It was a depressingly news-filled week for bankers on the mortgage front.
First, you have the foreclosure-gate mess, which will do unquantifiable damage to the system of housing finance in the US. The scandal has to do with the lack of/improper paperwork done by the banks, as they attempted to execute foreclosures on a Ford-ian scale.
Then there’s this new, brewing story about mortgage putbacks and the question of whether banks who sold customers baskets of faulty mortgages could be forced to give their clients a refund, potentially costing billions of dollars.
John Carney at CNBC Net Net argues that there’s no way any big crisis will result from the mortgage putback scandal because there will be a Congressional bailout. His post is titled: “Sorry Folks, The Put-Back Apocalypse Ain’t Gonna Happen.” His argument is that this is just a paperwork crisis, and there’s no way banks will be left to sink due to paperwork:
Here’s what is going to happen: Congress will pass a law called something like “The Financial Modernization and Stability Act of 2010” that will retroactively grant mortgage pools the rights in the underlying mortgages that people are worried about. All the screwed up paperwork, lost notes, unassigned security interests will be forgiven by a legislative act.
So here’s what I expect will happen. The lame duck session of Congress will pass a bill that essentially papers over the misdeeds of the banks that originated mortgage securities. Every member of Congress and every Senator who has been voted out of office will cast a vote for the bill. And the President will sign it.
Here’s what’s weird about this piece though: Carney’s argument would make sense if we here talking about foreclosure-gate, because that really is a paperwork crisis. Most foreclosures have been totally legitimate in the sense that the foreclosed-on family has stopped paying their mortgage, and thus contractually owes their house back (to someone). The issue is whether the process complies with state regulations. And yes, it’s bad that the law wasn’t applied, but the issue isn’t so much about economics.
But Carney’s piece is about the putback issue which is different, and not about paperwork or last notes or unassigned security interests. Mortgage putback-gate (yes, very ugly and crude term) is an economic issue, because it’s about who’s on the hook for bad mortgages.
If mortgages were sold fraudulently by the banks — which is what Felix Salmon has alleged in his work that’s reignited this issue — it’s not a trivial paperwork that Congress can just paper over.
Of course, Carney may be right that there will be no putback-apocalypse. Chris Kotowski at Oppenheimer put out a note this week saying the numbers were way overblown. And you have to figure that the GSEs, which would be doing a lot of the putting-back, aren’t going to do so much that will damage the banks (if you’re looking for a bailout think along those lines).
But if you’re thinking the banks will be saved by this particular issue in the lame-duck session, think again. Foreclosure-gate? Maybe, because this is a paperwork issue. Mortgage-putbacks? Not a chance.