October 8, 2010

The Next Crash At Hand? (Mortgage System Collapse, MBS Disaster)


Just two years after the big crash, is this already the start of the second, terminal crash we’ve agreed is inevitable?
Leaving aside the obvious – looting – the whole Bailout has been predicated on propping up the balance sheets of the insolvent banks. This means artificially, by any and all means, propping up the prices of worthless toxic paper like MBS and the CDOs built on them.
I often explore how the mortgage conveyance scandal exposes how the banks have inadvertently abrogated their own property rights in the land, according to their own rigged law, most recently here. How this is systematic, endemic lawlessness, which must more and more suck in the courts themselves.
As the legitimacy crisis expands, we’re seeing how it’s metastasizing into a new, more virulent assault on those fraudulent balance sheets, on the government’s attempts to reflate the bubble on behalf of those balance sheets, and how it may strike a death blow to all the efforts of the Bailout itself.
Yves at Naked Capitalism explains:

Although the data points we have seen so far could be considered anecdotal, we have evidence that strongly suggests that major RMBS originators, the investment bank packagers, and the bank trustees failed to convey the notes (the borrower IOU, which is critical to having the legal standing to foreclose in 45 states) to the RMBS trusts starting in 2005, perhaps even earlier. And comments from industry insiders suggest this problem is pervasive.

That puts a cloud over the entire US RMBS market, the biggest asset class in the world. This paper was sold as secured; the ability to offset the cost of borrower defaults by seizing and selling his house is critical to the value of the instruments. And if no assets were conveyed to a particular trust by closing, an even uglier possibility exists: under New York law, which was elected by RMBS as governing law for the trust, it would be considered to be “unfunded”, which means it does not exist.

This is a double compromise of all those toxic assets at the core of the Bailout.
1. They were sold as loans secured by the house, but since in 45 states the lien cannot be separated from the note and still be secured by it, this may render all those mortgage loans simple unsecured loans.
So while I’ve emphasized how this places the land itself in legal limbo, we see how it also caves in the entire legal foundation of the financial stability of the loans and any system built upon that stability.
2. By violating the NY trust law, the industry standard, the MBS trusts may have nullified themselves. (Specifically, those administering them nullified them; never forget the criminal and/or negligent agency.) These MBS trusts may not exist at all.
Yves thinks that the GSEs will probably just make good on all the toxic crap they already bought. (What about the Fed’s holdings?) But it’s hard to see how they could politically and even legally get away with buying more of it, even though that would give mark-to-market succor to the bank balance sheets. (Banks haven’t had to use that since spring of 09, but they can still choose it, can’t they?)
Yves quotes MSM blogger Felix Salmon repeating some of the same rationalistic stuff we were hearing in 08 before the Bailout really got rolling in earnest. But perhaps it’ll prove true this time round. How much can the already-stretched thin Bailout do?

Argentina’s sovereign default has been called “the slowest trainwreck in history”, but this one might turn out to be slower, bigger, and much less fair. Millions of people have already lost their houses to lenders who didn’t have the proper paperwork, and it’s unlikely they will ever get any redress. For people who haven’t yet been foreclosed upon, however, it could now be a very long time before they lose their house.

The big-picture consequences here are by their nature unpredictable, as no one has a clue how this might all play out. But I can think of a few themes:

1. Bond investors, who have seen the value of their mortgage-backed debt rise impressively over the past 18 months, could find themselves unable to find any kind of bid at all. The paper will still be cashflowing, but those cashflows will be surrounded by enormous uncertainty, and no one’s going to want to buy them except at extremely deep discounts until the mess is cleared up.

So Salmon thinks the toxic garbage, which always did keep trading at some price, may literally go to zero.
He envisions some richer reverberations:

3. The time from default to foreclosure will become indefinite, and as a result there will be a significant uptick in strategic defaults, especially in states with judicial foreclosures.

4. The “shadow inventory” of houses which aren’t on the market but will eventually be sold once the bank gets around to foreclosing will grow substantially from its already-enormous level.

There’s no such thing as a strategic default among the non-rich. The beleaguered people should not only stop paying but wait before they physically walk away, if they’d like to stay in the house. Demand to see the note. Often this will be impossible, and it will take judicial lawlessness (or street thugs) to pry people loose.
The more people do this, the closer it will come to snowballing into an actual nonviolent rebellion. Land Reform from below.
Meanwhile that shadow inventory could prevent the kleptocracy from ever reflating the bubble.
Yves discusses four scenarios for how this will proceed. They boil down to:
1. Try to expand and intensify the Bailout tyranny, trampling the Constitution and the law even further. The unconstitutional law Congress rushed through (but Obama is apparently pocketing for now) is an example of this. As would be an expanded version of Florida’s  kangaroo courts.
2. Bailout-lite: Try to reduce foreclosures and prop up the system by really doing what the HAMP fraudulently pretended it was going to do. The taxpayers would of course pay for propping up the prices of principal. (This is where we get a lot of pro-bankster attitudes even from non-rich bank-haters. Many people seem to find a bailout which would also incidentally help some non-rich people more offensive than one which helps only the rich. It’s a moot point in my case since I oppose all bank bailouts. But I’d love for people who have a little but are getting screwed to recognize that the banks and the government are the enemy, not their fellow debtors.) 
3. Write down the principal. Do real cramdowns. This is the real reformist solution. Capitulate on the bubble (temporarily, they’d hope) in order to save rest of the structure. If I know my kleptocracy, they’ll never do this. A “real” HAMP will be just barely what they can take, if they absolutely have to.
4. Continue to pretend there’s no problem, for as long as possible.
I’ve always said that once doing nothing no longer works, I expect mostly attempts at (1), although some banks like Citi have toyed with (2).
Sure enough, we have this bizarre Congressional escapade. Commentators have immediately converged on the analysis that the pocket veto is kabuki for November, after which Obama will sign either the bill as is or a modified version. This will trash many provisions of the Constitution and wipe out a vast array of venerable state laws governing real estate. It’s precisely the kind of might makes right lawlessness we predicted.
So as with everything else, in the end this is going to be up to the people. Maybe we didn’t want this responsibility (certainly all the crises and suffering have been inflicted upon us as a criminal assault from above), but we have it nevertheless. Now we have to rise to it, to save ourselves, our families, and our human future.


  1. If we operate from the assumption that this is a top down society then the lawlessness from above will ultimately work its way down to the lower tiers. Put another way,

    “Those with nothing to lose, lose it.”

    Comment by Edwardo — October 8, 2010 @ 12:17 pm

    • As Hunter Thompson quoted the philosopher Raoul Duke,

      “When the going gets weird, the weird turn pro.”

      Comment by Russ — October 8, 2010 @ 2:15 pm

  2. To your question, let’s hope so! Only a collapse yields space for a new foundation. “Unless a grain of wheat falls to the ground and dies, it cannot bear fruit.”

    It will take a significant event for the predators to turn on each other, and this may well do it. Surely, “a cloud over the entire US RMBS market, the biggest asset class in the world” is a rat hole even the Fed can’t fill. See: “CHRIS WHALEN DESCRIBES WHY 2011 COULD MAKE 2008 LOOK LIKE A CAKEWALK” at http://pragcap.com/chris-whalen-describes-why-2011-could-make-2008-look-like-a-cakewalk.

    I can’t see the notorious robo-notary bill making any difference either, other than increasing the value of real estate under bridges. Of course our so-called representatives will be stampeded into “fixing” the laws retroactively for derelict banks, but here the leverage appears insurmountable, and predators’ conflicting interests change the equation. Picture the scene in Jurassic Park with T-rex and the velociraptors.

    Comment by Doug Terpstra — October 8, 2010 @ 12:28 pm

    • Hi Doug, apt parable.

      Thanks for the link. We knew this was coming, one way or another.

      But these swine sure are going to try to make it as painful and destructive as possible.

      Comment by Russ — October 8, 2010 @ 2:29 pm

  3. Time to STOP operating under the assumption that this is a top down society, then…
    The question is.. do we have FAITH in the legitimacy of the people or not ? If we don’t.. then we will flush ourselves down the toilet.
    Oddly enough, I’ve been promoting “the Merchant of Venice” for a long time now.
    Travaux pratiques, as we say in French. The casket scenes. The one THE TREASURE IS IN, is the one where you have to risk body and soul, and its appearance is very discouraging. It LOOKS worthless.
    If THE PEOPLE take no risks in this situation THEN we will lose everything.
    This is totally IRRATIONAL. But… it’s the way we work. I believe.
    So… people staying in their houses should be encouraging OTHERS to stay in theirs. At the very least.

    Comment by debra — October 8, 2010 @ 12:37 pm

    • I encourage everyone to stay – but stop paying.

      If there’s no faith in the legitimacy of the people then there can be no legitimacy at all, since within the people is the only place sovereignty can lie, and it is neither alienable nor divisible. (Rousseau got both of those right, but he oddly still wanted elite government, which seems to me a contradiction.)

      Comment by Russ — October 8, 2010 @ 2:22 pm

      • So, since you are better at doing your homework than I am, where did he say that he still wanted elite government ? I would like to read those pages myself. Are they on your blog ?

        Comment by debra — October 9, 2010 @ 2:14 am

      • Rousseau’s concepts of the sovereign and the general will, as well as the social contract in itself, can in principle be applied to positive democracy. E.g. Book 1, sections 6 and 7.

        But Rousseau clearly didn’t want this outcome. In sections 7 and 8 he’s already looking for ways to justify the civil state and even property (via the false concept of “first occupancy”, the first moral and intellectual fraud of the book).

        He then gives the good discussion of sovereignty in principle which I mentioned above, but by Book 2 section 7 he’s conceiving the lawgiver, whom he explicitly defines as an elite whose legislative power is benevolently despotic and divorced from execution.

        From there Rousseau discusses forms of government, none of them democratic.

        By contrast, a basic democratic principle is that “the commune must be a working body”, as Marx put it. This means it combines the legislative and executive functions, probably delegating the latter to accountable, instantly recallable executives.

        So my view of the matter is that Rousseau’s basic philosophical analysis is fruitful, but he goes astray once he dogmatically decides he must justify the state and “property”, and his allowed range of practical options are all unacceptable while he leaves out the only truly moral and practical option, direct decentralized democracy.

        Here’s my only post where I extensively discussed Rousseau:


        Comment by Russ — October 9, 2010 @ 3:06 am

      • Which book by Rousseau are you talking about ?
        One of the major failings of Enlightenment thought was to put EXCESSIVE FAITH in the law.
        This is why I talk about aristocracy.
        Because to me the law is necessarily a REPRESSIVE instrument of social CONTROL (thus.. NOT an AFFIRMATIVE but essentially NEGATIVE way of dealing with human behavior. And Nietzsche seems to have gotten bogged down in the excessively black SOCIAL DARWINIST ideas that were circulating at the time, and that are STILL circulating, as a matter of fact.)
        The God question is not reductible to the justification of the authority or the legitimacy of the law, because Christianity historically appealed to TWO forces for social cohesion : the law, and GRACE, from whence comes “gratuity”.
        Grace is the motor behind the law. Only when the law is SUBSERVIENT to grace can it do its job.
        I don’t BELIEVE IN taking God out of the system, because for me the system falls apart without Him, (and YOU who love the Old Testament ranters are in a rather “butt between two chairs” position on this one).
        Grace goes along with.. sharing, cooperation, altruism, the POSITIVE, AFFIRMATIVE virtues that we need to rebuild this society.
        The law ? When you give commandments in a spirit of LOVE, (subservient to grace) then they work for you. But.. if you give them in a spirit of spiteful punishment, then they DON’T.
        WE are not using the law in a living manner these days. And as a result, it is taking us down.
        As far as getting along without “God”, you know what I say.. throw him out the door, and he’ll come back through the window. THIS time.. in the form of… “the general will” ? What the hell is that, and what’s the difference between that and tyranny of the majority ? Remember.. I don’t think that “the poor” are INTRINSICALLY VIRTUOUS. They’re.. men and women just like the rest of us (including the rich, by the way..)
        It ultimately comes down to the glass half full or half empty. You LOVE and TRUST your neighbor, and your society works. You MISTRUST and HATE your neighbor.. and you take YOURSELF AND your neigbor, and your whole society down with you.
        And NO LAW in the world will prevent this.

        Comment by Debra — October 10, 2010 @ 11:57 am

  4. The system is in chaos now.A major revamp is in order, Thanks for the quality post.!

    Comment by doug — October 8, 2010 @ 12:58 pm

  5. A couple of things.

    First, yeah, systemic foreclosure fraud has made the next banking crisis inevitable. I’m with Chris Whalen and believe the major TBTF banks will F again in the next 3-6 months (I’m betting on the under), but this time they have to be wound down under the Frank-Dodd bill and not bailed out.

    Second, we now have 40 state attorney generals involved looking out for their own citizens (and their own political futures), so I don’t see Yves’ scenarios 1 and 4 as viable for practical reasons. I don’t see Yyves’ scenario 3 as politically viable because it has only been 18 months since the TBTF banks F’ed the last time, and they paid themselves billions using taxpayer money in the meantime.

    Third, while I view what Obama did as political kabuki, it’s not because I believe the notarization law has any bearing on the foreclosure fraud. That law really would have made no difference in foreclosure cases involving fraud, one way or the other. The fact that a document is notarized does not mean a judge has to accept the document as true. (I’m speaking as a former lawyer with a fair amount of trial experience, and the Ohio AG confirmed my viewe of HR 3808 in an interview over at firedoglake.) The fact that Obama vetoed such an innocuous bill is an indication of how volatile the foreclosure fraud mess really is.

    Politically, “foreclosuregate” transcends the typical “my tribe versus your tribe” frame because it calls into question what every American has been taught it means to be an American. Failed banks will be allowed to fail, which will extinguish the bad debts that have been marked-to-myth for the last couple of years. Reflation is now politically impossible, and debt deflation will truly begin.

    Comment by Tao Jonesing — October 8, 2010 @ 9:27 pm

    • Tao, I know you think this law is much ado about little, and maybe it would be if courts were conscientious.

      I agree that if passed it still wouldn’t go to the heart of their problem. It would just regularize some of the “irregularities” they’ve been using to cover up the structural problem, that they broke the chain of ownership, and that all their toxic “assets” are even more toxic than we thought.

      Although, I don’t see how it’s a small matter to have the federal government override all these meticulous state notarization procedures. As a rule “streamlining the bureaucracy” (a conservative buzz-term) really means degrading or destroying all standards.

      That’s what I think the intent is with this. Get to work degrading the standards and otherwise muddying the picture of what the legalities really are (meanwhile propaganda would push the Orwellian claim that this is clarifying it), while they try to figure out the real fix. (And meanwhile the alternate route of kangaroo courts and street thugs continues.)

      The way things are nowadays I assume any law that can give functionaries, including judges, cover to do the “expedient” thing will have and is intended to have that effect.

      If the health racket bailout and the sham finance bill were really enforced to the hilt, the result would be not great but perhaps not terrible either. But it seems like no sober observer expects any such enforcement. All “regulation” is a scam.

      I’d find it hard to believe that a redoubling of the Bailout to keep trying to reflate is politically possible, but then I still can’t get over how everything that’s been done so far has been politically possible, but there it is. I think there has to be a tipping point somewhere out there, but wherever it is it’s not rationally calculable. We passed any such point a long, long time ago.

      In the meantime I’m more inclined to think it’s simply impossible according to “the markets” themselves. With this mortgage mess we’re now undergoing a monumental new realization of instability and uncertainty. There’s no way everyone can keep cheering one another on to have faith in all these bubbling numbers, all these phony rallies and aspects of “recovery”. Something will give, and just like in 2008 it will all start unravelling again, but with much greater violence, and this time no economic policy, no “forbearance” and array of lending facilities will be able to patch it.

      Maybe then we’ll finally see the political tipping point.

      That we can overcome the tribalism you mention is the key to it all. That question will decide the outcome.

      Comment by Russ — October 9, 2010 @ 3:36 am

      • I hope you’re right about there being a tipping point at some point. But I think we akread reached the last tipping point on 12-12-2000. And yet the piece of unelected filth was allowed to take office anyway, and no one of any import so much as said much less did anything about.

        Comment by Andy Lewis — October 10, 2010 @ 5:10 am

      • I think we’re long past the occasion for any rationally explicable tipping point.

        So if it comes, it’ll probably come as a surprise at that moment.

        And I agree completely on how Gore and his supporters in particular, having won the election, and especially given all their advantages, had to fight in 2000. It’s a mark of their cowardice and lack of integrity that they not only caved in then, but have ever since scapegoated the trivial Ralph Nader campaign, which of course had no effect on the election, which Gore won.

        Nader didn’t force Al Gore to vacate the White House. Nor did Bush or the SCOTUS. Only Gore forced Gore to do that.

        Comment by Russ — October 10, 2010 @ 8:19 am

      • re: Gore

        The recent allegations about Gore ring sympathetically with his surprising capitulation in 2000.

        Bush’s connections to the CIA means he knew every little piece of dirt on Gore – whether it was sex (or something else) we will never know.

        Just a hypothesis.

        Comment by purple — October 12, 2010 @ 2:40 am

      • Which allegations?

        Who knows what happened in 2000. What kind of “dirt” can someone have on you, especially when you just won and will be in a position to exact nasty payback if anyone screws with you?

        But then, as we saw from his actions, Gore wasn’t psychologically capable of understanding that he won and acting accordingly, unless that victory were ratified according to the proper “process”.

        There again we see the cramped limits of the liberal process mentality.

        Comment by Russ — October 12, 2010 @ 3:49 am

    • I don’t buy this analysis, nor do a lot of people. The point of the Interstate Recognition of Notarizations Act is to muddy the waters. Business has bought and paid for the Supreme Court and they intend to use it. All you need is a bit of wiggle room — the ambiguous word “recognize” strewn repeatedly throughout — and the courts have plausible justification to throw the fight to the moneyed interests, which is what really they wanted to do anyway. (Can’t let those deadbeats get away with anything, after all.)

      BTD at TalkLeft:

      The other issue is what precisely does “recognize” mean in terms of this law. If the notarized document can be rebutted and is treated like any other piece of evidence, then fine and dandy. But as we now know, courts have been rocket docketing foreclosure actions. This is just one more excuse to deny due process. (link)

      Another post: What does “Recognize” Mean?

      Let’s assume for the moment that there is in fact, nothing malign about the suspicious circumstances by which the Congress passed the Interstate Recognition of Notarizations Act. The effects of the legislation would be, in my view, to further erode the due process afforded homeowners in foreclosure proceedings. The use of the ambiguous term “recognize” could, and in my opinion, will, be used to further deprive homeowners of due process (link)

      Comment by reslez — October 9, 2010 @ 9:59 pm

  6. As a former mortgage employee that got lay’d off by a greedy lender in 2007….get ready, there is another crash yet to come! Hold on to your boot straps this will be the worse one yet!!!

    Comment by Lori — May 2, 2012 @ 7:33 pm

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