Summary
The Kansas Supreme Court has made it much harder to foreclose on a securitized mortgage.
If upheld on the inevitable appeal this could have a disastrous effect on bank capital.
The only slightly better news is that without mortgage payments, some people will consume more.
The magnitude of this decision, if it is upheld, if it becomes law anywhere beside Kansas, is hard to overstate.
Analysis
I read a really interesting account of a Kansas Supreme Court ruling (http://www.globalresearch.ca/index.php?context=va&aid=15324) which could shift the whole real estate game. I've been maintaining that MBS have a liquidation value in excess of their street price. If liquidation is not an option because the security holders individually or collectively don't have the right to foreclose, if even the originating lender has no right to foreclose, then I've just been wrong. And those MBS prices look optimistic. Instead of liquidation proceeds the only thing underlying them would be a payment stream from mortgagees who know they can skip the payment with impunity. So, that's the bad news.
More bad news is that beside a lot of MBS paper that remains in the banking system, the Fed has bought a bunch, too. At least they have a printing press to paper over the cracks in their balance sheet.
The better news, such as it is, is that foreclosures would cease to add to supply on the market. Correspondingly, to the extent that borrowers took advantage of the invalidity of their mortgages to default there could be more consumption. On the other hand this looks a bit like farmers in the '30's bidding $1 for their neighbors' farms, then giving them back. Fine as far as it went, I suppose. But if the bank was even in business the next year it wasn't too inclined to lend for feed, fuel and fertilizer.
This could be a seismic upset of the market that makes the various Wall Street temblors look like Loma Prieta compared to New Madrid. Maybe the Kansas Supremes have just opined as to who THEY think is "too big to fail".
More bad news is that beside a lot of MBS paper that remains in the banking system, the Fed has bought a bunch, too. At least they have a printing press to paper over the cracks in their balance sheet.
The better news, such as it is, is that foreclosures would cease to add to supply on the market. Correspondingly, to the extent that borrowers took advantage of the invalidity of their mortgages to default there could be more consumption. On the other hand this looks a bit like farmers in the '30's bidding $1 for their neighbors' farms, then giving them back. Fine as far as it went, I suppose. But if the bank was even in business the next year it wasn't too inclined to lend for feed, fuel and fertilizer.
This could be a seismic upset of the market that makes the various Wall Street temblors look like Loma Prieta compared to New Madrid. Maybe the Kansas Supremes have just opined as to who THEY think is "too big to fail".
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
