Deutsche Bank headquarters in Frankfurt, Germany
The reserves of hundreds of banks are at risk, including some major banks, after a little-noticed federal court decision signaled the crisis in securitized home mortgages could spell much more trouble for financial institutions than previously realized, even on Wall Street.
Justice Christopher A. Boyko of the Eastern Ohio U.S. District Court dismissed 14 Deutsche Bank-filed home foreclosures Oct. 31, based on a ruling that the German financier lacked standing for not owning the mortgage loans at the time the lawsuits were filed.
Bob Chapman, author of the International Forecaster website, emphasized the problem in his Nov. 21 newsletter.
“This court ruling in Ohio means that the securitized trusts own nothing,” Chapman wrote. “The investors in these securities might have assumed – wrongly, it turns out – that they actually owned some real estate in these deals. The problem is, they own nothing.”
Chapman called the ruling “monumental.”
“The holders of those slice-and-dice derivatives could have zero legal redress or collateral in foreclosures,” he said. “This reduces their values substantially.”
Deutsche Bank held the home loans through a packaged bundle of loans bought in what is known as a Mortgage Backed Security, or MBS, the home-owner version of the more general Collateralized Debt Obligation, or CDO, packaged by Wall Street.
Simply put, Boyko’s decision raises the prospect that Mortgage Backed Securities may be “mortgage backed” in name only.
An MBS typically involves only a residential mortgage, whereas CDOs involve a variety of debt instruments, including credit card debt, which is purchased from the original issuer and sold to an institutional investor, typically a bank.
The problem is that banks hold MBSs in their asset portfolios, contributing to the reserves banks are required to hold in order to operate.
“The U.S. financial media and Wall Street pundits are asleep or remiss on the true extent of the MBS crisis,” Chapman asserted.
He concludes that many institutional holders of the MBS securities try to argue that they had assignment of the mortgage titles, or equitable assignment, that predates the filing of the foreclosure.
But the court in Ohio disagreed: “If a securitized trust cannot take an equitable assignment of a mortgage loan, the banks holding these instruments may be out of luck.”
Over the past few years, Wall Street has bundled billions of dollars of home loans into various MBS securities and derivatives products.
The full dollar amount of MBS obligations owned by financial institutions is not yet fully determined, not even by top experts on Wall Street.
Conceivably, MBS obligations, in trouble because of the bursting of the real estate bubble, could number in the trillions of dollars. The stock market already has realized this.
But the Ohio U.S. District Court decision adds another level of complication to the crisis.
If the holders of the MBS securities do not hold any claim or title on the underlying mortgages, then the banks might not have a claim even on the home foreclosure proceeds.
In other words, bank assets and reserve calculations now face the risk of a double loss.
The first loss is the devalued value of the MBS because the underlying mortgages are in foreclosure.
The second loss is that the financial institutions, as owners of the MBSs, may not receive any proceeds from the foreclosures if only the mortgage originator owns the title to the home, not the financial institution owning the MBS.
WND previously reported two Bear Stearns hedge funds, heavily laden with mortgage-backed securities derivatives, took losses which threatened the solvency of the funds, forcing Bear Stearns to lend one of the funds $3.2 billion, just to prevent the fund from imploding.
WND reported in the same story that Bill and Hillary Clinton raised eyebrows on Wall Street by liquidating between $5 and $25 million in a blind trust, just before the beginning of a market downturn that now has seen the Dow Jones Industrial Average close under 13,000 twice since August.
When the Clintons liquidated the blind trust on or around June 15, the Dow was averaging over 13,600.
The index closed Monday at 12,958.