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Friday, October 8, 2010

Foreclosure Mess

The foreclosure situation has gotten worse over the past few weeks, with banks not having clear title to mortgages and not even knowing which mortgages they have.  In one case a man was foreclosed on and his property was sold even though he had no mortgage (he paid cash for his house).  Now mortgage foreclosures in a growing number of states (23 so far) are getting frozen until the end of the year, to give the banks the chance to straighten out those records (don't know if they actually will).   This freeze will have rippling effects into other markets, like the $2.8 Trillion MBS (mortgage backed securities) market.  An article by the WSJ makes  a few points:
If a foreclosure is delayed, the servicer must typically keep advancing payments that will go to all bondholders, including the junior debt holders, even though the home loan itself is producing no revenue stream. 
Normally the foreclosure would go through and the holders of the riskiest debt ( junior debt holders) would take the loss.  Now this investment instrument seems toxic, as it pays on an asset that is became a liability, paying to a debt holder that would normally be liquidated from the position and creating a drain on the asset on the Senior debt holders ( less risky debt holders).
The latest events thus set up an odd circumstance where junior bondholders—typically at the bottom of the credit structure—could actually end up better off than they expected. Senior bondholders, typically at the top, could end up worse off.
This impacts whomever made investments in these type of assets, be it pensions, mortgage based mutual funds and etc ( ultimately you and I ).  The sellers of these instruments (investment banks typically) have 90 days to correct the problem or they have to buy back the loan.  The Assoc of Mortgage investors is trying to hold the sellers accountable for these bad practices by demanding an audit and enforcement of the 90 day period.

The banks actions on foreclosures has wider reaching implications, like impacts to our rights (whether your foreclosed on or not, as some that are not in default are mistakenly being foreclosed on as well).  How do we ensure houses aren't broken into by the banks foreclosure arm without proper notice (maybe a sign should be posted in the yard for 2 or 3 weeks, so that person knows they are being foreclosed on)?  Here is a video on the Dylan Ratigan show of one persons experience.

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