Elizabeth Duke Understates the Problems with Mortgages

Guest Author:  derryl is the nom de plume of Derryl Hermanutz, who is a frequent commenter of note on economic topics on such sites as Seeking Alpha and RagingDebate, as well as here at Global Economic Intersection.

Recent debate over QE2 questions whether the Fed’s money injections “work”.

Elizabeth A. Duke gave testimony today before the House Financial Services Subcommittee on Housing and Community Services.  She said:

“Over the course of the past two years, the Federal Reserve has taken forceful action in response to the financial crisis to help improve financial market conditions and to promote the flow of credit to households and businesses. More specifically, our purchases of long-term mortgage-backed securities, government agency debt, and Treasury securities served to reduce mortgage rates which in turn allowed mortgage holders to refinance into lower payments and made home loans more affordable for new purchasers.”

I think it is pretty clear that the Fed is still playing the role of Atlas holding up what would, on its own, be a collapsing RE market; followed by a collapsing banking system; followed by a collapsing real economy; followed by a (capital D) Depression. RE is the linchpin that is holding the US economy from falling into the depression abyss that it is poised over. If QE supports the mortgage market which supports RE which supports the banking system which supports the economy, then QE is an amazing success and is probably the main reason the collapse has not occurred.

Elizabeth Duke soft-pedals the chain-of-title issue that underlies the “right to foreclose” question that is central to Foreclosuregate. She says,

“State law and local real estate recording requirements govern recordation of real estate and mortgage title transfers. Given the multiple transfers of mortgage loans over time, concerns have been raised about investors’ or servicers’ right to foreclose. Although state-by-state practices vary considerably, generally the note holder has the right to initiate foreclosure if an original note can be produced and the current holder’s ownership is able to be verified in some fashion. If there is no controversy concerning ownership of the note, but rather an inability to locate original documents, processes usually exist that allow for a foreclosure to proceed, albeit at some cost and delay. If there is some question of ownership, the investor or servicer may be required to produce evidence of ownership before a foreclosure can proceed.”

She seems to want to leave the impression that proof of chain-of-title has merely been ‘misplaced’, “an inability to locate original documents”. The fact of the matter seems to be, on the contrary, that the securitization process itself may systematically break the chain of title in some, if not many, cases by failing to sign over the note each time ownership of the mortgage is assigned to a new buyer.

This not only creates “some question of ownership”, as Elizabeth styles it. It can make it impossible to legally reconstruct the chain of title and determine exactly which party is currently the lawful owner of the mortgage who enjoys the right to foreclose and keep the sale proceeds from the foreclosed RE. Lawyers representing homeowners in default could exploit this legal failing to claim that, since nobody can present satisfactory evidence to prove they lawfully own the mortgage, their client should stop making payments to the party who claims without proof to have the right to collect payments and to foreclose in lieu of payment.

This issue is not a firecracker. It is potentially a nuclear threat to the legal integrity of the entire securitized RE-based financial system.  This may not be a simple problem of “missing” documentation;  This may be a systemic seismic fault.

In the time before the internet it may have been true that “perception is reality” and it may have been possible for authorities to quietly violate rules and laws in the interest of fixing some truly frightening problem like this chain of title issue. Insiders merely had to keep quiet about what they were doing, and mass media had to be either in on the perception management or kept out of the information loop.

How many people were aware, for example, that after the early 1980s Latin debt default 7 of the 8 largest US banks were technically insolvent? And the authorities quietly took measures to allow the banks to earn their way back to health? It wasn’t until just this past year that a regional Fed President of the era (I can’t remember his name) admitted this publicly. Today the blogosphere exposes all and disseminates the information immediately to everybody with eyes on. The authorities and mass media can still manage the general public’s perceptions, but the blogging public has access to the view behind the veil.

Lawyers have access to this view. What will prevent them from exploiting it? On the micro scale lawyers are serving the legal interests of their clients, but on the macro scale this could destroy the edifice of securitization, which is the foundation of the current dollar-reserve currency global financial system. This is a big problem, and Duke’s soft-pedal suggests the official strategy is to try to quietly manage it away. I’m just not sure that strategy is going to be possible this time around.

Related Articles

Elizabeth Duke on Foreclosures and Documentation Issues by John Lounsbury

The Mortgage Mess by Yves Smith

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