Should a bank be able to foreclose on a property when it doesn't technically hold the promissory note for the home? This is a question before the Massachusetts Supreme Court. On the base of it, the question has an easy answer: what does the law say? In fact, the law would forbid such a practice, as it says that only the owner of the mortgage can foreclose on the borrower. But securitization often took a shortcut that implied banks could foreclose on behalf of mortgage bondholders. Barry Ritholtz wonders if such expediency ultimately does more harm than good:

Way back when I was a law student, it always stuck me as odd that efficiency arguments could somehow trump legislation passed by elected state legislators. Somehow, an efficiency was insinuated into legal cases. Not efficiency of Judicial resources mind you, but economic efficiency. Blame Gary Becker and the Chicago school of economics for wedging this extra-constitutional economics arguments into jurisprudence via a back door. It always sounded not only false to me, but a treasonous violation of the US Constitution that Judges are sworn to uphold. An economic theory, not part of the constitution, and not passed by any elected body, somehow was superior to democratically passed laws. Some jurists who were proponents of this economic efficiency school of thought, such as Richard Posner, appear to be backing away from those views. (See Posner's 2009 book, A Failure of Capitalism).

If banks are forced to buy back all of these loans, it could throw the housing market into further chaos. What really should have happened is that legislation should have been passed to explicitly govern this aspect of the securitization process and provide banks who service loans the right to foreclose on behalf of bondholders who technically own these mortgages. For whatever reason, the industry must have believed that it didn't need permission. We'll have to see if judges agree.

Read the full story at The Big Picture.

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