Friday, August 20, 2010

Total Loss

Seeking Alpha is taking a look at the problem with bundled mortgages. And they are huge. As in bigger than you can possibly imagine.

Mortgages bundled into securities were a favorite investment of speculators at the height of the financial bubble leading up to the crash of 2008. The securities changed hands frequently, and the companies profiting from mortgage payments were often not the same parties that negotiated the loans. At the heart of this disconnect was the Mortgage Electronic Registration System, or MERS, a company that serves as the mortgagee of record for lenders, allowing properties to change hands without the necessity of recording each transfer.

MERS was convenient for the mortgage industry, but courts are now questioning the impact of all of this financial juggling when it comes to mortgage ownership. To foreclose on real property, the plaintiff must be able to establish the chain of title entitling it to relief. But MERS has acknowledged, and recent cases have held, that MERS is a mere “nominee” — an entity appointed by the true owner simply for the purpose of holding property in order to facilitate transactions. Recent court opinions stress that this defect is not just a procedural but is a substantive failure, one that is fatal to the plaintiff’s legal ability to foreclose.
I see a lot of work ahead for lawyers.

Update: More at Stop Foreclosure Fraud

Cross Posted at Classical Values


J Carlton said...

This has to be the most stupid financial mistake in history. Sorry to say, the usual laws are pretty clear about transfer of title. If you don't register and lose the trace, you can't prove that you are entitled to anything. Therefore you screwed yourself and your trusting stockholders but good.

LarryD said...

Mortgage securitization is several bad ideas packaged together. Most of them can be lumped together as "buying a pig in a poke".

Trancheing means that the security doesn't even represent intact mortgages, but "slices" of mortgages.

And now this. It sounds like trying to foreclose on the property behind securitized mortgages is throwing good money after bad.

linearthinker said...

I need help. The negatives associated with the bundling are obvious in hindsight, and would seem to me to have been equally obvious going in.

What was the incentive to buy a pig in a poke in the first place? These were not rubes doing the trading.

Something really smells.

M. Simon said...

Greed is often sufficient motive.

linearthinker said...

Not disagreeing with that, Simon. Maybe I can answer my own question.

If these were the variable rate loans, is that where the speculation enters the picture? Purchasers of the bundles looking to profit as rates were jacked up? I'm an innocent bystander in these matters. I'd never take out a vrm in the first place, and don't pretend to understand the more arcane manipulations.

Regardless, they should have been allowed to fail instead of being bailed out. Let them bear the burden of their risk taking. Simple as that, to a linear thinker.