Reading the Fine Print

Okay, first off - if you haven't seen this, watch this as a warm up.




Mortgages were written with crap paperwork that are now being used to foreclose on people's houses. Stewart presents this as a "Sophie's Choice" scenario: we could allow the banks to foreclose using BS paperwork - or we could stop foreclosures and blow huge holes in the finances of the companies who sold securities that were supposedly backed by this paperwork.

That's the soundbite version, complete with flashy visuals.

Here's Yves Smith for the dry, analytical version:

That puts a cloud over the entire US RMBS market, the biggest asset class in the world. This paper was sold as secured; the ability to offset the cost of borrower defaults by seizing and selling his house is critical to the value of the instruments. And if no assets were conveyed to a particular trust by closing, an even uglier possibility exists: under New York law, which was elected by RMBS as governing law for the trust, it would be considered to be “unfunded”, which means it does not exist.

But Yves Smith has a marvelous pushback on they way Stewart (and the financial press) are framing this (emphasis mine):

Now the rather sick irony is that this monster screw-up probably affects Fannie and Freddie paper only indirectly; presumably, it will a given that this will be treated as if the government guarantee covers this little mess. The Obama Administration is the last bunch of folks that will look into the fine print to see if Fannie and Freddie ought to eat this liability.

I’ll admit I have not looked into the Fannie/Freddie procedures on this one, but I’d have trouble believing their rules would include having the government guarantee extend to operational screw ups that prevent losses on guaranteed mortgages being relieved by foreclosures. I’d have to believe they have putback procedures which will not be applied because the consequences would be too devastating to Team Obama’s best friend, the banking industry.

So Frannie and Freddie not pushing the losses related to foreclosures back to the banks would be yet another back door bailout.

In other words:

• If a consumer doesn't read the paperwork, they are bound by the unbreakable bonds of the contract they signed. Tough bounce.
• If a corporation is rescued from bankruptcy owes bonuses to is employees - those bonuses must be paid. There was a contract.
• But if a financial institution ignored proper paperwork in a rush to make money, and everything blew up in its face - the contracts that it signed with secondary lenders (like Freddie and Fannie) that require underwriting and due diligence must be ignored - because otherwise it would end up costing a corporation money.

And banks apparently have veto power on contracts that cost them money.

What a crock of sh!t.

Brace for another backdoor bailout.

(H/t Felix Salmon and if you're in the mood to have your mind blown, by all means read the NC posts he links to. They are simply incredible.)