Travel•Music•News•Sports•Money•Tech•Fashion
Sunday October 21st 2018

Mortgage-Putback Crisis Explained

In previous articles here and here we wrote about the foreclosure fraud scandal where lenders are foreclosing homes which they may not have legal standing to foreclose on. In other words, because of sloppy practices in the mortgage industry, many home loans may no longer have the house as collateral for the loan. That would mean that the loans are now unsecured debt like credit-card debt. It should be obvious that it’s not a good thing for a lender to lend someone $500,000 without collateral. Not very smart.

The second scandal brewing is the mortgage-putback scandal. In a way this is kind of the other side of the coin from foreclosure fraud scandal. On the one side of the coin, banks lent money to borrowers who often did not have the ability to pay back the loan, and then failed to maintain the proper records so that the collateral legally backed up the loan. On the other side of the coin are the investors who were sold those bad loans. It appears this is a head the banks lose, tails the banks also lose kind of situation.

So investors that bought mortgage-backed securities (MBS) now want to exercise their option to putback the mortgage to the investment bank that sold it to them and get their money back. There’s no telling how much money this could cost banks. Some estimates are $150 billion. Maybe it will be trillions. Something like 60% of all mortgages have gone through securitization. That’s a lot of mortgage!

A lot of this has been brought to light by blogger Felix Salmon. See The mortgage bond scandal FAQ Here’s the first question of the faq:

I’m hearing a lot about foreclosuregate, MERS, moratoriums, bad title, etc. What does this have to do with that?

Nothing. This is an entirely separate, parallel, scandal. The main area overlap is that it gives investors in mortgage bonds one more colorable reason why they should be able to put back their bonds to the banks who issued them—over and above the fact that they have the right to do that if the mortgages weren’t properly transferred.

Mortgage-Putback Scandal In a Nutshell
Read the entire faq. In a nutshell, the banks that were selling the mortgage-backed securities hired a firm, Clayton, to check the quality of the loans. It turned out that many of the loans were not up to snuff. But instead of rejecting the loan pool, the banks asked for a discount. But then they failed to tell investors that the loans in the MBS were not up to snuff. The banks withheld material non-public information from the investors.

Here is a youtube video with Christopher Whalen, managing director of Institutional Risk Analytics discussing the coming storm of mortgage putbacks on Bloomberg television.

In the video, Whalen mentions another crisis brewing which is that when a home goes into foreclosure, nobody pays the property taxes. That could be devastating for local governments and could require some intervention by state or federal governments as local revenue disappears. (Why aren’t the lenders that foreclose on homes required to pay property taxes and maintain properties?)

More Bailouts Coming?
How this crisis will play out is anyone’s guess. If the TooBigToFail (TBTF) banks go down again, will the federal government once again come in and rescue them? All these scandals are the result of pure greed. Despite massive screwups by the bankers, banks paid out record bonuses in 2008 and 2009. It doesn’t seem right that the TBTF banks should get to reap enormous profits which they pass through to their executives as bonuses. But then when the losses come, stick it all on the taxpayers. Private profits and public losses. What kind of a free market economy is that? It’s one sided socialism.

Here’s another article by Felix Salmon, The enormous mortgage-bond scandal

More from category

Bullying and Shaming in the New Media
Bullying and Shaming in the New Media

Tried and convicted in the court of public opinion on fourth-hand hearsay evidence. [Read More]

Why the Charade?
Why the Charade?

Why is a phony pretext needed to start bombing? [Read More]

Trayvon Martin Case Exposes Racism in Media
Trayvon Martin Case Exposes Racism in Media

Why does one shooting out of thousands get so much attention? [Read More]

Chechen Terror Comes To America
Chechen Terror Comes To America

Violent extremists from the Caucusus now operating in America. [Read More]

I Wish the Market Wasn’t So High!
I Wish the Market Wasn’t So High!

What this country needs is a good $5 stock that pays a $1 dividend. [Read More]

Advertisement