Saturday, January 22, 2011

Foreclosure Cooties

I had an interesting conversation regarding the US housing market. One of the current problems that does not get the attention it deserves is the difficulty that many banks are having foreclosing on delinquent loans. The local banks that originated the loans and sold them into Real Estate Mortgage Investment Conduits (REMICs) can't do it. The REMICs are also having trouble. They sold the mortgages to investors. Investors, however, do not seem to want to foreclose themselves.

Up until now, this reluctance has been a mystery to me but no longer. It turns out that the investors are suing the REMICs on the basis that they were defrauded. Given that prospectuses include promises that the REMICs had the underlying notes and they could be inspected at any time and this was a lie, it seems like they have a pretty good case. So long as the investors don't touch the foreclosure process, they are not responsible for any paperwork defects in the underlying mortgages. But if they start cooperating with the REMICs in the foreclosure process, they would instantly gain the headaches of the huge paperwork mess that so many mortgages have.

So the banks are being assaulted left and right for their foul ups. It makes you wonder why they ever bothered.