Two facets of the prevailing crisis need to be looked into – the problem of non-modification of loans and the court ruling invalidating foreclosure.
Last August the Supreme Court in Kansas gave a ruling against the MERS or Mortgage Electronic Registration System. It will make foreclosures more expensive for the banks and might lead to huge write downs. This could save the homes of many who have been trapped by foreclosure. The case has gnawed into the core of the operation of these gigantic securitization markets and derivatives. As such the ruling is of great significance.
This privately owned service of MERS made it debut thanks to the initiative of Fannie Mae and Freddie Mac together with banking giants like JPMorgan Chase, Citigroup and Bank of America in 1997. MERS is the party that often files the foreclosure cases representing the lenders against the defaulting homeowners. The ruling by the Kansas court bars MERS from initiating legal suits on the behalf of the lenders in some foreclosure related situation. Potentially it questions the legal right of MERS to be a plaintiff affecting over sixty million mortgages that it is in charge of. The lenders will now have to endure massive losses. The matter is complex and complicated.
At the epicentre of the storm are the securities backed by mortgages known as securitization process. Previously all he mortgages were shown as loan in the account books of the banks that sanctioned the original loan. This meant if the homeowner became delinquent the matter had to be negotiated between the borrower who took the loan keeping the property as security and the individual lender or bank who held the mortgage.
But the scene changed when the MBS or mortgage-backed-securities were lumped together, sliced and made into security packages. The same lot was then made into a hash with other similar packages and securities and became CDOs or collateralized-debt-obligations. The CDO’s were then cut into pieces and became CDOs of CDOs! These were then sold to global investors.
Generally the mortgages at the originating point were highly risky ones – the sub-prime mortgages. But at the time when they were sanctioned like peanuts during the time of the housing boom the rating agencies gave them the highest rank making them safe for investors. With the fall of the housing sector these securities too fell nose down.
The rule of law in Kansas still remains that MERS can foreclose or assign the mortgage lien and that when MERS is the mortgagee, the mortgage loan is secured and enforceable. The Landmark National Bank v. Kesler opinion is very limited and only stands for the Kansas Supreme Court not wanting to vacate a final judgment because of the broad discretion given to the trial judge.
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