I’m a finance and economics nerd, not a legal nerd, so I’m trying to make heads or tails of the whole foreclosure signing mess just like everyone else. Fortunately a friend sent along a Citigroup research piece, summarizing the views of a Georgetown law professor named Adam Levitin, that I found very enlightening. Unfortunately, the piece is proprietary so I can’t link to it. But I will try to sum up some of the major points.
I had mentioned last week that the crux of the foreclosure issue was that servicers had signed documents attesting to specific knowledge about each foreclosed property, but that they’d done so at such a fast pace that it was clearly impossible for them to have truly verified the information as they’d claimed. This could lead to an assortment of troubles. Some people have been erroneously foreclosed on. Others have claimed they were erroneously foreclosed on, though it’s not clear that that actually were — and there could be a lot more of this group to follow. More generally, the lack of clarity about who exactly owns a foreclosed property could prevent buyers, lenders, and title insurers from wanting to have anything to do with properties that have been foreclosed on in recent years.
But according to Professor Levitin, among others, the foreclosure issue isn’t even the main event. The bigger problem lies with the securitization of the mortgage loans that took place years back. Securitization, longtime readers may recall, describes the act of bundling up a bunch of mortgages and selling pieces of the resulting bundle to investors. As hard as this is to believe in our digitized age, it seems that the law still mandates that transferring ownership of a mortgage requires actual, tree-meat paperwork to be physically transferred as well. In the go-go days of the securitization boom, the parties involved were apparently a bit lax (to put it mildly) in transferring the paperwork in the manner required by law.
This puts into legal question the ownership of the loans in all those mortgage-backed securities. And importantly, it may open the door for purchasers of mortgage-backed securities — those would be the folks who lost enormous amounts of money by providing the financing for all the reckless lending that took place earlier in the decade — to challenge the legality of the securities they purchased and try to recoup some of their losses.
This would all be another blow to the long-suffering (if serially bailed-out) banking industry. Serious confusion about who owns what could also potentially freeze up the market for lending and title insurance on all existing homes — even if they had never been foreclosed upon.
It’s all become a big political issue now, and it’s not really possible to predict the outcome once national politicians (who can be depended upon only to come up with some combination of misdirected outrage, financial industry appeasement, and can-kicking) get involved. All we can say for sure now — assuming this law professor is right — is that the paperwork issues regarding foreclosure and securitization have the potential to seriously impact both the housing market and the financial industry.
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