Tuesday, November 16, 2010

The Mortgage Mess: Worse Than We Thought

It turns out that using mortgages as collateral to back bonds sold globally was a bad idea. Financiers sold mortgage-backed securities as lucrative, risk-free investment vehicles. It was supposed to be a win-win for everyone.

But now it appears that these wonderful new financial products could undermine a large chunk of the U.S. housing market. A new report issued today by the Congressional Oversight Panel that oversees the Troubled Asset Relief Program (TARP bailout) suggests that the electronic mortgage-processing systems at the heart of this mess may call into question 33 million mortgage loans. Oops, sorry about that.

In an earlier post, I summarized an article by Professor Christopher Peterson of the University of Utah Law School. His analysis now sounds cautious. The new Congressional Oversight Panel report suggests that our entire financial system might be undermined: 
Clear and uncontested property rights are the foundation of the housing market. If these rights fall into question, that foundation could collapse. Borrowers may be unable to determine whether they are sending their monthly payments to the right people. Judges may block any effort to foreclose, even in cases where borrowers have failed to make regular payments. Multiple banks may attempt to foreclose upon the same property. Borrowers who have already suffered foreclosure may seek to regain title to their homes and force any new owners to move out. Would-be buyers and sellers could find themselves in limbo, unable to know with any certainty whether they can safely buy or sell a home. If such problems were to arise on a large scale, the housing market could experience even greater disruptions than have already occurred, resulting in significant harm to major financial institutions (COP "November Oversight Report," p. 5).
Oops, sorry about that. It really does come down to who owns the promissory note in your mortgage. Unfortunately, for 33 million people the answer to that question is not clear.

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