This is a bit of a surprise, I must admit:
An American judge has prevented Deutsche Bank from repossessing 14 homes because the bank could not prove it owned the defaulting mortgages involved. The ruling by Ohio district court judge Christopher Boyko could have serious repercussions for banks and mortgage lenders, for whom the pooling of mortgage securities is a $6,500bn (£3,200bn) industry.
Pooling involves taking hundreds if not thousands of mortgages, putting them in one unit, and then selling parts of that unit to others. As a result, it can often be unclear which bank actually owns the individual mortgages.
Judge Boyko had ordered lawyers acting for Deutsche Bank National Trust Company to prove the lender was the ultimate owner of the mortgages. When it could not do so, he dismissed the cases.
If this is a general thing affecting a significant proportion of the pooled mortgages then there\’s actually a very much larger problem underlying the sub-prime mortgage problem than we at first thought. It\’s not that some of the paper is worthless, it\’s that if it cannot be attached to the underlying security then all of it is (technically) worthless.
But I can\’t believe that it is. For the pooling of mortgages has been going on for decades (it\’s one of the products talked about in Michael Lewis\’ "Liars\’ Poker" which is set in the mid-80s) and there will have been defaults before. Indeed, Fannie Mae and Freddie Mac exist to provide exactly this sort of pooling and securitisation.
So what has actually happened, anyone know? A particularly recalcitrant judge who is going to get over ruled? Or in the scramble to issue these loans, did some of the paperwork get missed?