Thread: What Paulson's Loan "Freeze" Really Seeks to Accom

What Paulson's Loan "Freeze" Really Seeks to Accomplish
http://stopthebailout.org/

The ticking time bomb in the US banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require the bundler and, or originator, to buy back he loans at face value if there was fraud in the origination process. The "Super SIV" M-LEC is about hiding what the mortgage bonds are worth, and the "Freeze" is about stopping mortgage investors from suing to make banks buy back this junk. It is widely believed that origination fraud may exceed 50% of all mortgages originated in the United States since 2004. The goal is to insert what may fairly be called an "intervening factor" in the process thus impairing the ability of mortgage bond investors to force bundlers and originators to buy back the loans as is required in the majority of current mortgage bond contracts when there is fraud in the loan origination process. What's at stake is nothing short of the continued existence of the US banking system.

Those selling the "freeze" suggest that mortgage backed securities investors will benefit because they lose more in foreclosures. This is a speculative argument for three reasons: (1) those who appear unable to pay the higher rate, but who do pay will provide some increased income, (2) the increased transactions costs may prevent few foreclosures because many of the 17 million empty homes in the United States are held by investors waiting for this to turn around and when it doesn't, they will dump their holdings regardless of interest rates, and (3) with fast depreciating collateral, the last thing investors in mortgage bonds ought to do is put off foreclosures into the future. Rate freezes are at best a tool for putting foreclosure off into the future. Goldman Sachs' report issued in October 2007 expects an incredible 35% to 40% drop in California home prices in the coming few years. A mortgage bond holder would obviously be better off foreclosing on a home before prices drop 35% to 40%.

The idea until November 2007 was to use Fannie Mae and Freddie Mac to buy up massive bad loans and then when the defaults rolled in and a trillion dollar taxpayer bailout became necessary, lawmakers and the Fed would step back and say, "Oh goodness! We never anticipated such problems and we were just trying to help 'working families' but now that this has gotten out of control, we really must bail out Fannie and Freddie with your tax dollars." Ben Bernanke in highly disturbing testimony to the Senate Finance committee a month ago recommended to Charles Schumer that Fannie's loan cap be raised from $417,000 to $1 million and that Fannie give an explicit guarantee to bond investors in exchange for a small fee. Judging from the price of bond default insurance in the market right now, one may assume that Fannie's "fee" to guarantee the loans would be a pittance with the trillion dollar deficit made up by US taxpayers. Bernanke did tell Schumer that if Congress was going to do something, they'd better do it fast. And he was right.

To the chagrin of policy makers, within a mere week of that testimony and before Schumer could introduce a bill to save his Wall Street chums, a new scandal developed when a Fortune writer noticed that Fannie was suddenly using a new method to calculate loan losses that resulted in them being reported as significantly lower than they would be using the previous method. Then, as lawmakers were mulling the effects of this news on efforts to saddle Fannie and Freddie with the bad debt, Freddie announced a surprise loss of $2.5 billion. Suddenly the news was replete with new analysis of the systemic risk created by the existing exposure of Fannie and Freddie to bad loans without them buying any new ones. To Schumer's credit, he did make a recent inquiry into why the Depression-era Federal Home Loan Bank (FHLB) was making very large loans to shaky institutions like Countrywide Financial. If Countrywide can't pay them back, the taxpayers are on the hook. In any event, these developments have shelved Bernanke's intentions to use Fannie and Freddie to absorb these losses because lawmakers themselves could face big trouble if there was evidence at the time they passed such a law that Fannie and Freddie were already shaky.

The catastrophic consequences of bond investors forcing bundlers and originators to buy back loans is beyond the current media discussion. Such suits would raise such stunning liability as to cause even the largest US banks to fail and result in massive taxpayer funded bailouts of Fannie and Freddie, and even FDIC. In short, it would cause such a massive financial catastrophe that today's problems will seem like the good old days.

Fraud is everywhere. It's in the loan application documents and it's in the appraisals. There are e-mails and memos floating around showing that many people in banks, investment banks, and appraisal companies all the way up to senior management knew about it and there are lots of people who would like to muzzle Andrew Cuomo to buy time to make this all go away. I bet some people are trying right this moment to make him an offer "he can't refuse."

The Alt-A market alone highlights rampant origination fraud: puffing income in no doc loan applications. This problem is separate from and in addition to current subprime pain. The only purpose of no doc loans is to puff income. Why would a borrower pay a higher interest rate only for the right to not have to make a photocopy of his pay stub? There is no other possible reason than fraud. Nobody called it fraud when home prices were rising, but under the civil and criminal laws it is quite clearly fraud. Because mortgage brokers, lenders and investment banks allowed these loans to be made to people who indicated on their loan applications that they were not self employed, they were arguably aware of, and in many cases participated in the fraud and thus may have difficulty defending against actions to force them to buy back these loans.

Paulson's problem is that as Chief of Goldman Sachs he was, to degrees as yet unrevealed, involved in the mortgage securitization process during the halcyon days of mortgage fraud from 2004 to 2006. Paulson became the US Treasury Secretary on July 10, 2006 as the extent of the debacle was coming clearly into focus for those in the know. Goldman Sachs achieved recent fame in the investment markets for having bet heavily against the housing market while Citigroup, Morgan Stanley, UBS Warburg, Merrill Lynch and other investment houses got hammered for failing to time the end of the credit bubble. Goldman Sachs is the only major investment bank in the United States that has emerged unscathed from the debacle. The success of their strategy must have resulted from fairly substantial bets, which also means that they saw this coming at the same time they were bundling and selling these loans.

If Goldman Sachs, its mortgage originators, or both are made to buy back securitized loans at face value, the extent of the bludgeoning to the US financial system will be incalculable because the sheer enormity of this pool of loans dwarfs the combined available capital in the largest US banks. But the question remains of how to get mortgage bond holders to buy into this. The mortgages are in pools that are owned by different central banks, funds, and investors all over the world. Perhaps some US agencies can make veiled threats to select countries to suggest that they will face unpleasant consequences if their largest holders like central banks and investment funds don't go along with this, but how could it be possible to strong arm everyone? The timing is everything just like it was with yesterday's plan to use Fannie to run this bailout because the time is running out. If a mortgage bond investor sues Goldman Sachs to force them to buy back loans, could they make Paulson testify as to whether Goldman Sachs knew or had reason to know about fraud in the origination process of the loans they were bundling? Would it reduce travel costs for the US Treasury Department since Paulson would need to meet with the same group of people to work on the "Freeze" issue?

First was M-LEC, then raising the caps on Fannie, and now the "Freeze." Things are souring fast and the key is to perpetrate one last big fraud before it becomes obvious that what's going on is an effort to conceal one massive fraud with one even bigger. As Bernanke said in October, you have to move fast.

A mortgage I got in 1990 was an adjustable rate, but I was very, very lucky as interest rates were sinking, so what started out at 8% ended up at 5.875%.
All these mortgage lenders should be tried for treason and then drawn and quartered. And thank you, GWB gang, for it was your enouragement of home ownership, and lax regulation of the lending industry to please the corporate buddies for campaign contributions.