10/27/2010

Housing Crisis

In the Bloomberg Businessweek article, Mortgage Mess: Shredding the Dream, we learn the frightening story of what was really happening in the mortgage industry between 2005 and 2007.

Due to the “housing bubble” and perceived “good times ahead,” mortgage lenders were frantically closing home loans for anyone who applied; regardless if the applicant was qualified. Even though closing loans for unqualified borrowers is bad business, the problem becomes worse as lenders habitually “fudged” on the paperwork by not adequately completing documents or filing them properly.

To compound matters further, the lending industry relied on Fannie Mae’s digital overlay system, known as Mortgage Electronic Registration Systems (MERS), to create images of their paperwork. MERS would serve two purposes. First, they would digitize the agreements and thus businesses would not need to keep hard copies of their files. Second, MERS would become the “third party that would foreclose if a borrower stopped paying.”

The major problem with MERS, however, is their system was unable to keep up with the flow of agreements. As a result, a number of contracts were never scanned and thus became lost or accidentally destroyed. Of those contracts which were digitized, a number of them were not correctly filled out and thus the agreements were not legally binding.

According to the article, due to the recession, between $2 trillion and $6 trillion in “U.S. mortgages and home-equity loans that were securitized during” 2005 and 2007 are “likely to go into default.” In other words, those individuals who should not have received loans but did are now unable or unwilling to make their monthly payments and thus the banks need to foreclose.

However, due to the problems of incomplete documentation or un-scanned (lost) contracts, banks are having a difficult time proving they have the right to foreclose on said individuals and thus, it appears, they have no legal rights to reclaim their properties.

From and economic standpoint, this article brings to light major flaws within the mortgage industry and foreshadows more difficult times in the future. Who will bear the expense of the losses if banks are unable to reclaim their properties? Will the Government, once again, feel compelled to “bail out” the banks? If that were to happen, taxes would unavoidably increase. Will the banks find a way to prove ownership and thus evict tenants? If that were to happen, the supply of houses for sell will shift to the right and thus home prices will continue to fall and citizens nationwide will continue to see their wealth deplete.

From any angle one approaches this news, it is apparent, in the near future, home values will continue to fall, banks will lend less, and the Government may very likely raise taxes. Hold on to your wallets!

1 comment:

Dave said...

-1 on Jeffrey for grammatical mistakes.

The MERS issue is a new thing that has come up this autumn (and we may be more exposed to news about it here, because it is being pushed by a law professor from the U).

I don't think we can yet tell how this is going to pan out.

Having said that, isn't it ironic that when a new issue clouds the picture, it's again a government-sponsored enterprise that has muddied things up. My guess is that heads will not roll this time either.