A New Quirk in the Mortgage Tale: Debt-Free Homes

The New York Times for October 25, 2009 has a fascinating article about the likelihood that a considerable number of homes in the U.S. do not have valid mortgage documentation. In the super hurry to securitize anything and everything it appears that the collateral packaging wizards have been remiss in maintaining adequate paper trails and back up documents on many of the properties covered under MBS's etc.

This adds another dimension to the financial black hole story. Not only do we have no idea what is the real mark-to-market value of products resulting from mortgage-backed securitizations, but, even more bizarrely, the banks may not literally know what properties are actually covered under such contractual packages.

One surprising smackdown occurred on Oct. 9 in federal bankruptcy court in the Southern District of New York. Ruling that a lender, PHH Mortgage, hadn’t proved its claim to a delinquent borrower’s home in White Plains, Judge Robert D. Drain wiped out a $461,263 mortgage debt on the property. That’s right: the mortgage debt disappeared, via a court order.

So the ruling may put a new dynamic in play in the foreclosure mess: If the lender can’t come forward with proof of ownership, and judges don’t look kindly on that, then borrowers may have a stronger hand to play in court and, apparently, may even be able to stay in their homes mortgage-free.

The reason that notes have gone missing is the huge mass of mortgage securitizations that occurred during the housing boom. Securitizations allowed for large pools of bank loans to be bundled and sold to legions of investors, but some of the nuts and bolts of the mortgage game — notes, for example — were never adequately tracked or recorded during the boom. In some cases, that means nobody truly knows who owns what.

Comments

[Roger Knights:]

Lost mortgage documents. This sounds like something out of Dilbert. You'd think if these gnomes were good at anything it would be record-keeping.

Oct 26 08:04 AM

[Smalltownba...:]

Can anyone say skyrocketing premiums for E&O Insurance for Banks and Attorneys going forward? Hmmm...

Oct 26 09:24 AM

[John Lounsbury:]

Roger Knights - - -

The people getting the money - the mortgage originators and the securitization builders didn't care about records. They just took their fees and ran. It is not surprising that some documentation disappeared. The rating agencies weren't checking and the buyers of the securities saw triple-A and forked over their money. Hear no evil, say no evil, see no evil and leave town. PT Barnum would have loved it.

Oct 26 05:28 PM

[John Lounsbury:]

Clive - - -

Nicwe news find. Quite amazing.

BTW, nice mug shot. Did you crop the numbers?

Oct 26 05:31 PM

[Albertarocks:]

This has the potential to be the biggest and stupidest blunder of all time by the "Wall Street Wizards".

It sure appears to me, that since courts are ruling in favor of the home purchasers, this even has the potential to be a large enough shift in the distribution of wealth to save the very futures of a whole lot of the most innocent actors in the entire play... the American homeowner.

Wow!

Oct 26 05:34 PM