Naked Capitalism has a very interesting post up about the consequences of lazy mortgage securitization. A Federal judge has thrown out a mortgage that was challenged during a foreclosure hearing. Yes, he didn’t just throw out the foreclosure, but the mortgage itself, giving the owner the house free and clear.
While this is the first case of that happening, more and more judges are throwing out foreclosures in general, a trend that will make things interesting going forward.
The problem stems from the way that mortgages were securitized. To make a long story short, the banks took massive shortcuts in bundling them together and selling them off, and many houses went through layers of ownership. Instead of properly accounting for the change at each step, documents were kept that don’t conform to legal standards and at this point the majority of processes involving deeds rely on affidavits that the owner of the mortgage is the entity that claims to be. However, when people challenge the affidavits as being legally invalid, judges are agreeing.
This means that for tons of mortgages (probably the majority in the country at this point) the supposed owner isn’t the legal owner and the legal owner probably isn’t even aware that they technically own the home.
I’m an extreme novice in this area, so I’ll recommend you just follow the link instead of risking saying something that is incorrect. However I will say that the implications are astounding, and potentially hundreds of billions of dollars worth of securities are legally worthless.