The Bankwatch

Tracking the consumer evolution of financial services

“If the chain of title of the note is broken, then the borrower no longer owes any money on the loan” | Subprime redux

I have been reading John Mauldins weekly emails for a while and I gain tons of insight through it.  Tonights note including quotes from David Kotok at ( almost made me fall off my chair.  Like everyone I have heard that US banks are pressing pause on foreclosures and there was some talk of fraudulent foreclosure notices with what I thought I heard about shortcuts.  The issue is much deeper.

The Subprime Debacle: Act 2 | John Mauldin

"Homeowners can only be foreclosed and evicted from their homes by the person or institution who actually has the loan paper…only the note-holder has legal standing to ask a court to foreclose and evict. Not the mortgage, the note, which is the actual IOU that people sign, promising to pay back the mortgage loan.

"The whole purpose of MBSs was for different investors to have their different risk appetites satiated with different bonds. Some bond customers wanted super-safe bonds with low returns, some others wanted riskier bonds with correspondingly higher rates of return.

"So somewhere between the REMICs (Real-Estate Mortgage Investment Conduits, a special vehicle designed to hold the loans for tax purposes) and MERS (Mortgage Electronic Registration System), the chain of title was broken”

In simple terms the mortgages placed with Freddie Mac/ Fannie Mae, were broken up into tranches where each mortgage was no longer whole … bits went into high grade securities, and bits went into junk bonds.  This was the attraction of the new vehicles with different rates of return.  In order to maintain chain of ownership between borrower and (original) lender the use of REMIC and MERS was designed to do that.

It failed.  The chain of ownership was broken between the borrower and the holder of the note.  That break in the chain says that the borrower no longer owes any money on the loan.  The issue of transparency has always been there with Mortgage Backed Securities MBS).  This goes much further than transparency.  The question is one of legality in creation of MBS and the methodology that supported them.

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This is huge.  This is why Ally Financial (formerly GMAC), JP Morgan Chase, and Bank of America have suspended mortgage foreclosures.  They run the risk of all the foreclosure actions being declared null and void.  This story is about to get big. 

Written by Colin Henderson

October 16, 2010 at 21:10

Posted in sub prime, subprime

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