Hundreds of banks threatened by new subprime crisis
Pastor Dale Morgan
Hundreds of banks threatened by new subprime crisis*
Court ruling blocks institutions from profiting from foreclosures
Posted: November 20, 2007
11:45 p.m. Eastern
The reserves of hundreds of banks are at risk, including some major
banks, after a little-noticed federal court decision signaled the crisis
in securitized home mortgages could spell much more trouble for
financial institutions than previously realized, even on Wall Street.
Justice Christopher A. Boyko of the Eastern Ohio U.S. District Court
dismissed 14 Deutsche Bank-filed home foreclosures Oct. 31, based on a
ruling that the German financier lacked standing for not owning the
mortgage loans at the time the lawsuits were filed.
Bob Chapman, author of the International Forecaster website, emphasized
the problem in his Nov. 21 newsletter.
"This court ruling in Ohio means that the securitized trusts own
nothing," Chapman wrote. "The investors in these securities might have
assumed – wrongly, it turns out – that they actually owned some real
estate in these deals. The problem is, they own nothing."
Chapman called the ruling "monumental."
"The holders of those slice-and-dice derivatives could have zero legal
redress or collateral in foreclosures," he said. "This reduces their
values substantially."
Deutsche Bank held the home loans through a packaged bundle of loans
bought in what is known as a Mortgage Backed Security, or MBS, the
home-owner version of the more general Collateralized Debt Obligation,
or CDO, packaged by Wall Street.
Simply put, Boyko's decision raises the prospect that Mortgage Backed
Securities may be "mortgage backed" in name only.
An MBS typically involves only a residential mortgage, whereas CDOs
involve a variety of debt instruments, including credit card debt, which
is purchased from the original issuer and sold to an institutional
investor, typically a bank.
The problem is that banks hold MBSs in their asset portfolios,
contributing to the reserves banks are required to hold in order to operate.
"The U.S. financial media and Wall Street pundits are asleep or remiss
on the true extent of the MBS crisis," Chapman asserted.
He concludes that many institutional holders of the MBS securities try
to argue that they had assignment of the mortgage titles, or equitable
assignment, that predates the filing of the foreclosure.
But the court in Ohio disagreed: "If a securitized trust cannot take an
equitable assignment of a mortgage loan, the banks holding these
instruments may be out of luck."
Over the past few years, Wall Street has bundled billions of dollars of
home loans into various MBS securities and derivatives products.
The full dollar amount of MBS obligations owned by financial
institutions is not yet fully determined, not even by top experts on
Wall Street.
Conceivably, MBS obligations, in trouble because of the bursting of the
real estate bubble, could number in the trillions of dollars. The stock
market already has realized this.
But the Ohio U.S. District Court decision adds another level of
complication to the crisis.
If the holders of the MBS securities do not hold any claim or title on
the underlying mortgages, then the banks might not have a claim even on
the home foreclosure proceeds.
In other words, bank assets and reserve calculations now face the risk
of a double loss.
The first loss is the devalued value of the MBS because the underlying
mortgages are in foreclosure.
The second loss is that the financial institutions, as owners of the
MBSs, may not receive any proceeds from the foreclosures if only the
mortgage originator owns the title to the home, not the financial
institution owning the MBS.
Ywo Bear Stearns hedge funds, heavily laden with mortgage-backed
securities derivatives, took losses which threatened the solvency of the
funds, forcing Bear Stearns to lend one of the funds $3.2 billion, just
to prevent the fund from imploding.
Bill and Hillary Clinton raised eyebrows on Wall Street by liquidating
between $5 and $25 million in a blind trust, just before the beginning
of a market downturn that now has seen the Dow Jones Industrial Average
close under 13,000 twice since August.
When the Clintons liquidated the blind trust on or around June 15, the
Dow was averaging over 13,600.
The index closed Monday at 12,958.