Lack of proper mortgage paper trail could leave big banks reeling again (Do you Smell Another Bail out?)

Vatic Note:  What we have here is a MSM publication owned primarily by the bankers exposing the underbelly of the beast.  Why?  Is this why the big fight internally at the White House?   Is Wall Street trying to get another bail out to complete the final demise of our economy and consolidation of control of our banking system into a few wall street brokerage hands,  just before their third world war SO WE ARE ASSURED OF LOSING THAT WAR??? 

Is this a prelude to consolidating total control of the banking industry under a few International brokerage houses controlled by Rothschild and the BIS of Switzerland which is the Rothschild's bankers bank, using this information to justify another massive take over and control by the fascists and managed by the head fascist shown in the pic below???  You read it and decide.   I am so cynical right now, that nothing that comes out in the MSM is about serving as a forth column for the people, so a more objective eye will have to view this information and decide what is the truth.... that elusive quality that is hard to find in this nation anymore.  (just check out that smirk on his ugly puss, no wonder he has to pay  $40,000 PER NIGHT of our bail out money FOR prostitutes to get anything,  sorry, just can't contain my disdain for these perverts).

Lack of proper mortgage paper trail could leave big banks reeling again (Do you Smell Another Bailout?  Over our dead bodies)

By Ariana Eunjung Cha and Jia Lynn Yang,  Contributed to Vatic Project by David Brackhahn,  Colorado, USA
Washington Post Staff Writers Wednesday, October 13, 2010; 10:44 PM

The federal government's pressure on lenders Wednesday to fix the paperwork problems plaguing foreclosures left unaddressed a far greater potential threat facing the financial system and the U.S. economy.

Beyond sloppy documents, the foreclosure debacle has exposed one of Wall Street's little-known practices: For more than a decade, big lenders sold millions of mortgages around the globe at lightning speed without properly transferring the physical documents that prove who legally owned the loans. 

Now, some of the pension systems, hedge funds and other investors that took big losses on the loans are seeking to use this flaw to force banks to compensate them or even invalidate the mortgage trades themselves.

Their collective actions, if successful, could blow a hole through the balance sheets of big banks and raise fundamental questions about the financial system, financial analysts and a lawmaker said.

If judges rule in favor of such lawsuits, "it could be 2008 all over again," said Josh Rosner, managing director at Graham Fisher & Co., referring to the Wall Street meltdown that occurred after Lehman Brothers collapsed.  (VN:  he took the words right out of my mouth,  another borderline illegal unethical practice of the bankers where justice is not a jail cell, rather a bailout.   Wish I could do that with any illegal, or unethical thing I felt like doing just like the DERIVATIVES,  They BETTER NOT DO ANOTHER BAILOUT, rather see them all go down, saves us having to do it when we take back control of our currency & credit)

Financial and legal analysts are divided over how the ownership questions will be resolved and the scope of the potential damage. Lenders and investigators are in the midst of a painstaking process of unraveling the complex chain of loans that were sold from one party to another, a process that some analysts say could take years.

Of the nearly $11 trillion in mortgages in the United States, about two-thirds was turned into securities that were traded around the globe.

After a home buyer gets a mortgage, the lender typically pools that loan with hundreds of others to create a security that can be traded like a stock. This process is commonly called securitization and has been the preferred method of financing debt in America for more than a decade.

Wall Street firms would set up partnerships called "trusts" and would raise money from pension funds, university endowments, hedge funds and other investors to buy these mortgage securities. The investors would then share the cash flow from the payments made by homeowners every month.

However, local laws in most states dictate that each time a mortgage changes hands, the transaction needs to be recorded in courts or county offices. But the speed with which the loans were being generated during the housing boom and then pooled together and passed around Wall Street meant that big financial firms took shortcuts, consumer lawyers said.

Often the proper paperwork got lost or was passed along without being filled out, lawyers say. Some documents have been found retroactively signed or even forged.

"It now appears that in many cases: 1. the paperwork was not properly transferred and 2. it is unclear in many cases where the actual paperwork actually rests today," Citigroup Global Markets analyst Josh Levin wrote in a note to investors this week.

Some analysts doubt whether the consequences will be dire.

"Does it call into question all securities? I think that's flying way, way too far," said Laurie Goodman, a securities analyst at Amherst Mortgage Insight. Goodman said there should be an easy way to go back and transfer documents correctly, which she says some firms are already doing.

Yet officials at the ratings agency Moody's say they are watching the courts very closely.

If they rule that the securitization process muddied the ownership of the loans, "then basically the whole thing winds down," said Debash Chatterjee, senior vice president at Moody's.

Adam Levitin, an associate professor of law at Georgetown University, who briefed Citigroup's clients on a conference call this week, said in an interview that it's hard to predict the scope of the problem.

"If you read through court decisions, there's a pretty consistent picture that there are all kinds of problems in the chain of title," Levitin said. "It's not clear how it's going to be resolved. There's a question mark hanging over the whole housing system."

Big lenders have said the issues could be solved in a month or so, but Levitin questioned that, saying that any resolution could take at least a year. In the worst-case scenario, this becomes a "systemic problem" and the mortgage market grinds to a halt.

"The liability here for the major banks is potentially enormous, and can lead to systemic risk," wrote Rep. Alan Grayson (D-Fla.) in a letter last week to Treasury Secretary Timothy F. Geithner, Federal Reserve Chairman Ben S. Bernanke and other senior regulators.

A number of investors, who are already suing trusts for losses related to mortgage securities, are seeking to expand their lawsuits or file new ones focused on whether the trusts actually owned the loans, according to lawyers involved in the discussions.

Lawyers said the investors could try to force the banks to buy back the assets if contracts were violated.

"If we can't come up with a system for investors to enforce their contract rights here, then there shouldn't be a securitization market," said Bill Frey, chief executive of the hedge fund Greenwich Financial Services. "It's just as simple as that.

"Ultimately, the resolution of this is in the hands of the investors, and they have to have the political and economic will to stand up," he added.

That might already be happening. The Association of Mortgage Investors is pressuring trustees to investigate the transfer of loans in the securitization process. The trade organization has said big lenders should be liable for losses due to their negligence.

A key case before the supreme court of Massachusetts should shed more light on whether the trusts have valid ownership of the loans. A lower-court judge ruled that Wells Fargo and U.S. Bank did not have the right to foreclose on two properties because of errors in the securitization process, a decision the banks dispute.

A search of court records by an attorney for homeowners in Florida turned up nearly 80 cases in which a trust initiated foreclosure proceedings before it registered its ownership of the mortgage with county offices. Citibank, for instance, started foreclosure proceedings on a home in May 2008 but recorded the trust's ownership of the mortgage in March 2009.

Ann Rutledge, chief strategist of the structured finance advisory firm R&R Consulting, said not much more could go wrong in the mortgage-backed securities market.

"It's certainly not an indication that [the market] doesn't work," she said. "It's one more indication that it hasn't worked."

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