“New” foreclosure mess = time to book equity (and bond) gains?

Good post on the Big Picture blog today covering the new mess we (USA) find ourselves in with a lack of proper documentation for most foreclosures and indeed mortgages. Read the post here:  http://www.ritholtz.com/blog/2010/10/the-foreclosure-mess/

This feels a lot to me like the early days of the financial crisis in late 2007/early 2008; when some hedge funds were going under and only some news on a banking problem was coming to light – but most investors  (and by extension stock market) hadn’t really grasped the extent of the problem and panicked yet.

This might not be as bad as that (nor a complete breakdown of society and laws as some have predicted); but a movement by some homeowners to stop paying mortgages because they don’t believe the bank can prove they own the loan (or because they think the bank’s proof is forged and fraudulent) seems inevitable.  They even have a new website to help out: http://www.youwalkaway.com/

What percentage of the home loan population would try and get a free ride in this way?  If you think more than say…2%, buckle your seatbelts… because it only took about that much in new delinquencies in 2007 to kick off this whole mess in the first place.  Remember that these mortgage backed securities are so levered up, that each 1% in defaults can equal 5% to 25% loss on the security.  Time to book some equity (and bond?) profits and look at that ‘managed futures during crisis periods‘ graph again?



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