On Friday the rally in bank stocks came to an abrupt halt after the Massachusetts court ruled against the banks in the closely-watched Ibanez case, which pertained to the right to foreclose on homes whose mortgages had been securitized, and where paperwork wasn’t entirely kosher.
There is a nightmare scenario, which everyone whose been foreclosed upon disputes the legitimacy of their foreclosures, and people who bought foreclosed homes have to relinquish their houses, and so on and so on.
But this nightmare scenario is unlikely to unfold, argues Oppenheimer’s Chris Kotowski in a new note.
He cites this quote from the ruling: “There is no dispute that the mortgagors of the properties in question had defaulted on their obligations, and that the mortgaged properties were subject to foreclosure. Before commencing such an action, however, the holder of an assigned mortgage needs to take care to ensure that his legal paperwork is in order…The type of sophisticated transactions leading up to the accumulation of the notes and mortgages in question…are not barred nor even burdened by the requirements of Massachusetts law. The plaintiff banks… have simply failed to prove that the underlying assignments…entitled them to foreclose ever existed in a legally cognizable form…”
In otherwords, he argues, so long as the banks go back and fix their paperwork, they can foreclose — that will be costly and cumbersome, but not catastrophic.
The problem actually sounds like something Chris Whalen has talked a lot about, which is that earnings of the banks will be ground down thanks to all kinds of unusual administrative costs.
Meanwhile, says Kotowski, the Supreme court ruling will likely have the largest impact on private label mortgages, and thus disproportionally impacts Bank of America — JPMorgan, Wells Fargo, and Citi will be less impacted.
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