Could This Be the Next Shoe to Drop

There has been a lot of buzz recently regarding the second round of quantitative easing by the Federal Reserve scheduled to begin next month. It has rekindled optimism among investors that their action will simulate a rebound in the fledgling economy. As a result, equities and other investments have risen in value. However, the real reason for the second round of quantitative easing may be to avert another financial crisis.

We may be facing another mortgage crisis. As you are aware, millions of homes have been foreclosed because of the bubble that burst in the housing market a couple of years ago. The problem has been so overwhelming for the institutions processing the foreclosure documents that it has led to rubber-stamping. There are many instances in which the documents were notarized before they were even signed in order to hasten the process. Fraud was clearly rampant in the process. This brings up the question of whether the documents were legally executed. If not, the homeowners may still have a legal right to their home. This also raises the issue of whether the buyers of the foreclosed homes have a legal right to them. It is possible that the owner of a mortgage holds a loan without claim to the property as collateral! The problem gets deeper when the securitization of mortgages that were packaged by investment banks and sold to investors is brought into question. This is one of the reasons that a moratorium was recently placed on foreclosures.

What effect will this have on the inventory and values of unsold homes? What will happen to the value of the mortgage-backed securities that contain the properties? Keep in mind that banks still own toxic assets that may be getting more toxic. Our government owns them as well through TARP. China is holding our debt; what will they do in the midst of a deepening crisis?

In my opinion, the reason for the second round of quantitative easing is that the Federal Reserve is bracing for a potential tsunami that could occur once the seriousness of the issue is realized. Could it lead to widespread panic in the market? Keep in mind that the financial markets have many leveraged players that could head for the exit if the chance for an economic recovery is doused. This problem has the widespread smell of fraud and corruption by the same players in the first mortgage meltdown. This is going to be a field day for real estate attorneys and could force some of the banks that are “too big to fail” into insolvency!