Sunday, 25 October 2009

Mortgage backed securities - even more vaporware than thought

The New York Times for October 25, 2009 has a fascinating article about the likelihood that a considerable number of homes in the US 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.

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