Foreclosure Crisis: Is The Foreclosure Crisis A House Of Cards?

Posted on November 21st, 2007 by saman

Many experts in finance and the economy are likening the current mortgage foreclosure crisis and it’s many ramifications to a house of cards, They are saying that the country’s economy is approaching the point where it won’t take more than a stiff breeze to blow the house down. And that adds up to a full-blown recession.

There is evidence that suggests these worries are more than justified. Case in point, the recent federal judge’s decision to dismiss fourteen foreclosure actions by the Deutsche Bank which was seeking to collect on securitized subprime mortgages that it had acquired. The judge decided that since there was no ‘proof of ownership’ on the loans in question since they were gained by the bank after defaults had already taken place. Since the proof required by the court was not on hand, he dismissed the actions and gave the bak thirty days to come up with cerdible legal documentation that showed ownership.

Of course, it goes without saying that this judgement has made the hit parade of homeowners and also that the apparent ‘escape clause’ is spreading through the nation’s courts like wildfire. What most people don’t realize, is that this situation has massive negative ramifications to financial institutions. At the very least, banks and others will face major obstacles in collecting from the American courts without proof of ownership, especially if they purchased bad paper or have been defrauded.

Lawyers for troubled homeowners are asking the federal courts to prevent applicable lenders from foreclosing on the subprime mortgages. They cite rampant fraud where securities trusts are pushing for foreclosures when they actually never owned the mortgages when the foreclosures started.

This could dramatically affect Wall Street and the overall economy if the courts continue not to recognize securitizations by lenders. It portends years of lawsuits and delays and even more lawsuits by creditors who bought mortgages already in default. Creditors will have no choice but to sue the mortgagors of brokers who they got the loans from, and many of these have dissapeared, gone out of business or were fraudulent to begin with. It also means that the homewoners will be able to continue living in their houses without paying out anything while lawsuits and appeals continue.

It also is bad news for the credit markets because the courts will likely conclude that they will not get the properties and that the only asset they will have will end up being whatever the person who sold them the junk mortgage from promised at that time. It means there will be many more write-downs because creditors will be stuck in litigation for years or may have to just ‘walk away’ from the loans.

Moreover, this situation also means that credit markets will get even together as holders of bad paper either dump it or continue driving down other asset values by sell-offs necessary to raise the cash needed to cover their losses.

Right now, American, Canadian and European banks have written off many billions of dollars. And what will follow with mutual, pension and hedge funds losses? The scandal that might result from this complicated scenario just might make the old S&L scandal look like a hiccup by comparison.