I Hadn\’t Expected This Problem

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?

9 thoughts on “I Hadn\’t Expected This Problem”

  1. Madam Tanta at
    reckons it’s a sign of slack paperwork. The empty-headed managerialists, she seems to imply, cut costs by sacking the sort of employees who like to devote attention to getting detail right. Profits rise, until you suddenly wish you’d got the detail right. One for Dillowbert, I think.

  2. Madam Tanta at the excellent
    thinks it’s incompetence with the paperwork. The managerialists (as Dillowbert has taught me to call them) sack all the employees who like to get the deatil right, and that saves lots of money until it’s imperative to get the detail right. Then it might cost a bit.

  3. Or in the scramble to issue these loans, did some of the paperwork get missed?

    If true, that would definitely fall into the category of “oops!”.

    For the pooling of mortgages has been going on for decades

    One would (naively) assume that while Deutsche Bank may not actually own these particular mortgages any more, there will be records within the system as a whole (not necessarily all within Deutsche Bank) of who does, so a repossession claim could be brought on behalf of this group, as in a class action?

  4. Class action may not be the correct legal term for this, but why would a judge not allow repossession, assuming of course that the mortgage owners can prove their ownership?

  5. It’s probably a combination of Deutsche’s legal team being taken by surprise, and thus not having the chain documentation on hand, and the judge being an asshole and out to make a name for himself. It’s probably the case that the documentation of these things is clumsy, and thus there is a practice to provide some sort of summary or collective document instead, and the judge has taken it on himself to be pedantic. Perhaps he has an election soon.

  6. Boyko is a US federal district judge. As such, he does not stand for election and has little, if any, need to “make a name for himself”. According to local reports, Deutsche’s legal team had been given the typical time to amend their filing to demonstrate that Deutsche Bank was the holder of the contested mortgages-they were not “surprised”. For whatever reason(s), the Bank could not demonstate that the commercial paper they held was tied (backed by) to the properties in question. Personally, I kind of like the idea that a bank filing for foreclosure has to show that kind of basis.

  7. I’m not sure why this is a big deal. It is a simple case of a large company not having its ducks in a row. It has become more common with larger and larger interstate lenders, whose minions cannot keep track of individual state’s legal requirements for foreclosure. In most states, residential borrowers are favored and laws regarding foreclosure are strictly construed against the lender, ergo no proof of ownership of the note means no foreclosure. It happens all the time.

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