Foreclosure woes--Paperwork and solvency at the big banks

Washington Post:

The federal government's pressure on lenders Wednesday to fix the paperwork problems plaguing foreclosures left unaddressed a far greater potential threat facing the financial system and the U.S. economy.

Beyond sloppy documents, the foreclosure debacle has exposed one of Wall Street's little-known practices: For more than a decade, big lenders sold millions of mortgages around the globe at lightning speed without properly transferring the physical documents that prove who legally owned the loans.

Now, some of the pension systems, hedge funds and other investors that took big losses on the loans are seeking to use this flaw to force banks to compensate them or even invalidate the mortgage trades themselves.

Their collective actions, if successful, could blow a hole through the balance sheets of big banks and raise fundamental questions about the financial system, financial analysts and a lawmaker said.

If judges rule in favor of such lawsuits, "it could be 2008 all over again," said Josh Rosner, managing director at Graham Fisher & Co., referring to the Wall Street meltdown that occurred after Lehman Brothers collapsed.

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Hopefully judges will not be so foolish. The paperwork problems should not benefit those who have defaulted on their obligations through no fault of the lender.

It is also important to note that it is borrowers who pay their mortgages on time who will bear the cost of not enforcing the foreclosures. When Texas rewrote its foreclosure rules in 1997 Fannie and Freddie were waiting on the new rules in order to set the rate for borrowers. Because the rules were fair to the borrowers and the lenders Texas home owners got better loan rates for their mortgages. If the courts come up with "screw the lender" rulings borrowers will wind up paying the price.