Some Sand in the Gears of Securitizing

From the New York Times by FLOYD NORRIS

Was the great securitization machine that made hundreds of billions of dollars in mortgage loans based on a legal foundation of sand?

That possibility, raised by two law school professors, has begun to scare many jittery investors, causing bank stocks to plummet, although they recovered a little Monday.

If they are correct, the best outcome for lenders would be a prolonged delay in completing foreclosures, raising costs still further and paralyzing an already depressed housing market. …

The arguments involve MERS, the Mortgage Electronic Registration Systems, which was created to smooth the securitization process and, in the process, to allow lenders to avoid paying registration fees to counties each time the mortgage changed hands.

Several state supreme courts have chipped away at MERS. But none has gone nearly as far as the professors, Christopher L. Peterson of theUniversity of Utah and Adam Levitin of Georgetown, say is possible. …

If it is an agent, he wrote, “it is extremely unclear that it has the right to list itself as a mortgagee,” as it does. State real estate laws, he said, “do not have provisions authorizing financial institutions to use the name of a shell company,” in large part because “the point of these statutes is to provide a transparent, reliable record of actual — as opposed to nominal — land ownership.”