Best of the Week
Most Popular
1.Stock Market Crash and Recession Indicator Warning: Extreme Danger Ahead - Harry_Dent
2. Is This How World War III Begins, In Almost Complete Silence? - Jeff_Berwick
3.Trump Wins 2nd Presidential Debate, Betfair Betting Markets Odds Bounce - Nadeem_Walayat
4.Why Krugman, Roubini, Rogoff And Buffett Dislike Gold - GoldCore
5.End of SPX Stock Market Correction Nears - Tony_Caldaro
6.Get Ready for the Future - Exponential Machine Intelligence Mega-trend towards Singularity - Nadeem_Walayat
7.US Housing Market Bubble II – It’s Happening Again! - Andy_Sutton
8.FTSE BrExit Stock Market Panic Crash Resolves towards New All Time Highs - Nadeem_Walayat
9.Can Trump Still Win Despite Opinion Polls, Bookmakers and Pundits all Saying Hillary has Won? - Nadeem_Walayat
10.Gold’s, Miners’ Stops Run - Zeal_LLC
Last 7 days
Stock Market Investment Success Through the “Investment Rule of 72” - 21st Oct 16
The Final Bottom in Gold - WHEN - 21st Oct 16
Gold Green Lights Upleg - 21st Oct 16
Demand for US Mints Silver Eagles has ‘Returned with a Vengeance’ - 21st Oct 16
Central Bankers Can't Stop The Death Blow Of The Post US Election Recession - 21st Oct 16
The Fortune at the Bottom of the Pyramid: Golden Opportunity for Frontier Asia - 21st Oct 16
Have You Taken These 4 Simple Steps to Improve Your Trading? - 21st Oct 16
The Stock Market is an Accident Waiting to Happen - 20th Oct 16
It's Rally Time for Gold and Silver Equities - 20th Oct 16
Cashless Society – Risks Posed By The War On Cash - 20th Oct 16
China's Insanely Leveraged Housing Market Will Enter Its Secular Bull Market In 2017 - 20th Oct 16
Donald Trump Bounces Going into 3rd and Final US Presidential Election Debate - 20th Oct 16
Attention Please: Phase Two of the Gold and Silver Train Now leaving the Station. All Aboard? - 19th Oct 16
How to Successfully Trade a Stock Market Crash - Black Monday October 19th 1987 - 19th Oct 16
Tesla, Apple and Uber Push Lithium Prices Even Higher - 18th Oct 16
Silver, Debt, and Deficits – From an Election Year Perspective - 18th Oct 16
UK Property Market: Slow Growth Does Not Equate To Decline - 18th Oct 16
Trump Election Victory is in Your Power - 18th Oct 16
Stock Market More to Come! - 18th Oct 16
This Past Week in Gold and Silver - 17th Oct 16
A Falling Stock Market Cannot Be Allowed - Financial Repression Is Now “In-Play”! - 17th Oct 16
Commodities, Forex and Stock Market Trend Forecasts - 17th Oct 16
Stock Market Crash..or No Crash? - 17th Oct 16
A perspective on risk rally – Risks abound but Stock Market is Confident - 17th Oct 16
Bank of England Blames Brexit for Sterling Drop Inflation, Masks QE Money Printing Cause - 17th Oct 16
From Piety to Pride to Pity, America's Racial Divide - 17th Oct 16
Is Obama Juicing US Government Spending To Get Hillary Clinton Elected? - 16th Oct 16
Seek Your Independence: Anything Else Will Destroy You - 16th Oct 16
SNL - US Presidential Debates, 1st, 2nd, VP - Like You've Never Seen them Before! - 16th Oct 16
End of Economic Growth Sparks Wide Discontent - 16th Oct 16
Donald Trump on Life Support, May Abandon Election Campaign and War on Republican Party - 15th Oct 16
The Gold Manipulators Not Only Will Be Punished, They Have Been Punished - 15th Oct 16
Black Votes Matter - Is the US on the Verge of Mass Race Riots? - 15th Oct 16
Gold Stocks Screaming Buy - 14th Oct 16
Brace Yourself for the Quadrillion-Dollar Reckoning - 14th Oct 16
The Next Recession Will Blow Out the Budget - 14th Oct 16
John Mauldin: My Infrastructure Plan to Save the US Economy - 14th Oct 16
World War III On The Brink: War Will Continue Until It Triggers Economic Collapse - 14th Oct 16
US T-Bill Rejection At Ports In Progress - 14th Oct 16
These 2 Debt Instruments Pose Peril to Millions of Investors - 14th Oct 16
China’s Rocketing Housing Market Real Estate Bubble - 14th Oct 16
DIY Winter Home Maintenance Money Saving 22 Point Checklist to Get Ready for Winter/Fall - 14th Oct 16
US Stock Market, Big Picture View - 13th Oct 16
Stock Buybacks Main Force Driving Bull Market; Rewards Investors and Starves Innovation - 13th Oct 16
SPX Gapping Down... - 13th Oct 16
Syria - Obama Stepped Back From Brink, Will Hillary? - 13th Oct 16
The Structure and Future of Gold in the Investment and Monetary World - 13th Oct 16
Can Trump Still Win Despite Opinion Polls, Bookmakers and Pundits all Saying Hillary has Won? - 12th Oct 16
Gold and Crude Oil - General Stock Market Links - 12th Oct 16
Samsung's Galaxy Battery Just The Tip Of The Iceberg - 12th Oct 16
Hillary: Deceit, Debt, Delusions (Part Two) - 12th Oct 16
Gold and Silver Metals Show Strength Relative to the USD Index - 12th Oct 16
Announcing Trader Education Week -- a Free Event to Help You Learn to Spot Trading Opportunities - 12th Oct 16
Confirmed Stock Market Sell Signals - 11th Oct 16
Hillary Deceit, Debt, Delusions - 11th Oct 16
Trump Support Crashes to New Low of 6.4 on Betfair Odds Betting Market - 11th Oct 16
The World Is Turning Dangerously Insular - 11th Oct 16
An American Tragedy: Trump Won Big - 11th Oct 16

Free Instant Analysis

Free Instant Technical Analysis

Market Oracle FREE Newsletter

LEARN to Trade

Mortgagegate Could Crush the U.S. Banking System

Housing-Market / US Housing Oct 15, 2010 - 06:18 AM GMT

By: Money_Morning


Diamond Rated - Best Financial Markets Analysis ArticleShah Gilani writes: What most Americans don't know about " Mortgagegate" is that "robo-signing" of foreclosure documents is the tip of the iceberg.

The breadth and depth of this newest mortgage crisis is so dangerous that the U.S. Federal Reserve last month pre-announced another potential round of quantitative easing (pundits are calling it "QE2") to address "potential negative shocks."

In fact, the fallout potential is so numbing and the actions that birthed it so scandalous that commentators have given the crisis the Watergate-esque title of " Mortgagegate" (or, as some prefer, "Mortgage Gate").

Here's what the news-story headlines aren't telling you.

Foreclosure Follies

The Fed can't admit that the potential shocks it's worried about have already materialized, because that would trigger the very panic the central bankers hope to avoid.

But the odds that a financial tsunami will result from Mortgagegate are building each day. If this storm strikes with its full fury , it could be the kind of credit-crisis aftershock that undermines the tentative handhold that the U.S. recovery is so desperately clinging to.

On the surface, the problem looks like foreclosures have been conducted based on improperly processed paperwork. That is a gross understatement.

Here's what's wrong. When a homeowner buys a property with a mortgage, the property title lists them as the rightful owner and their lender as the mortgage-holder. The named lender possesses an encumbrance on the title. If the homeowner doesn't pay his or her mortgage, the lender can rightfully repossess the property and sell it.

In order to take the home back, the lender must first foreclose on the property. The problem begins with the fact that lenders, in order to make trading mortgages between themselves easier so they can be packaged into mortgage-backed securities (MBS) pools and sold to investors, assign their rights on titles to a "nominee." (How that happens is the part of the story that news outlets aren't talking about and will both shock and sicken you).

To take homes back, lenders or mortgage services start by filing court documents in "judicial foreclosure states" (most states in the U.S. require foreclosures to be court-processed). Filings against homeowners must include signed affidavits attesting to the relevant facts and demonstrating the lender's legal status to foreclose. Affidavits must be notarized.

But here's what's been uncovered: The people who are signing the necessary documents on behalf of the lenders aren't even reviewing documents - which means there's absolutely no way they followed the pre scribed procedures. It turns out that signers are basically "rubber-stamping" legal documents.

In the case of IndyMac Bank FSB (since purchased by a private equity group and renamed OneWest Bank), The Wall Street Journal reported that Erica P. Johnson-Seck routinely signed as many as 6,000 documents a week. In another instance, employees of GMAC Home Mortgage and the mortgage unit of JPMorgan Chase & Co. (NYSE: JPM) admitted in sworn testimony that they each signed 10,000 documents per month, without properly reviewing and notarizing them.

Similar instances of what's become known as "robo-signing" are now coming to light in relation to hundreds of thousands of other documents. And by the time it's all said and done, it's likely that we'll be talking about millions of documents.

Fraud was clearly rampant in the notarization of documents that were part of the foreclosure process. The fact that document signers weren't reading and reviewing the paperwork, and weren't contacting homeowners - all of which was mandated by lenders - there clearly was no way that the proper due diligence was observed.

Questionable legal notarizations include pervasive findings that documents were notarized even before they were signed and dated. A notary is legally designated to verify the identity of the signer of a document and affix their notary stamp along with their signature that they have witnessed the signer executing the document, and that the signer is who they say they are.

Some notarizations on suspect documents are affixed by notaries that don't live or work anywhere near where documents were signed. Indeed, many of them live across state lines. That makes it highly unlikely that signers were verified or that the documents properly notarized by law.

Congress, in its inimitable way, was made aware of this problem. Legislators tried to solve the problem by ramming through - without debate (highly unusual, but they did it) - legislation that partly addressed some of the notary issues.

In a bill that was supposed to facilitate interstate commerce, our elected representatives made it legal for notarizations to be accepted across state lines. How high up is the knowledge of this crisis? Apparently pretty high. After all, it was none other than U.S. Sen. Patrick Leahy, D-V T, the chairman the Judiciary Committee, who on Sept. 27 rammed through the Interstate Recognition of Notarizations Act, the bill in question.

In case you miss the egregious irony of the timing of the bill, it came up for a vote only a couple of weeks after the initial disclosure in courts around the country that GMAC had robo-signers falsely notarize foreclosure documents. Last Thursday, U.S. President Barack Obama refused to sign the bill.

Circle of Deceit

Here's a key question: If these foreclosures aren't being legally executed, are homeowners being kicked out illegally? And what about the buyers of foreclosed properties: Are they rightful owners if the previous owner still has a legal claim to the home?

Is everyone going to sue everyone? What will a nationwide moratorium on foreclosures do to the inventory and prices of unsold homes? And what e ffect will all this have on homes situated near foreclosed properties?

What will happen to all the mortgage-backed securities that contain all these properties and that banks still hold? What will happen to the economy if these problems take years to work through?

And that's not even the worst of it all.

There's actually a much deeper problem that could lead to troubles far worse than anything you can imagine.

The whole mess begins at Square One. And "Square One" is a circle of fraud and deceit so large that if civil and criminal charges and fines were eventually levied against the perpetrators, there isn't a big bank in this country that wouldn't be insolvent.

Naturally, it's about money.

Frightening Fallout

In order to easily buy and sell mortgages between themselves so that these loans might be repackaged, securitized and then sold to investors as mortgage-backed securities, banks and other lenders needed a quick way to "trade" individual mortgages. They created a company called Mortgage Electronic Registration Systems (MERS). This group includes Bank of America Corp. (NYSE: BAC), GMAC LLC (NYSE: GMA), Wells Fargo & Co. (NYSE: WFC), Washington Mutual (now owned by JPMorgan Chase), the United Guaranty Corp. unit of American International Group Inc. (NYSE: AIG), Fannie Mae (OTC: FNMA), Freddie Mac (OTC: FMCC), mortgage-servicing companies and other similarly interested members.

You may not realize it, but at your home-purchase "closing," you sign a document that appoints MERS as the "nominee" for the lender that granted you a mortgage. That gives the nominee the right to flip your mortgage to any other bank or lender it chooses. That's how banks move mortgages around to package them into different securities.

But that brings us to the crux of the controversy: Every time there's change on the title (a change occurs when the nominee switches the lender on your title out for another), local governments require that a new title be recorded. Of course, those governments - the county or municipality that you live in - also charge a "recording fee." MERS also charges a fee, but it's a lot less than government recording fees.

Here's the problem. In creating MERS, these institutions actually changed the land-title system that this country - for much of its history - has relied upon to determine legal ownership status of land titleholders.

Not only did the lenders sidestep (read that to mean avoid) paying billions of dollars in fees to local governments, they paid themselves from the fees that MERS collected.

MERS is facing class-action lawsuits and civil racketeering suits around the country and their members are being individually named in all these suits. One suit alleges that MERS owes California a potential $60 billion to $120 billion in unpaid land-recording fees.

If suits against MERS and all its members are successful, unpaid recording fees and fines (that can be as much as $10,000 per incident) would make every one of them insolvent.

And you wonder what the Federal Reserve meant when it warned of "potential negative shocks?"

The bottom line for investors is that until all these issues are cleaned up (which might take years, or even decades) - or until there's perhaps some sort of legislative clarity that eases uncertainty - investors face the threat of a severe "correction" in any or all of the markets that have risen on the hope that the long-hoped-for U.S. recovery is finally taking hold.

It makes sense, as it almost always does, to have stop orders in place on all your investments and consider the ramifications of these problems whenever your investments have real-estate (or mortgage) exposure.

Actions to Take: On Wednesday, in an e-mail alert to subscribers of his Capital Wave Forecast advisory service, Gilani detailed his "Mortgagegate" concerns, and concluded by recommending that readers "Immediately place a stop loss on all positions, 10% below [Tuesday's] closing prices."

Gilani's logic made sense. By using stop-losses, investors could stay in the market, and reap any upside - while also protecting themselves against the fallout should this controversy turn into a full-blown crisis. In fact, we liked his analysis so much that we've reproduced it here so that Money Morning readers might benefit.

Writes Gilani: "Banks still own most of their toxic assets. They're just buried (with the consent of the Fed and Treasury) waiting for an economic recovery and low rates to let borrowers re-finance and pay them back. Speculators, assuming low rates will generate economic growth have leveraged themselves up buying everything in sight, including mortgage-backed securities for their high yields.

Because of moratoriums put in place, if homes can't be foreclosed on until this mess is straightened out, inventories will build up, and prices could crash again later when that inventory hits the market. If homeowners who bought foreclosed homes find that the validity of the titles they now hold are challenged, lawsuits will fly . People who were foreclosed could sue to get their homes back. Title insurance companies that protect buyers of their insurance policies from title lawsuits could never make good on their policies, and would go belly-up. Governments could (and will) sue banks for potentially hundreds of billions of dollars of recording fees they were cheated out of. Criminal fines could add hundreds of billions of dollars more to their tabs.

What happens if there's widespread panic that this new round of mortgage-related stress won't be fixed quickly?

Markets could tank as leveraged players see their holdings drop and get margin calls. All the speculative, leveraged momentum trades based on a slow- but- upward recovery (especially hoped for in housing) could get upended as speculators rush for the doors.

Is this going to happen?

I certainly hope not. But it is a real, very real, possibility.

If the U.S. Federal Reserve is worried, I'm worried. And you should be, too.

If I'm wrong, great. Markets should continue their recent uptrends. But my job, first and foremost, is to protect you from devastating capital losses.

Here's hoping that I'm wrong."

[Editor's Note: Shah Gilani, a retired hedge-fund manager and renowned financial-crisis expert, walks the walk. In a recent Money Morning exposé, Gilani warned that high-frequency traders (HFT) were artificially pumping up market-volume numbers, meaning stocks were extremely susceptible to a downdraft.

When that downdraft came, Gilani was ready - and so were subscribers to his new advisory service: The Capital Wave Forecast. The next morning, because of that market move, investors were up 186% on a short-term euro play, and more than 300% on a call-option play on the VIX volatility index.

Gilani shows investors the monster "capital waves" now forming, and carefully demonstrates how to profit from every one.

But he doesn't stop there. He's also the consummate risk manager. As the article above demonstrates, Gilani also makes sure to highlight the market pitfalls that can ruin years of careful investing and saving.

Take a moment to check out Gilani's capital-wave-investing strategy - and the profit opportunities that he's watching as a result. And take a look at some of his most-recent essays, which are available free of charge. Those essays can be accessed by clicking here.]

Source :

Money Morning/The Money Map Report

©2010 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email:

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2016 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


John Smyth
16 Oct 10, 14:12
Title insurance

Look to the US government to become the US TITLE INSURANCE company.

The government will "guarantee" the title of foreclosed sales as no insurance company in it's right mind will write a policy for one now.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife