The Bad News You Haven't Heard Yet

[Crossposted at Daily Kos where it made the rec list and drew some interesting comments]

Despite a deal that may keep it solvent until June, the city of Vallejo, CA, is teetering on the edge of declaring bankruptcy.

Worried yet?

No, hunh? Well, let's squint a little harder at the mess there. Vallejo is an East Bay city of 117,000, not particularly wealthy, with a population split between a fairly diverse working class already hammered by the closure of a Navy shipyard in the '90s and commuters who can't afford to buy closer to San Francisco.

The city government's financial problems have been triggered by the real estate crunch. Falling housing values and one of the highest foreclosure rates in the state have cut sharply into tax revenues. For decades, the city budget has been fudged and jury-rigged to put it technically in balance every year, the kind of thing that happens everywhere as elected officials try to kick fiscal problems downstream to some future administration.

But the spin the California media and the business press has put on the crisis is that it's all the fault of--you'll never guess--greedy unions. Over 75% of Vallejo's general fund goes to police and fire department wages, benefits and pensions. (The California average is closer to 50%.)

A bankruptcy declaration last Thursday was staved off by a last minute set of concessions by the unions including 6.5% pay cuts and closing of two fire stations, as well as a host of other cutbacks in city services. And all that does is buy time for additional scheduled concession negotiations, in advance of budget time in June.

Now let's think about this. I'm not from Cali and I don't know squat about the particularities of Vallejo, but i know it makes me worse than nervous to read stuff like this:

But the mayor, along with the local police and fire union officials who joined him Saturday, was continually interrupted by residents complaining that the unions still were grabbing too big a chunk of Vallejo's shrinking revenues.

Now Vallejo may be a fluke, and some fancy financial footwork may paper this over. But if it isn't, this may be an ugly sneak preview of the next few years.

Cities around the country are in budget trouble already. Outside of the Bush administration, it's hard to find anyone who thinks that housing prices have bottomed out and foreclosures peaked, which means local revenues will continue to fall. Add in the likelihood that the economy is already in a recession, cutting sales taxes and other revenue sources.

The troubled "monolines"--the companies that insure the ratings of bonds and other securities and have taken a bath on the sub-prime mortgage-backed securities now imploding--may themselves have their AAA ratings downgraded. That stands to affect every bond they insure, which include lots of "munis" and state bonds. Lower ratings mean higher interest has to be paid. And right now new bond issues are going unsold which offer to pay interest rates as high as 20%.

This is a recipe for local bankruptcies.

What worries me the most in this scenario is not simply that working people will be forced to give up gains they have fought for and need to keep their families afloat. It's more the potential impact of collapsing local budgets on public sector unions. They are the mainstay of the US trade union movement these days, while fewer than 9% of private sector workers are unionized. A round of concessions, forced by the threat of bankruptcy, or contract abrogations and mass layoffs mandated by bankruptcy courts could well deal a major blow to AFSCME, SEIU, CWA and other unions with big public sector memberships and to the fighting spirit of their members.

And it sure looks like working people in this country are going to need every union and the unions are going to need every member in the months and years to come.

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Judge Boyko's Snowball Starts Rolling Downhill

A bright note in the gathering foreclosure crisis.

U.S. Bankruptcy Judge Samuel L. Bufford in Los Angeles issued a notice last month warning plaintiffs in foreclosure cases to bring the mortgage notes to court and not submit copies:

"This requirement will apply because developments in the secondary market for mortgages and other security interests cause the court to lack confidence that presenting a copy of a promissory note is sufficient to show that movant has a right to enforce the note or that it qualifies as a real party in interest."

In November, Federal District Judge Christopher Boyko walked into his Cleveland courtroom and into the news. He made the mainstream media in a small way and the blogosphere in a big one (and Fire on the Mountain was on the case). You may remember Boyko—he knocked the attorneys for the US unit of global giant Deutsche Bank for a loop. Their lawyers were in court as the subprime mortgage mess unfolded, trying to evict 14 families and seize their homes for non-payment.

Boyko asked to see the mortgages.

"Umm, the mortgages," mumbled the lawyers, pretending to pat their suit pockets. "The mortgages...Gee, nobody ever asked us to actually see them before, the mortgages per se, that is. But trust us, Deutsche Bank really does hold them."

Boyko was unimpressed and told the lawyers that until the paper was forthcoming, forget about foreclosure and repossession.

The physical mortgage notes had, no doubt, been tucked someplace while the mortgages were sold and sold again and bundled in tranches of mortgages of varying types and shuffled into mortgage-backed securities which were traded far and wide, until the bottom fell out last fall.

Now, asserts an article by Bob Ivry for Bloomberg News,

Judges in at least five states have stopped foreclosure proceedings because the banks that pool mortgages into securities and the companies that collect monthly payments haven't been able to prove they own the mortgages.

Read Ivry’s nifty piece to get a sense of the worry this development is causing in the world of high finance, and why. About one mortgage in five, $2.1 trillion worth, is currently packaged in these securities. Maybe half of them are registered and transactions involving them recorded, at least in theory, by a tracking company set up by mortgage companies (and that information doesn’t necessarily say where the physical mortgage is). The other half? Don’t ask.

By law, in every transfer of a mortgage, the seller must sign over the notes to the buyer. How much of that do you think actually happened in lending, buying, selling, bundling, repackaging frenzy of the last six years? A lot of these mortgages look to be still technically held by one of the 100+ mortgage companies that stopped making loans, closed or were sold last year.

One of these, amusingly enough, is a NY state firm called American Home Mortgage Investment Corp. which filed for bankruptcy last August. They complain that warehousing their loan paperwork is costing them $45,000 a month that they don’t have and they've petitioned the Bankruptcy Judge to let them dump the lot!

There’s more good stuff to be found in Ivry’s article and by googling some of the instances he cites, but this post is plenty long enough already.

But, and this is a big, big but, before I sign off, there is one thing I want to make sure everyone who has read this far knows and understands and spreads the word on. Most foreclosures are still going smooth as silk, even with no paperwork in sight. In many cases banks are submitting "lost-note affidavits" as a matter of course. If you or anyone you know winds up facing foreclosure, your lawyer has to challenge the bank and the bank’s attorneys and not just pray that you have a Judge Boyko or a Judge Bufford on the bench.

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