By: Todd M. Schoenberger
Uh oh. Only two weeks away from an earthquake change of power in Washington, along with the inevitable announcement of a monster quantitative easing package, we hear news that the recent foreclosure fiasco has ratcheted up a notch.
Only Emeril could correctly describe the chaos taking place in the banking sector as the FBI is now beginning to investigate “criminal intent” when banks processed mortgage and foreclosures. To say this is bad for the housing sector would be an understatement; it’s a colossal rockslide that won’t end for years to come.
The fact that the Federal Reserve Bank of New York is part of a consortium to send bulge bracket firm Bank of America to court and have them repurchase $47 billion in mortgages, known as “put-backs, is telling enough. Now, the cops are involved.
The interesting thing is the $47 billion in question is looped into an investment category defined as “toxic.” Ummm, didn’t our government go out and “buy” all of this toxic debt? Well, evidently not, because it’s Q4 of 2010—more than two years removed from the real estate bubble burst—and we have headline stories about even more toxic debt.
Think again if you think Bank of America is going to be the only lender impacted. You would be naïve to think this is a one-dimensional investigation. Once the FBI is involved, you can rest assure several layers of this disaster will make it to a courtroom near you.
Investors realize this, as well. Everyone is talking about the financials, how BofA dropped 4.4% yesterday, and is off another 3% (as of this writing) today. Yes, the financials are toxic; but so are the homebuilders.
One only needs to get a quick quote on the S&P Homebuilders SPDR (NYSE: XHB). Grant it, this group has been a complete disaster this year, but XHB is getting clobbered since the latest foreclosure mess was announced. Components in this group, such as Toll Brothers, KB Homes and Hovnanian are seriously lagging the broader averages as traders believe people will stay far away from every purchasing one of these units.
With major class action lawsuits against lenders looming, don’t be surprised if legal action starts arriving for mortgage brokers, title companies, foreclosure filers and real estate agents. Many of these areas are highly unregulated, thus increasing the risk of limited oversight. Federal regulators—including firms like Pimco and Blackrock—want answers, and will not stop until the issue is completely resolved.
To take a cue from Andrew Ross Sorkin’s Too Big to Fail, this story may be the catalyst to have lawmakers and taxpayers simply say these banks are just Too Hazardous to Care.