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Banking System Halts Foreclosures
Congress Fears Total Collapse.
Perspective on the News
Monday, October 18, 2010
Ed DeShields

The Great Recession began with the housing crisis.  Now, it might just end it all as the mother of all banking crises emerged last week.  It turns out that the bank that claims to owns your mortgage may not actually own it after all.  Worse yet, your bank may not be entitled to foreclose on you if you don’t pay.

The problem started when a homeowner looked over his paperwork and asked why his bank showed up to foreclose.  The paperwork said they weren’t the real owner.  Someone else was.   That started a chain reaction that caused most major banks, title insurers and the Attorney Generals of at least 26 states to immediately halt foreclosures in the mortgage banking business.  This is a hard stop by law enforcement.     

Without getting too technical, there are two kinds of ownership; equitable interest (someone who is owed for something of value) and ownership interest (someone who owns title to an asset).   When you buy a home, you have ownership interest and you banker has an equitable interest because you owe them money for it via your mortgage.  Stay with me here. 

You see, when the mortgaged-backed securities market bundled up your loan and sold it to investors it used a special trick called the “bankruptcy remote special purpose entity” (SPE) so it could qualify for the bond market – the market place for most mortgage money, car and credit card loans.   The SPE is a beautiful legal entity.  It can hold assets and borrow billions, but it cannot be held directly accountable because it is “backed” only by the assets it holds.   It’s a valuable thing in the field of finance.  It’s purpose is to act as a holder of the equitable interest but cannot use the bankruptcy courts if something goes wrong.  It must surrender the assets without a fight to protect the investors.  The equitable interest is transferred to the SPE.  

It turns out that in most SPE’s the chain of title was often broken – and once broken it cannot be put back together;  unless someone “cheats” a little to fix the paperwork.   Yes, cheating is required to fix it.  This is done when law firms use illegal procedures to reclaim an investor’s money by foreclosing on a home. 

This dirty little secret became news when the United States Congress attempted to sneak what appeared to be, at first glance, a mundane Act into law last week.  The Act allows someone, other than you, to be recognized as a party to your transaction without your signature or those of the other parties in your contract.  Can that happen in America?    

While the Interstate Recognition of Notarizations Act was quietly passed on a voice vote (so that there would be no record of who had voted for it) the President used an unusal procedure called the “pocket veto” to avoid a vote within the ten days he has to approve, or disappove legislation.   Therefore, President Obama kicked the can down the road to avoid an election backlash as the mortgage banking industry ground to a hard stop.   Leadership or political gain?   The full story is yet to unfold which is likely to show that Obama knows if he approves the law, there is little chance it won’t be challenged to the Supreme Court – and a flicking of the first domino as the word gets out.

Once the general public learns that there is no consequence for not paying their mortgage what do you think will happen?  Let me help you.  Millions of home owners will stop repaying their debt.

One financial analyst put it this way, "What are the banks going to do...try to foreclose and then evict you? Show me the paper, Mr. Banker, will be all you need to say.”

“This is a major, major crisis.  The Lehman bankruptcy could be a spring rain compared to this hurricane.  And if this isn't handled right... and handled right quick, in the next couple of weeks at the outside... this crisis could also spell the end of the mortgage business altogether. Of banking altogether. Hell, of civil society. What do you think happens in a country when the citizens realize they don't need to pay their debts?"

Let me help you again;  the system collapses while Congress is sneaking around trying to fix it before the word gets out.  Where are the grown-ups? 

About Ed DeShields

Last week: Signs of the Time. Tipping of the American Economy

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