This is the great equalizer. The land of insolvency. Georgetown Law professor Adam Levitin did not mince words in his appearance before Congress in January, stating bluntly that JPMorgan, Citigroup, Bank Of America and Wells Fargo are all insolvent, just from their massive portfolios of second-lien loans. It's not even close, according to Levitin, as all 4 our largest commercial banks would be wiped out by an honest valuation of home-equity loans.
The 4 largest banks are insolvent many times over. Their puny and massively over-leveraged capital bases would not just be wiped out, they would be turned into negative multiples of the original equity. Then take the next step and understand that these same criminally fraudulent and insolvent institutions, paid their executives $144 billion in bonuses this year, based on false accounting that was endorsed by Congress and jammed down the throats of FASB in June of 2009.
Chris Whalen is quoted extensively in Gretchen Morgenson's new piece below.
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Snip:
While the S.E.C. has been pressing banks to make comprehensive disclosures about these potential pitfalls, regulators have been quiet on another worry for investors: how banks are valuing their vast holdings of home equity lines of credit, also known as second liens.
Privately, however, the S.E.C. has been pushing banks hard on this issue, according to Meredith Cross, the director of the commission’s corporation finance unit. As regulators review banks’ annual reports, they are asking tough questions about how institutions are valuing their second liens. Ms. Cross expects banks to provide more details about these loans in quarterly reports due next month.
The numbers are significant. Banks held $624 billion of such loans in the first quarter, Federal Deposit Insurance Corporation data show. Millions of these loans are deeply troubled. According to CoreLogic, a real estate data concern, almost 11 million of the nation’s mortgaged properties — nearly 23 percent of the total — were underwater at the end of March. Some 4.5 million of those properties carried home equity loans, according to CoreLogic. The average amount of negative equity shouldered by borrowers across the nation was $65,000.
WHEN first mortgages run into trouble, second liens are at greater peril, even if homeowners manage to keep up with their payments. That is because in a foreclosure, first mortgages are supposed to be paid off before second mortgages.
It is not clear that is happening, however. Banks like the big four — JPMorgan, Citigroup, Bank of America and Wells Fargo — not only hold home equity lines but also service first mortgages held by others on the same properties. Some analysts worry that servicers are able to protect their own holdings of second-lien loans while foreclosing on the first liens.
“The big four are pretending that the second liens are still money good because many are still performing,” said Christopher Whalen, editor of the Institutional Risk Analyst, a research publication. By performing, he means that borrowers are still making payments, if only the minimum. Many home equity lines require only the payment of interest for the first 10 years.
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Levitin spells out the problem...
Video - Georgetown Law Professor Adam Levitin
Start watching at 1:35, though the bomb from Levitin comes near the end...
- "If they started writing off their second-lien mortgages, they would have no capital left. They would be insolvent."
He mentions Citigroup (nyse:C), JP Morgan (nyse:jpm), Bank of America (nyse:BAC), and Wells Fargo (nyse:wfc) by name.
Though it's nice to hear the truth leak out in front of a small Congressional committee, this is nothing new to Daily Bail readers. Bill Black made the case here:
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Quotes from Levitin's testimony before Congress...
"It is important to emphasize that junk fees on homeowners ultimately come out of the pocket of MBS investors. If the homeowner lacks sufficient equity in the property to cover the amount owed on the loan, including junk fees, then there is a deficiency from the foreclosure sale. As many mortgages are legally or functionally non-recourse, this means that the deficiency cannot be collected from the homeowner’s other assets. Mortgage servicers recover their expenses off the top in foreclosure sales, before MBS investors are paid. Therefore, when a servicer lards on illegal fees in a foreclosure, it is stealing from investors such as pension plans and the US government.
Many foreclosure complaints are facially defective and should be dismissed because they fail to attach the note. I have recently examined a small sample of foreclosure cases filed in Allegheny County, Pennsylvania (Pittsburgh and environs) in May 2010. In over 60% of those foreclosure filings, the complaint failed to include a copy of the note. Failure to attach the note appears to be routine practice for some of the foreclosure mill law firms, including two that handle all of Bank of America’s foreclosures.
Recently, arguments have been raised in foreclosure litigation about whether the notes and mortgages were in fact properly transferred to the securitization trusts. This is a critical issue because the trust has standing to foreclose if, and only if it is the mortgagee. If the notes and mortgages were not transferred to the trust, then the trust lacks standing to foreclose."
DB here. We played a game of roulette in the 1980s when all of our large money-center banks were technically insolvent due to Latin American exposure, and most sloggged their way back to solvency over the the next 10 years. The difference this time is simple - LEVERAGE. Paulson's 2004 SEC-enhanced gift of unlimited leverage for the 5 largest investment banks changed the game.