I’ve been mulling a followup housing policy post, and meanwhile looking over the news about housing. One thing that stands out to me is the shadow that’s about to be cast on the legal structures of housing ownership, title, and finance.
I spent a few years doing RE Investment banking, and have some friends in that world still – mostly in the larger institutional-commercial space. And I’m guessing that many of the same issues apply there – except that the borrowers have the resources and skills to hire very smart lawyers.
The root of the problem is that we have a mortgage finance system – legal and administrative regime – that was deliberately undermined in the name of efficiency by a bunch of half-smart people who then made (and in many cases doubtless lost) zillions from the new financial conduits they established.
Here’s a great post on Barry Ritholz’s blog that sets out one major part of the problem.
You’ve heard the name Mortgage Electronic Registration Systems or “MERS” mentioned in relation to the foreclosure problems in the residential real estate market.
But what is MERS?
It is the company created and owned by all of the big banks to process title to property in the U.S. Approximately 60% of the nation’s residential mortgages are recorded in the name of MERS.
MERS is a shell corporation with no employees, but thousands of officers.
That’s not necessarily a problem. The way they managed it is.
And the implications are massive; a challenge to the validity of billions in mortgages, putbacks of mortgage securities to banks that are already stressed, and a frozen hosuing market because title is impossible to insure.
Go read the whole post, and think about it when you write your next mortgage check.
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Unfortunately, trying to follow this issue one is left with one-sided over-the-top the end-is-coming from blogs like Ritholz and complete utter indifference to the issue from the rest. In short, the Ritholz states one side of the argument, while linking to a forthcoming law journal article that identifies some of the arguments on the other side. (For instance, different states have adopted less technical rules, courts are likely to use equitable liens to provide the banks with relief, chains can be repaired, and simply just that many of these issues would be ones of first impression)
A fairer description here is that the banks saved money by taking the risk they wouldn’t have to spend a far greater sum down the road. Some people might get lucky, but a far greater will find themselves on the short end of the whacking stick. “Tanta”:http://www.calculatedriskblog.com/2007/11/deutsche-bank-fc-problems-and-revenge.html wrote about these claims years ago:
bq. _I do, however, have some problem with lawyers who take their own smoke-blowing tactics too seriously. It’s one thing to get a case dismissed because the plaintiff’s affidavit is in error; why shouldn’t you do that if it’s in your client’s best interest? It’s another thing entirely to smoke your own dope and call this “rampant foreclosure fraud,” and for a blogger to claim that this will single-handedly bring down the securitization market. That’s fighting bongwater with bongwater. I did a quick Google search this morning to look for any follow-ups to this post, and found the following: “It appears that the holders of CDO’s do not have legal title to the properties that have been defaulted on, so they cannot foreclose, so they get a big fat NOTHING.” That this is not about CDOs, not about title to real estate, and not about anyone getting NOTHING isn’t stopping the internet-chain of conclusion-leaping that make my client’s endorsement-chain problems look like a careful business practice. Now a bunch of vocal people “know” something that they do in fact not know. And people like me will be trying to swat this fly forever in the interest of having a useful conversation._
I read what Ritzhold is quoting weeks ago. He is taking the (maybe?) worst case scenario. But, following the amateurish behavior of the financial industry during the melt down, I would not rule anything out. Look at the lasting effect that sub-prime and other synthetic securities have wrought on the world economy.
There are so many criss-crossing currents, so many powerful characters that have an interest in this drama, that it appears top me to beyond legislative remedy.
The foreclosure side will be worked out since the homeowner debt will not be expunged but will remain, except as an unsecured debt. the ramifications of that alone, even in the most simple terms of securing a date on the court calender is daunting.
The last time I went to court for a commission in NYC, it took me 7 years to get a date. Add another 100,000 spots on the calendar.
I believe, in the end, The Supreme Court will have to issue any number of opinions on all facets of this mess. As I wrote in another thread, we are talking about claims that flow from the basic elements of a contract.
Anyone that thinks this is going away anytime soon, I think, is whistling past a graveyard.
The movements by Blackrock, The NY Fed and Pimco against B of A for nearly 50 Billion dollars on bundled mortgage instruments sold to them by B of A, looks to me like the tip of the iceberg.
I wonder what it will be like in November when our Big Bank executives make a encore before the Senate, which of the Clerical Error, Risk Management, Sophisticated Investor or Normal Operating Procedure arguments do you think that the American people will swallow?