Title, Standing at Heart of Foreclosure Disaster; Stocks Don't Care, Rally

Finally, the truth about affidavits which are at the heart of the "robo-signing" scandal comes to light, courtesy of a must-read, NY Times front page story by Gretchen Morgenson.

The key passage:

"The byzantine mortgage securitization process that helped inflate the housing bubble allowed home loans to change hands so many times before they were eventually pooled and sold to investors that it is now extremely difficult to track exactly which lenders have claims to a home.

Many lenders or loan servicers that begin the foreclosure process after a borrower defaults do not produce documentation proving that they have the legal right to foreclosure, known as standing.

As a substitute, the banks usually present affidavits attesting to ownership of the note signed by an employee of a legal services firm acting as an agent for the lender or loan servicer."

Now we know that what mid-level employees at GMAC (now Ally Bank), JP Morgan Chase, and Bank of America were signing off on were attestations of mortgage assignments between banks and securitization trusts, i.e., the supposed note-holding investors. The sad truth is that the original notes have been lost, misplaced, trashed or somehow dispossessed, and the servicing banks - which have no standing to foreclose - have been scrambling for alternatives. In light of the fraudulent manner in which the banks have been handling real estate business for the past five to ten years, it's entirely possible that even the information in the robo-signed affidavits is faulty, incorrect or woven entirely from unwholesome cloth.

This issue has not escaped the notice of some quick-draw attorneys in Kentucky, who have filed a class-action RICO lawsuit on behalf of all Kentucky homeowners in foreclosure, against Citigroup, Ally Bank and MERS (Mortgage Electronic Registration System), claiming that through MERS the banks are foreclosing on homes even when they don’t hold titles to the properties.

Lender Processing Services (LPS), one of the foreclosure mills at the heart of the controversy and unfolding legal drama, traded as high as 44 within the last year, but has been in decline lately. Over just the past three trading sessions, the company's stock - which went public just two years ago - has fallen from a high of 33.50 on Friday to a low of 25.50 today. Company executives were busy explaining discrepancies in signatures on various foreclosure documents.

The issue was discussed in a heated segment on CNBC's "The Kudlow Report" Monday night, with host Larry Kudlow calling the situation "chaos." Note Kudlow's shocked and animated appearance during the segment below. Obviously, he's aware of the potential long-term ramifications of these developments.



At issue is nothing less than the credibility of the banks and the legal system. In Florida, where foreclosure cases are being heard in courtroom hallways and by retired judges due to the overwhelming volume of cases, the "rocket docket" has given the banks the benefit of the doubt when the reality may be that many servicing banks didn't actually have standing to foreclose and may have used forged, fraudulent documents to take homes from unsuspecting owners.

None of this was worthwhile news on Wall Street, however, as investors took advantage of a weak US dollar and hints of more QE by the Federal Reserve to boost stocks in a day-long rally.

Dow 10,944.72, +193.45 (1.80%)
NASDAQ 2,399.83, +55.31 (2.36%)
S&P 500 1,160.75, +23.72 (2.09%)
NYSE Composite 7,434.18, +161.65 (2.22%)

Advancers buried decliners on the day, 4682-1078. New highs towered over new lows, 550-32. For a change, volume was actually quite robust.

NASDAQ Volume 2,234,181,500
NYSE Volume 4,932,642,500

Commodities made enormous moves on the back of the declining dollar. Crude oil for November delivery soared $1.35, to $82.82 on the NYMEX. Gold advanced $23.50, to $1,340.30 another all-time high, while silver rose an astonishing 70 cents, to $22.74, a 3.18% move.

The moves in the stock market may be fleeting however, as investors brace for the release of key jobs data. At 8:15 am Wednesday the ADP Employment Change will hit the wires. Expectations are for a feeble number of just 20,000 private sector jobs created in September.

On Friday, the Bureau of Labor Statistics reports on non-farm payrolls for the prior month with expectations for a loss of 18,000 jobs overall and an unemployment rate of 9.7%. The figures are distressing to most people but seem to have little effect on Wall Street as continued high unemployment simply doesn't seem to be a metric most traders wish to look at with any kind of fundamental analysis.

With earnings beginning to take center stage, employment data may be simply overlooked, something investors will do at their own peril. With the true unemployment rate hovering around 18-20%, one has to wonder how long Wall Street can remain in denial as the underlying US economy continues to deteriorate.

As we've learned from the dotcom explosion, the subprime disaster and the general market malaise of 2008, denial can be an ongoing condition until well after the crisis has become severe. As elections loom ever closer, stocks seem to be in a highly volatile state, with valuations not reflective of economic realities.

Today, stocks seem like no-lose investments. The key question is how long will they remain floating on a bubble of cheap or free money when the underlying debt conditions appear to be creaking and groaning for relief.

Wall Street Sell-Off; Foreclosure Fraud Issue Grows

Investors weren't interested in buying much of anything on Monday. In fact, the selling pressure persisted from the opening bell to the close as the major indices took a turn lower.

Selling was broad-based with most of the blame placed upon the rising US dollar, as inside players unloaded some of their more profitable trades built up over the past month. With stocks up roughly 9% in September, October should, by shear market dynamics - or, what's left of them in this low-volume regime - revert to the mean, suggesting a 5-7% decline in stocks overall, though a complete reversal cannot be ruled out.

Dow 10,751.27, -78.41 (0.72%)
NASDAQ 2,344.52, -26.23 (1.11%)
S&P 500 1,137.03, -9.21 (0.80%)
NYSE Composite 7,272.53, -63.38(0.86%)

Decliners finished well ahead of advancing issues, 4312-1529. New highs maintained their large edge over new lows, 304-41. Volume was dull, at best.

NASDAQ Volume 1,922,075,250
NYSE Volume 3,770,310,500

Oil, which had traded higher through most of the session, fell victim to heavy selling pressure, losing 11 cents, to $81.47. Precious metals took a bit of a breather, with gold off $1.00, to $1,316.80, and silver losing 2 cents, to $22.04.

Gaining momentum was the ongoing foreclosure fraud story, which is larger than the mainstream media wishes to believe. Late Friday, the nation's largest mortgage servicer, Bank of America, announced that they were halting foreclosures in the 23 states which have judicial foreclosure processes. This news came late in the day, on a report that one of their employees admitted to signing as many as 8000 affadavits in a month without reading their contents.

This was the same kind of issue which caused Ally Bank - formerly GMAC - and JP Morgan Chase to halt foreclosure proceedings in the same states earlier last week.

Over the weekend it was learned that title insurers were in communication with officials from Fannie Mae and Freddie Mac, over the issue of clouded titles on homes sold post-foreclosure, some even going so far as to deny writing title insurance on some properties.

The issue enlarges when one considers the overall ramifications of falsifying documents. The very banks which began the mess by issuing bad mortgage products to unqualified buyers - knowing they had a high risk of default - and then packaging the mortgages into security instruments sold to equally in-the-dark investors, are now attempting to rush through the foreclosure process with another round of fraud, in the form of faulty paperwork submitted to courts across the country.

At the very heart of the issue is ownership, or title, to the properties. When the banks securitized these mortgages, they separated the mortgage from the note, a practice long held to cause title issues, and never before attempted.

Allegations that the banks had this purpose in mind all along, defrauding the note-holders as well as the home-buyers, are gaining traction in legal circles. Some states are calling for complete moratorium on foreclosures until the depth of the fraud is revealed.

What is not occurring are calls for criminal prosecution of the banks which engaged in the practice of defrauding courts, though it appears clear that the practice of rushing paperwork without due diligence - thus denying due process - was as widespread as the subprime and 80/20 loans the banks were pushing and securitizing years earlier.

There should be no downplaying of the seriousness of the issue, though there was no mention of the scandal - and a scandal it indeed is - on any of the Sunday talk shows, weekend nightly news shows nor Monday morning talk programs from the major networks.

If titles to homes are in such a state of confusion that the chain of ownership cannot be maintained, identified and indemnified, the variety and scope of claims and counter-claims threatens to clog the court system for years, which, in a cynical way, might be what the unscrupulous banking interests wanted from the very start.

Without oversight and regulation, this is what happens to money and markets. Insidious operators will take advantage of loose regulations and loopholes and drive billions through them in dirty transactions, which is what appears to have happened on Wall Street, in county clerk offices and courtrooms across the country.

In a perverse kind of way, this overhanging, unresolved issue, one which threatens the entire banking and credit system again, may have been the hidden catalyst behind plenty of today's equity sales.

This scandal is only beginning, with much more to be revealed in coming weeks and months. with elections front and center, and a questionable terror alert being issued by the US, conspriacy theorists are having a field day trying to tie all of this together. It does make perfect sense that politicians and banksters, working in cohort behind the scenes, would attempt to either delay more allegations of fraud or blow them up prior to the elections, depending on the style of tin-foil of your particular hat.

Fraud should be taken seriously, however, though when it comes to banks, they apparently can get away with just about anything, calling it "procedural errors" or "paperwork issues." In the end, the truth will come out, and the US economy will be the worse for it.

Mortgage, Foreclosure Mess Broadens, Deepens

Following up on yesterday's post, "Should American Homeowners Stop Paying Mortgages?", despite the issues involving apparent widespread fraud by banks originating, servicing and now foreclosing on mortgages being hushed up and brushed aside by the mainstream media, others have taken notice, specifically the Office of the Comptroller of the Currency (OCC), which issued a directive on Thursday ordering seven major banks to review their foreclosure procedures..

The banks include the largest originators and servicers in the industry, including JP Morgan Chase, Bank of America, Wells Fargo, HSBC, PNC Bank, US Bank and Citibank.

That list should be familiar to most Americans, as they are some of the same entities who shared in taxpayer largesse via the $700 billion TARP program and are known collectively as "too big to fail" (TBTF).

Now under closer scrutiny in the aftermath of the most enormous and hastily-prepared bailout in our nation's history due to passage of new financial regulatory legislation, the banks are apparently not yet well enough feted on taxpayer money and have resorted to outright fraud against homeowners in an effort to enlarge their racketeering activities.

The one question that should be asked, but isn't, is "where is Eric Holder and the Department of Justice?" noticeably absent from even the hint of a comment, inquiry or investigation. The DOJ should have been on the banks like lightning, but instead have turned a blind eye to obvious criminal wrongdoing at some of the nation's most "trusted" companies.

Americans are becoming wise to the idea that these major banking institutions should be trusted with nothing, much less anyone's hard earned dollars being deposited in their vaults. Meanwhile, with elections looming, Attorneys General in a handful of states - like New York, where this post is being written - are too busy running for office to be bothered with mundane details such as protecting the rights of citizen homeowners. Specifically, Andrew Cuomo, the NY AG, is busily running for governor when his office should be calling for a complete and total stoppage to all foreclosure proceedings.

It's not like there haven't been enough flags raised in the state. In Brooklyn, State Supreme Court Justice Arthur Schack has earned a national reputation as a friend of homeowners and adversary of foreclosure mill attorneys, routinely tossing out cases wherein the plaintiffs have skirted or short-cut legal requirements in foreclosure actions.

Also weighing in on the mortgage mess is Florida Senator Alan Grayson, who released a video outlining the roots of the national catastrophe. Readers can follow the link above or view the embedded clip at the end of this post.

Minnesota senator Al Franken has chimed in with a letter to Fed Chairman Ben Bernanke, FDIC Chief Sheila Bair and Attorney General Eric Holder, seeking criminal prosecution in the Ally Bank matter.

If it weren't the height of election season, there might be within a few days of a nationwide moratorium on foreclosures, but, with the rhetoric already reaching super-nova status in a number of races, the Obama administration is keeping its distance from this issue, for now.

Once the election is over, expect a flood of moratoria from state leaders and AGs, and a more serious posture from the administration, depending upon the outcome, of course. Our elected leaders don't do anything unless they see a political benefit, so that does not preclude some sort of action by President Obama or the congress in the form of an "October Surprise."

It's a political hot-button issue that has more than its share of adherents and opponents. While the millions facing foreclosure or already having been through that mess, would cheer any kind of action by the federal government, the conservative tea partiers would surely spin it as another bailout or handout and a display of more fiscal irresponsibility.

The upshot is that whatever occurs, expect this issue to continue to explode. Class action lawyers are certain to sniff out the potential for enormous profits in overturning the hundreds of thousands - if not millions - of foreclosure sales made over the past two years, creating a further backlog for already over-stretched courts in the most affected states.

As for the play on the markets this Friday, stocks were buoyed by a number releases off the economic calendar, including the University of Michigan Consumer Sentiment Index, which checked in at 68.2, above consensus, and the ISM Index, below estimates at 54.4.

Pushing stocks more than anything else, however, is the continued promise of cheap money supplied by the Fed, sacrificing the value of the dollar with their inflationary death-wish.

Dow 10,829.68, +41.63 (0.39%)
NASDAQ 2,370.75, +2.13 (0.09%)
S&P 500 1,146.24, +5.04 (0.44%)
NYSE Composite 7,335.91, +54.84 (0.75%)
NASDAQ Volume 1,937,217,000.00
NYSE Volume 4,457,833,500

Advancing issues clobbered decliners, 3627-2069. There were 410 new highs to a paltry 27 new lows. Volume remained depressed as the trade is being led almost entirely by Hedge Funds, Primary Dealers and High Frequency Traders. Individual investors are nowhere to be found, having been scared off by the 2008 meltdown and the May 6 flash crash.

Speaking of which, the SEC released their preliminary findings into the cause of the flash crash, pinning the blame on an unnamed midwest broker-dealer (Waddell and Reed) in a 151-page report, full of charts and data, though devoid of conclusion or recommendations on how to fix the maze of electronic trading at the heart of the issue.

Commodities went completely bonkers, with oil flying another $1.61, to $81.58; gold setting another record at $1,317.80, up $8.20; and, silver up 24 cents, to $22.06, making another 30-year high.

Savvy investors would be therefore holding gold and silver, plus a raft of foreclosed properties on which they would be paying no mortgage, rent or taxes and use to store oil by the barrel indefinitely, or at least until somebody offers them cash for keys or starts foreclosure proceedings.

We certainly do live in interesting times.

Should American Homeowners Stop Paying Mortgages?

Since Wall Street is essentially lined with Zombie traders trading Zombie stocks, there are more interesting developments on the financial landscape that deserve attention.

We'll get to the title of this post in a moment, but first, here's how the day went for those six or seven individual investors still trading stocks.

Initial claims came in better than expected, at 453,000, after last week's upwardly-revised 467,000. Everyone cheered. Stocks started the day on a positive note. At 9:45, the Chicago PMI came out, showing a dramatic ramp-up, to 60.4, after an August reading of 56.7, and far better than the expectation of 55.0. More cheering. CNBC's Mark Haines nearly wet himself, giddy that the Dow was closing in on 11,000, though that's expected from such an utter moron cheerleader.

The Fed executed another POMO, which was not accompanied by cheers, but rather jeers, worth only $2.2 billion. Stocks soured on the news. The Dow, which had been up more than 110 points, dropped to a 90-point loss shortly after noon, with the other indices registering similar declines.

The rest of the day was spent trying to ignore bad news and prop up stocks. The insiders did a fair job, bringing the indices back to show only marginal declines.

Dow 10,788.05, -47.23 (0.44%)
NASDAQ 2,368.62, -7.94 (0.33%)
S&P 500 1,141.20, -3.53 (0.31%)
NYSE Composite 7,281.07, -18.24 (0.25%)
NASDAQ Volume 2,198,369,250
NYSE Volume 4,673,228,500

Declining issues nosed out advancers, 2878-2812. New Highs beat New Lows, 478-36. Volume was at its normal, reduced pace.

Crude oil gained $2.11, to $79.97. Gold fell $1.20, to $1308.70. Silver also lost ground, down 15 cents, to $21.75.

Now, on to the question of whether or not American homeowners should stop paying their mortgages. This question became relevant a few years ago, when many subprime lenders defaulted on what have come to be known as liar loans, no doc loans and NINJA (No Income, No Job and no Assets) loans. The subprime catastrophe began in 2007, and some of the borrowers are probably still living in their homes without making either mortgage or tax payments.

Even more homeowners defaulted during the recession of 2008-2009, cratering the housing markets in Nevada, California, Florida and Michigan primarily, but spreading nationwide as foreclosures soared and millions were kicked out of their homes and onto the street.

Recently, however, the sad saga of the residential housing collapse took an even more severe turn, when it was discovered that thousands of affidavits used by banks in foreclosures were invalid. The signers of the affidavits were employees of Ally Bank, formerly GMAC, whohad neither read the contents of the affidavits nor had any knowledge of the events described therein.

Ally Bank responded by halting all foreclosures, evictions and repossessions in 23 states.

Also, implicated was JP Morgan Chase, one of the largest holders of mortgage paper. The bank responded by halting 56,000 foreclosures in their respective tracks. With an average value of $200,000 (probably worth something closer to $125,000 today), that's more than $11 billion in mortgage loans facing foreclosure that are just going to have to sit and wait while the bank and the courts sort all of this out.

In response, today, the Attorney General of Ohio, Richard Cordray, has referred the GMAC foreclosure fiasco to the Justice Department as a possible criminal matter.

And, not to be left out, late Wednesday, Ambac Assurance sued Bank of America for $16.7 billion, saying the bank's Countrywide unit fraudulently induced Ambac to insure bonds backed by improperly made loans.

On top of all of that, savvy homeowners with underwater loans have been strategically defaulting in droves, choosing to fight the banks rather than spend hard-earned money on a home which may never be worth what they paid for it. That only adds to the hundreds of thousands of strapped homeowners who defaulted due to job loss or other personal calamity.

With word out now that the bank paperwork may be in tatters, with titles clouded on homes across America, the banks - who started the whole mess by making mortgage loans to anybody with a pulse during the mid-2000s - are looking more and more like the eventual fall guys in all of this.

For background, this interview on King World with Institutional Risk Analytics Co-Founder Chris Whalen gives a very concise and scary view of where the banks stand and what may come next.

In essence, the banks have reams of paperwork on mortgages all over the country, though nobody is really certain which parts are real, which are forgeries and how this is all going to play out in the courts. What is known is that the banks face extremely expensive litigation for years to come, courts are overwhelmed with foreclosure cases and meanwhile, many non-paying homeowners are living in the houses rent-and-mortgage-free, most not paying property taxes either.

Banks may choose to "walk away" rather than litigate on many mortgage loans, especially those with known defects (so-called "putbacks") that have been returned by the GSEs (Fannie and Freddie) or the trusts of MBS.

With scads of homeowners living the good life, those stuck with mortgage payments may get the idea that they too might like to take their mortgage payment and sock it away or spend it rather than give it to the bank, who may or may not have legal title and thus the right to foreclose in the first place.

It's a calculated risk, depending upon the state in which you live and the pertinent laws. Most states are judicial foreclosure states, in which the only way for the bank to repossess is through the courts, while others are non-judicial. Even in those states, faulty paperwork would prevent foreclosure, should the homeowner hire a capable attorney or handle the proceedings on one's own.

With the outlook for the economy generally glum over the coming five to ten years, there are for certain more than a few people considering the strategic default route, foregoing the mortgage payment, and thus risking being kicked out of your home, and weighing the risk with the distinct possibility that the litigation could take anywhere from nine months to three years and that the bank may not have the proper paperwork, anyway.

In such a case, the homeowner may receive a windfall in the form of a free house, though he or she may not be able to ever sell it, due to defects in the title. The scenario is cloudy for most people, but still worth consideration.

One thing is for sure. The more people who openly default, the more the idea gains traction and at some point the flood of defaults could reach critical mass, wherein the banks and the courts are so completely overwhelmed - and the economy suffers severely as a result - that it makes complete sense NOT to pay.

That condition almost certainly already exists in Detroit, Las Vegas, Miami and parts of California and Arizona, the epicenters of mortgage default. The municipal authorities have to be under severe pressure in these cities, as property tax revenues have likely fallen to depression levels. When the government begins to take significant hits because of the calamity in home-ownership, squatting and vandalism become rampant. This is already the case in the aforementioned areas. The question is whether or not it is coming to your town or city and whether or not your local mayor or supervisor has enough vision - and money - to keep the municipality operational.

And that's the ultimate fear: anarchy, as debt becomes the brunt of jokes, homes are lived in without regard to legal ownership and the government cracks under fiscal pressure. If the onslaught of defaults isn't handled properly and quickly enough, America's cities could turn into seething, decaying cesspools of debt, default and doubt, with the suburbs soon to follow suit.

In such a scenario, guns and metal doors may serve occupants better than clear title and paying off a mortgage would move to the bottom of the list after safety, security, food, water and utilities.

So, the next time you're about to write that check for the monthly mortgage payment, consider that moral hazard has already been slain by the actions of the banks and the government and your next move could be the most critical, life-changing action you'll ever undertake.

Borrowing a line from Clint Eastwood's "Dirty Harry", you have to ask yourself, "do you feel lucky?"

No POMO Today; Stocks Down

The Fed didn't pass along any free money to the primary dealers, so trading was slow, nobody buying much of anything, stocks fell.

I told you my ob was going to get easier thanks to POMO and the Fed, didn't I?

There's a POMO scheduled for Thursday, so stocks will be up.

Here's today's scoreboard, as if anyone actually cares:

Dow 10,835.28, -22.86 (0.21%)
NASDAQ 2,376.56, -3.03 (0.13%)
S&P 500 1,144.73, -2.97 (0.26%)
NYSE Composite 7,299.31, -11.01 (0.15%)
NASDAQ Volume 2,116,638,250
NYSE Volume 4,256,400,000

Yes, that's the gist of it. Advancing issued did outnumber decliners, 3076-2607. There were 421 new highs and just 27 new lows. The economy must be absolutely booming! Volume? Don't ask.

Oil gained $1.68, to $77.86, but it probably can't go much higher as $80 has been upside resistance for the last year and a half.

Gold, last bid was $1309.90. Silver was up another 16 cents, to $21.90.

Jobless claims tomorrow at 8:30 am. Place your bets!