How the Housing/Foreclosure Will End

There are several scenarios that could play out. I will list the ones I know and concentrate on the one that is most likely to bring this crisis to a constructive conclusion.

SCENARIOS:

1. The current scenario remains unchanged resulting in a thirty-year battle over all kinds of debt besides home loans — student loans, business loans, commercial real estate debt, auto loans etc. In my opinion this would be catastrophic for the economy (total stagnation) and for the REAL people who have skin in the game — the investors who put up the money and the homeowners who put up their homes. The losses in many cases would be total losses as the intermediary non-creditor pretender lenders take what is left of the capital in the marketplace and keep it as profit (untaxed in most cases because it is unreported) instead of being used to increase the reserves of banks, mitigate the losses of investors, and mitigate the losses and dislocation of homeowners.
2. State legislatures attempt to legitimize titles obtained through securitized mortgages. By enacting legislation that makes legal what is mostly illegal (see Minnesota’s law empowering MERS to foreclose even though it has no claim as creditor) states may try to force the issue of foreclosure leaving borrowers and investors defrauded with no apparent legal remedy.
3. State Treasurers and Attorneys General claim taxes, filing fees, and other remedies or penalties based upon the trafficking of securities or interests in real estate located within their state. While this will eliminate or minimize the budget deficits caused by drainage of wealth out of the states and into Wall Street, these actions might be met with blow-back from U.S. Congress, or the administration. It would be an effective tool in setting the stage to clear title on tens of millions of homes where title is now clouded (questionable), defective and thus unmarketable.
4. Judicial (i.e., courtroom) actions continue to gain traction as the creditors (investors in mortgage backed securities) and issuers (homeowners who executed documents that were part of an undisclosed securities issuance scheme continue to gain control of the situation.
5. Judicial action combines the interests of investors and homeowners. This is what I predict will happen sooner than later. Right now investors are paralyzed by fear and terms of their investment that strip them of any right to control the process of mitigating losses. The problem for investors is the same one as the the problem for homeowners: the creditors (investors) are being kept out of the process and in the dark about the issues and actions being taken allegedly on their behalf by parties who have their own interests ahead of the actual creditor. Thus investors are not getting the information, money or titles they have coming to them — and neither the investor (creditor) nor the homeowner (debtor) have an opportunity to eliminate the intermediaries who are acting in breach of their duties and to either deal directly with each other or through new intermediaries who answer directly to the investors.

Investors are in the best position to actually demand and get the real details and information on the status of each and every loan attributable to their fractional interest in alleged pools of loans. Investors, as the real creditors, are in position to get a full accounting, demand the appointment of a receiver, fire the servicer and other intermediaries, approve short-sales, modifications, mediations, settlements and, most importantly take REO property off the market forever as they work out deals with homeowners to create performing loans that fall within the category of normal home loans.

Both investors and homeowners have virtually the same causes of action against the intermediaries. If they join together to file those actions, the intermediaries have nowhere to hide and are exposed for what they are. There are numerous ways in which the joinder of investors and homeowners could result in judgments that can be collected. Neither group will be as successful alone as they would be joining forces.

The snow-ball effect would be executions on both performing and non-performing loans, reducing the amount of foreclosed properties headed to market to perhaps 10% of current and projected REO inventory. Pressure on housing prices would be alleviated and there could even be a bounce as people see the market as oversold under the new paradigm of mortgage modifications and settlements. The amount recovered by investors, even with substantial principal reductions will vastly exceed the returns they are now receiving (usually zero).

This will probably result in a number of non-performing loans converted to performing loans since the motivation to mitigate losses is the paramount concern of investors whereas the improper motivation of intermediaries would be eliminated: to force homeowners into default and achieve additional ill-gotten gains from servicing and selling homes in friendly sales at a fraction of their value. These intermediaries are neither too big to fail nor protected from actions for fraud, breach of fiduciary duties, violation of federal and State Statutes and predatory tactics resulting in losses to both investors and homeowners.

The probably unintended consequences of this joinder is that investors are composed by funds and fund managers with conflicting loyalties in this mess, which would pit some investors against other investors. Another unintended consequence might well be the conversion of a borrower into an investor when the dust settles and the execution of judgments results in the ownership of loans outside the scope of particular cases in litigation.

Special Note to Investors: For those of you who have no conflict of loyalty to the investment banks and other intermediaries who caused this mess contact me at ngarfield@msn.com. We’ll put you together with other like-minded investors along with lawyers for homeowners who are open to this strategy. The rest is up to you.

Tags: homeowners, investors
Posted in bubble, Corruption, Eviction, securities fraud |