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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (71448)	11/20/2007 12:28:25 PM
From: ajtj99	Read Replies (5) \| Respond to of 116555

Speaking of broken deals, I thought you'd enjoy this, courtesy of Traders Cooperative on Ihub Another debt crisis looming Diane Francis, Financial Post Published: Tuesday, November 20, 2007 A recent Ohio court case has not hit the headlines but represents a debt catastrophe that will make the subprime mess far worse than now imagined. A Federal Court Judge rejected 14 foreclosure claims by Deutsche Bank AG, which was trying to collect on securitized subprime-mortgage loans it acquired. The judge said the bank did not really own the "bad loans" because it acquired them after defaults had already occurred. He asked the bank to prove it held the mortgages at the time of the foreclosure notices or said he will dismiss its claims. Naturally, the judgment is popular among homeowners fighting this foreclosure. The media have yet to pick up on this case but, needless to say, the outcome is spreading like wildfire across the U.S. court system. The significance to financial institutions around the world is profound. They will have difficulty in collecting from U.S. courts if they bought bad paper or were defrauded. The result is Federal Court judges, who are political appointees, are being asked by lawyers everywhere not to foreclose on their subprime homeowners for the same reason. For instance, a Legal Aid attorney from Florida (representing poor people with subprime mortgages) wrote to financial Web site internationalforecaster that: "This court order is what I have been saying in my cases. This is rampant fraud where the securities trusts are filing foreclosures when they never owned/held the mortgage loan at the commencement of the foreclosure." In other words, "liens" arising from lending securitizations are not being recognized in U.S. courts. This means years of delays and litigation, more writedowns. This means more litigation by creditors who bought mortgages that were in default. If the Ohio judge and dozens of other courts decide these banks don't really own the "bad" loans, they cannot get at the underlying real estate to secure the bad loans. It means they will have to sue those they obtained the loans from, namely the mortgagors or their middlemen. Many of these people or companies are out of business or have disappeared or were outright frauds in the first place. Put another way, the game of "hot potato" -- or passing along the mess mostly outside the country in bundles --has not fooled this Ohio judge. He is saying only the entity that held the mortgage at the time of default can collect. Presumably, if the original lender is out of business, the securitized creditors are out of luck. Also presumably, the homeowners will be able to live in their houses without making mortgage payments while the litigation and appeals continue. For credit markets, it means U.S. courts may determine who will get title to properties and their only "asset" will be whatever the guy they bought the junk from promised. This ruling is staggering if upheld and viral. It means the writedowns have only just begun as creditors become further mired in litigation for years or have to walk away from it all. It also means credit markets will worsen as those with this crummy paper are dumping it or are driving down other assets by selloffs in order to raise cash to cover losses. Canadian, U.S. and European banks have written off tens of billions. Then there are pension, mutual and hedge fund losses. And this is just a start. This will make the savings and loan frauds look like a picnic. dfrancis@nationalpost.comwww.financialpost.com/dianefrancis © National Post 2007