The big mortgage market mess has caused a big press coverage mess. Many people, including me, have been blending together the couple of major problems occurring with mortgages and labeling it all "foreclosure-gate." Yet, there are actually two separate issues here, both of which affect the mortgage market.
Bad Foreclosure Process
The first problem came to light in late September. Banks discovered that some foreclosures had been signed off on without being properly reviewed. This could be a problem for a number of reasons. The loan file might be incorrect or incomplete. This caused banks to halt foreclosures to figure out if mistakes were made and to correct the process.
Bad Mortgage Bond Process
The other problem occurred much earlier in the process -- shortly after the time of loan origination. It turns out that banks may not have transferred loans properly into trusts for securitization. As a result, covenants may have been broken, so investors who bought bonds backed by mortgages might have reason to file suit against banks. This doesn't actually affect foreclosures directly, though title problems could also further complicate the process.
So which problem is worse? The banks probably have more to lose through the latter mistake.
Banks can fix their foreclosure process problem pretty easily going forward. At most they would probably only face a handful of legitimate lawsuits if borrowers' homes were foreclosed in such a way that violated the rules surrounding the process. And those monetary remedies will probably be minimal, amounting to penalties rather than big damages.
The documentation problem, however, could be worse. If investors try to put-back bad mortgage securities to banks, then things could get pretty ugly, as described here. If this is a legitimate legal claim by investors, then these lawsuits may soon begin to mount. Congress could try to step in and prevent them through some legislation, but politicians are too busy campaigning at the moment to deal with this problem.
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