Foreclosure Crisis Developments UDATED

Lots of interesting news stories on the foreclosure crisis:

Federal Courts in Cleveland Toss Foreclosure Cases - Bill Callahan is all over this story, although you can also read about it in the New York Times, at Bill Sloat's The Daily Bellwether, and in some Ohio newspapers. Refusing to go along with the usual routine processing of foreclosure cases, two federal judges are dismissing cases that don't attach documentation to the complaint to show the chain of ownership of the loan from issuer to ultimate holder. These rulings may be overturned on appeal, or the defects may be cured by the plaintiffs so the cases can be refiled, but it acts as a mini-moratorium for some homeowners who might be able to negotiate a workout or otherwise save their home in the meantime. It is also wonderfully ironic, since lenders started filing foreclosures in federal court (taking advantage of "diversity of citizenship," meaning that the plaintiffs are all out-of-state) in order to avoid the backlog and long delays in foreclosures in state court.

U.S. House Passes Mortgage Reform and Anti-Predatory Lending Act - A measure sponsored by Rep. Barney Frank (D-MA) and Rep. Spencer Bachus (R-AL) passed by a veto-proof bipartisan vote of of 291-127. Rep. Betty Sutton (D-Copley) issued a press release late yesterday calling attention to a provision she introduced which requires loan creditors or servicers to provide a separate notice to borrowers six months before their adjustable rates reset. Callahan is not impressed with the bill, which requires licensing of mortgage brokers and set new standards for mortgage origination, because it does "little to help — and may actually obstruct — real community efforts to keep our neighbors in their homes, stop the death cycle of 'flip-foreclose-flip.' and rebuild our damaged neighborhoods."

GM in Trouble Due To Mortgage-Related GMAC Losses - This is how it spreads to other sectors of the economy. General Motors may be unable pursue its bid to buy Chrysler because of huge losses at General Motors Acceptance Corp. due to subprime mortgage losses at a GMAC subsidiary. Meanwhile, GMAC and Cerberus (which acquired a 51% stake in GMAC from GM) may walk away from the troubled subidiary, Residential Capital LLC, which hasn't been able to meet financial requirements under its loan agreements, probably forcing the subsidiary into bankruptcy. Called "ResCap," the subsidiary is the biggest privately held U.S. mortgage lender. And so it goes.

Merrill Didn't Write Off Enough? - Merrill posted enormous losses in the third quarter, ostensibly writing off all of its exposure due to subprime mortgage-tainted assets. But did it? Blogger Kevin Drum highlights a story by CNBC, indicating that Merrill changed its mind about who to hire to replace the CEO forced out on account of the losses, because the first-choice candidate "said he would take the job but only if Merrill did a full accounting of its subprime exposure." Could it be that the $8.9 billion write-off didn't get to the bottom of the problem? That would be very bad, especially since other financial institutions didn't write off their problem assets as aggressively as Merrill.

Home Ownership Rate Dropping - It is down to 2003 levels, which was before many of the worst lending abuses occurred.

UPDATE: Over-sized Bank Profits Were a Clue - Floyd Norris has an intriguing column in the business section of today's New York Times, saying "we should have known something was strange" because banks were doing better than they should have been doing. Inexplicably large bank profits were "signs that banks were either lying about their results or were taking large risks that were not fully disclosed." Among the undisclosed risks were poorly understood "liquidity puts," which required the banks to buy back collateralized mortgage obligations if they became unmarketable.

Some Investors Leaving Stock Market? - "Treasuries rose to the highest level since 2005 as concern over subprime mortgage losses led investors to sell stocks and seek the safety of short-term government debt." I've been wondering when we might start to see some evidence of this. I personally know two expert legal scholars on predatory lending and one of them has taken her own money out of the stock market, the other has not. Yet.