Millions of U.S. mortgages have been shuttled around the global financial system - sold and resold by firms - without the documents that traditionally prove who legally owns the loans.Some states and localities have laws that require the filing of paperwork and the payment of a fee whenever a mortgage changes hands, and the mortgage security industry has simply ignored these laws. They have an electronic registry for mortgage ownership that they say is legally adequate. And they may well be right, but right now judges more sympathetic to homeowners than to big banks are slapping the banks by refusing to approve their foreclosures. This may help some homeowners find more time to stave off foreclosure, but as they say, uncertainty is bad for business, and this could create further problems for the mortgage and housing industries over the next few years. That all of these local laws were just ignored is another good sign of how frantic the business of mortgage-backed securities became, and how divorced from reality.
Now, as many of these loans have fallen into default and banks have sought to seize homes, judges around the country have increasingly ruled that lenders had no right to foreclose, because they lacked clear title.
Thursday, October 7, 2010
A New Wrinkle to the Housing Mess
Here is a weird little detail that is coming up in many foreclosure cases now:
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There are several different ownership models for a mortgage loan... An entity (I use the term because there are so many different types of entities owning these assets... companies, individuals, trusts, etc.) may own the whole loan, meaning they control all aspects of the ownership - all principal and interest paid. Or, the loan may be bundled into a Mortgage Backed Security, where an investor may purchase a portion of that pool of loans - again all principal and interest. There are the stripped MBS - a tranche of the underlying asset - paying interest only, principal only, zero coupon strips, etc. The MBS are made up of large numbers of loans, all having similar charateristics - principal, interest rate, term, and are pooled together in large amounts, millions of dollars, and investors can buy portions, just like a company selling debt. Think about Ford Motor Company selling debt to investors... The want to raise $50 million dollars. What ends up happening is the debt, with its coupon rate of interest is split into more purchasable chunks, say $10,000 worth. Different entities can then buy in those bite sized chunks. The same thing happens to MBS. So - who owns the mortgage? Another analogy... You have a credit card and you go to Walmart five different times in a month and each time you spend exactly $100. When the bill comes due from the credit card company, you pay $250. Exactly which purchase was paid off - the first one, the last one, or everyone? And, let's slap a little more on the top... Each of the MBS represent a binding legal agreement between the seller and the purchaser for that slice of the deal. Breaking that up or modifying it in anyway is like telling Walmart that you only owe them $300 in total even though you contracted to pay them $500 for goods and services. This is a horribly complicated mess and we need very smart people thinking straight without bias. Personally I hope to work myself out of a job cleaning this crap up. I will have done a little good by doing so.
And contrast this to the model assumed by many old local laws, in which a mortgage or any other lien on a house has to be filed at the courthouse with certain forms, and any change in the ownership of that lien has to be registered as well. As you say, a mess.
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