A shiny new crisis

A new economic crisis is brewing in the USA. After the Subprime Mortgage Crisis of 2007 and the Financial Crisis of 2008, the US economy is faced with a looming 'Foreclosure Fraud' Crisis. A crisis that The New American calls 'an epic legal and economic meltdown that would make the crisis of 2007-2008 look like the proverbial Chinese tea party'.

The cause of the crisis can be traced back to two phenomena that have taken hold of the US real estate sector over the last two decades: 1) repackaging and reselling of mortgages and 2) forging (euphemistically called 'recreating') the so-called "chain of title". The chain of title is the proper (signed) documentation that records who is the lender of the mortgage and who is it that owes the lender.

In the nineties of last century it became fashionable to sell mortgages to other parties. Mortgages were sold, repackaged, and sold again. In the process a bewildering array of mortgage-backed securities was created to underwrite this new market. The United States mortgage business not only went national but international as investors worldwide rushed to get a piece of the lucrative American real estate sector.

To help streamline the process, a national mortgage electronic registry called MERS (Mortgage Electronic Registration System) was created, whose purpose was to streamline the transfer of mortgages by helping to avoid the costs and inconveniences of recording mortgages at local courthouses. The biggest problem with this system is that the note, the part of a US mortgage which empowers creditors to enforce the terms of the mortgage, typically lacks the requisite signatures, breaking the chain of title. And when the chain is broken, neither lender nor home-owner can be properly identified: All of a sudden nobody owns the home for which the mortgage was written.

That this was the case for many mortgages came out only when the number of foreclosures started to rise. Before, owners weren't aware because banks simply didn't inform them mortgages were in the possession of other banks. And as long as payments were made, nobody but the banks was any the wiser. But all of a sudden delinquent home-owners (and even some that weren't) started to get eviction notices from companies they'd never heard of and certainly did not sign the mortgage with. Many home-owners contested the eviction in court. That is when the massive breaking of the chain of title was discovered.

But there is that second aspect of the story: the fraud. Of course, the banks were aware that the legal basis of the mortgages, the chain of title, was corrupted. Hence, many banks used the services of obscure and frankly sleazy companies that offered 'recreated' (which means: forged) documents to re-establish the chain of title.

With the number of foreclosures rocketing up and the many problems with the mortgage notes and the chain of title now emerging the demand for these services exploded. The companies offering forged documentation struggled to keep up, cutting corners where they thought they could. New employees were dragged almost literally from the streets. People were asked to 'notarize' forged notes, who barely knew what a mortgage was.

To what absurd results this has led can be read in the DC Caller: One Nation Under Fraud. Home-owners that were current on their payments, even home-owners that had fully paid their mortgage or didn't have any, received eviction notices from banks on the basis of 'recreated' notes that didn't even have the decency to mention the correct names and/or addresses. The pinnacle of absurdity must be the case where Wells Fargo was sued for wrongful foreclosure by... Wells Fargo. And lost...

The scale of the fraud is truly staggering, with estimates that 95% of foreclosure cases involve some form of fraud on the part of the bank. Assuming that these foreclosure cases are a more or less random sample of all mortgages in the system, this throws into severe doubt the value of the mortgages that banks (think they) own. Moreover, the position in mortgage backed securities held by trusts will turn out to be positions in securities backed by nothing. When this notion sets in the market the values of both will drop down to their natural level: $0.00.

But that isn't yet the end of it. The US Office of the Comptroller of the Currency estimates that an incomprehensible $233 trillion is tied up in credit-default swaps (those WMD's that precipitated the 2008 Financial Crisis). These are derivatives based on mortgages. With the mortgages losing their value, so will the derivatives. And that means that $233 trillion may disappear virtually overnight, together will all the money outstanding in fraudulent mortgages and securities.

How much of that massive number is held by European or Dutch banks I don't know. But I think it is a safe bet that if and when the US real estate market finally sneezes, we'll be in for a massive head-cold. Already last Friday, financial institutions took a hammering on Wall Street. Bank of America shares lost nearly 5%. Shares of Wells Fargo also fell nearly 5%, while J.P. Morgan Chase fell 4% and Citigroup lost nearly 3%. And the cost of protecting against the default of bank bonds continued to surge. In all likelihood, come Monday, European financials will likewise take a beating. I think the appropriate caution is: HANG ON TO YOUR SEATS!

In the mean time a massive number of properties exist in the US for which no legal ownership can be established: No-one owns these houses. The question is: What will happen to these properties? Vox Day asks the question and a reader provides a tentative answer. Not a lot of people are going to like it, though.

Recommended reading:
DC Caller: One Nation Under Fraud
The New American: The Mortgage Foreclosure Crisis
Wall Street Journal: Mortgage Damage Spreads
Chink in the Armor

[INSTANT UPDATE] The post above is a simplified version of the nature of the Foreclosure Fraud crisis. The whole thing is a much more convoluted affair as a cursory reading of (any of) the links given above will make clear instantly. My aim with this post is to explain things for a non-US audience. Here in the Netherlands at least the reporting on the nature of the crisis is truncated to the point of imbecility. I think I have the basics correct, but if there are corrections to be made, I'd very much like to hear about it.

[UPDATE001] Have the circumstances leading up to the crisis been engineered? Tom Blumer explores the question on Pajamas. He sees the filthy fingerprints all over housing and mortgage lending of the 'Cloward-Piven Strategy'.

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