Daily Dispatch: Who Owns Your Mortgage? - Oct 28, 2009

Councils get ‘Al Capone’ power to seize assets over minor offences
Draconian police powers designed to deprive crime barons of luxury lifestyles are being extended to councils, quangos and agencies to use against the public, The Times has learnt.

The right to search homes, seize cash, freeze bank accounts and confiscate property will be given to town hall officials and civilian investigators employed by organisations as diverse as Royal Mail, the Rural Payments Agency and Transport for London.

The measure, being pushed through by Alan Johnson, the Home Secretary, comes into force next week and will deploy some of the most powerful tools available to detectives against fare dodgers, families in arrears with council tax and other minor offenders…

…An “explanatory memorandum” says that a swath of financial investigators attached to the newly empowered bodies will be accredited, trained and monitored by another quango, the National Policing Improvement Agency. The memo adds that asset seizure will result in financial rewards: “Investigation bodies will receive a share of money recovered as additional funding to incentivise further work in recovering the proceeds of crime.”

Councils and other bodies had access to asset recovery powers before but only with the authorisation and involvement of the police. Now they will be able to act independently of any police force or law enforcement agency.

The memo says councils and quangos will employ “trained internal financial investigators” and be “less reliant on more traditional law enforcement agencies, notably the police”…

The reason that notes have gone missing is the huge mass of mortgage securitizations that occurred during the housing boom. Securitizations allowed for large pools of bank loans to be bundled and sold to legions of investors, but some of the nuts and bolts of the mortgage game — notes, for example — were never adequately tracked or recorded during the boom. In some cases, that means nobody truly knows who owns what.

This is happening in an isolated way. It isn’t very significant at this point. However, there are many other pitfalls for lenders today. The difficulty in being a lender today is in trying to proceed against your collateral. Courts are not very sympathetic to lenders, and the entire system is overloaded and being tilted toward the borrower.

This is having an impact in the land of unintended consequences. Private lenders are now finding it too risky to make mortgage loans, and as a result, they have contracted. This happens, of course, at the worst possible time. This is the time when we need private lenders to enter the market, not exit the market. Fannie, Freddie, and FHA are responsible for 80%-90% of the origination of new U.S. residential mortgages.

Effectively, the home mortgage market has been nationalized. This is the reason that I am very bearish about the home market. If the government withdrew its support for home mortgages, the entire mortgage market would implode. Values would crater, and private money would rush in to fill the void – albeit at large discounts and higher yields.

Are Fannie, Freddie, and FHA at risk of being curtailed? No, not at this moment.
One must remember, though, that the entire U.S. mortgage market is dependent on bond buyers purchasing mortgage-backed securities. Right now, bond buyers are focusing on bonds backed by the full faith and credit of the U.S.A. Fannie bonds, Freddie bonds, and GNMAs. No one wants the junior bonds created by uninsured private mortgages.

If the dollar continues to weaken, or if inflation begins to take its toll on purchasing power, then buyers of mortgage-backed securities will most certainly rethink their purchasing strategy.

This would be catastrophic. However, I think it is inevitable.

The Fed has sponsored the purchases of “agency securities” to the tune of $1.5 trillion. That, if you recall, was part of their strategy in “quantitative easing.” It sounds just like the Treasury markets. It is. When Treasuries lose their luster, which is highly likely, then the agency market will collapse as well. This will happen at the worst possible time, when the government bond market becomes tenuous. Yields will have to increase, which means that mortgage rates will increase, and the vicious cycle will be initiated in the home market and the attendant mortgage market.

In response to comments from a number of shareholders and potential investors in the Fund about the liquidity of the Fund’s shares, the Board, having consulted with the Fund’s brokers, Arbuthnot Securities, believes that having a larger number of shares in issue with a lower share price than at present and changing the currency in which the shares are traded from US dollars to Sterling, should assist in improving the marketability and liquidity of the Fund’s shares and support the attraction and retention of a diverse shareholder base.