“We’re facing the same issues we’ve been facing for the last four years…every year we have another set of hearings.”
Adam Levitin never hesitates to speaks his mind. On November 18th, the young Georgetown professor gave some of the most memorable testimony of 2010. He was speaking before the House Financial Services Subcommittee
At RealtyInfusion, we’ve written a LOT of material trying to estimate the size of the Foreclosure market, the effects of Unemployment, the extent of Strategic Defaults and of course, the growth of the Short Sale industry. (Most recently, our focus was on Timing the Next Foreclosure Wave.)One of the most frequent emails I get from readers is the same basic question about statistics: why does it have to involve so much research and guesswork? Why aren’t there more simple, clear answers?
Well, as Levitin indicated several times during his testimony, it’s because we all work in a very strange industry. Straight facts are not easy to come by, even for college professor experts…
“We don’t actually know how many mortgages there are in the US…which is just an astounding regulatory failure. No one knows the number. Somewhere between 50 and 60 million.”
Adam Levitin does have a clear picture on what the root of the problem is, though. He says it’s because government oversight has been an ongoing failure. “We’re not going to get the numbers unless Federal regulators go after them,” he said on Thursday. He also thinks the system is broken deliberately:
“Federal regulators don’t want to get this information, they don’t want to see if there is a problem, because they’re too scared that if there is a problem, they’re going to have to do something about it.”
Now, it’s not exactly a radical theory he’s advancing here. We’ve been writing about the need to deal with Fannie and Freddie for as long as RealtyInfusion has existed, and the government is still dragging their feet to this day. Unfortunately, this fear of responsibility is just a part of the culture in Washington, DC. Believe me, if all Adam Levitin had to offer you was criticism of our government, I would not be wasting your time.
Here’s where Levitin gets interesting: he also testified that the biggest, most powerful banks in the country — and indeed the world — are completely broke. What’s even more remarkable is that the numbers appear to back him up.
The Scope of the Problem
“There’s about $400 billion in second lien mortgages out there at the four largest banks — Bank of America, Chase, Citi, and Wells Fargo. That’s roughly equal to the market capitalization of those four banks. So if they started writing off their second lien mortgages, they would have no capital left. They would be insolvent.”
Four hundred billion dollars is pretty huge, but it’s not a Doomsday scenario he’s making up, either. The day before his testimony, the New York Times ran an article (“Foreclosure Fix is Seen as Distant“) citing almost the same number:
For the banks, the immediate cost of halting foreclosure is not significant. Brian Moynihan, the chief executive of Bank of America, said it totaled $10 million to $20 million a month. Bank of America has frozen foreclosures in 27 states.
A far greater threat to the broader financial system is the possibility that investors will force financial institutions to buy back hundreds of billions of dollars in soured mortgages, according to a Congressional Research Service report prepared for Thursday’s hearing and obtained by The New York Times.
Loan buybacks could shift $425 billion in losses on mortgage-backed securities from the investors that owned them to the banks that helped originate or assemble the securities, according to the report, far more than most estimates floated on Wall Street.
The Bottom Line
Here’s a screen shot from Levitin’s testimony:
That’s the back of Levitin’s head to the left. The rest of the frame is mostly empty seats, except for Brad Miller, who was asking the questions. Although finance and Real Estate blogs have been discussing Levitin a great deal in the past week, his words have gotten no play in the major media whatsoever.
So in closing, here’s the real question: does it matter if Adam Levitin is right? If the big banks are never forced to write off their losses, they’ll never go bankrupt even if they technically are. If the mortgage servicers can buy their way out of the Robo-Signing scandal with a settlement fund, does it matter if MERS was committing fraud on an industrial scale?
What’s Your Call?
