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Friday, January 7, 2011

A mountain of trouble in store for the banks

The Massachusetts Supreme Court confirmed a lower court decision in a case where a homeowner challenged a foreclosure because the foreclosing bank couldn't prove it owned the legal title. The bank may well own the mortgage but as the housing bubble accelerated and mortgages were transferred willy nilly by an electronic transferring bank, the legally required paperwork wasn't signed and filed as the law requires.

The banks are also liable to be sued by local governments who charge a small fee to file the paperwork for a mortgage transfer. This wasn't done in millions of cases as mortgages were sold and then resold multiple times as investment banks bought and sold huge bundled of securitized mortgages.

Felix Salmon, Reuter's financial blogger lays the possible consequences out.

The legal craziness that this decision sets in motion is going to be huge, I’m sure. Anybody who was foreclosed on in Massachusetts should now be phoning up their lawyer and trying to find out if the foreclosure was illegal. If it was — if there was a break in the chain of title somewhere which meant that the bank didn’t own the mortgage in question — then the borrower should be able to get their deed, and their home, back from the bank. This decision is retroactive, and no one has a clue how many thousands of foreclosures it might cover.

Similarly, if you bought a Massachusetts home out of foreclosure, you should be very worried. You might not have proper title to your home, and you risk losing it to the original owner. It might be worth dusting off your title insurance: you could need it. And if you ever need to sell your home, well, good luck with that.

This issue is at the root of the financial folly that led to the 'Great Recession'. Outright fraud was committed at virtually every step of the way. Prudence may in vogue right now but given half a chance Wall Street will happily find a new way to generate huge fees and risk money, some of it loaned from the Fed and therefore backed by the taxpayer, The modest financial reform that was passed might put the brakes on future follies but not if the Republicans have their way. They want to repeal the entire reform bill and kill the Financial Consumer Protection Agency which, has it existed at the time, may have prevented some if not most of this insanity.

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