The Housing Chronicles Blog: Potential widespread fraud behind the mortgage meltdown?

Tuesday, December 11, 2007

Potential widespread fraud behind the mortgage meltdown?

From Sunday's San Francisco Chronicle is an opinion piece by a local attorney who claims that none of the remedies set forth by either the Bush Admin. or those running for President will amount to much. That's because:

The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value - right now almost 10 times their market worth.

The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process...

The catastrophic consequences of bond investors forcing originators to buy back loans at face value are beyond the current media discussion. The loans at issue dwarf the capital available at the largest U.S. banks combined, and investor lawsuits would raise stunning liability sufficient to cause even the largest U.S. banks to fail, resulting in massive taxpayer-funded bailouts of Fannie and Freddie, and even FDIC...

We are on the cusp of a mammoth financial crisis, and the Federal Reserve and the U.S. Treasury are trying to limit the liability of their banking friends under the guise of trying to help borrowers. At stake is nothing short of the continued existence of the U.S. banking system.

Oh, my.

Now I have to admit that this is a very well-written article and lays out some important points. There are some folks (such as Bruce Norris, speaking at tomorrow's sold-out Real Estate Research Council lunch at Cal Poly Pomona) who think that 2008 will be even worse than currently predicted (and for the low, low price of $4,000 he'll teach you how to benefit!). But I like Bruce -- he's a straight shooter and has been proven right before on some prior predictions and usually makes a good case for his ideas.

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