Jim's Blog

Did you make payments on your mortgage?  Can you prove it?  Can you prove you made the payments to the right entity?  Who is the right entity?  Does anyone know?  Mortgage servicers don’t have great incentives to get distressed homeowner’s records correct

The foreclosure scandal, at first sight, does not seem like much of a scandal.  A bunch of people borrowed large amounts of money against houses, usually with false or nonexistent documentation of their income and assets and grossly inflated valuations of the houses.  Then they did not make their payments.  Then some random person attempts to foreclose on them, and they complain that the guy trying to foreclose lacks standing to foreclose.  What is so bad?

Somehow, one does not feel any great sensation of outrage and pity, but yes, there is a scandal here and it is really bad.  Also very, very complicated.

The dud loans were made into dud mortgage backed securities, which were divided into tranches, some of the tranches being more senior, that is to say less dud, than the others.  So when it all has to be unwound, it is a total mess and complete chaos.  To make things worse, the various entities that arranged the loans were fly by night scamsters who cannot be found.  Even worse, the senior tranches all wound up being sold to the government:  Freddy Mac, Fannie May, the Federal Reserve, and the FHA.

Why does the feds holding senior tranches make things worse?  Because the holder of the senior tranche should be defending his own interests, should be making sure that foreclosures benefit himself, should be organizing the foreclosures to be most lucrative to himself, but the federal government could not run a pie stand.  The labyrinthine and rigid federal bureaucracy  is at the top composed largely of people who graduated in political correctness from the most eminent universities.  Which means that these assets (the rights to foreclose on various houses) are ill defended, therefore apt to be stolen at worst, and incompetently exercised at best.

So it looks as if houses are often being foreclosed to the benefit of those who merely hold the junior tranches and thus have no right to benefit by the foreclosure, or perhaps do not hold anything at all – it is difficult to tell, perhaps impossible to tell.

It is also unclear how much money the people being foreclosed upon actually owe – again, it is difficult to tell, perhaps impossible to tell.  When the scammers sold mortgages on to the next guy in line, they tended to pad up the mortgage, tended to exaggerate the amount of money owing.

But the big scandal is a fraud upon the taxpayer: Goldman and Sach, and other well connected and too big to fail securitizing entities guaranteed that 9999 out of 10000 mortgage notes would be valid. It looks like few or none of them are valid. Thus the people that securitized these the mortgages are liable for the full value. Unfortunately, since the senior tranches were all purchased by the taxpayer, this claim against Goldman and Sach is unlikely to be exercised.  It may well be exercised by the holders of junior tranches, which will produce further chaos.

The Market Ticker ® complains that the banks and the regulators are flagrantly and massively violating laws that are necessary for borrowing and lending to work – violating every step that is necessary for the trust to work along the chain, with the result that our entire financial system is massively disfunctional, and continues to leak huge amounts of money.  He gives lots of interesting details of a multitude of flagrantly criminal acts.

But he fails to ask how the widespread criminality began.

It began because the law both commanded and forbade affirmative action lending, and to comply, what was illegal had to be done, therefore, had to be made de-facto legal.

Repeating my much repeated rant yet again:

When they gave a Nobel prize to Marie Curie for being female, that did not hurt anyone except more deserving potential Nobel prize winners.   But handing out phony Nobels on the basis of sex, race, and nationality necessitated handing out phony degrees on the basis of race and sex, and handing out phony degrees on the basis of race and sex necessarily led to a crisis where these phony degrees were being ignored by employers, so employers necessarily had to be forced to give out well paid phony jobs on the basis of race and sex.   But being given well paid phony jobs on the basis of race and sex failed to result in recipients living a middle class lifestyle, so lenders had to be forced to give out a middle class lifestyle on the basis of race and sex.  Which required every single banker to become dishonest or get a new job.  Which has led to our present financial crisis.  It all began with Marie Curie.

So if you roll back the most unpopular, extreme, and disastrous form of affirmative action, you then immediately face a problem with less extreme and more popular forms.  And if you roll them back … All solutions are either radical or unworkable.  Roll back affirmative action loans, and pretty soon you are going to have to ridicule Marie Curie, and say her husband should have kept her in the bedroom and the kitchen, and not put her in the lab.  And since no one wants to start walking down a path that ends in them saying it was inappropriate for Pierre Curie to try to make Marie Curie into a scientist, no one wants to stop bankers doing criminal things.

And so the financial system continues to leak money