TBTF October 11, 2010 - Our House, in the middle of our street

Too Big to Flail

October 11, 2010

“Our house, in the middle of our street, Our house, in the middle of our… Something tells you that you’ve got to get away from it” (Madness – 1982)

Just as everyone is getting more at ease with the US housing crisis, sales and prices seemed to have bottomed out the last few months, a new dangerous phenomenon is rearing its ugly head. Something that could potentially be even more dangerous to the economy than the crisis so far, something which could keep the housing market in a deadlock for many more years to come.

I am talking about the mortgage-ownership mess which is starting to cripple the foreclosure process and potentially threaten to undo millions of foreclosures in the past years and therefore undo millions of sales that have been done in the past years. Over the past months there have been reports about missing mortgage-ownership documents, falsified documents and documents which simply lack the necessary paperwork to specify who holds the title to those loans.

“Millions of U.S. mortgages have been shuttled around the global financial system - sold and resold by firms - without the documents that traditionally prove who legally owns the loans.

Now, as many of these loans have fallen into default and banks have sought to seize homes, judges around the country have increasingly ruled that lenders had no right to foreclose, because they lacked clear title.

The court decisions, should they continue to spread, could call into doubt the ownership of mortgages throughout the country, raising urgent challenges for both the real estate market and the wider financial system.

For struggling homeowners trying to avoid foreclosure, it could mean an opportunity to challenge the banks they argue have been unhelpful at best and deceptive at worst. But it also threatens to leave them in prolonged limbo, stuck in homes they still can't afford and waiting for the foreclosure process to begin anew.

For big banks, "there's a possible nightmare scenario here that no foreclosure is valid," said Nancy Bush, a banking analyst from NAB Research. If millions of foreclosures past and present were invalidated because of the way the hurried securitization process muddied the chain of ownership, banks could face lawsuits from homeowners and from investors who bought stakes in the mortgage securities - an expensive and potentially crippling proposition.

For the fragile housing market, already clogged with foreclosure cases, it could mean gridlock and confusion for years.” (Washington Post article Oct 7 2010 and Washington Post article Oct 8 2010)

If this comes to fruition it would be a disaster. A closed housing market, billions of claims versus banks and financial institutions from within the industry and consumers, new bailouts, capital increases, not something we are currently looking forward to. But I guess that is the consequence if you bailout crooked businesses and crooked business models. You can condone and prolong these bad practices, but they come back to bite you sooner rather then later.

Meanwhile the market is taking the mixed bag of economic data in stride as it rather focuses on the possible QE II (not to be confused with the ocean liner Queen Elisabeth II) by the FED. Bad economic data is being dismissed since the prevailing market wisdom is that it will lead to the FED pouring massive amounts of money into the Treasury markets (investors are already pushing up prices of the 2y Tsys as if the FED had actually already poured in between $400 - $600 bln) and good news is, well, just good news. Bernanke is playing this round of “Liars Poker” rather well.

After the initial comment that there might be further monetary easing his lieutenants have been arguing in favor and against more monetary stimulus, while Dr. Bernanke has been quiet. For now the market is doing his bidding for him, lowering market rates and pouring money into more riskier assets like equities and commodities, but I wonder what will happen if the markets call his bluff. Will he be able to be bold and decisive or will he falter under the pressure and give in to further ballooning the FED-balance sheet to heights where it will undoubtedly lead to a USD devaluation, ending in a crash in equities, bonds and commodities.

Time will tell!

For now the markets moved up this last week. The Dow ended above 11.000 for the first time since April, while the S&P closed Friday at 1.165 (+0.61%) and the Nasdaq at 2.402 (+0.77%) EuroUSD 1.3913 WTI $83 Gold $1.346,75

Within the S&P the Basic Materials sector rallied 2.11% while Telecoms closed lower by -0.23%)

The JPY yen closed at multi-year highs versus the USD. An effort by the BOJ earlier in the week to stem the rise of the YEN by unveiling a new stimulus plan obviously did not work as the carry-trade is still on.

Here in Europe we still need to break through resistance levels. The DAX is still trapped in a triangle-formation with an upward-sloping support line (now above 6.000) and a horizontal resistance line at 6.350

As long as 1.150 holds in the S&P500 index there should be sustained support for the eurozone indexes. Will there be a catalyst that helps them break yearly highs, I doubt it. Not in the near term anyway, but we can always hope for some price-action. One way or the other.

Happy Hunting & Let’s be Careful out there !!!