20 Oct. 2010 | Comments (0)
“The robo affidavits are an attempt to hide the fact that (1) the mortgage securitization trusts or REMICs didn’t comply with the IRS rules, and (2) the trusts may not have had a legal interest in the mortgages they were selling,” wrote James McRitchie in his Oct. 13 CorpGov.net blog post. “The consequences in both cases are dire.”It could have huge ramifications. It could cripple the already debilitated housing and mortgage securities markets, negatively affect the bottom line of big banks that act as servicers of those loans, hurt the investments made by companies and possibly lead to another credit crisis if troubled banks decide to rein in lending. “It’s brutal,” Yves Smith, author of the Naked Capitalism financial blog and head of corporate financial consultant and advisor Aurora Advisors, said in an Oct. 13 Business News Network Canadian TV interview. “Normally, if it was just a case of the note, you could endorse the note over to anyone. But, [since you are dealing with trusts], you can’t do that under the trust law.” “There really aren’t any quick fixes. They have to take place on a state level. You would have to suspend the Uniform Commercial Code in 50 states, suspend real estate laws in 50 states, suspend New York trust laws and get a waiver for the IRS REMIC rules.” What does this all mean for directors of public companies? For starters, it might be a good time for management to look at their crisis management plans for dealing with financial risks, such as lack of liquidity and a credit crunch. Also, it might be a good time to for the CFO’s office to look at lining up other investments and types of liquidity in case this foreclosure crisis does indeed turn into another major financial crisis. Of course, it is up to the board to oversee how management is prepared for such a crisis. One suggestion I have is to reread my blog post of Jan. 8, 2010 (Top 10 Issues Facing Directors in 2010). In that post, there was a thorough list from Wachtel, Lipton, Rosen & Katz (Some Thoughts for Boards of Directors in 2010). Included in that list on page 7 is a link to a WLRK memo on risk management that offers a how to dealing with risk management issues related to a financial crisis (Risk Management and the Board of Directors, November 2009). Unfortunately, the foreclosure logjam and spate of litigation from investors and homeowners against the banks is not even the biggest problem those banks face. In a Canadian Business News Network interview Oct. 13, (See it here.) Smith said it may get so bad the federal government may have intervene. “These [foreclosed and troubled] loans should’ve been written down already,” she said. “They are carrying them at 90 cents on the dollar instead of 50 cents.” We’ll all have to wait and see how this plays out, but meanwhile boards may not have the luxury of waiting. They may want to act now by preparing for the worst.