I think Matt Taibbi does a good job at getting at the dangers the Ibanez ruling creates, but provides a pretty adequate sense of the scope of what will need to be done to actually make the fraudclosure mess right across the country.
I’m not sure I completely understand the ramifications of it, but certainly it sounds like a great thing on the surface — at the very least, I’m sure the partners of every one of the major Wall Street banks developed 5-6 new hemorrhoids at the news of this decision.
There’s a flip side, of course, which is that decisions like this, and ones that invalidate the MERS transfers — they may forestall unjust foreclosures and keep people in homes, but they won’t actually do much to fix the situation. Preventing bad foreclosures is great, but I’m pretty sure they need to come up with some sort of legislative solution to a) properly compensate the investors in the MBS who are usually the true owners of the mortgage b) negotiate new payment schedules so that homeowners who win these applications don’t feel like squatters but legitimate owners c) preserves as much as possible the credit scores of the homeowners in question, and d) create a modern registry system that does make sense, that both compensates the state for taxes and makes sales of mortgages efficient. I don’t think they can do this through the courts; we’re going to need a federal law that creates a logical procedure for dealing with the bad mortgages from the bubble period, an amnesty or a federal review or something. The problem is, of course, is that any move to legally change the status of these mortgages would affect the value of all these mortgage-backed instruments still floating around, which would leave these banks more or less instantly bankrupt, which would set the stage for another round of bailouts. If this decision means the banks have to take a big loss, they’ll find a way somehow to put that bite back onto the taxpayer. As I saw a commenter on Zero Hedge (with the apt handle what_a_mess_man) write, “cue another back-door, taxpayer-funded bank bailout in 3…2…1!”
I really don’t think there’s any why for there to be a judicial solution that is similar across all fifty states. Or rather, while each state is obviously entitled to follow its own real estate law, I don’t know that waiting around for 50 individual solutions is realistic. Fraudclosure is a systemic risk. There needs to be a response targeting the entire system, which necessitates a federal one.
The starting point for federal conversations about how you solve this needs to include the following premises: (1) property rights must be preserved in America; (2) the big banks are already insolvent; (3) people that have repeatedly fracked the economy do not deserve compensation for doing so, let alone the opportunity and backing of the federal government to do it again. A solution would likely involve breaking up all of the Too Big To Fail banks, providing a bailout directly to their RMBS investors, and cramdown for all underwater mortgages in exchange for a proper sorting out of ownership to these notes, most likely as Taibbi says to the owners of residential mortgage backed securities.
Obviously this is a very rough approximation of how to solve some of the big, top-line issues in the fraudclosure time bomb. But at a certain point, until some of the biggest issues about how to deal with TBTF banks, MBS investors, and underwater homeowners are addressed, the other questions can’t be answered adequately. We have to know what we want the economy to look like at the end of this thing to make the right steps in that direction.