The Unsecured Country (rule of law edition)

It seems that the sub-prime mess will have even more fallout than I’d thought back in this post in April. I’d thought about the global connections but there are a few things happening that could make this a really sticky wicket, and the fallout could well be much larger than anyone’s allowing right now.

It has come out that one of the largest mortgage lenders had pressured the appraisal firm to use appraisers who had a track record of over-valuing houses. The next logical step is an accusation of fraud from those who securitised these mortgages, and then from those who bought the securities backed by these mortgages. It is a small step from that point for consumers to begin to repudiate these loans, saying they were fraudulently duped into taking out a larger loan, and therefore seek damages. And they would simply be: right, if the lender put pressure on the appraiser. And it seems they did.

And from a recent legal decision regarding the enforceability of these securitized loans, there is a special bonus, one of those great quotes from a judge who actually upholds the law, and didn’t get (or didn’t read) the memo that the American legal system is a wholly-owned subsidiary of Mega Corp, Inc:

The plaintiff’s argument that “‘Judge, you just don’t understand how things work,’” the judge wrote, “reveals a condescending mindset and quasi-monopolistic system where financial institutions have traditionally controlled, and still control, the foreclosure process.

This mess of coarse is an example of colossal stupidity: those who made the loans sold them off and it was in their interest to make as many loans as possible with complete disregard for the riskiness of those loans, since they weren’t going to be left holding the bag when the music stops playing. Can we say market failure?

Of course, those that bought these securities should have done due diligence, and further those who pressured the appraisal system to produce the ‘right’ appraisal will likely be prosecuted. But what or who will fix the terrible loans that many consumers now have taken on? How will that get fixed?

First, the appraisers being pressured by the savings and loan industry:

Cuomo: Appraisers pressured to inflate subprime mortgage values

The Associated Press

ALBANY, N.Y. — New York Attorney General Andrew Cuomo said Thursday a major real estate appraisal company colluded with the nation’s largest savings and loan companies to inflate the values of homes nationwide, contributing to the subprime mortgage crisis.

“This is a case we believe is indicative of an industrywide problem,” Cuomo said in a news conference.

Cuomo announced the civil lawsuit against eAppraiseIT that accuses the First American Corp. subsidiary of caving in to pressure from Washington Mutual Inc. to use a list of “proven appraisers” who he claims inflated home appraisals.

He also released e-mails that he said show executives were aware they were violating federal regulations. The lawsuit filed in state Supreme Court in Manhattan seeks to stop the practice, recover profits and assess penalties.

Cuomo said eAppraiseIT and the parent company knew its actions were illegal, citing an April 17, 2007 e-mail from eAppraiseIT’s president to First American that said, “We view this as a violation of the OCC, OTS, FDIC and USPAP influencing regulation.”

“This is another example where the federal government is asleep at the switch,” Cuomo said.

“It runs through the entire mortgage spectrum,” he said. “Everyone is relying on the appraisal … The appraisal is really the linchpin of the home buying transaction.”

Second, it appears that those who have bought these securities may not have bought what they think they’ve bought. This will cause these securities to lose their value very rapidly unless this gets sorted out very soon:

Foreclosures Hit a Snag for Lenders

Published: November 15, 2007

A federal judge in Ohio has ruled against a longstanding foreclosure practice, potentially creating an obstacle for lenders trying to reclaim properties from troubled borrowers.

A federal judge in Ohio has ruled against a longstanding foreclosure practice, potentially creating an obstacle for lenders trying to reclaim properties from troubled borrowers and raising questions about the legal standing of investors in mortgage securities pools.

The plaintiff’s argument that “‘Judge, you just don’t understand how things work,’” the judge wrote, “reveals a condescending mindset and quasi-monopolistic system where financial institutions have traditionally controlled, and still control, the foreclosure process.” The cases could be filed again in state court, however.

As this crises develops, it will be interesting seeing who gets bailed out, who doesn’t, and how quickly the Bushies will abandon their supposed ‘free market’ principles.

Third, remember next year is an election year, and this issue will resonate with many disaffected voters.

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The Unsecured Country (rule of law edition)

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