10/17/10

Megan McArdle on Foreclosures

"...the implications seem much more disturbing for people who aren't in foreclosure.

Take the investors in these mortgage bonds.  Most of these securities have clauses that allow investors to force the banks to take back loans in the case of fraud. 

When did the fraud start? 

...I doubt that many of the originators have the capital to withstand a mass wave of such loan repatriations, especially since you can expect that they'll only be forced to take the bad ones.  This is going to be an expensive mess for the courts to sort out, could lead to another wave of bank failures, and doesn't have any obvious legislative fix.

Or how about people who are in trouble, but not in foreclosure? 

...If a loan servicer doesn't have sufficiently clear authority to foreclose, then presumably they also don't have any authority to modify the loan. 

...shouldn't banks be stopping their modifications, too, until clear lines of ownership are established?

Already, it's apparently impossible to sell a foreclosure--and people who have bought foreclosed homes are starting to sweat, wondering if they're going to get embroiled in a lawsuit. 

But what about short sales?  ...if a company doesn't have the authority to foreclose, it doesn't have the authority to authorize you to sell it for less than the value of the mortgage. 

Things seem cleaner with ordinary sales, but what if some other company comes out of the woodwork to claim that the note wasn't properly registered, and you paid the wrong guy? 

Does the lien go back on the house? 

Who owes the money?

This is why people are worried that the title-insurance system will break down.

 ...if I were a title insurer, that would make me kind of reluctant to write new policies.

...All this uncertainty is ultimately going to be terrible for both the housing market, and the broader economy."

Megan McArdle
The Atlantic via Business Insider

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