Resolving Foreclosures Thwarted By Securitization

The New York Times recently ran a story on the confusion and complications that homeowners facing foreclosure are running into when attempting to work out a financial resolution on their home mortgage obligations. According to the story:

• "[T]he very innovation that made mortgages so easily available — an assembly line process known on Wall Street as securitization — is creating an obstacle for troubled borrowers. As they try to restructure their loans, they are often thwarted, lawyers say, by strict protections put in place for investors who bought the mortgage pools. This impasse could exacerbate the housing slump, pushing more homeowners into foreclosure. That would lead to a bigger glut of properties for sale, depressing home prices further. 'Securitization led to this explosion of bad loans, and now it is harder to unwind and modify them even where it is in the best interests of both the borrower and the investors,' Kurt Eggert, an associate professor at the Chapman University School of Law in Orange, Calif., said in an interview. 'The thing that caused the problem is making it harder to solve the problem.' Creating difficulties is the complex design of mortgage securities."

Among the problems: (1) some homeowners have problems simply identifying who holds their mortgages, (2) others find the loan servicing companies handling the loan payments are unresponsive due, in part, to the threat to their profits, (3) some lawyers say that even if facts indicate that a fraud may have been committed, the various parties protect each other by refusing to produce documents.

One Marietta, Georgia consumer protection attorney said that he has had cases where homeowners received foreclosure notices from entities that could not prove ownership of the mortgage loans in default and believes that many people are no longer living in their homes as a result of possible flawed foreclosure actions.

According to the article, "more than 60 percent of home mortgages made in the United States in 2006 went into securitization trusts." For more, see Mortgage Maze May Increase Foreclosures.

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