Foreclosure Fraud to be Legalized by Congress?

A nice primer on the foreclosure fraud situation can be found here on CNBC.

In it, the author predicts:

The most damaging thing that could happen to banks would be the discovery that they simply cannot prove they hold a mortgage on a house. In that case, the loan would probably have to be written down to near zero. Even for current loans, the regulatory reserve requirements would double as the loan would no longer be a functional mortgage but an ordinary consumer loan. Depending on the size of the “no docs” portion of the loan portfolio, this might be a minor blip or require a bank to raise new capital to fill the hole in the balance sheet.

What does this mean for the housing market and the economy?

Get ready to hear the phrase “pig through the python” a lot. For example, “We need to get the pig through the python very quickly so that the market can be free of uncertainty.”

This is the favorite metaphor of bankers discussing the foreclosure crisis. The idea is that anything that slows down foreclosures will unsteady the housing market. There’s a lot of truth to this. Buyers will hesitate to bid on foreclosure sales if they are not confident the foreclosure is legitimate. Other buyers may worry that the lack of foreclosure sales in an area is a false indicator of the health of the local housing market.

Banks concerned about the recovery values of their mortgage portfolios and higher capital requirements, may pull back lending even further than they already have. In short, this could be the beginning of the second leg of the credit crunch.

There is probably no better example of how screwed up the banks’ records on loan ownership are than that of Florida homeowner Jason Grodensky who bought a house in cash, owed no money, and was rather unpleasantly surprosed to learn that Bank of America had foreclosed on his home.

A CNBC reporter now predicts that in the lame duck session after the elections Congress is probably going to pass a bill to help out their good friends the bankers, as they always do when things get rough for those poor fellas:

Congress will pass a bill to “forgive” banks the potentially criminal errors made in foreclosure proceedings, a senior CNBC editor predicts.

In a blog column Friday, John Carney argues that lawmakers in DC won’t allow the country’s largest issuers of mortgages to suffer financial losses following revelations of numerous mishandled foreclosure proceedings, especially when bailing them out this time “won’t cost taxpayers a dime.”

Carney predicts that the lame-duck session of Congress following this November’s elections will pass the law. “Every member of Congress … who has been voted out of office will cast a vote for the bill. And the President will sign it.”

Well, I certainly wouldn’t put it past them, we shall see … :)

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