Bad News in Housing

Foreclosure rates could drop!!!

That is bad news?

It is if it is because courts are throwing out cases because mortgage companies holding securitized mortgages  don’t have the actual note. I’ll let Luke explain:

The problem has arisen because most of these sorts of trust do not actually possess the physical mortgage note itself. Instead they have a third party hold the document. So, when they attempt to foreclose on a property (or in this case, 14 properties), they are unable to provide actual proof of ownership of the notes.

The decision in this case is an enormous deal. It is unclear at this point whether the majority of these trusts would be able to provide actual proof of ownership if challenged by the borrower to do so. If they cannot, then the foreclosure rate may begin dropping precipitously - not because people aren’t defaulting, but because the note owners aren’t keeping adequate records.

This could be disastrous for the mortgage industry. Throw in the damage to the underlying bonds if investors are unsure of the actual assets backing them. What will that do to the credit markets? I assume panic is not in overdrive yet because nobody believes this will stand, but in the meantime markets hate uncertainty.  If this story gets much play disaster in the credit markets could result even if it has no real impact on foreclosures.

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5 Responses to “Bad News in Housing”

  1. on 17 Nov 2007 at 8:07 pm Allen

    How are they not able to produce the note? I worked at one point in a business that had a couple vaults. They provided this service. Are the mortgage holders simply failing to realize they need to have the paper note pulled? Or are they using 3rd party’s that are somehow incapable of keeping track of the notes they’re being paid to keep track of?
    I don’t see how the law would actually require them to have possession of that note 24/7. Otherwise the industry would’ve never shifted to having 3rd parties store those physical notes.

  2. on 19 Nov 2007 at 1:40 am Doug

    Here’s a good post I read the other day that explains what’s going on.

    There’s no problem with paying a 3rd party to hold the notes. This is an issue of record-keeping for the note holders. If all the i’s are not dotted and the t’s not crossed, loan holders can do so after the fact. It just will cost them money and possibly delay foreclosure proceedings while they clean up their documentation. But even in the specific case in OH, the result is not that Deutsche Bank cannot foreclose on those 14 loans. Rather, they will have to re-file their suit once they have their documentation in order.

    IMO, the news & blog coverage of this case, including what you linked, has been extremely misleading.

  3. on 19 Nov 2007 at 2:42 am Lance

    It may be. As I said, it is a matter of uncertainty. I assume it will be worked out,but the uncertainty comes at a very bad time.

  4. on 19 Nov 2007 at 6:32 pm MichaelW

    Could this be a case where you (Doug and Lance) are both right?

    On the one hand, it is not that unusual for an original Note to be lost and there are procedures to rectify that situation. The Holder can file a Lost Note Affidavit attaching a certified true copy of the original. The Borrower can then challenge the copy in court if s/he so desires, but that rarely happens. This procedure is fairly routine. Accordingly, Doug has a point that the media is overhyping the situation by making it seem much more dire than it really is.

    But, on the other hand. Lance has a point too about the uncertainty being introduced to the market. That uncertainty is fueled primarily by ignorance of what’s actually happening, but it is uncertainty nonetheless.

    As an aside, these sorts of “Lost Note” problems are red herrings for what ails the finance industry. News stories about them simply reveal how little most reporters know (or care to understand) about the subjects they write about. If they were really interested in flushing out finance bogey men they would writing about SIV’s and the implications they have for undermining not just the commercial paper market, but the securitization and sale of debt in general. Of course, we should probably be thankful for the lack of such coverage since the inevitable result is the clarion call for (yet more) government regulation and the criminalization of doing business.

  5. on 19 Nov 2007 at 7:54 pm Lance

    SIV’s? I can write about those!

    Of course you are right, and you relate exactly my point. I do think there may be some substance as well. If with this court ruling the clearing of the market is slowed while judges make demands that, while doable, have not been accounted for by note holders, the process becomes even more drawn out than it is. Or, as they say at calculated risk:

    The big news here is that the true cost of doing business is belatedly showing up. I happen to think that’s a more important story than was originally reported.

    We are seeing such things cropping up across the industry. Little issues ignored and papered over and in toto achieving some real impact.

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