From a small northwestern observatory…

Finance and economics generally focused on real estate

It’s been a busy couple of weeks

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Two quickies, and then I’m off to give a talk at Clemson University in South Carolina.

First, I had the pleasure of speaking at yet another Gulf Coast Oil Spill Litigation conference, this one last week at the Fountainbleu Hotel in Miami Beach. First, a brief shout-out for the venue — a great hotel, now elevated to one of my favorites in the world. Seriously. I can’t speak to highly of it. Imagine the Bellagio, but without the casino, and a perfect view of the ocean.

But, back to the subject at hand. I’ve also given a couple of private talks to groups of attorneys in recent weeks, but this was my first “public” forum since back in the summer. A lot has changed, not the least of which is the apparent decision by the Gulf Coast Claims Facility that they will not pay property diminution claims (despite what their documents say). This will unfortunately leave claimants with no choice but to pursue in the courts. Many of the smaller (i.e. — single residential and condos) will need to band together in class actions and mass torts under the MDL. Larger claimants (and we’ve been talking to nearly all of those) will have other options.

On a different topic, the news about the mortgage foreclosure mess just gets worse and worse (see my October 18 link to John Stewart for a funny but spot-on analysis of this). The most recent turn of events is comes from the 50 state Attorneys General, all of whom are elected officials, and many of whom have names like Andrew Cuomo and Jerry Brown. Yeah. These are not wallflowers, and many (most?) AG’s find that the post can be a great stepping stone to higher office (like… Jerry Brown and Andrew Cuomo). By the way, it’s a great year to be a populist, and no one ever lost votes by beating up on Bank of America and Wells Fargo, so out come the long knives.

Seems that the banks forgot that foreclosure is essential a state action, not a Federal one, and so falsifying evidence in state court can get you in a whole heap of trouble. The Wall Street Journal has had several great articles about this in recent weeks, perhaps the best being a piece by Robbie Whelen on page B-1 in the Sat/Sun, Oct. 30-31 edition.

This is going to get worse before it gets better. Best case scenario is that the cost of servicing (ultimately borne as a cost to borrowers) will increase dramatically, as the linkage between the “mortgage” and the “note” will need to be better maintained in the future. Worse and Worst Case Scenarios are hard to plumb, and could include severe state court sanctions against major banks, gumming up the mortgage process for months and years to come.

Foreclosure isn’t anyone’s dream. Banks lose, buyers lose, and in today’s market, even post-foreclosure investors are taking risky positions. However, just like getting an absessed tooth pulled (or root-canalled), the foreclosure process is necessary to get bad loans off bank books and get assets back into productivity. With foreclosure rates running 500% of just a couple of years ago, and with something like 25% of home mortgages “under water”, banks can ill afford to keep huge chunks of assets out of play while this gets adjudicated. Worse still, the cost of this mess, currently, is being borne by the servicing agents, who are seeing no new paper come IN the door, but they’re having to expend huge resources dealing with old, dead paper. The legal fees alone are enough to drown these thin-margin firms. Everyone who’s consulting on this mess is going to want to get paid, and yet there’s no new money coming in the door to pay those bills.

Yep, it’s a mess. It may actually be, in the end, the worst spill-over of the mortgage crisis.

Written by johnkilpatrick

November 10, 2010 at 5:48 pm

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