The Mortgage Foreclosure Crisis

From The New American by CHARLES SCALIGER (the original online post has been removed).

Let us be blunt: The mortgage foreclosure crisis, which first burst into full public view with Bank of America’s suspension of all foreclosures only a few days ago, has the potential to completely destroy the American real estate sector in an epic legal and economic meltdown that would make the crisis of 2007-2008 look like the proverbial Chinese tea party. …

Unfortunately for the mortgage sector, there were two big problems with that approach. In the first place, mortgages and mortgage transfers are governed by state, not federal laws. By providing a means to circumvent the hassles of state laws and local jurisdictions, MERS effectively ran roughshod over state authority. The other, potentially greater, problem, is that the critical document in a mortgage transaction — the one that empowers the creditor to enforce the terms of the mortgage on a delinquent homeowner — is the note, in 45 out of 50 states. A note, like any claim on assets, must be properly signed to have the force of a title. If it is sold to a new owner, it must be signed again, and so forth. Only thusly can what is called the “chain of title” be legally established.

But many, perhaps most mortgages that have been sold and repackaged again and again over the last few years were done so electronically, thanks to MERS, and typically lack the requisite signatures. Their chains of title, in other words, have been broken.

None of this would have mattered had the housing market continued to boom. But with the unprecedented volume of foreclosures — many of which have hit otherwise creditworthy, responsible individuals hard-pressed by unexpected circumstances — many victims of foreclosure hired lawyers and fought back. Astute lawyers began looking into chains of title, and the entire tangled mess began to unravel.

Nor are banks ignorant of the shaky legal ground on which many foreclosures rest. An entire industry has sprung up over the past few years to assist banks in the foreclosure process by forging documents to reestablish the chain of title. One such firm, outed by Yves Smith of, DOCX, advertised its “GetNet Document Recovery service” for mortgage holders, including such goodies as “create missing intervening assignment” (fee: $35) and “recreate entire collateral file” (fee: $95.00). This is but one example of the dark side of the foreclosure sector, an entire industry dedicated to bullying homeowners out of their homes by forging lost links in chains of title, if necessary.

These two issues — the ignoring of state mortgage laws and the willful abandonment (and illegal re-forging) of chains of title — threaten to plunge the entire real estate sector into chaos. This time around, the problem is less economic than legal, but the ramifications are truly appalling. It is entirely possible that no title can be established on any mortgaged property unless the mortgage is older than eight or ten years. Millions of mortgage holders — even those not in foreclosure — may be able to abandon their mortgages and leave lenders on the hook, if banks are unable to produce proof of ownership. And the entire banking system could well implode under the weight of untold billions of dollars more in losses that cannot be recouped. The federal government might attempt another TARP-esque bailout — but without any prospect for repayment.