The current real estate market is the most heavily subsidized and manipulated in US History. More than 90% of loans used to buy real estate in the US carry direct government guarantees. The federal reserve embarked on an unprecedented policy of buying mortgage-backed securities to artificially lower mortgage interest rates on the government-backed loans. Add to that the manipulation of the market by the banking cartel which engineered a 60% reduction in available housing inventory, and it becomes obvious that we navigate a housing market which has little or no semblance to a free market.
In Barack Obama’s second term, he can guide policymakers in one of two directions. Either he seeks to reduce the government’s manipulation of the housing market, or he moves forward with the reflation of the housing bubble. Some proceed under the delusion that Dodd-Frank will somehow protect us from reflating another housing bubble, but there is nothing in that law that addressed the underlying problems. Even the most tepid attempt at reform, forcing loan originators to retain 5% of the risk on their own balance sheets, is met with howls of protest from a lending industry that wants to underwrite all manner of ill-conceived loans and pass that risk on to the US taxpayer. If Obama does not work to reduce housing subsidies and taxpayer exposure, as the recovery continues, lobbyists for the lending industry will roll back the few protections still in place, and we will inflate another housing bubble — but this time, after lenders rape the economy for profits during reflation, the US taxpayer will be completely liable for the losses when the Ponzi scheme finally blows up.
Of course, Obama has other options. He could encourage lawmakers to enact a strict interpretation of the “qualified residential mortgage.” This definition is important because loans that conform to this standard are eligible for government backing, and lenders do not have to retain any of the risk on their own balance sheets. Obviously, lender lobbyists are trying to get this definition to be as loose as possible to pass as much risk as they can onto the US taxpayer.
Obama could also roll back the conforming limit to its pre-bust levels of $417,000 or less across the country. Right now, here in Coastal California, the conforming limit is $625,000. This is an enormous subsidy to high wage earners who don’t need the help. If the conforming limit were lowered back to $417,000, private lending would step into the void left by the government. If prices continue their recovery, private lending will not fear excessive losses from a declining market, and they will make these loans.
Of course, private lending without the government guarantee will be more expensive. Investors in mortgage-backed securities with government backing have no risk of loss, so they will pay more for those securities, which keeps mortgage rates very low. Low mortgage rates helps prices move higher thus helping the banks recover their capital from the foolish bubble-era loans. Removing the government backing by lowering the conforming limit will cause investors to be more cautious because they will have risk of loss. As a result, these investors will pay less for mortgage-backed securities, and mortgage interest rates will rise. Rising interest rates will harm the recovery making it more difficult for lenders to recover their capital from their bad loans.
The inevitability of rising interest rates with the return of private lending necessitates a gradual approach. If Obama is committed to reducing the government’s footprint — which I hope he is — he would act to lower the conforming limit slowly over time to prevent a major disruption in lending that might push house prices lower once again.
Another option Obama has is to re-regulate the banks. Dodd-Frank does not address the biggest regulatory favor the banks received during the crash, the relaxation of mark-to-market accounting rules. At some point, lenders must return to an accounting system based in reality. The shadow inventory phenomenon is a direct bi-product of the relaxation of mark-to-market accounting rules. If banks were required to report these loans at their true resale values, they would no longer meet their capitalization requirements, and they would be exposed as insolvent. This would force bank regulators to step in, fire the management, and either sell the bank to a competitor or liquidate its assets — which is what should have happened to thousands of banks in 2008.
(Iceland’s Rock Bottom Approach to Debt Crisis: Let the Banks Fail)Eventually, mark-to-market accounting will return. Regulators are waiting for the banks to reach a point of solvency where the return of proper standards won’t wipe out our banking system. All the struggling banks today are working under an unstated deadline to get their books in order. Those that don’t pull it off will become casualties of the next wave of bank consolidations likely to occur when banks are no longer allowed to run under the emergency measures that have been in place for the last five years now.
For Obama, Housing Policy Presents Second-Term Headaches
By PETER EAVIS — November 8, 2012
… as President Obama’s first administration comes to an end, the government is still deeply embedded in the mortgage market. In the third quarter, various government entities backstopped 92 percent of all new residential mortgages, according to Inside Mortgage Finance, a publication that focuses on the home loan industry.Mr. Obama’s economic team has consistently said it wants the housing market to work without significant government support. But it has taken few actual steps to advance that idea. …
Prices were falling from the day Obama got elected until the spring of 2012. It was very unlikely any substantive reform was going to take place until after prices stabilized because any pullback in government guarantees would cause prices to fall farther and longer.
Housing policy is hard to tackle because so many people have benefited from the status quo.
And the longer we wait, the harder it will be to change.
The entire real estate system — the banks, the agents, the home buyers — all depend on a market that provides fixed-rate, 30-year mortgages … And any effort to overhaul housing and the mortgage market could eventually reduce the amount of such mortgages in the country, angering many and creating a political firestorm.
In other words, the best person to fundamentally change how housing works may be a president who won’t be running for office again.
I always hold out hope that a second term president will do something bold and meaningful, but I have been consistently disappointed. Most second-term presidents become concerned with their legacy, and since they aren’t facing reelection and the rest of Congress is, Congressional leaders become increasingly unwilling to accommodate the president. Add to that, the mid-term elections for second-term presidents are nearly always brutal to the president’s political party, a president’s second term is usually one of decreasing influence and effectiveness.
Most immediately, the housing market has to be strong enough to deal with a government pullback. Some analysts think it’s ready. “I think the housing recovery is far enough along that they can start winding down Fannie and Freddie,” said Phillip L. Swagel at the University of Maryland’s School of Public Policy, who served as assistant secretary for economic policy under Treasury Secretary Henry M. Paulson Jr.
DiMarco is decried by politicians on both sides of the aisle, but he has done a great job of liquidating most of the GSEs portfolios. The GSEs have a small fraction of the assets today than they did four years ago. Unfortunately, their liabilities through their loan guarantees are still enormous.
The administration can take smaller steps first. Mr. Lawler, the housing economist, thinks the government could start to reduce the maximum amount that it will guarantee for Fannie and Freddie loans. In some areas, like parts of the Northeast and California, it is as high as $625,000. Before the financial crisis, it was essentially capped at $417,000.
The big question is whether the private sector — banks and investors that buy bonds backed with mortgages — will pick up the slack when the government eases out of the market. If they don’t, the supply of mortgages could fall and house prices could weaken.
As I mentioned above, that’s why any pullback will need to be gradual.
…The temptation will be to make the definition of what constitutes a qualified mortgage as broad as possible, to ensure that the banks lend to a wide range of borrowers. But regulators concerned with the health of the banks won’t want a system that incentivizes institutions to make potentially risky loans…. Resolving the conflict between mortgage availability and bank strength may depend on the person who replaces Timothy F. Geithner as Treasury secretary. Mr. Geithner is stepping down at the end of Mr. Obama’s first term.
There is no real dilemma faced by regulators. One on side, you have an army of banking lobbyists who want to pass as much risk as possible onto the US taxpayer. On the other side you have a few concerned legislators and bureaucrats who understand what’s at stake but find it difficult to resist the financial power of the lending industry and their lobbyists. In our current corporate-dominated crony culture in Washington, I expect these regulations to overly favor bankers.
The Obama administration faces other daunting decisions.
One is how to deal with the considerable number of troubled mortgages still in the financial system. … “If you don’t ever deal with these problems, you may never get to where you want to go,” said Mr. Lawler, the housing economist.
To help tackle that issue, the new administration might decide to make its mortgage relief programs more aggressive. It might even aim for more loan modifications, writing down the value of the mortgages to make them easier to pay. The Federal Housing Finance Agency, the regulator that oversees Fannie Mae and Freddie Mac, has effectively blocked such write-downs on the vast amount of loans those entities have guaranteed.
A new Obama administration may move to change the agency’s stance on write-downs, perhaps by replacing its acting director, Edward DeMarco. If that happened, it would be a sign that the White House had a taste for more radical housing actions. The agency declined to comment.
If the Obama administration starts widespread principal reduction, the resulting moral hazard will ensure another housing bubble. Rampant Ponzi borrowing and subsequent default or principal reduction on the back of the US taxpayer will be the best financial decision a family can make. Why would anyone be the slightest bit prudent when they know they can borrow and spend every penny of equity as it appears and receive principal reduction when the Ponzi scheme unravels?
Then there’s what to do with the Federal Housing Administration, another government entity that has backstopped a huge amount of mortgages since the financial crisis. The housing administration was set up to focus on lower-income borrowers, and it backs loans that have very low down payments. Its share of the market has grown since the crisis. The F.H.A. accounted for 13 percent of the market in the third quarter, according to Inside Mortgage Finance.
The new administration has to decide whether it wants the F.H.A. to continue doing as much business. The risk is that a big pullback by the F.H.A. could reduce the availability of mortgages to lower-income borrowers. Banks almost certainly won’t want to write loans with minuscule down payments since they are considered riskier.
Ultimately, housing policy comes down to one question: Which borrowers should get the most subsidies?
Why not eliminate all subsidies? These subsidies do nothing but inflate house prices in the market. Subsidies do not even benefit the groups that they target because the increase in market prices caused by the subsidy negates the effect policymakers are after.
Right now, the government largess encompasses a wide swath of borrowers. But most analysts believe government support should be focused on lower-income borrowers.
If we are going to subsidize any group, low-income borrowers would be the most worthy. The current system of subsidizing everyone is both unfair and untenable. It’s unfair to renters to subside all loan owners, which is what’s happening now. It’s untenable because continued government backing will lead to another housing bubble and potentially trillions of dollars in taxpayers losses.
Obama has many housing options in front of him. Let’s hope he chooses the right ones.
High-end REO in Irvine
I’ve noticed many more high-end REO over the last few months. Lenders are testing the waters on the high end, and they believe the market is strong enough to start clearing our their well-to-do squatters.
The former owners of today’s featured REO extracted more than $800,000 from their property in a refi in late 2005. Based on the filing of the notice of default, it doesn’t look they they squatted long, but the foreclosure balance tells s different story.
Their refinance on 10/18/2005 was for $1,500,000. When the bank foreclosed, the outstanding balance was $1,752,781. In order to rack up $252,781 in costs, the borrowers must have been delinquent for a very long time.
I imagine it was a very nice place to squat while they spent the $800,000 they extracted.
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We're sorry, but we couldn't find MLS # P840437 in our database. This property may be a new listing or possibly taken off the market. Please check back again.
Proprietary OC Housing News home purchase analysis
50 NEW DAWN #1 Irvine, CA 92620
$1,999,900 …….. Asking Price
$720,000 ………. Purchase Price
11/6/1996 ………. Purchase Date
$1,279,900 ………. Gross Gain (Loss)
($57,600) ………… Commissions and Costs at 8%
============================================
$1,222,300 ………. Net Gain (Loss)
============================================
177.8% ………. Gross Percent Change
169.8% ………. Net Percent Change
6.2% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$1,999,900 …….. Asking Price
$399,980 ………… 20% Down Conventional
3.91% …………. Mortgage Interest Rate
30 ……………… Number of Years
$1,599,920 …….. Mortgage
$392,530 ………. Income Requirement
$7,555 ………… Monthly Mortgage Payment
$1,733 ………… Property Tax at 1.04%
$142 ………… Mello Roos & Special Taxes
$500 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$210 ………… Homeowners Association Fees
============================================
$10,140 ………. Monthly Cash Outlays
($1,398) ………. Tax Savings
($2,342) ………. Equity Hidden in Payment
$536 ………….. Lost Income to Down Payment
$270 ………….. Maintenance and Replacement Reserves
============================================
$7,206 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$21,499 ………… Furnishing and Move In at 1% + $1,500
$21,499 ………… Closing Costs at 1% + $1,500
$15,999 ………… Interest Points
$399,980 ………… Down Payment
============================================
$458,977 ………. Total Cash Costs
$110,400 ………. Emergency Cash Reserves
============================================
$569,377 ………. Total Savings Needed
The property above is available for sale on the MLS.
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Nearby Foreclosures
Gain a competitive advantage over other buyers. By locating distressed properties -- before they hit the MLS -- you can discover where tomorrow's REOs and short sales will appear. Most of these properties are not listed on the MLS, but they will be soon. Research properties in advance and get a jump on your competition. Don't miss out on another deal because you couldn't act quickly. Use this tool to your advantage! The red properties are already bank owned. As soon as REO asset managers prepare them for sale, they will be on the MLS. Get ready! The green and blue properties have owners who are not paying their mortgages. They may be offered as short sales, or they may go through foreclosure and become REO. Either way, they will also likely be available on the MLS soon. Find your next home! Be prepared to offer on these properties by researching them in advance or risk losing out to buyers who are have done their homework. Start your research today! To find distressed properties, enter your desired location and press search. Scroll through list by pressing "next."http://www.redfin.com/CA/Irvine/2349-Watermarke-Pl-92612/home/5981232
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28 Responses to “Obama’s second term: Will he reduce housing subsidies or reflate the housing bubble?”
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[...] the original post: Obama's second term: Will he reduce housing … – OC Housing News Filed Under agency, fannie mae, freddie mac, housing, loan modification, loan modifications, [...]
Obama Administration Reports Improving Housing Market
The state of the housing market continues to improve though recovery remains “fragile,” according to the October Housing Scorecard released Friday by the Obama administration. Along with the scorecard, the administration released special instructions for those administering the Making Home Affordable Program in areas affected by Hurricane Sandy.
Signs of improvement include rising home prices, rising home sales, and ongoing efforts through the Making Home Affordable Program.
About 1.3 million previously underwater homeowners are now above water due to rising prices.
“As the October housing scorecard indicates, our housing market is continuing to show important signs of recovery – with the FHFA housing price index posting its largest annual gain in
five years and new home sales at its fastest pace since April 2010,” said Erika Poethig, acting assistant secretary for policy development and research at the Department of Housing and Urban Development.
So far, the administration’s Making Home Affordable Program has helped almost 1.3 million homeowners. More than 1 million of these homeowners have received loan modifications through the Home Affordable Modification Program (HAMP).
Of those who start the program, about 86 percent have received permanent modifications over the past two years.
Additionally, the Federal Housing Administration has helped more than 1.5 million struggling homeowners through loss mitigation.
“To help families in the Northeast recover from the devastation caused by Hurricane Sandy, we are directing servicers to make special efforts to ensure that homeowners eligible for assistance through Making Home Affordable have the extra flexibility and relief they need,” said Tim Massad, assistant secretary for financial stability at the Treasury.
In areas directly impacted by Hurricane Sandy, servicers must offer at least three months forbearance to any homeowners eligible for Making Home Affordable who request forbearance.
If a homeowner receives help through Making Home Affordable or is in the application process for a program and misses one or more payments, services are directed not to “take any action that would adversely affect eligibility for the program unless there is contact with the homeowner.”
Demand declines in October significantly more than last year
Housing has made significant strides in 2012, but the market may close out the year with a whimper, according to data in Redfin’s Real-Time Demand Pulse for November.
Data collected from October shows the number of customers requesting home tours fell 3.0 percent from the previous month.
At the same time, the number of offers signed see-sawed from week to week, leading to an overall 3.8 percent decline at month-end.
While it’s not unusual for demand to sink in Q4, the decrease this year was more pronounced: In October 2011, requests for home tours fell only about 0.5 percent from the month prior, while signed offers slipped 3.7 percent.
Based on October’s figures, Redfin expects sales to slow down in November and December, possibly falling slightly below last year’s levels in some parts of the country.
“We have been bullish about the U.S. real estate market overall, but in October demand among home-buyers took a step backwards,” said Redfin CEO Glenn Kelman. “This trend will be even stronger in November due to Hurricane Sandy, but it isn’t just the time of year or the weather. Many markets are intensely competitive and inventory is very low, so plenty of our home-buyers are taking the rest of the year off.”
The company’s data showed inventory was down 29.3 percent year-over-year at the end of September. The decline in tours was most likely due to that drop in inventory—a problem on course to fix itself as sellers regain confidence and make a return to the market in the next few months. Until that time, however, Redfin expects touring volume to remain low.
The shameless market cheerleaders of the NAr are already pumping the market to create false urgency.
NAr Economist: Home Prices to Rise 15% in 3 Years
ORLANDO—National Association of Realtors Chief Economist Lawrence Yun foresees U.S. home prices rising by 15% over the next three years, a boost for the beleaguered housing market.
Mr. Yun is widely known for his optimistic forecasts, given his employer, the nation’s largest housing cheerleader. Still, any talk of rising home prices is welcome news. Home values have plunged a third or more from the peak, leaving millions of Americans underwater, or owing more than their mortgage, and unable to move. If their values increase, they might feel comfortable enough to buy a bigger home or retire to a smaller one, helping everyone from real-estate agents, who would earn a commission, to retailers selling everything from furniture to paint.
However, Mr. Yun expressed concern about home affordability, citing both supply and demand. Supply remains relatively scarce because builders are not producing as many homes as in past years. Mr. Yun predicts that construction will ramp up to 1.3 million units by 2014, but that still would be below the historic average of 1.5 million. One factor hampering construction: Small home builders still are having difficulty getting financing from local lenders.
“Builders need to add more,” Mr. Yun said at the group’s annual conference. “We need to moderate the price growth.”
If only it were that easy. Builders are dealing with increased labor and material costs, which threaten the nascent recovery. They also don’t want to build too many homes, just in case the economy weakens again. And, for builders, raising prices is a great thing—particularly if that trickles down to shareholders.
On the demand side, U.S. job growth has picked up, but it is, at best, keeping up with population growth. Many of the country’s new jobs are low-paying positions in retail, home health care and other such fields. Thus, U.S. household earnings aren’t growing robustly, and the country’s total employment level is not posting great gains. “Every single month, we would have to create 250,000 jobs for the next eight years to get back to normal” employment levels, Mr. Yun said.
An affordability gap could emerge if prices rise due to restricted supply and buyers lose momentum due to sluggish wage growth.
Mark Vitner, an economist with Wells Fargo, predicted that mortgage rates will remain at historic lows through 2014, keeping home buying affordable. Mr. Vitner forecast that the rate on a traditional, 30-year mortgage, now at roughly 3.4%, will “bottom out” at 3.3% in next year’s first quarter amid concerns about federal budget-balancing efforts. “We will probably be at an all-time-low in interest rates late this year or early next year.”
Those who’re positioned for reflating the bubble’s inevedibility are going to be in for a rude awakening, simply because the currency of a deflating nation typically strengthens.
Besides, there really is no point owning an unmoveable asset (risk) as investment if the currency in which the risk is denominated becomes meaningless in a few short days, or even worse, overnight.
The government’s plan is to print money to buy mortgage-backed securities until it causes inflation and lowers interest rates enough to force house prices higher. This policy will have devastating effects in other areas, but they will probably succeed in making nominal house prices go up.
What areas in particular? Are you referring to commodities or realestate?
The inflation caused by printing money will hurt the economy in a variety of areas. Most notably, people’s whose wages do not keep up with inflation will see a dramatic decline in their standard of living. We may also inflate other asset bubbles with commodities being a likely candidate. Inflation will also cause the bond market to crash as yields rise to compensate investors for inflation.
A ton of people who were born in 1946 will reach optimal age to retire in 2013 (age 67) onward. There will be wave after wave of baby boomers retiring over the next couple of years.
This means a massive, growing political constituency in the US that will demand that their entitlements and fixed wages not be sand-blasted away by inflation or govt cuts. I don’t think current era politicians are aware of this coming sea-change, but it’s going to affect fiscal policy big time.
Grab some popcorn for the generation policy war upcoming. Youth vote vs. senior vote. These guys may be angry, blue-haired and forgetful, but they vote like nobody’s business.
The method for calculating CPI will have a big impact on the generation war. Right now the CPI understates inflation, and with much of the senior’s cost-of-living adjustments tied to CPI, that could erupt into a firestorm. The only way the federal reserve and the government can avoid a generation war will be to continue to delude seniors into believing their retirement income via entitlements is rising with their cost of living. If they stop believing that, politicians will face a mean bloc of very active voters.
Indeed, ”the plan”…
but, why would the wealthy in ever increasing #’s deploy the ‘all cash head fake’ (delayed financing) to close deals on homes if they actually believed nominal prices were headed up, up and away? Wouldn’t they simply leave the cash ‘parked’ to reap the corresponding rewards?
New real-estate fad: the all-cash head fake
http://www.marketwatch.com/story/new-real-estate-fad-the-all-cash-head-fake-2012-11-09?link=mw_home_kiosk
“All-cash buyers have a better chance of standing out from competing bids and getting the home at a lower price since their offer isn’t contingent on financing. ”
People are using this tactic to get property, nothing more. The best, and really only, way to get a deal today is to pay cash. When inventory is very limited, sellers don’t take the risk of financing falling through, so they tend to go with the all-cash buyers.
Yeah, I ‘get’ all of that, but they’re pulling the cash right back out after the deal is closed, instead of leaving it ‘parked’ where in an inflationary world of rising home prices, the cash is supposed to keep up.
That they’re not leaving it ‘parked’ speaks volumes.
It would certainly be better to have the money parked in real estate rather than in cash if inflation is coming.
IR,
What is a bigger subsidy? Fannie/Freddie or FHA?
The GSEs have a much larger market share, but since they require 20% down on most loans, they are losing less than the FHA.
Spain announced a 2 year moratorium on foreclosures in response to a couple of suicides. Unlike the US, all mortgage debt stays with you after a foreclosure until it is paid off.
Spain is a mess. I think they will see major problems with civil unrest until they enact some major reforms with bankruptcy reform being near the top of the list. Right now, they are asking an entire generation to work for nothing more than to repay bad real estate loans. Can you imagine working your entire adult life to repay a bad debt?
You could pay in carrots:
http://www.npr.org/blogs/thesalt/2012/11/12/164027250/to-get-around-tax-hike-spanish-theater-sells-carrots-not-tickets?ft=1&f=1001
The tax rates are so high that Spain will become a barter economy to avoid them.
This is going to end badly.
“..Unlike the US, all mortgage debt stays with you after a foreclosure until it is paid off…” Then why foreclose? Debt is going to have to be paid anyway. Seems counter-productive.
I write this with a bit of sarcasm : Can the day be far off in which outstanding personal debt after death follows debtors beneficiaries?
” Can the day be far off in which outstanding personal debt after death follows debtors beneficiaries?”
That would prompt me to lead a rebellion against the banks. It’s bad enough when previous generations pass on copious amounts of public debt because they couldn’t live within their means, but to heap personal debt on top of it is truly unconscionable.
Looking at Romney’s list of largest donors, the top contributors list included almost exclusively financial institutions:
http://www.opensecrets.org/pres12/index.php
Do the banks already know something about Obama’s future plans for the housing market – a possible re-regulation of banks or change in accounting rules? I remember that Romney was not a big fan of govt intervention in the housing market, nor of foreclosure prevention policies, nor the mortgage interest tax deduction, so this universal support for Romney by banks and the real estate sector seemed, at least at face value, a bit strange. Maybe Romney was considered by banks as the way lesser of the two evils?
With his re-election in the rear view, seems to me that Obama could, if he chose, break with his liberal counterparts (as he has done on other issues) and do some major damage with minimal personal consequences (except the 2014 party mid-terms perhaps).
I’m not saying he will. I’m just saying he could.
My view is this: Even if Obama means well and genuinely wishes to make significant changes for the better of the two sectors (finance/real estate), the already “bought and paid for” Senators and Reps know on which side their bread is buttered. They are getting their money from banks in exchange for not rocking the boat:
http://www.opensecrets.org/industries/indus.php?ind=F
Notice our friends at the NAR.
Therefore I’m not optimistic about the “forward” meme in this area of the economy.
You describe my secret hope: Obama might actually reform housing and make it stable again. Winding down the government subsidies won’t be easy, and despite the campaign rhetoric, I never thought Romney would actually do anything substantive against the interests of the financial sector.
With Geithner stepping down and Bernanke facing an uncertain re-appointment, Obama is in a position to do something radically good.
I’m not holding my breath.
There will not be another nationwide bubble unless the government just says fuck it and brings back no down no doc loans. If they do that I give up and will jump in and get every house I can and pull every cent out of them and not pay a cent back when the bubble pops again.
You wouldn’t be alone. If they give out free money with government backing, many people will line up to play the real estate game.
Maybe the banks won’t get away with it. It will be interesting to see how it plays out.
Banks should fear ominous new rulings in Fannie/Freddie MBS cases
http://newsandinsight.thomsonreuters.com/Legal/News/ViewNews.aspx?id=60909
Wow!
“JPMorgan also disclosed that it is now facing put-back claims, in one form or another, on $140 billion in mortgage-backed notes. Yes, you read that right: $140 billion. That doesn’t mean there are $140 billion in claims, but it means that holders of $140 billion in MBS notes have asserted, in litigation or through contractual demands, that the bank must buy back deficient mortgages in their trusts. Given that MBS investors generally claim breach rates in excess of 50 percent, JPMorgan’s exposure to mortgage put-backs is tens of billions of dollars.
The bank, of course, thinks the put-back demands are meritless and its entire litigation exposure is a trifling matter. The SEC filing’s 10-page discussion of the various litigation headaches facing JPMorgan — which include really serious matters, such as the securities class action over its CIO losses, various Libor suits and the Federal Energy Commission’s market manipulation case — begins with the brash assertion that the bank’s “reasonable possible losses” in all of this litigation (aside from its litigation reserves) range from zero dollars to $6 billion.
Zero dollars? I think not. In fact, I’m prepared to say that based on two rulings this week by U.S. District Judge Denise Cote of Manhattan in the Federal Housing Finance Agency’s securities fraud litigation against MBS issuers and underwriters, JPMorgan has exceedingly low odds of getting out of the Fannie Mae and Freddie Mac conservator’s case — which involves claims on $33 billion in JPMorgan, Bear and Washington Mutual MBS — wit h out a settlement.
More importantly, Cote’s rulings this week make it clear that the judge, who is overseeing the FHFA’s cases against 16 banks that issued or underwrote mortgage-backed securities, does not intend to let any of them out of this litigation. I’ve already told you that the banks still have a slim chance of wiping out most of the FHFA’s claims on timeliness grounds, if the 2nd Circuit Court of Appeals overturns Cote’s holding that Congress intended to extend the obscure statute of repose, along with the statute of limitations, when it passed the law that created the FHFA. But unless the banks win a reprieve from the appeals court, it looks like Cote intends to send Fannie and Freddie’s claims to a jury.”