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Stop Press! Useless Establishment shill rag tells the truth about Foreclosure-gate!

It’s only the measly SMH, not the NYTimes, but it’s still cause for celebration.  The story is three years old, but these guys are the last ones to tell you the truth.  From obscure part-time writer Michael Trifunovic:

The Fed could be preparing the groundwork for the next mortgage tsunami, writes Michael Trifunovic.

Late in 2007, with the financial markets still catching their breath from the “subprime earthquake”, a very obscure and scarcely reported case was taking place in the Federal District Court of Cleveland, Ohio.

The judge made a ruling against the Deutsche Bank Trust Co, surprising bank executives. Deutsche Bank was looking to foreclose 14 homes in Cleveland whose owners had fallen behind on their mortgage payments, but the bank could not produce the legal title to the homes nor the actual mortgages papers. The bank only produced an “intent to convey rights”.

Despite Deutsche’s protests and argument that it was following standard practice to foreclose, the judge disagreed and insisted that it produce the required documents validating its legal claim. It could not. Deutsche Bank lost the case. The home owners kept their homes.

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Fast-forward two years and the ramifications of this are threatening another US mortgage meltdown.

Banks have been signing off on foreclosures without the correct paperwork, a practice known as “robo-signing”. The process hits trouble when challenged. The foreclosures are effectively illegal.

The problem is that the banks cannot foreclose on certain mortgages due to missing, incorrect or fraudulent documents, and sometimes no documents all. The banks cannot establish a legal claim. The validity of the mortgages and related securities is called into question.

The problem is monumental. There are trillions of dollars of mortgages and mortgage-backed securities as well as other assets exposed to this unravelling drama.

Banks will have no choice but to write down the value of these assets, and in many cases they may be forced to buy back the mortgage-backed securities.

Investors holding them are discovering that the securities don’t contain what they thought they did. Their value will fall and no doubt many will look to sell. A potential exists for a run.

Borrowers find themselves in a position where they can stop mortgage payments without facing foreclosure, as no one knows who owns their mortgage.

Borrowers are being encouraged to contact their banks and ask for “hard” evidence of a mortgage note demonstrating legal claim. If none is found, it is not too difficult to determine what some may do.

It’s hard to quantify potential write-downs. But a quick perusal of financial statements of US banks reveals huge exposure. A “guesstimate” is in the trillions of dollars.

This latest mortgage drama has been gathering steam over the past several months, but it has only hit headlines recently.

It is against this backdrop that the US Federal Reserve chairman, Ben Bernanke, said at a recent talk that a second round of quantitative easing (QE2, also known as printing money) has taken place.

The Fed would have been well aware of these mortgage developments and the ramifications for the financial system.

QE1, the first ”money printing” round, was delivered in the first quarter of last year. While its aim was to ”stimulate” the ”real economy”, it benefited only Wall Street.

QE1 allowed distressed banks to mend their balance sheets and generate ”trading” profits. Trading was the dominant earnings stream for US banks last year, rather than ”real” business.

If QE1 was a failure in achieving its stimulus objectives, why would we expect QE2 be any different?

Speculation on Bernanke’s statements have led to an expectation of a $US1 trillion stimulus package, which has triggered a rally across various markets.

In effect a colossal US dollar carry trade has been put into play with market participants effectively pricing in $US1 trillion of stimulus.

But given the ”new” unfolding mortgage disaster in the US, is the Fed’s QE2 really a stimulus measure to kick-start a floundering US economy or has the Fed been obfuscating the real reason for QE2, and that it has actually been preparing the groundwork for another bank bailout when the next mortgage tsunami hits?

While markets have priced in $US1 trillion of stimulus, the question remains have they priced in another mortgage meltdown in the US? One thinks not.

The Fed already has form in being a garbage dump for toxic assets. If another mortgage meltdown occurs one suspects the Fed will waste no time in adding to its stockpile by buying another round of toxic waste from US banks.

Indeed, one suspects an interesting chapter in the global financial crisis lies just ahead.

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