How the mortgage mess could spread beyond sub-prime
By Julian Fisher
Bank of America shares have been rocked by news that a consortium of mortgage bond investors is demanding it repurchase billions in soured mortgages, amplifying the effects of the recent “robo-signing” debacle.
Industry proponents are downplaying the risk that these so-called “putbacks” will impact more than a small number of financial institutions, but the evidence increasingly points to substantial and widespread breakdowns in controls along the mortgage origination and securitization chain.
What’s more, the impetus for putbacks appears to be shifting from lapses in documentation to ones involving possible fraud and misrepresentation.
The potentially fraudulent activity has come to light through data gleaned from reports and FDIIC hearings involving third party re-underwiter Clayton Holdings, as reported by Reuters.com blogger Felix Salmon.
Unlike the documentary issues at the heart of the “robo-signing” debacle, these findings point to a banking-industry wide epidemic of bundling loans which failed the originators’ underwriting standards into pools sold to investors.
Great article! The saddest part of this has to be that currently we are returning to the same atoms that went rogue and caused the just past atomic collapse. Let’s list a few.
The Government will once again take back end risk
The loan programs are amazingly similar and will become even worse as competition once again increases.
There has been no recognition that Servicing/Master Servicing has not created capabilities that contain the universe of information necessary from origination through Securitization, Derivative formation(Tranching), Credit Default Swap(CDS)coverage and and public Exchange created tracking of CDS. (Exchange is necessary)
Finally for now, there is no cost efficiency that would allow only good loans instead of quantities necessary to cover the too large inefficient overheads.