(Please take a careful look at this graphic to see the extent of banks exposure to this problem–KSH)
Even before some of the nation’s biggest mortgage lenders were forced to suspend foreclosure proceedings because of faulty paperwork, it was becoming clear that the Obama administration’s year-old effort to pump life into the housing market was falling short.
The federal government just reported that 4.2 million homeowners are “seriously delinquent” on their mortgages and some 10.9 million borrowers are underwater, meaning their loans exceed the value of their homes.
To make matter worse, there is the threat of protracted litigation between banks and borrowers because lenders might not have followed the letter of law in processing foreclosure paperwork.
An even bigger source of worry is the $426 billion in so-called second liens — home equity loans, second mortgages and other loans “junior” to the primary mortgage — that sit on the balance sheets of Bank of America, JPMorgan Chase, Wells Fargo and Citigroup.
“What is more worrisome than the recession itself is that the government doesn’t seem to represent the people anymore.” Robert Shiller, Yale University economics professor
Amen to that, and it hasn’t for a number of years.
The potentially bigger problem for the banks is that they now facing claims by investors that 1) the mortgages in pools were not of the quality represented and 2) many of the mortgages were never actually transferred to the investors’ trusts. Violationof #1 or #2 can require the bank to buy back suck mortgages at face value, with the bank taking any loss. Given the current estimate that nearly 60% of the securitized loans are estimated not to be owned by the equitable (intended) owner that has been receiving payments, bank exposure is huge.
Similarly, insurers of mortgages, either directly or via credit default swaps, are increasingly challenging payment requirements, based on misrepresentation.
The bank rush to foreclose increasingly seems to be driven by a desire to cover up as much of the fraud as possible. But this will be a continuing problem, as some of the false documents the banks have been using can make the foreclosures void, even as to later purchasers. We are looking at a good 5-10 years to resolve this.
“such mortgages”
Also, many od those bank 2d’s are completely underwater. Losses on them will be huge, and that is direct bank money, not third party investors.