Understanding the Foreclosure Crisis

Comment: The best article I've seen that explains the issues.

Mortgage Damage Spreads - Big Bank Stocks Hit Again as Modern Finance Collides With the Legal System


In essence, fast-paced modern finance is colliding with the much slower machinery of the U.S. legal system. While finance aims for efficiency and maximized profits, the courts demand due process. And that's becoming a growing issue as lenders come under attack for taking short cuts to oust homeowners who haven't mailed in a mortgage check for months.


The financial system and legal system have been on a collision course for some time in residential real estate. Both the lower standards for loans and the lax controls involving foreclosures were based on the premise that home prices would never fall, making it unlikely that many loans would go bad at once. Once that premise fell apart, the flaws in the system became obvious, and the long-term challenge now facing lenders is to rebuild the mortgage system on more solid footing.

Banks argue that these problems will be repaired swiftly, and they'll soon be running the foreclosure machinery at full speed again. But analysts say the problems could expand into a legal crisis if banks can't prove that they are following standard property-law procedures.

Lawyers, politicians and consumer advocates, meanwhile, are using the legal problems to stop foreclosures and extract settlements for troubled borrowers that lower their mortgage debt.

Industry executives note that few, if any, borrowers in the foreclosure process dispute the fact that they're not paying their mortgages. "We're not evicting people who deserve to stay in their house," James Dimon, J.P. Morgan chief executive, told analysts Wednesday.


[The] thornier issue is that banks could have trouble proving they have standing to foreclose as they go back to correct errors. That problem stems largely from mortgages that were bundled into pools and sold to investors as securities. This process, known as securitization, became the preferred method of financing U.S. home loans over the past 30 years.

"This is back-office work. This is not all going to resolve itself immediately, and we're going to have to be patient," says Richard Dorfman of the Securities Industry and Financial Markets Association's securitization group.

Real-estate law requires the physical transfer of paperwork whenever mortgages trade hands, and analysts are raising questions about how often that happened during the housing boom. One concern is that banks may have lost, or didn't ever have, mortgage certificates. If that happened, banks will have to pause foreclosures for months as they track down certificates and refile paperwork.

Comments: Only in the last several years have I come to understand how this "securitization" works. See an earlier post: Imagine a butcher making sausages. It's like when one eats a hamburger and one presumes it all the meat comes from one cow. In olden, olden days (way back when with local Savings and Loans), one institution might hold a mortgage for 20 years (back in the days of 20 year mortgages). Of course in those days mortgages were more difficult to obtain. Perhaps we need to go back to that system - pre-securitization?!

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