetts Land Court Judge Keith C. Long in Boston ordered the banks to prove they had the right to foreclose in the first place.

In March 2009, he ruled they didn’t. Published notices listed U.S. Bancorp unit U.S. Bank and Wells Fargo as the foreclosing parties when they weren’t the actual mortgage holders at the time of the 2007 auction, a violation of state law, the judge said. The Ibanez mortgage had been transferred to U.S. Bancorp 14 months after the auction, and the LaRace mortgage was transferred to Wells Fargo 10 months after, the judge said. Long voided the two foreclosures, saying U.S. Bancorp and Wells Fargo didn’t own the mortgages. [..]

Long said the banks couldn’t foreclose without a mortgage assignment that could be recorded in a local land office. The assignments they had didn’t pass muster, he said, because they didn’t name the assignee. "These blank mortgage assignments were never recorded and they were not legally recordable," he said. [..]

The judge also rejected the banks’ contention that having the note, the blank mortgage assignment and a contractual right to obtain the mortgage gave them the "indicia of ownership" of the mortgage. "Even a valid transfer of the note does not automatically transfer the mortgage," Long wrote. In this case, U.S. Bank and Wells Fargo owned the notes while Option One owned the mortgages, he said. The banks’ title-defect problem "is entirely of their own making as a result of their own failure to comply with the statute and the directions in their own securitization documents," Long wrote.

Ilargi: That's quite the puzzle. As Max Keiser said earlier today: "Quick Obama, change the law . . . It’s a NATIONAL EMERGENCY if Wall Street loses a penny and has to comply with the rule of law . . . " I think there's perhaps still hope if and when US courts decide to read, and follow, what's actually in the law. Not that I'm holding my breath. After all, where do these cases go to die? Exactly, the US Supreme Court, the most biased supreme court in the world, along perhaps with those in places like China, Iran and Zimbabwe. Hard to call. Hard to figure who's got the best cards in this game.

• Update Jan. 7: The Massachusetts Supreme Court today ruled against the lenders in the case I addressed above. There may indeed still be hope.

Banks Lose Pivotal Massachusetts Foreclosure Case
US Bancorp and Wells Fargo & Co. lost a foreclosure case in Massachusetts’s highest court that will guide lower courts in that state and may influence others in the clash between bank practices and state real estate law. The ruling drove down bank stocks.

The state Supreme Judicial Court today upheld a judge’s decision saying two foreclosures were invalid because the banks didn’t prove they owned the mortgages, which he said were improperly transferred into two mortgage-backed trusts.

“We agree with the judge that the plaintiffs, who were not the original mortgagees, failed to make the required showing that they were the holders of the mortgages at the time of foreclosure,” Justice Ralph D. Gants wrote.

Ilargi: Interesting development, but the court leaves open a door or two left and right:
Today’s court decision held out the possibility of securitization documents properly transferring mortgages.

Such documents, along with “a schedule of the pooled mortgage loans that clearly and specifically identifies the mortgage at issue as among those assigned, may suffice to be proof that the assignment was made by a party that itself held the mortgage,” Gants wrote. “However, there must be proof that the assignment was made by a party that itself held the mortgage.

Ilargi: Still, this is something else, courtesy Hugh Son for Bloomberg:
BofA Says Fannie Deal a 'Necessary Step’ in Housing Recovery
[..]"Our agreements with Fannie Mae and Freddie Mac are a necessary step toward the ultimate recovery of the housing market," Jerry Dubrowski, a spokesman for the Charlotte, North Carolina-based bank, said today in an e-mail. "We have taken a leadership role in responding to the housing crisis." [..]

The agreements resolved claims from McLean, Virginia-based Freddie Mac on 787,000 loans with unpaid principal of $127 billion sold through 2008 by Countrywide Financial Corp. The deal with Washington-based Fannie Mae resolved claims on about $4 billion in loans, Bank of America said.

Fannie Mae Chief Executive Officer Michael Williams said in a Jan. 3 statement that the agreement with Bank of America was "a fair and responsible resolution."

Ilargi: BofA, one of the main culprits in the housing mayhem, if only through their Merrill Lynch acquisition, says about the exact same thing Goldman CEO Lloyd Blankfein stated last year: they're doing the work of God. The fact that BofA gets away with a deal that has them pay $0.01 on the dollar for debts they themselves have originated, is now declared beneficial for the American people. And who's out there saying this is the bullest of shits we've ever seen? No-one in the main media. Well, except Dylan Ratigan, but he's more like the court jester by now, they keep him around for fun.

Gregory White reports for Business Insider that Florida Attorney General Pam Bondi raises her voice in defense of the law, with a great set of slides depicting how mortgage and foreclosure frauds work:
Anatomy Of A Fraudclosure - Florida AG Reveals How It's Done
A day after a report of settlements between banks and Attorney Generals across the U.S. on the issue of foreclosure-gate, the office of Florida Attorney General Pam Bondi released this blistering presentation on the "Unfair, deceptive, and unconscionable acts in foreclosure cases." It doesn't exactly read like someone is about to give in to a weak settlement.

This presentation explains some of the fraudulent and deceptive activities banks have been engaging in Florida. The now famous robo-signers are discussed, but the use of fake witnesses, documents, and affidavits are also eluded to. Examples of forgeries are included. If you had trouble understanding why many state governments put a halt on foreclosures, affecting firms like Bank of America, PNC, Citi, and JPMorgan, this presentation should make it obvious.

Click here to see the presentation >

Ilargi: So now we find ourselves in one of those eerily familiar Wile E. Coyote moments again: will Obama or Congress change the law, in order to make legal what the law today states is not, or are Scalia and Clarence Thomas to shine their dark lights on it, and simply declare legal what was a crime until they got to interpret the law in whatever way they see fit? Here's hoping that Massachussets Supreme Court Judge Keith C. Long, in Boston, has a spine. But I'm not holding my breath.

Then, US states. Hey, and they should have a strong interest in the fraudclosure files, since the MERS mechanism, whose legality is now under real scrutiny, has deprived them of millions upon millions in state taxes. Maybe there's a glimmer of hope there?! Are they desperate enough yet? If not , they soon might be, if we believe Kevin Freking at AP:

State Budgets Unlikely To Get Aid From Congress In 2011
Cut spending, raise taxes and fees, and accept billions of dollars from Congress. That's been the formula for states trying to survive the worst economy since the 1930s. As Republicans prepare to take control of the House and exert more influence in the Senate, it's clear that option No. 3 will soon wither. States will continue to face substantial deficits over the next few years, but they will have to get by with the end of stimulus spending and less financial help from the federal government. In recent interviews, top GOP lawmakers made clear it will be much less.

"We've got to put our fiscal house in order in Washington, D.C.," said Rep. Mike Pence of Indiana. "It's going to be essential that leaders at the state level roll their sleeves up, make the hard choices and put their fiscal health in order, as well." Rep. Kevin McCarthy of California, the new House majority whip, said GOP lawmakers will try to provide states with relief by cutting their expenses, not by giving them more money. For example, he advocates repeal of the national health care reforms enacted last year. "More importantly, what the states can really hope for is that we turn the economy around so revenues will pick up," he said. "But Washington is in very bad financial shape itself."

Ilargi: Isn't that just lovely? And that's not all. Tyler Durden at Zero Hedge has this to add to the picture:

More Bad News For States: State Revenue Plunges By 31% In 2009 To $1.1 Trillion As Spending Increases
The Meredith Whitney "ubiquitous state default" case may have just gotten another leg up. According to just released Census Bureau data, in 2009 total state revenue plunged by 31%, from $1.6 trillion to $1.1 trillion. "The large decrease in total revenue was mainly caused by the substantial decrease in social insurance trust revenue. Social insurance trust revenue is made up of four categories — public employee retirement, unemployment compensation, workers compensation and other insurance trusts (i.e., Social Security, Medicare, veteran's life insurance)."

But the drop in the top line did not stop states from spending more: in the same year, state government spending rose by 3%, while that pervasive source of backstop funding, the US government, saw its grants to states increase by 13% to $477.7 billion. At this point it is safe to say nobody believes there is a deficit that the US government can not fill.

Ilargi: Know what I mean? No more money for the states, and greatly decreased tax revenues. Great combination: now we can see what we're really made of. At the state level, but also at the federal level. It's dog eat dog from here on in. Meena Thiruvengadam and Jeffrey Sparshott write for Dow Jones Newswires:

Geithner Warns Lawmakers On US Debt Limit
The U.S. could reach its debt limit of nearly $14.3 trillion as early as March 31, Treasury Secretary Timothy Geithner said Thursday. Geithner in a letter to lawmakers said failure to raise the debt limit could "precipitate a default by the United States" and have catastrophic economic consequences--potentially more harmful than the financial crisis in 2008 and 2009. The letter received a cool reception on Capitol Hill.

[..] ... by Monday, the federal debt subject to that ceiling stood at around $13.95 trillion, giving the government just $355 billion before it would be legally prohibited from borrowing to pay its financial obligations. A Treasury official said the administration is hoping to separate the debt ceiling increase from the debate on spending. And in his letter, Geithner said deep spending cuts would delay reaching the ceiling by no more than two weeks. Boehner, though, emphasized the importance of spending cuts. "While America cannot default on its debt, we also cannot continue to borrow recklessly, dig ourselves deeper into this hole, and mortgage the future of our children and grandchildren," he said.

Failure to raise the U.S. debt ceiling could cast doubt on the U.S. government's ability to meet its obligations and send shockwaves through the bond market. "Default would have prolonged and far-reaching negative consequences on the safe-haven status of Treasurys and the dollar's dominant role in the international financial system," Geithner said. A Treasury official described the request for the increase as routine. Still, the political balance on Capitol Hill has changed, potentially making the process more fraught.

Many conservative candidates ran election campaigns criticizing their opponents for voting to lift the debt ceiling last year, and promised to vote against another increase when federal borrowing hits the current cap. Their promises likely will be tested in the coming weeks.

Ilargi: Oh, yeah, I'm so looking forward to this Mexican stand-off. So what's this going to mean, what if the US debt ceiling is not raised in about three months time? Andrew Leonard interviews Bruce Bartlett, who held big posts under both Bushes, for

"It is the most monumental insanity"
[..] Every single day the Treasury has bills to pay, Social Security benefits, interest on the national debt ... But if the debt ceiling is not raised, the only cash it would have to pay those bills would come from the tax revenues that come in on a day-to-day basis -- from the payroll tax or from income tax withholding. But that would not be enough to pay the bills that are due that day, so somebody at the Treasury is going to have to decide -- as individuals do when their pay doesn't cover their credit cards and other debts -- who gets paid this month and who doesn't.

And, of course, there is a problem with this, because not everybody can be put be off. By law, Social Security benefits have to go out on the first of the month. But the Treasury literally would not have the cash in its account to cover those benefits, or to pay interest on the debt -- at which point you have a default. Any time the precise terms of a bond are not adhered to -- if you don't receive exactly the amount of money you were promised, on exactly the day it was promised -- you have a default, and that is what would happen under this circumstance.[..]

Do we really want to introduce an element of doubt into the financial markets, that a security that is primarily bought because there is assumed to be risk zero risk of default is no longer safe? There is no other security on earth that has that reputation, not even German government bonds.

The U.S. Treasury is the gold standard and we have benefited enormously from this fact. Every time there is some disruption in the world financial markets, people flee to quality by buying Treasuries. As a result, we have benefited by not having to pay for the consequences of our own profligacy. Foreign central banks hold trillions of dollars of Treasuries as the backing for their own securities.

The minute we introduce an element of doubt into their own minds about whether these debts will be paid, suddenly other alternative investments may start to look better to them, and we will lose market share, which will greatly increase the costs of borrowing over the long term. It's the most monumental insanity that I can even imagine.

Ilargi: You know, this actually sounds to me like a great tool in the race to the bottom that all currencies are still involved in. I read multiple things every single day about how the US dollar is toast, but I think not. The Euro feel below $1.30 for the first time in half a year today, and I’m thinking, they're all toast, but I still don't see why the USD would get there first.

Which brings us to today's grand theme. Namely, if the Republican Party shuts off the option to raise the US government debt ceiling, then what?

And I’m thinking, The Bernank is not part of the government. The Bernank can do what he pleases. Well, after conferring with the wizards behind the curtain that got him his job, of course. Anyway, so what’ll he do? He's a Republican, after all. And he could stand back and let the entire Capitol Hill system break down, while still funneling money to Wall Street. I mean, cutting all the crazy spending sounds good to me, you got to stop somewhere. But the first big bad STOP sign should be held up to Wall Street. No more money for you guys!

But what are the chances that will ever happen? Nice posturing, Boehner, but will you shut off JPMorgan and Goldman? Yeah, didn't think so. And you can get it both ways, can't you? You can choke America, choke off a million provisions that run through government, from unemployment benefits through municipal sewage systems, and still keep the big banks alive through the Fed. And then let Fannie and Freddie do what they do best: chalk up another dozen notches of debt for the American people. Buy a home, get a loan, we're past the bottom!

Anyway, the Bernank has his plans ready for execution, say Caroline Salas and Joshua Zumbrun at Bloomberg:
Fed May Keep Easing at 'Full Throttle' Until Decline in Unemployment Rate
Federal Reserve officials signaled they’ll probably push ahead with unprecedented stimulus until the recovery strengthens and many of the 15 million unemployed Americans find work.

Ilargi: Even as he's racking up losses like there's no tomorrow (maybe that's his cue), says Tyler Durden:

Ben Bernanke Loses More Money In One Day Than All Of LTCM Ever Did... Doubled
The ongoing collapse in bond prices is making John Meriwether blush with envy at the wholesale wanton destruction of capital undertaken by Ben Bernanke. Keep in mind LTCM - the organization which proved definitively that Nobel prizes in economics are given only to the most consummate destroyers of value, logic, reason and humility - lost "just" $4.6 billion from its peak before it became the biggest systemic risk in the world back in 1998 and had to be rescued by a consortium of banks. The bottom line: with about $10 billion in SOMA losses today alone, Ben Bernanke has generated more than double the losses that nearly destroyed western finance 13 short years ago. And nobody cares.

John Lohman explains:

Chairman Top Tick continues to crash and burn, losing $7.2 billion in Treasury and Agency paper in today’s bloodbath alone. Adding a rough estimate for the MBS holdings would put the session’s losses well over $10 billion

Ilargi: Basically, all we need to figure out from here is whether The Bernank has a debt ceiling. And if he doesn't, who'll stop the rain?

I see two equally absurd themes here:
1 You raise the debt ceiling yet another time, which lets extend and pretend continue unabated until the next ceiling is reached (and/or someone somewhere calls the US bluff, which is closer than you might think).

2 You don't raise the debt ceiling, which will lead to highly unpredictable events, not seen since the Roman empire went broke.

But it doesn't really matter either, does it? It's all about political choices, not financial ones. Because this is a political crisis we're in, not a financial crisis.

There are two things wrong here:
1 Financial institutions can mark their worthless paper assets to whatever price they see fit.

2 Those same financial institutions have access to as much of your taxpayer money (present and future) as they want. They can pay their bonuses with it, their Hamptons homes, their Lamborghini's, their drugs and their prostitutes.

These are the same institutions that are broke, broker, and broken. Really, they will not survive no matter what. But for now, they still have unlimited access to your money. And that is not a financial problem, it's a political one. The people you vote(d) for choose to let this happen.

And to that extent, it makes no difference if Boehner and his lackeys decide that the debt ceiling will remain where it is. The negative consequences of this will fall squarely on your laps and shoulders, not on Lloyd Blankfein's.

They’ll just let the banks and the bankers live, and thrive, while the American people will get squeezed under an austerity steamroller the likes of which they’ve never even imagined.

Who's going to stop them? You?