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The Mortgage Morass

By PAUL KRUGMAN

Published: October 14, 2010

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The story so far: An epic housing bust and sustained high unemployment have led to an epidemic of default, with millions of homeowners falling behind on mortgage payments. So servicers — the companies that collect payments on behalf of mortgage owners — have been foreclosing on many mortgages, seizing many homes.

But do they actually have the right to seize these homes? Horror stories have been proliferating, like the case of the Florida man whose home was taken even though he had no mortgage. More significantly, certain players have been ignoring the law. Courts have been approving foreclosures without requiring that mortgage servicers produce appropriate documentation; instead, they have relied on affidavits asserting that the papers are in order. And these affidavits were often produced by “robo-signers,” or low-level employees who had no idea whether their assertions were true.

Now an awful truth is becoming apparent: In many cases, the documentation doesn’t exist. In the frenzy of the bubble, much home lending was undertaken by fly-by-night companies trying to generate as much volume as possible. These loans were sold off to mortgage “trusts,” which, in turn, sliced and diced them into mortgage-backed securities. The trusts were legally required to obtain and hold the mortgage notes that specified the borrowers’ obligations. But it’s now apparent that such niceties were frequently neglected. And this means that many of the foreclosures now taking place are, in fact, illegal.

This is very, very bad. For one thing, it’s a near certainty that significant numbers of borrowers are being defrauded — charged fees they don’t actually owe, declared in default when, by the terms of their loan agreements, they aren’t.

Beyond that, if trusts can’t produce proof that they actually own the mortgages against which they have been selling claims, the sponsors of these trusts will face lawsuits from investors who bought these claims — claims that are now, in many cases, worth only a small fraction of their face value.

And who are these sponsors? Major financial institutions — the same institutions supposedly rescued by government programs last year. So the mortgage mess threatens to produce another financial crisis.

What can be done?

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Full Article @ NYTimes.com

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There are many issues in the mortgage mess, not the least of which is the 'ownership dilution' by the mortgage derivatives - I say 'ownership dilution' because on the one hand the banks argue that the derivatives DO have some asset beneath it a few steps removed... but if that is the argument, they have a certain amount of ownership.  And, with so many buy and sell deals, often the banks that are foreclosing may not have the ownership even though they have the papers sitting in their filing cabinet in the transition faces.  Yep, there is a good reason why home buying and selling takes so long - it is a real mess on who owns and who has the papers.

I hope the BOA and other banks are REQUIRED to sign on the dotted line saying that they OWN the property before they issue the order for foreclosure.