The two stories related to mortgages we have been following closely at CNBC do not have a great deal in common, other than tracing their lineage to the home loans of dubious provenance that were doled out to anyone with a pulse between 2005-2007 and quickly packaged up into securities and sold by Wall Street to accounts around the planet.
It is the frenzy of that time period that links the mortgage foreclosure storyand the so called “put-back” story.
As detailed in our documentary "House of Cards"and in my book And Then the Roof Caved In, the participants in the chain of mortgage origination and securitization were not dwelling on the future when they seized on the unquenchable desire amongst investors to buy higher yielding securitized mortgage products.
The originator who was extending a home loan to someone they knew was lying about their income was not thinking about what would happen to that loan, the house it was financing or the foreclosure process that would ensue if that loan was not paid back. All they were thinking about was getting that loan signed and making sure the homeowner made good on their first three payments, after which it could be packaged up into a mortgage backed security (MBS).
The packager of that security was not concerned about whether the pool of mortgages that backed those securities was comprised of mortgages that fit the criteria of the pool.
Their concern was solely on creating the security so it could be sold to eager buyers and then creating other securities derived from those securities and then creating other securities derived from those securities. That was the reality of the mortgage securitization market in 2005, 2006 and half of 2007, a time when Wall Streetand not Fannie Mae and Freddie Mac was the dominating force in the mortgage market. It was not in anyone’s interest to entertain notions of what would happen should the housing market start to decline. But decline it did.
And now, years after those mortgages were underwritten with the scantest of standards and packaged up with similar abandon, we are dealing with the mess that’s been left behind.
One outcome of those years of frenzy: The tangle of securitization has created a maze of paperwork that is very hard to reverse engineer when one is looking to deliver the title of a house in a foreclosure procedure (I will defer to Diana Olick for any more analysison this topic).
The other outcome: a significant question about whether the banks that created securitizations adhered to the standards they set for those offerings. If the banks are found to have violated representations and warrantiesthat were made about the quality of the mortgages they bundled together, those mortgages that did not meet the standards can be put back to the banks at 100 cents on the dollar.
This is not an insignificant amount of money. Given the banks issued at least $1.5 trillion worth of mortgage securities, the potential for put-backs(given the belief that many of the mortgages in question will be found to have violated the reps and warranties) is huge.
The question is how many investors will take the required steps to find out whether they have the right to put-back mortgages and how the banks attempt to thwart those efforts. It is simply impossible to quantify. And while there are various efforts underway to bring together disparate holders of these securities, the clock on such efforts is also ticking.
There is a six year time frame in which claims must be made and for securitizations from 2011, that clock is clearly running out.
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