This post originally appeared on Rain City Guide.
I planned on waiting a couple of days before moving onto the practical implications — from a national perspective — but darn it if I wasn’t scooped by the NY Times! So onward I forge.
The Foreclosure Mess is going to worsen two inter-related problems. First, it’s going to significantly gum up the foreclosure process. The legal system simply cannot tolerate systemic lying, otherwise the system itself loses legitimacy. Clearly that is not acceptable — a properly functioning legal system is a veritable bedrock of a healthy society. Accordingly, the legal system will no longer accept at face value a foreclosing lender’s assertion that it is the holder of the note and has the right to foreclose. Given the “tidal wave” of foreclosures that is still cresting, this will further slow down the “working through excess inventory” process that is necessary to restore a healthy, value-sustaining balance to the housing market. So problem 1: Further delay in working through this lousy housing market. Ouch.
Second, this is going to further stress our banking system. When each promissory note was sold by the lender to the trust (which then repackaged and resold pooled mortgages as mortgage-backed securities), the lender essentially guaranteed that the loan was properly underwritten and otherwise a sound loan. We all know now (and many of us knew back then!) that many, many loans were NOT properly underwritten. If the lender lost the note, thus jeopardizing the holder’s ability to foreclose to preserve principal, then that too breaches the lender’s promises at the time of sale. The purchasers of these securities are beginning to demand that the original lender repurchase the loans given these breaches. And since we’re talking tens and possibly hundreds of billions of dollars, these legitimate and legal demands to repurchase loans — that are worth MUCH lesss than as sold — are going to cause further stress on our banking system. That’s problem 2.
Not pretty, to say the least. Time will tell whether we can weather this latest development, or whether it’s going to kick us in the teeth circa 2008. My final post on the issue will look at the implications for our beloved Evergreen State.