The Mortgage Mess

Here’s a story that’s not receiving a lot of coverage thus far, but really brings home what a mess the housing crisis really is.

Supposedly, when you buy a home the bank lends you money up front and agrees to be paid back gradually, with interest.  A simple, straightforward relationship. But as we all now know, lenders in the past decade or so have been securitizing their mortgages.  This means that the bank doesn’t really own your mortgage.  Instead, mortgages are tossed into a pool and then sold to many different buyers.  So a piece of your mortgage is owned by a businessman in Taiwan, another by a retiree in Kansas, and so on. As the New York Times reports:

During the mortgage lending spree … home loans changed hands constantly. Those that ended up packaged inside of mortgage pools, for instance, were often involved in a dizzying series of transactions.

To avoid the costs and complexity of tracking all these exchanges, Fannie Mae, Freddie Mac and the mortgage industry set up MERS to record loan assignments electronically.

MERS (the Mortgage Electronic Registration System) was then listed as the owner of the mortgage, for legal purposes.  As long as housing prices continued to inflate, this worked out just fine.  But now that foreclosures rates are spiking, this jury-rigged system is receiving a trial by fire.

Efforts by MERS to foreclose have met with increasing legal opposition from many homeowners, and the courts have begun siding with them.  They’ve declared that MERS doesn’t have legal standing to foreclose on homeowners in default.  And this means that no one does.  Ownership of these mortgages is spread so far and wide that there is no single entity with the legal right to foreclose on homeowners.

When they call it the “mortgage mess,” they’re not kidding around.

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