Monday, October 25, 2010

Mortgage Gate 101

As a few know, I do follow the markets and most recently, one of the primary causes of 2007-2008 crisis is once again peeking out from under the rug. Peeking may not be the right word - it is gathering momentum - more like a tsunami. And it is important because it could bring down a few big banks and therefore the market. And like it or not, the U.S. is still the dominant player in the global economy so what happens there will affect you regardless of where you live.

The mortgage mess (that had been swept under the rug in 2008) is unravelling on several different fronts. I saw an article today alluding to two fronts but I think they are at least three.

First, the front that has gotten the most ink from the Main Stream Media (MSM) has been that individual home owners may have been improperly foreclosed upon because banks have forged documents such as affidavits and in some cases even signatures. Bigger than that is that the banks didn't follow the law which requires them to transfer the original paper (more on why they couldn't do that later). Some commentators have tried to pass this off as sloppy paperwork but it is fraud. There should not be two different standards - one for individuals and one for corporations.

The second front relates more to the origination of these loans and may be the most damaging. Banks sliced and diced these mortgages and stuck them into these complex financial products - mortgage backed securties (MBS). Luckily I found a great vid that cuts to the chase and explains what the banks did at a high level:

Why is this big - these loans were sold to mutual funds, pension funds and foreign institutions under false pretenses. A few of these third parties have already started lawsuits and I'm sure more are to come. For some reason the word fraud once again comes to mind.

The third front relates to local and state taxes. The fact that these banks didn't legally transfer all the paper work means they may have been skipping out on paying local taxes and fees.

A tsunami is the correct word - I'm not making any predictions except I think we are in for stormy weather for the next few months.

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