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Monday, October 18, 2010

Mortgage Mess Means Trillions in Losses for Wall Street Banks

Last post I did concerning the costs concerning foreclosure-gate was $70 billion, but now we are up to trillions?
The damage will be astronomical. Most of these mortgage securities have deeply depreciated in price. No logical buyer wouldn't try to return them for the purchase price. Since the law provides a full refund of the purchase price, there is a huge incentive to demand a refund. What should be most frightening to any big bank shareholder is the fact that, at its peak, the amount of outstanding non-agency guaranteed mortgage securities reached $2.3 trillion in June 2007 (see here). This omits Fannie Mae and Freddie Mac securitizations, which were created and processed by the same Wall Street banks. If we add those, the amount is about $5 trillion more, for a total of about $7.3 trillion.
Clayton Holdings is a Connecticut-based firm that analyzes home mortgages for banks, hedge funds, insurance companies and government agencies (see here). After reviewing a sampling of 10,200 mortgages at Bank of America, it found problems in 30% (see here). Assuming a 30% rate, big bank securitizers have an exposure to about $2.19 trillion, with an unknown amount of additional costs and attorneys fees.
Mr Goodman references Blue Sky laws from 1934 as the basis of arguement.
Since the securities were supposed to be fully backed by mortgages at the time of their sale, it doesn't matter if the correct paperwork is eventually done. From a legal standpoint, to get a refund of the full purchase price, buyers will not need to prove fraud. The law does not require them to prove anything other than the fact that material misstatements of fact occured during their sale. The issuers do not even need to know that their representations were false. Securities sold upon the basis of false representation, intentional or not, can be returned to the seller under the provisions of the Federal Securities and Exchange Act of 1934 and under “Blue Sky” laws of most states. These laws require a full refund of the original purchase price, regardless of whether the securities in question have gone up or down, in the interim.
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