Thursday, November 15, 2007

a mortgage mushroom cloud in ohio?

this article caught my eye today. it has the potential to undo a large chunk of our financial assets and cause a broad freezeup in lending:

some parts from Gretchen Morgenson's story in NYT:
Judge Christopher A. Boyko of Federal District Court in Cleveland dismissed 14 foreclosure cases brought on behalf of mortgage investors, ruling that they had failed to prove that they owned the properties they were trying to seize. ...
Saying that Deutsche Bank’s arguments of legal standing fell woefully short, the judge wrote: “The institutions seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Finally put to the test, their weak legal arguments compel the court to stop them at the gate.”

here's what worries me:
these trusts all use the same language and concepts, essentially. wall st firms churn these things out like sausages. if there are problems with one or two, there are almost certainly problems with plenty of others. something like this is like seeing a roach. there's never only one. the mortgage industry has been doing business as usual for a long time.

I then spoke to a high ranking industry insider with a background in securitization. he said everyone in his office was very worried about the case. and, he assured that it was just "a few cases." just a couple of bad-apple loans that weren't recorded right. it sounded to me like the self-delusional statements of people having a nightcap on the titanic.

however, the article made it sound like in none of the cases in question had the banks obtained the physical notes before filing foreclosure. one wonders if they might not simply find a way to obtain them first to clean this whole matter up.

one way or the other, given the size of the securitization movement, if this does goes to the worst scenario it would be a catastrophic for the entire dollar-based fixed income market.

on more thing worth remembering is that lawyers are going to start going after the financial industry. an important risk-management expert just told me that, and it makes sense. the asbestos, tobacco etc wells have run dry. they will now attack wall street, asset managers, etc. that also means that all the legal genius that prevailed in other cases will now be used to unwind mortgages and everything else. that will be another headwind for financials.

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