Sunday 3 October 2010

Mortgage-gate

There is a slow-motion train wreck unfolding before us while attention is focused on whether Christine O’Donnell’s flirtation with Hare Krishna is interesting or not. Once again, it involves the nation’s cancerous house-building habits of recent years in which endless new suburbs were carved out of cornfields to stoke millions of American Dream lives and make gazillionaires in Wall Street. Like all addictions, it ended badly.

But the destruction may not be over by a long shot. Foreclosure mills have been churning out tens of thousands of ejections and repossessions because the sharpies who created the mess now want people out fast. (Forget trying to help people stay in these homes, which is official policy—that’s usually not convenient for the financial industry, which is still very much in charge.)

But it turns out that key aspects of the legal chain of ownership were ignored starting in the mid-00s, and now there is hell to pay. Huge banks like JPMorganChase and BOFA are shutting down their foreclosure actions, and despite the assurances that tut-tut, these are mere technicalities, there are now inklings of acknowledgment that the impact may be huge.

A NY Times article argued that this will be good for the housing market and even ‘lay the groundwork for recovery’ because it will boost prices by slowing down the foreclosure tsunami. But other, wiser heads in the econ-blog world have been saying for months now that what housing urgently needs is to hit bottom, to get to a true price level so that people wanting to enter the market will be assured that the value of the property won’t decline further.

Interruption of foreclosure where the household is hopelessly in the tank will not help this process, and meanwhile the banks and pension funds holding the rubbery mortgage security bonds cannot even liquidate the underlying properties. This could quickly aggravate the woozy state of bank solvency nationwide as the AFP piece today stated:

“It is bad for the finance market because the lenders can’t get their money for years. The losses for the banks will be much bigger.”

The latest round of revelations include the rather amazing fact that the foreclosure mills have been fabricating documents to be presented in court. That strikes us as, um, potentially quite annoying to, um, like, judges? Sounds as though any minimally alert homeowner about to get his sofa put on the sidewalk might have a good case for halting the process—imagine the ripple effect throughout the entire economy if it’s not clear who owns the country’s houses.

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