The American Dream Hit By Foreclosure

For weeks now it seems the financial markets have been focused on anticipating the next FED move.  And chairman Ben Bernanke delivered – as usual. With the attention having been on quantitative easing for so long, it was inevitable that investors would focus on something else. So, this week the focus returned to where the troubles began – the housing market. But this time with a slight twist; the potentially errant foreclosure practices.

“Maybe the only winners are attorneys general with ambitions for higher office.”

Otis Casey


The markets expected a move for quantitative easing to happen before the end of this year, and they’ve priced it into asset prices close to fully with almost absolute certainty over the last week. It must have ben a relief when FED Chairman Ben Bernanke Friday seemed to confirm what most were expecting with the following statement: “Given the Committee’s objectives, there would appear…to be a case for further action.”

“A more cautionary or qualified statement could well have triggered a reversal of gains and significant volatility in the market,” vice president Otis Casey at  Markit Credit Research points out the weekly market wrap.

And with the attention being on quantitative easing for so long, I guess it was inevitable that investors would focus on something else.

So, according to Markit, the focus returned to where all of the trouble once began: the US housing market.

However, this time with a slight twist; the potentially errant foreclosure practices.

“It is hard to imagine what might raise populist ire more than the spectre of people being removed from their homes and thrown out into the streets”

“It is hard to imagine what might raise populist ire more than the spectre of people being removed from their homes and thrown out into the streets ‘unfairly’. This is especially true in the United States, where many view the chance of owning a house on the hill with a white picket fence as a birthright or something sacred. Recognizing this, some banks even though they had yet to find specific instances of errors in their foreclosure process put an immediate halt on foreclosures in all states,” Casey writes.

In particularly, US state attorneys general have been quick to respond, with many of them announcing forthcoming investigations into lending and foreclosure practices.

The office of attorney general has become more of a stepping stone towards higher office (usually governor or senator) ever since they learned that class action lawsuits against the tobacco industry were a convenient way to bring revenue to the state without passing a tax increase.

But delays in foreclosures often lead to ultimately depressed recovery values to lenders.  Combine this with uncertain litigation risk and the risk profile of major mortgage lenders shifts for the worse, Otis Casey at Markit notes, and points to the fact that the impact did not stop there.

Homebuilders and mortgage insurers also saw their CDS levels widen this week.

“While much of the public, many of whom are still quite upset about the use of taxpayer dollars to bail out banks (regardless of whether or not the funds have been repaid), was quick to cheer the troubles facing the banks this week, the impact into the homebuilding and mortgage insurance sectors should give them a little pause.”

Surely, the halt in foreclosures may give struggling families more time to figure out how to adjust their personal finances so they can resume payments (or even just give them more time) and it certainly is easy to sympathize with these families.

“Viewed in these terms it is hard to know what one should cheer about or imagine who the winners are in this scenario.”

But the halt is ultimately only temporary and the markets seem to be just beginning to determine what might be the possible downside, according to Casey.

Will the costs be passed on to future consumers causing higher mortgage rates and/or fees?  Will mortgage lenders have to consolidate in order to survive, also leading to higher rates?  Will lending standards be tightened so much that more and more first time buyers will find it harder or impossible to qualify for loans?

“Viewed in these terms it is hard to know what one should cheer about or imagine who the winners are in this scenario. Maybe the only winners are attorneys general with ambitions for higher office.  The fortunes for some of them are only a few weeks away,” Otis Casey concludes.

Related research report: The European ABS Market – Monthly Review.

Related by the Swapper:

Mandelbrot & Market Behavior: The Fractals of Life

How To Create A 3 Trillion Dollar Bubble And Burst It

Housing Bubbles In Australia, Canada, Norway, Sweden Worse Than In USA

Beware: Global Asset Bubbles Growing!

Daily Show: Jon Stewart Finds Humor In The Foreclosure Crisis

Dangerous Economic Misconceptions

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