Rising Star Shorts: Bank of America and Lender Processing Services

Rising Star Shorts: Bank of America and Lender Processing Services

Ilan Moscovitz

This article is part of our Rising Star Portfolios series. You can read about the Dada Portfolio here.

You may have been hearing about the various mortgage fraud scandals ripping through Wall Street and the economy. We believe the problems are real, though their full extent remains unknown. At the Dada portfolio, we’ve decided to put a little bit of capital into betting against two of the biggest apparent culprits.

Bottom line
The Dada Portfolio plans to split $800 between LPS puts and a Bank of America short.

While my Foolish colleague and banking expert Anand Chokkavelu provides a rather compelling bullish case for Bank of America and JPMorgan, on the grounds that their stocks are cheap and the government will find a way to bail them out, we think there could be further downside.

President Obama has already vetoed HR 3808, the Interstate Recognition of Notarizations Act of 2010 (aka the Notary Fraud Condonation Act of 2010). While there could be other actions at the Federal level to forgive servicers, originators, and robo-signers — for example, the Federal Reserve is inexplicably considering weakening consumer protections for homeowners — to a large extent, these issues fall under state jurisdiction.

States appear to be somewhat more determined than federal officials to actually get to the bottom of potential fraud and abuses. Earlier this month, Iowa Attorney General Tom Miller, who is leading the 50-state investigation, promised a group of homeowners that “we will put people in jail.”