Subprime Morality

John Mauldin is an investment advisor who has a weekly newsletter. It's an eclectic collection of financially oriented interviews, summaries, opinions and occasionally simple forwards of other letters. Recently he has sent out three letters on the subprime problem. It is available at: http://JohnMauldin@InvestorsInsight.com

It is not for the faint of heart. Starting with this incredible quote from Bernanke, "The subprime problem will be contained", it tracks several parallel problems in the development and potential endgame of the subprime problems for banks, underwriters, investors and homeowners. More important is the insight it gives into the thoughtless black heart of what is masquerading as American capitalism and finance. He starts with the relatively minor housing problem which promises to become major as the subprime problem expands. False appraisals rose 50% last year; over 19,000 claimed the first time house buyer's tax credit but did not buy a house and 74,000 who claimed $500 million in refunds already owned a house; one in twenty-one residential mortgages are in foreclosure.

But enough of the small stuff.

Homeowners can be foreclosed upon and evicted only by the entity that holds the loan paper. As the Savings and loan industry declined, mortgages were shunted away from local institutions and into mortgage backed securities which were pooled together into Real Estate Investment Conduits. There they were divided into groups or tranches based upon various qualities like risk of default, interest rate and the like. The designation of these various mortgages into tranches was presided over by the Mortgage Electronic Registration System, jointly owned by Freddie Mac and Fanny Mae. It was legally impossible for these various organizations to hold the mortgage paper of the various mortgage loans. Thus the transfer of the title of the different properties was never done, the "chain of the title" was broken and the borrower now does not know who to pay. In essence, with a broken chain of the title, the borrower does not have a lender.

Consequently the banks holding these "broken chain" loans hired experts ("Foreclosure Mills") to evaluate the chains. They found these poorly documented titles and began to fix the broken chains by forgery and fraud. The title insurance companies that insured these titles balked and refused to sign on to this obvious illegality so the banks, desperate for protection against this chaos, went to the government and the Interstate Recognition of Notarization Act was created which gave a blanket approval to the fraud the foreclosure mills had perpetrated. This was passed by both, BOTH, houses of Congress but Obama pocket vetoed it--no standup guy he. Now the entire mortgage industry is under question. People foreclosed upon might get their houses back; people who bought foreclosed properties might not own them. The entire industry is in peril.

And the banks knew all the time. Richard Bowen from CitiMortgage repeatedly wrote to his superiors (including the esteemed Robert Rubin) warning them of the problem. He estimated 60% of the mortgages were defective and, as time went by, it increased to 80%.

When any of the mortgages were found on sampling review to be defective, they were recycled back into the general pool. Sometime they used the defective paperwork to renegotiate with the borrower for better terms for themselves. The taxpayers are responsible for some of these through Freddie and Fannie--perhaps 400 billion-- but 1.7 trillion, TRILLION, dollars in securities are not guaranteed and may well go to court. Bank of America's exposure may be 400 Billion. International clients and federal agencies (with subpoena power) will be involved.

The final letter describes Ameriquest and its predator employees as they behave like highwaymen and pirates in the field of contract law. Fraud, forgery and malicious insincerity was the norm. A specific sad story, Carolyn Pittman's, shows the callous disregard of these people as they repeatedly return to loot what little this poor woman had left.

Won't someone please call a cop? One only wonders how this will be resolved. Will the mortgage system collapse as borrowers strike back with righteous vengeance and withhold loan payments? How will the Washington Bathoes respond, having already shown their colors with The Interstate Recognition of Notarization Act? Certainly someone will call for a transfusion into the system.

But can morality and character be transfused?