THURSDAY, OCTOBER 21, 2010
Mulligan Mortgages—The Banks’ Only Way Out
“Would you give this man a mulligan?”
Photo by Mark Pain of the Daily Mail. The man with the cigar was an actual bystander.
We’ve seen this movie so many times already, we can practically recite the ending: The Too Big To Fail banks are once again in the middle of another crisis—another mortgage crisis—that’s breaking like a bad rash. And this new scandal has so many moving parts!
Robo-signings!—Foreclosure mills!—Forged documents!—Attorneys General huffing and puffing!—Too Big To Fail banks tottering!—Foreclosures suspended!—Bond holders freaking out!—Credit default swaps shooting the moon!—
Aaaaaahhhh!!!!! Again.
As I explained in a long piece discussing the current Mortgage Mess, all of these different issues are all symptoms of the same disease: The Mortgage Backed Securities—America’s Herpes: The gift that just keeps on oozing.
Because of how the MBS’s were structured, there was an inherent ambiguity as to who actually held the mortgage notes. This is crucial, because only the note-holder has standing in court to foreclose and evict a delinquent homeowner. No tickee, no laundry applies doubly to mortgage loans: No notee, no standing.
The banks, MERS and everyone else in the sausage factory that created the MBS’s were sloppy and/or greedy, which led to them failing to cross the I’s and dot the T’s. (Did you catch that? Just checking.)
They realized this screw-up during the current Global Depression. In order to foreclose and evict the massive number of delinquent homeowners, the banks hired “foreclosure mills”—bottom-feeding law firms that specialized in foreclosures.
Since the documentation was either hinky or lost, the foreclosure mills routinely and systematically fabricated and falsified documents: The “robo-signing” scandal is a part of this part of the Mortgage Mess scandal—the thing is as complicated as a Rube Goldberg device on acid. (Yves Smith at naked capitalism has been all over this; the woman should get the Pulitzer—not just for her reporting, but for keeping it all straight in her head!)
Anyway: In the piece I wrote, I argued that we could quite likely be seeing this Mortgage Mess turn into a Foreclosure Crisis, whereby homeowners refuse to pay their mortgages, let alone accept a foreclosure, unless and until the banks produces the note of their mortgage loan. Show Me The Note, Mo-Fo!!, could become the rallying cry of this homeowner revolt.
Since the chain-of-title on many of these notes is broken because of the process that created the Mortgage Backed Securities, and because in many cases the foreclosure mills irretrievably tainted so much of the documentation, the litigation could draw out for years, not to mention multiply like a cancer.
This of course would affect Mortgage Backed Securities. After all, MBS’s got their moniker for a reason: Because they’re backed by mortgages. If the bundled mortgage loan notes that created the Mortgage Backed Securities are no longer legally tethered to them, then the MBS are secured by nothing but air.
All the TBTF banks still have boatloads MBS’s on their balance sheets. There are literally tons of Credit Default Swaps that were written on these MBS’s. So you see, this Mortgage Mess could well get the banks to teetering and tottering once again—it could be the trigger for Global Financial Crisis, Part Duh!: Bigger!—Wider!—Uncut!
Like I said: A movie we’ve seen before, and whose sordid ending—TARP-2 anybody? Maiden Lane CCLXVIII?—we can very well predict.
In the zoo called Washington, everybody’s making loud noises about this blossoming crisis—but nobody in that God-forsaken town is coming up with a practical solution that would actually work.
The pundits are doing no better: Paul Krugman—who advocated a housing bubble back in 2002—can hardly contain his glee at the Mortgage Mess, even as he condescendingly tut-tuts about the bad banksters who caused it.
From the Department of I’m-So-Not-Surprised: The solution Krugman proposed in a New York Times op-ed is a vague lunge at giving “mortgage counselors and other public entities the power to modify troubled loans directly.” In other words, he’s arguing for more government intervention, while blithely ignoring the fact that government regulators—Treasury, the Fed, the SEC, etc.—helped create this mess by not doing their jobs in the first place.
They didn’t regulate before—so now according to Krugman, they’re gonna get bright magic and Solomonic wisdom, and all of a sudden do their jobs right? Puta huevón, please . . .
(And please don’t bother telling me that Krugman’s the smartest economist in the world. That’s like saying, “He’s the smartest moron in the world”: Impressive, until you stop to consider that a bright 12 year-old makes more sense than him.)
From the Department of I’m-So-Even-Less-Surprised: The Left might be putting out stupid ideas, but the Right is putting out no ideas.
Anyway, it’s an open secret that the politicians on the Right are all in the banksters’ collective back-pocket. Who do you think tried to make law the Interstate Recognition of Notarizations Act, which would essentially have made it legal for banks to commit perjury in order to foreclosure on a homeowner?
Talk about violating the Rule of Law! By passing that act (via a cowardly voice vote, so as to collectively hide their hand), the Republican senators and congressmen didn’t just try to violate the Rule of Law—they tried to gang-bang it, murder it, and leave it in a heap by the side of the road!
The American political Right is corrupt—beholden to the banksters and the money men. There’s really no other way to look at it.
Whatever the politicians might say, no solution is going to come out of Washington. Intellectually, both parties are exhausted—they have no new ideas. The only idea both parties cling to is Spend Money!—and that’s no idea at all.
Washington can’t throw money at the TBTF banks, to fix this problem: Politically, another bailout of the banks is untenable—I think. Actually, I’m not sure. In any other country, I’d say with confidence that another bank bailout would cause widespread rioting. But with the fat, slovenly, slatternly, pathetic American people? Placid as cud-chewing cows, peacefully going through Temple Grandin’s curving contraptions, on their way to their slaughter without a thought in their pretty little bovine heads . . .
Come to think of it, another bank bailout might fly.
But while the pundits and political riff-raff hee-haw and trumpet like donkeys and elephants, but with none of the sense of those fine animals—lo and behold!—the banks themselves are quietly fixing the problem.
They’re doing it through Mulligan Mortgages.
I got a first sense of it with the story of Brian and Ilsa—my retired friends in the Southwest, whose home had gone underwater. I wrote about them here, as well as here.
Brian and Ilsa qualified under HAMP, the Home Affordable Modification Program—yet though they were at first allowed to modify their loan, they had been later denied the benefits of the program after three months.
HAMP in many ways has turned out to be a scam for the banks and servicers to make money off the Federal government: For every mortgage accepted into the HAMP, the banks and servicers received a fee from the government. But after 90 days, the banks and servicers could claim that a person did not qualify for HAMP—and therefore exclude them from the program, while keeping the Federal government fee.
Brian and Ilsa were caught in the middle of this HAMP scam, when they decided to demand to see the note on their home loan—this nice suburban couple said, Show Me The Note, Mo-Fo!!
Suddenly, frantically, a loan officer from their bank appeared, and magically, their problems were solved: They qualified, they qualified! And soon, they were signing a new mortgage loan—and a new note—with a new mortgage payment close to $700 a month less than before the loan modification.
I wrote about this—and a flood of other people wrote telling me similar stories.
For various reasons—occasionally for no reason at all, just out of the blue—the TBTF bank would suddenly expedite a mortgage refinance. The principal would remain the same, but there would be a substantial decrease in their monthly mortgage payment.
One of these stories came by way of Lars Larson, the terrific radio host in Portland, Oregon. A listener of his, Tim Hope, had had the same thing happen with his mother’s loan. As he told it: “No costs, simply fill out the paperwork (I think they offered to do everything), and ‘presto’ new mortgage and new lower monthly payment (I believe by several hundred [dollars] — $200, $300 — per month).”
Tim Hope’s story wasn’t exceptional, but he did come up with a wonderful name for it: Mulligan Mortgage.
The clever turn of phrase captures it exactly: A mulligan is a golf term. It’s when your first shot pretty much sucked—so your golf partner lets you take another shot, with no penalty. It’s the gentlemanly thing to do, as it were. A way to keep a lazy Sunday afternoon game interesting.
Mulligan Mortgages seem to be how the TBTF banks are keeping their own game alive: They seem to be chasing mortgage holders—whether in default or not—and offering them an expedited refinance of their mortgage loan.
In order to convince homeowners to sign on the line which is dotted, the banks have to give them something: What they give them is lowered monthly payments of at least a couple of hundred dollars a month. The banks can offer this without touching the principal of the loan by either refinancing the mortgage at a lower interest rate, or a longer term of repayment, or usually both.
In other words, though the homeowner might still be underwater after signing the Mulligan Mortgage, they’ll still get a reduction in their monthly mortgage payment.
Now there are several advantages to these Mulligan Mortgages:
From the banks’ point of view, the Mulligans automatically fix the chain-of-title issue by creating a new note. The whole problem with the current scandal is that a lot of home loan notes were either lost, destroyed or mishandled, or else irremediably tainted by foreclosure mills’ unsavory business practices.
But all of that goes away, with a new note courtesy of the Mulligans.
(There are, of course, a whole host of administrative and legal steps that must be followed, in order for this to happen. In this post as well as in my previous post on the Mortgage Mess, I skipped a lot of these legal and administrative steps for two simple reasons: One, they add no insight to the issues at hand, and in fact clutter up the view of the overall situation; and two, the administrative and legal steps are often different in each state.)
A new note by way of a Mulligan Mortgage clears up the issue of standing, which would allow a bank to foreclose on a delinquent borrower. So once a homeowner signs a Mulligan, the bank will have clear standing to foreclose, if the homeowner becomes delinquent.
For bond holders of Mortgage Backed Securities, Mulligan Mortgages are also a fine idea: By re-establishing the chain of title, MBS holders are once again holding secured bonds—they’re not holding paper which might well be worth nothing.
This is a non-trivial issue: Considering how PIMCO and the New York Fed started making noises yesterday about the bonds Bank of America sold, I’d say there are a lot of bond holders and CDS underwriters who are very nervous about how this new outbreak of America’s Herpes will affect their MBS positions.
Mulligan Mortgages are the unguent that will keep bond holders happy—until they realize the cost that they’re payng (I’ll get to this in a moment).
These Mulligans are also great from the Federal Reserve’s and the Obama administration’s point of view: Mulligan Mortgages mean people will pay less for their home mortgages, and therefore have more disposable income. There’ll be a bump in consumer spending.
Mulligan Mortgages, of course, can’t fix REO’s that may or may not have been foreclosed illegally—but they’ll get the rest of the housing market back on track.
But it’s not all sweetness and light—there are some issues with Mulligan Mortgages:
First of all—and most obvious of all—the homeowners the TBTF banks are targeting for Mulligans are probably the very homeowners whose original note is lost or irretrievably ruined by someone in the sausage factory that created Mortgage Backed Securities. I’ll bet a buck to a nickel that they’re precisely the ones where the bank likely has no standing to foreclose.
So the banks have to do the Mulligans quickly, before people get wise. Homeowners can’t be allowed to realize what the banks are up, or why. If homeowners understand fully why the banks are suddenly so nice to them, they’ll realize that they’ve got the banks by the short-hairs—and then they’ll realize that they can have their way with them, up to and including doing the Show Me The Note, Mo-Fo!! dance. If that happens, the banks are screwed.
The second obvious issue is, Mulligans represent a severe hit to the TBTF banks’ revenues.
How much of a hit? Nobody knows—at least not yet—because nobody knows how many mortgages are affected by the current Mortgage Mess.
CoreLogic says there are something like 11 million underwater mortgages in the United States as of late August. The Wall Street Journal says about $154 billion worth of mortgage loans could be affected by the Mortgage Mess.
We could extrapolate ‘til the cows come home, but simply put, there is no way to know how many mortgages might be getting a Mulligan. The TBTF banks are completely opaque, ever since the Fed basically rescinded sane accounting rules in March of 2009; when the banks officially turned into zombies.
But any way you look at it, the Mortgage Mess—even with all the Mulligans needed to fix a lot of this mess—is going to take a bite out of revenues—
—and not just on the balance sheets of the TBTF banks: On the MBS bond holders too.
Nobody ever said Bill Gross was stupid: Regardless of how effective the Mulligans are, the Mortgage Backed Securities—and the CDS’s written on them—are all going to take a hit. That’s why PIMCO started making noises, trying to bully BofA into taking back the mortgage bonds: Even with the best solution to the Mortgage Mess, bond holders are going to take a forced haircut. Or a buzzcut, as the case may be.
Since the Federal government really does not have the political will or inclination to go for yet another round of bank bailouts, and since the bond holders have the political muscle in this corrupt system to get their bacon saved (where’s all that bullshit talk about “capitalism’s creative destruction” now, huh?), it’ll be up to the Fed to make MBS bond holders whole—just like they did the last time.
So although a lot of people are predicting that the Fed will start buying Treasuries when QE2 is anounced, I beg to differ: I think they’re going to load up on even more Mortgage Backed Securities. In fact, I think a big piece of QE2—maybe a trillion dollars’ worth—will be directed at Mortgage Backed Securities. And I think the Fed is going to pay top dollar for that garbage.
I think the way the Fed is going to do it is, they’ll go for another round of Stealth Monetization: Buying MBS and other toxic assets off the banks for newly conjured cash, the banks then taking that cash and parking it in Treasuries, thereby funding the Federal government’s deficit.
Because of the Currency Wars going on around the globe right now, I don’t think the Fed wants to be perceived as accelerating any weakness in the dollar. I think Bernanke and the Lollipop Gang at the Fed want to weaken the dollar, sure, but I don’t think they want the perception to linger that they are out-and-out trashing the dollar.
Also, I don’t think Bernanke has the votes on the Federal Reserve Board anymore. I think a lot of Board members are discreetly coming to the conclusion that Benny Boy’s strategy of ZIRP, propping up assets, and extreme market liquidity, is a losing one.
But they’ll be forced to vote in favor of a massive MBS buy, in order to keep the American Zombie banks on their feet. As predicted back in 2008 when they were saved rather than allowed to fail, the TBTF banks really have become “too big to fail”—because they’ve grown, like a cancer.
So you see, it all goes back to the Mortgage Backed Securities. America’s herpes. See, the problem with herpes is, once you get it, you can never be cured. At best, you can alleviate the symptoms—but the disease is always there.
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Email ThisBlogThis!Share to TwitterShare to FacebookShare to Google Buzz Posted by Gonzalo Lira at 2:29 PM
16 comments:
Anonymous said...
The only way the American people will stand for another round of big bank bailouts is if they get a slice - principal reductions. With enough printed money, everyone can be made happy!
Credit for the first publication of the idea (I thought of it a few days ago) goes to Jim Willie - http://www.kitco.com/ind/willie/oct212010.html
"In the end TARP-2 will pass with at least $500 billion in new big bank rescue aid, which will require the big banks to provide strong meaningful home loan balance reduction. The package will contain a provision to kick in, which will deliver another $500 billion upon other contingencies. The total $1 trillion bank aid package would cause a firestorm. A key provision to win over public support will be promises by the big banks to finally give home loan balance reductions, what the people demand. That will enable the American public to agree to the package, except one year later they will be shown more revolving doors and dead end corridors."
October 21, 2010 3:09 PM
Anonymous said...
I think the problem is far more systemic than just mortgage backed securities. The herpes goes to the heart of the system: central banking. This collapse isn't an accident. It's grand theft at a massive scale. They're taking the money and running away to their global banking cabal daddies. We will see some pretty nasty war soon. Then the world will be divvied up under just a handful of regional currencies. This is about power much less than it is about money. That is my anonymous opinion, anyway.
October 21, 2010 3:32 PM
K Smith said...
GL,
Your analysis has confirmed my suspicions. The creation of zombie banks and uber-zombie banks is part of the plan. So is the creation of zombie pension funds.
There is a new banking reg in the hopper - elimination of the reserve requirement. Without the reserve requirement, it doesn't matter any more whether or not banks are solvent. The Fed can just keep buying up bank assets and the banks can just keep buying up treasury issues.
Doing this establishes the mechanism by which the Fed can continue to routinely buy up all bank assets. Then the Fed will own all the income streams from all the bank generated financial instruments in the US. Watch for the cry for the Fed to do for the zombie pension funds what they are now doing for the zombie banks.
When the economy turns, this means the income generated by those who create real wealth - the wage earner - will be pouring into the Fed coffers. It will be mega mucho dinero.
Pretty nifty, huh? It remains to be seen if the public will become aware of the real endgame and stop it from happening.
KS
October 21, 2010 3:42 PM
Michael said...
GL,
It will be interesting to see how this plays out. While I agree Congress won't approve another bailout, I'm not so sure QE2 will find its way to the MBS market in a big way.
Let's assume the WSJ is right by half, and the real MBS problem in 300 billion hit to the banks revenues. So what? Considering what they are earning that's nothing. The greatest fix to this problem in targeting ALL of QE2 to Treasuries--the 5-7 year variety they've been doing will likely go a little longer to 7-10.
You see, if they can get the 30 year conforming fixed rate down to 3%, you will see refi's go ballistic (putting more money into the pockets of note holders) and reseting the chain of note mess triggered by the sausage factory.
In comparision, bailing out bank revenues and MBS holders seems lame, no? SO what, Bill Gross eats some crow along with slightly smaller bank profits. Even BAC said it wasn't as big as deal as it's being made out to be? So is it the CDS market that would need to be saved by QE2 going to MBS?
I don't know for sure. But I know one thing for sure, if QE2 isn't a mother of easing the global economy will simply crash faster than the postponmnet game we've been on.
October 21, 2010 3:51 PM
RobertM said...
re: "At best, you can alleviate the symptoms—but the disease is always there."
Unless a cure is found.....and I suspect that cure starts with ending fictional reserve lending.
October 21, 2010 5:43 PM
Anonymous said...
Maybe they'll just decide to take it all back to the period of "i give you a chicken you give me 10pounds of potatoes", start from zero, its just too messy.
I admit I know next to nothing about economy and from what I read, I wish I knew nothing at all. It was such a simple idea and now you have people making money from thin air, great system we've created...
Thanks for the reading though, you've got word.
Andre, a hope to be ignorant 22-year old
PS. fear not, you're not the only country where a 2nd bank bail out would fly. I'm from Portugal, a bail out was made here too when it was all coming to shit and now we still see stuff happening that I'm too shy to share, but rioting: 0.
October 21, 2010 5:44 PM
Dave of Maryland said...
So the choices are, Stiff the banks & walk away with the property scot-free, or,
Negotiate a new mortgage.
The first will require a quiet title filing. Which in theory should be successful, but which may, at any time in the future, be challenged for any number of reasons.
Negotiating a new mortgage has the advantage that the two main parties, you & the bank, have come to terms & even if the result smells, the two most likely parties to challenge the deal are already partners to it. Permanent peace of mind.
On a long-term basis, I think I like No. 2 better.
But as long as No. 1 hangs in the air, then I am free to dictate to the bank.
Such as, 1 or 0 percent interest. 50% reduction in principal - if not 60 or 70. What are they going to do? Present me with the original note? Take their chances on a future maybe?
Properly defrauded, I expect the banks to turn about and re-securitize the new mortgage. The're bust, they gotta make money on this somehow, and, note carefully, securitization may be dumb, but it ain't illegal. MERS all over again.
October 21, 2010 5:54 PM
Anonymous said...
I wonder how many shares of BAC pimco went short before pressing for the put back?
So after someone does a mulligan mortgage with BAC what happens if some other entity shows up with the real note and wants to foreclose?
October 21, 2010 6:01 PM
Reverse Engineer said...
Why on earth would an underwater McMansion dweller take a Mulligan and sign a NEW note for more than the house is actually worth? Prior to signing said note, the McMansion dweller can walk away from the house having lost only his equity currently in it. Sign a new note, and you are on the hook for that entire amount. Pardon my bluntness, but your friends Brian and Ilsa are complete suckers if they signed a new note.
RE
October 21, 2010 6:03 PM
Anonymous said...
Congress has the power to abolish the Federal Reserve System and thus destroy the private credit system. However, the people have it within their power to strip the Fed of its powers, rescind private credit and get the banksters to pay off the National Debt should Congress fail to act.
The key to all this is 12 USC 411, which declares that Federal Reserve notes shall be redeemed in lawful money at any Federal Reserve bank. Lawful money is defined as all the coins, notes, bills, bonds and securities of the United States: 'Julliard v. Greenman' 110 U.S. 421, 448 (1884); whereas public money is the lawful money declared by Congress as a legal tender for debts (31 USC 5103); 524 F.2d 629 (1974).
Anyone can present Federal Reserve notes to any Federal Reserve bank and demand redemption in public money -- i.e., legal tender United States notes and coins. A Federal Reserve note is a fixed obligation or evidence of indebtedness which pledges redemption (12 USC 411) in public money to the note holder.
The Fed maintains a ready supply of United States notes in hundred dollar denominations for redemption purposes should it be required, and coins are available to satisfy claims for smaller amounts. However, should the general public decide to redeem large amounts of private credit for public money, a financial melt-down within the Fed would quickly occur.
The process works like this. Suppose $1000 in Federal Reserve notes are presented for redemption in public money. To raise $1000 in public money the Fed must surrender U.S. Bonds in that amount to the Treasury in exchange for the public money demanded (assuming that the Fed had no public money on hand). In so doing $1000 of the National Debt would be paid off by the Fed and thus canceled.
October 21, 2010 6:55 PM
Jahfre Fire Eater said...
Hi Gonzalo,
I have only been reading your articles for a few weeks but I appreciate your take on things. I do wish you would respond to the constructive discussion occasionally. The folks over at http://thedailybell.com interact with their comments to make for some good, thought provoking reading....sometimes. :-)
I don't think the Mulligan sounds like a good idea unless the home owner intends to stay in the home for decades.
In fact, I suspect that many of the deals made in the short term will be in the foreclosure mill again in the next year or two as the economy continues to unwind.
I have no doubt that if I were faced with the situation I'd go jingle mail and Forrest Gump...don't own anything you can rent....until the real recovery starts somewhere off over the horizon.
-Jahfre Fire Eater
October 21, 2010 9:26 PM
Anonymous said...
Dave from Maryland seems to be thinking along the same lines as me...
As I understand it, as a result of all the shoddy paper-work and short-cuts, nobody can establish legal title to a particular house - not the bank, not the MBS holder, not even the people living in the house. So how can the occupants and a bank create a document establishing legal title to said house when neither party could prove legal standing beforehand? It sounds like more fraud to me. What would stop them cooking up some documents to establish title to the neighbour's house?
October 21, 2010 9:52 PM
Anonymous said...
You like the bash the republicans but the fact of the matter is that both parties are bought and paid for by the bankers. The only reason why Obama used a pocket veto against the Notarization Act is that it allows him to delay the vote until after the November 2 elections, in which case I suspect Congress (Dems and Repubs) will try to once again ram it down our throat. Just go to infowars.com to find out more.
October 21, 2010 11:48 PM
Anonymous said...
I have a dream
I dream we will get a president like Ron Paul, who will conspire with the other world leaders to shut down the central banks once and for all.
I dream that they will burn them all to the ground and put all the central bankers and their ilk in prison.
I have a dream that might become reality!
October 21, 2010 11:53 PM
Anonymous said...
the FED was given unlimited powers by the CONgress. they can and will do anything and everything ..and damn any public discoarse or dislike. the FED must be abolished and they and this government will not go easily or gently.
END THE FED..VOTE THEM ALL OUT
clean em load em stack em be prepared
October 22, 2010 12:24 AM
Anonymous said...
"For every mortgage accepted into the HAMP, the banks and servicers received a fee from the government. But after 90 days, the banks and servicers could claim that a person did not qualify for HAMP—and therefore exclude them from the program, while keeping the Federal government fee."
A new F-R-A-U-D!: HAMP scam. Financial engineering at its finest.
GL, it's interesting that you conclude that FED will purchase MBS securities with the QE2.
Lindsay Williams, who claims a direct source on the "elite" pulling strings behind the curtain, also claimed yesterday (on Alex Jones Show, infowars.com, yesterday's stream is also available on youtube) that the end game includes FED (which is a private entity owned by the big banks) purchasing ALL of the MBS paper with newly created money.
This would make, according to Williams, americans neo-serfs, who work for the elite-controlled government and pay for the privilege of inhabiting the elite's land.
October 22, 2010 12:26 AM
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