Update: "National Moratorium on Foreclosures"

Make That Four Theories
(#4. Overreaction)

In my post on Thursday, "National Moratorium on Foreclosures," I puzzled over the seeming disconnect between the stocks of publicly-traded title insurance companies (barely affected), and the supposed tidal wave of claims headed their way due to defective mortgage foreclosures.

I posited three possible explanations: 1) the aforementioned companies don't have exposure in the markets where the problems are most severe; 2) they've already laid off their risk, through reinsurance, derivatives, or the like; and/or 3) the banks, not the title insurance companies, are going to take the hit.

Based on this week's stock market action, the clear winner is theory #3 (all the too-big-to-fail banks -- including Bank of America, Wells Fargo, and JP Morgan Chase -- had rough weeks).

SARS vs. AIDS

But I'd now also add a fourth theory: the problem, while serious, has been exaggerated.

Think of it as the financial equivalent of a possible health epidemic.

In 2003, much of the developed world was bracing for a full-blown outbreak of SARS ("severe acute respiratory syndrome").

The quick spike in (well-documented) cases -- fanned by all manner of media -- was certainly alarming.

And SARS in fact was extremely lethal if contracted.

But ultimately, nothing like the pandemic officials initially feared occurred.

Other scares like West Nile virus have followed the same trajectory.

It's too soon to tell -- all 50 state attorneys general are now looking into the matter -- but it's possible that the stories about homeowners with no mortgages having their locks changed in the middle of the night are the (rare) exception, not the rule.

At least in Minnesota, the fact that I haven't heard first-person accounts from a pretty broad circle of clients and friends tells me that that's at least plausible.

"The Joy of Sachs"*

And Then There Were Two

Goldman and Morgan were assisted in a rather violent industry consolidation. They remain, more than ever, officially “too big to fail” (TBTF), so they know they can always request tax funds directly from the Treasury Department and elevate risks above competitors. With their enormous profits they can buy out any remaining politicians and expand their direct appropriation of taxes, pensions, and anything else they might want. They really should be congratulated. It isn’t easy toppling a large nation with barely a shot fired.

--post, Floyd Norris blog , "A Great Time to be a Banker"; (NY Times; 7/16/09)

No, the author of this post isn't Matt Taibbi (the "poster" is someone named Nelson Alexander).

And, yes, his analysis of what has transpired the last 18 months or so seems startlingly accurate (and depressing, and enraging).

Or, maybe it's just that I agree with it.

Here's my post on Mr. Norris' blog in response (yes, I occasionally contribute to other blogs):

Once upon a time, corporate charters were granted stingily, directly by the sovereign, on the condition that the recipient serve the interests of the commonweal. Can anyone argue that that’s what Goldman Sachs and JP Morgan Chase are doing today? Or have done the last 2 years — or twenty?

Forget the inevitable class actions suits to come, kicked off by CALPERS’ against the credit rating agencies. The judgments will be years in the coming, then appealed even longer (think, Exxon Vadez). Maybe it’s time to go for their jugular; they sure know how to go after ours!

--"A Great Time to Be a Banker", Floyd Norris blog (see, comment #28)

Want a more succinct take on all this? Try *Paul Krugman:

Goldman is very good at what it does. Unfortunately, what it does is bad for America.

--Paul Krugman, "The Joy of Sachs"; The NY Times (7/17/09)

Dispatches from NY

Barry Ritholtz Talk

I'm in NY the next few days, mainly to serve as a chaperone to a few kids (at least they're my own!).

However, I did manage to break away to hear Barry Ritholtz, of The Big Picture blog (see, my Blog Roll) at a midtown Barnes & Noble. Or, more accurately, see him sign his new book, Bailout Nation -- family responsibilities came first, and I got there at the tail end.

I still caught one good tidbit, though.

Ritholtz speculates that the reason why JP Morgan Chase has held up so much better than Citigroup is that its CEO, Jamie Dimon, was the one-time heir apparent at Citigroup, before being passed over.

Privy to all the excessive risk-taking at Citigroup, Dimon made sure that JP Morgan Chase steered clear (relatively speaking).

P.S.: Showing up late meant I didn't get to engage Ritholtz on a topic nearer and dearer to my heart: why he heaps so much scorn on Realtors (to be fair, his shots at NAR, the National Association of Realtors, are all too often on the mark -- unfortunately).

Sold Price: Almost 5X(!) Over Ask

List Price: $17,900; Sold Price: $85,100

Sure, it was a mess. But this beat-up, bank-owned home was in a prime location -- just a couple blocks from the Mississippi, in Minneapolis' Longfellow neighborhood (the land alone had a tax assessed value of $44k).

So it wasn't surprising to see this home sell quickly.

However, even by the standards of recent South Minneapolis "foreclosure feeding frenzies," the selling price -- almost five times the asking price -- was still a shocker.

Want to guess how many offers came in on it?

Bonus (non-rhetorical) question: who was the seller?

Answer: Washington Mutual, one of the biggest peddlers of toxic loans before it blew up and was seized by the FDIC last September (what was left of its carcass was bought by JP Morgan Chase).

P.S.: in what is close to a record for turnaround time, the Buyer did a gut rehab and just re-listed the home for $239.9k.

Next Post: Foreclosure Bait and Switch