• 20
  • July
    2011

A recent Reuters article, discussing the ongoing foreclosure crisis, had an interesting discussion about the difficulties there have been industry-wide in attempts to correct improper or unethical mortgage procedures. Those procedures threaten even now to make the foreclosure crisis even worse.

According to the article, loan servicers' attempts to save money are part of the motivation behind such practices. But another piece of the problem is that loan servicers frequently process dubious documents in their determination to foreclose, since originals of the documents cannot be obtained.

That trend, which is apparently a holdover from the housing boom, is a result of original lenders-desiring to make loans and sell them to Wall Street investors as quickly as possible-destroying original documents or failing to submit them to the mortgage-securitization trusts that picked the loans up.

According to data from the Securities Industry and Financial Markets Association, over half of all new mortgages between 2004 and 2006 were securitized and sold to mortgage-securitization trusts. In many of those transactions, though, banks and other lenders acting as intermediaries failed to submit promissory notes and mortgages, the two documents that would have conveyed ownership. As a result, many of those trusts never received formal title to the mortgages. The implications are that such trusts could be facing billions of dollars of losses.

In terms of dealing with the problem, there hasn't been a united response. While some regulators have urged industry-wide auditing of the problem, others haven't been so quick to back up that approach. Some say that there may be a resistance to such auditing for fear that bringing the problem to light will further harm the housing market.

Regardless of whether industry-wide audits take place, increasing proper foreclosure procedures at this point very well could slow down the foreclosure procedure and cause further depression in the market. That, in turn, will likely have some effect on bankruptcy filings.

Source: Reuters, "Behind foreclosure corner-cutting, troves of missing documents," Scot J. Paltrow, 18 July 2011.