Markets and Foreclosure Crisis
We still don’t have any reaction from the markets on recent issues with mortgage documentation and to be frank I still don’t know what to think on all that.
In terms of housing market possibilities are:
1. This all is overblown and the number of mortgages with defective legal documents is insignificant.
2. Number of mortgages with defective legal documents is significant to slowdown the foreclosures and reduce unsold housing inventory thus slowing down housing prices decline (or even prevent them from falling). Stronger demand in the future clears the inventory.
3. Number of mortgages with defective legal documents is significant and it delays foreclosed homes coming to market resulting in stronger downward price pressure in the future and prolonged and deepened housing crisis.
In terms of banking sector effect we have:
1. Nothing happens.
2. Asset backed securities prices fall. Buyers of securtized mortgages sue asset backed securities issuers and sponsors claiming fraud and demand damages. Buyers win the court case (remember it takes only one court case to start the avalanche).
If the scale of defective documentation is large mortgage originators’s and servicer’s will not have enough money to cover the damages and the banking sector losses large chunk of its capital.
Or even worse: FED and U.S. government forces on to issuers all defective mortgages it bought.
Banking crisis 2.0 arises.
3. Asset backed securities prices fall. Buyers of securtized mortgages sue asset backed securities issuers and sponsors claiming fraud and demand damages. Buyers win the court case. The scale of defective documentation is smaller; banks, originators and servicer’s are able to cover damages without structural damage to banking sector.
My base scenario for the time being is that U.S government will view favorably on delaying foreclosure activity (pushing the problem further in to future) and that nothing material will happen to banks.
October 12th, 2010 at 11:57 am
Don’t worry, he will sign..
http://www.reuters.com/article/idUSTRE69B3BA20101012
October 19th, 2010 at 12:32 pm
[…] change my base case scenario. This has the potential to start another banking crisis and cause serious fall in risk-assets […]
January 9th, 2011 at 11:35 pm
There are two ways to reduce negative equity,’’ Fleming said in a telephone interview. “Price appreciation or disposition, which means people getting taken out of their homes. At the moment, there’s more disposition.’’ A further decline in prices threatens to increase the number of homeowners with negative equity, Fleming said.