FedUpUSA

Archive for the ‘FHA’ Category

An interesting item in the Federal Register. This notice: (Link to FHA/FR)

SUMMARY: A recently issued independent actuarial study shows that the Mutual Mortgage Insurance Fund (MMIF) capital ratio has fallen below its statutorily mandated threshold.

We can pretend that that the FHA does not need a bailout, but it does. Unlike its bad siblings, Fan and Fred, there has never been a question whether Uncle Sam is on the hook with FHA. We don’t need a fancy conservatorship this time. Tim Geithner over at Treasury will just write the checks to cover the shortfalls. The good news is that those debts will not show up on the Federal balance sheet. They don’t count because there are “assets” behind these loans.

The Notice would appear to be a requirement of some sort to solicit public opinions on policy changes at FHA. The proposed changes would (supposedly) address the high default rates that the FHA is experiencing. What have they proposed to achieve this? Surprise surprise, they are going to instill some sanity into their lending program.

This kills me. I, and a hundred others, have been writing and screaming that FHA was just a ‘bailout to be’ for a few years now. This was an easy call. FHA was making 96 ½% LTV loans to borrowers with low FICO scores. They did this in a period where RE values fell by 25%. Their business plan was, “How To Take a Bath on the Tax-payer Dime”.

Don’t look for these changes to come anytime soon. I suspect that this will not evolve to a point where actual adjustments are made until after the next election. But these changes are coming. Real equity of 10% will be required for borrowers with low credit scores. There will be restrictions on seller equity, or “concessions”.

My read on the proposals is that the FHA is getting out of what I call “Silly Lending”. If they actually do take these steps it will mitigate future losses. It will also sharply restrict the availability of mortgage credit. Similar steps are being taken by F/F. The implementation will be felt this fall. By spring time mortgage land could look quite different. The D.C. lenders are 95% of the mortgage market today. There are no willing private sector lenders. If Washington steps back RE will get illiquid.

Central to our problems is the fact that for many years a social agenda and lending standards were mixed. The goal was admirable. Make mortgage credit available to all so that everyone could enjoy a leveraged bet on home appreciation. What a terrible bet the feds have financed. There are very few winners in this story. I read the following as a mea culpa. I think FHA accepts that bad lending standards have ended up hurting those they intended to aid. And along the way it hurt all of America’s homeowners.

Given FHA’s mission, allowing the continuation of practices that result in such a high proportion of families losing their homes represents a disservice to American families and communities. It is FHA’s intent to eliminate this portion of its business, and utilize other established methods to reach and support these families.

In the end the mortgage mess will cost us nearly a trillion. A very big price. For that tab we should learn a lesson. Soft lending to achieve broad social goals is a mistake. Tell that to Barney Frank. This was his dream.

Rising FHA Default Rate Foreshadows a Crush of Foreclosures

Washington Post Staff Writer
Tuesday, February 2, 2010

Agency officials said they have cracked down on poorly performing lenders and announced higher qualifying fees for borrowers. On Monday, the agency projected that the fees should generate $5.8 billion in fiscal 2011, up from $2 billion this year. That would fatten the FHA’s cash cushion, used to cover unexpected losses.

Beleaguered books

For now, just about every major measure of the agency’s financial health is worsening.

The FHA does not make loans but insures lenders against losses. And claims have already spiked. The agency had to pay out on 47 percent more loans in October and November than in the corresponding period a year earlier, according to an FHA report.

The number of loans in foreclosure, including those that have not yet been billed to the agency, has also increased. They were up 26 percent in the last quarter from a year earlier.

FHA Commissioner David H. Stevens, who joined the agency in July, flagged his agency’s troubles with the 2007 and 2008 loans in October, when he told a House panel that “rogue players on the margin” immediately migrated to the world of FHA lending after the subprime mortgage market collapsed.

Their aggressive lending tactics attracted borrowers with unusually poor credit profiles to the FHA. “That clearly impacted the books of business in 2007 and 2008, and that performance data is showing up very clearly in today’s balance sheet,” Stevens said at the time.

Plunging home prices have exacerbated matters by leaving some FHA borrowers unable to sell or refinance their homes because they owe more than their homes are worth. Yet with unemployment running high, many borrowers can’t afford to keep up their payments.

Adding to the trouble was a now-defunct FHA program that enabled sellers to cover the down payments of buyers. This meant many borrowers had no skin in the game and were more likely to walk away at early signs of trouble. The program resulted in excessive defaults before it was ended in late 2008, and it is projected to cost FHA an additional $10.5 billion in losses, Stevens said.

For all these reasons, the FHA projects that it will pay out claims to lenders on one out of every four loans made in 2007 — the worst rate in at least three decades. The claim rate should be nearly the same on the vastly larger volume of loans made in 2008.

Better borrowers

But agency officials said they have reasons to be optimistic.

The FHA-backed loans made in 2009 tended to go to borrowers with higher credit scores than in previous years. These borrowers turned to the FHA when the mortgage market collapsed and other lending sources dried up. By then, reputable lenders doing business with the agency were already imposing tougher restrictions on FHA borrowers, further boosting the credit profile of those loans. The average credit score of an FHA borrower is now 690, up from 630 only two years ago, agency officials said.

These higher-quality loans are expected to result in lower losses, so the agency should make money on loans issued this year and over the next few years, according to an independent audit designed to gauge the agency’s health.

The audit, released in November, found that the cash the FHA set aside to pay for unexpected losses had dipped to historic lows, well below the level required by law. As of Sept. 30, those reserves were estimated at $3.6 billion, down from nearly $13 billion a year earlier. The most recent figure represents 0.53 percent of the value of all FHA single-family-home loans — far lower than the 2 percent required by Congress.

But Ann Schnare, a former Freddie Mac official, said the situation could be even worse. She said the audit underestimates future losses because it does not take into account all loans that are now overdue, only those that the FHA has paid claims on.

Stevens said his agency has pored over its data to analyze risk and is taking steps to shore up its financial health. “You have a limited set of options under these circumstances: Raise fees [for borrowers] or make policy changes,” Stevens said in an interview. “We’ve done both.”

The agency banned 268 lenders from making FHA loans last year, more than double the total terminated in the previous eight years. The FHA suspended six other firms. Among them were some of the largest FHA lenders — Taylor, Bean & Whitaker and Lend America, both of which shut their doors soon thereafter.

The agency also proposed a rule that would require banks to hold up to $2.5 million in capital that they can use to repay the agency for losses if they were involved in fraud. Banks are now required to hold only $250,000.

Borrowers are also facing tougher scrutiny from the agency. People taking out FHA loans will have to pay higher upfront fees, perhaps as early as this spring. Those with especially weak credit scores will also have to put down at least 10 percent instead of the usual 3.5 percent down payment. The amount of money sellers can kick in toward closing costs and other fees will also be limited.

I was disappointed with the Christmas Eve ditties from Treasury and
FHFA re: the Agencies. To be honest, I was appalled. The two releases
contained significant information. The timing was obviously an attempt
to slip in some bad news while everyone is drinking eggnog.

Of course that backfired. The blogs, and yes, the MSM disintegrated
those that sent the emails out on Christmas Eve. The smell that these
announcements have created is not likely to go away anytime soon.

If you are reading this you know the story. Treasury ponied up for
another $200b for Fannie and Freddie and the management of these
entities are getting serious paychecks.

The former clearly establishes that Fannie and Freddie have been
nationalized. I don’t care what they say any longer. The numbers speak
for themselves. The $400 billion the taxpayers have signed up for far
exceeds any theoretical value for these two important institutions.
Sadly, ‘the people’ own these things at this point.

The notion that the Agencies are private sector companies with
influential shareholders is over. These entities are no longer big shot
players on Wall Street. There is no earnings prospect for these
behemoths. There is no upside. There is no justification for
multimillion dollar salary packages.

The Agencies fund themselves with lines of credit from Fed and
Treasury. The Fed is buying 1.45 Trillion of their dodgy paper. Why in
the world do we need to pay someone $6mm per year to run that mess?

A question for Mr. Geithner; What are the salaries and bonuses being
paid to the people who run FHA? These are government salaries. FHA is a
part of HUD. Compensation for Fannie and Freddie Exec’s should conform
to those guidelines. Not the other way around. We need to end the myth
that F/F are private sector entities. They are not.

We are not stupid Mr. Geithner. We watch what you are doing very
closely. There are a significant number of us who flat out do not trust
you. You have given us good reason in the past and you have proven
again that you are not trustworthy. You tried to ‘Sneaky Pete’ some
important information past us. In my view you owe us an apology and
explanation, or better still, a letter of resignation. This
Administration has promised a much higher standard than you have
delivered.

From The Daily Capitalist
December 3, 2009

Since the biggest financial collapse in world history was built on credit related to housing, it is pretty obvious that we should be paying very close attention to that market. The reasons are complex, but a recovery must be based on the liquidation of bad debt. The sooner that happens the quicker a recovery will happen.

When we mean “liquidation of debt” we are talking about a mountain of credit built on the housing bubble. This phony bubble wealth permeated the entire economy. When home owners saw the price of their home rising, they saw it as a source of capital to use for a variety of things, but let’s face it, most people spent it.

New stores opened, malls were built, financial institutions grew, cars and boats, second homes, vacations, and restaurants all flourished. Credit card debt mushroomed. Home mortgages were increased to pull cash out for spending. Yes, some of it went to good things, like our children’s education, helping our aged parents, and paying off bills. But the reality was that our debt kept growing.

The clever lads created even more phony wealth under the guise of insurance, but as we found out, companies like AIG really had no idea how large their obligations were for credit default swaps written against almost any financial risk. And these instruments were further leveraged without understanding the magnitude of these triple-counted obligations or their relationship to housing.

It all comes back to housing as the fuel for the 70% of our economy that was consumer spending. The thought was that housing has always gone up, and if it went down, it really never went down if you averaged growth since the post-WWII-period. A drop of 10%? Never has happened. 20%? Not even a 6th deviation possibility.

My thesis has been that this was all fueled by the Fed through monetary policies that created and supported the bubble. Aided and abetted by governmental policies and financing schemes that favored housing and risky loans. This was not a “free market” phenomenon. Far, far from it.

My thesis has also been that we can’t recover until all this bad debt is liquidated, and capital generated by savings is created and ultimately invested in profitable enterprises. It would be a mistake to rekindle the bubble. But, as we know, that’s what our government is trying to do. The government creates uncertainty as it flails around with programs, spending, and debt schemes to revive the economy. As a result mark-to-market accounting is thing of the past and banks are guarding their balance sheets, corporations are sitting on a lot of cash, cutting costs, and becoming leaner, and Mr. and Mrs. America still favor savings and debt instruments over equities and spending.

The big question: is the housing market bottoming out? Because once it does, debtors and debt holders will then have a handle on how great their losses are. When the bottom is falling out, it is difficult to get lenders to lend if they are afraid their remaining cash reserves will be needed to shore up the bank because of loan losses. The holders of subprime debt find it difficult to value their assets while housing values are still dropping.

Lenders have been shepherding their cash, reducing debt obligations, and cutting back lending and new investments because they do not know how deep their hole will be until housing bottoms out. Keynes called this a “liquidity trap.” More reasonable people, especially the Austrian school economists, call this a reasonable and necessary response to uncertainty.

The Fed and the federal government have been flogging this liquidity trap issue without let up and basically credit is still drying up. A 0.25% Fed Funds rate is basically a negative rate and they still can’t get banks to lend. The Fed’s balance sheet is at a record high. They have bought $850 million of mortgage backed securities. They are injecting cash into lenders. They have basically suspended mark-to-market accounting.

In Q3, the FDIC reported that bank lending still contracted by 3%:

Loans and leases held by U.S. commercial banks have declined for 10 straight months, falling to $6.7 trillion as of Oct. 28 from $7.2 trillion at the end of 2008, according to a separate statistical release from the Fed.

 

Commercial and industrial loans have dropped to $1.37 trillion from $1.6 trillion, commercial real-estate loans have declined to $1.66 trillion from $1.72 trillion, and consumer loans have fallen to $847 billion from $857 billion at the end of last year.

What do banks do? They have decided they would rather hold Treasury paper instead of make loans. This chart shows what’s been happening. No wonder T-rates have stayed so low despite massive deficit financing.

This is what makes Bernanke, Geithner, and Summers lose sleep at night. “It’s supposed to work, dammit!” Maybe this is why Summers is always falling asleep. No matter what they’ve tried, they can’t get banks to lend. I think they are very worried about this and while they say the economy is recovering nicely, they are crossing their fingers at the same time.

Back to housing.

I have been saying that I think the housing market is finding a bottom. I thought that low prices and rising affordability was the main driver of the housing market. If this were so, then housing prices would reflect real market valuations and this would finally bring about the liquidation of assets and debt wastefully invested during the prior artificial credit cycle. Lenders would know where they stood financially and would liquidate bad assets and rebuild their balance sheets. No more waiting around wondering what the Fed or the government would do to save housing.

I was wrong.

The housing market I now believe is being sustained almost entirely by the Fed and the federal government. This rekindling of the housing bubble is counterproductive and will hinder a real recovery of the economy because an artificially backed market will delay the necessary liquidation of the prior cycle’s malinvestment of capital.

Here is why I changed my mind:

First, 59% of new home buyers are relying on government-backed FHA, the Veterans Administration, and the Department of Agriculture loans. Most of these sales are driven by the first-time home buyers tax credit. The tax credit program has been extended through April, 2010.

Second, existing home sales are being driven by the tax credit and by foreclosure and short sales. Existing home sales are up 10.1%. Distressed sales — mainly foreclosures and short sales — accounted for 30% of transactions in the third quarter. And. according to the NAR, home sales are being driven by first time home buyers trying to make the previous November deadline.

This will have a negative impact on future sales. Like Cash for Clunkers, these government-driven sales may just be eating into sales that would have occurred in 2010. Many economists are referring to this phenomenon as “payback.”

Third, mortgage rates are now at 30 year lows. Another Fed related gift to home buyers. The average 30-year mortgage rate was 4.95% in October, down from 5.06% in September, according to Freddie Mac. Today, Freddie said the rate was down to 4.7%.

But … home prices are still falling. The S&P/Case-Shiller index of prices fell 8.9% for the July-through-September period from a year earlier. That was an improvement from the 14.7% drop in the second quarter and the 19% decline in the first three months of 2009. Median prices of existing homes fell in 123 of 153 metropolitan areas during the third quarter compared with a year earlier. The national median price was $177,900, down 11.2% from the third quarter of 2008. [Don't ask me to explain the disparity. Case-Shiller and NAR measure this differently.] Last month the median price for an existing home was $173,100, down 7.1% from $186,400 in October 2008.

Thus, despite record interference in the housing market by the government, home prices are still falling. There are several reasons why it is likely that home prices will continue to fall.

Almost 25% of home owners are upside down with their mortgages. Nearly 10.7 million households had negative equity in their homes in the third quarter, according to First American CoreLogic. This shadow market is huge:

Home prices have fallen so far that 5.3 million U.S. households are tied to mortgages that are at least 20% higher than their home’s value, the First American report said. More than 520,000 of these borrowers have received a notice of default, according to First American. …

 

But negative equity “is an outstanding risk hanging over the mortgage market,” said Mark Fleming, chief economist of First American Core Logic. “It lowers homeowners’ mobility because they can’t sell, even if they want to move to get a new job.” Borrowers who owe more than 120% of their home’s value, he said, were more likely to default.

 

Mortgage troubles are not limited to the unemployed. About 588,000 borrowers defaulted on mortgages last year even though they could afford to pay — more than double the number in 2007, according to a study by Experian and consulting firm Oliver Wyman. “The American consumer has had a long-held taboo against walking away from the home, and this crisis seems to be eroding that,” the study said.

This overhang will continue to drive prices down. There is no way the Feds can force lenders to modify enough loans to make a serious dent in this overhang. It’s imply too big. Eventually the losses from forced modifications will mount and the FHA or any other agency will not be able to pay off their guarantees to lender. Nor should they try.

Mark Zandi, who correctly predicted a crisis in the housing market, but not the Crash, said on Wednesday, “The housing crash is not over.” He said the lull in foreclosure sales for the past few months, due to the government’s pressure on lenders to modify loans, has resulting in higher prices. He expects Case-Shiller to bottom by Q3 2010 with an overall price decline of 38% (now at 32%).

“Foreclosure sales will increase, and home prices will resume their decline by early 2010 as mortgage servicers figure out who will not qualify for a modification,” he said.

 

Zandi said 7.5 million foreclosure sales will have taken place between 2006 and 2011. The majority of these sales, however, have not emerged yet, with 4.8 million foreclosure sales expected between 2009 and 2011.

What this means is that the housing supply, now down to a 7+ months supply, will rise again, and prices will continue to decline. We haven’t seen the bottom yet.

CR Note: This is a guest post from albrt.

MERS v. Kansas

Although the internet discussion has died down considerably, I thought it might be helpful to offer some background and some explanation of what happened in the recent Kansas MERS case. I am not involved in the case, but I used to read Tanta’s posts about this sort of thing and I did some research, so I guess I am well-qualified to opine.

What is MERS?

MERS is part of an attempt by bankers to homogenize mortgages so they can be traded among banks more easily. In many cases the ultimate goal is to bundle the mortgages into bonds. From the MERS website:

About MERS

MERS was created by the mortgage banking industry to streamline the mortgage process by using electronic commerce to eliminate paper. Our mission is to register every mortgage loan in the United States on the MERS® System.

MERS acts as nominee in the county land records for the lender and servicer. Any loan registered on the MERS® System is inoculated against future assignments because MERS remains the nominal mortgagee no matter how many times servicing is traded. MERS as original mortgagee (MOM) is approved by Fannie Mae, Freddie Mac, Ginnie Mae, FHA and VA, California and Utah Housing Finance Agencies, as well as all of the major Wall Street rating agencies.

Got it? I didn’t think so. MERS’ claim that its loans are “inoculated against future assignments” is an unmixed, but also unenlightening metaphor. Inoculation most commonly means exposing someone to a pathogenic organism or other immunologically active material in order to promote the development of antibodies. I can’t think of anything in the MERS process that can be profitably compared to either a pathogen or an antibody.

What actually happens is that a MERS mortgage is recorded once, usually with MERS shown as the “nominee” of the lender. MERS then tracks loan assignments, including both repayment rights and servicing rights. The output of the tracking system is approximately as good as the input from the lenders. When something happens, MERS is supposed to notify the interested parties.

In some cases MERS will act for the interested parties in lawsuits. If a MERS lender wants MERS to file a foreclosure suit, the lender is supposed to find the original note, endorse it in blank, and give it to a certifying MERS officer before the foreclosure is filed. That makes MERS a “holder” of the note, even if MERS is not actually the owner of the note. Being a holder is generally sufficient to allow MERS to foreclose.

Tanta explained how endorsement works here. MERS apparently has more computers involved, but when it comes time to produce the note in litigation it still amounts to pretty much the same thing. Pathogens and antibodies aside, MERS can’t really provide protection from all the potential errors and problems that came up when loans were being traded and securitized at warp speed all over the country. Many of the cases where MERS has gotten in trouble involved a misplaced note, but it is generally not clear that the problem was MERS’ fault, and it is not all that much different from what happens when a non-MERS lender files a foreclosure suit without having the original note handy.

This should be enough background to understand what happened (and did not happen) in the recent Kansas Supreme Court case.

The Kansas Supreme Court case

In Landmark National Bank v. Kesler , Landmark held a first mortgage and foreclosed on Mr. Kesler’s property. Landmark obtained a default judgment and was able to sell the property for more than the balance due on the first mortgage.

There was also a second mortgage on the property. The document for the second mortgage showed an outfit called “Millennia” as the lender, and showed MERS as the lender’s nominee. The document said notice should be sent to the lender, and did not say much about the nominee. Landmark sent notice of the foreclosure suit to Millennia, but not to MERS.

As it turned out, the second mortgage had been sold to an outfit called “Sovereign,” so Millennia no longer had an interest in the case. After the foreclosure judgment and sale, but before the distribution of the proceeds from the sale, Sovereign entered the case and tried to set aside the foreclosure judgment. Sovereign’s problem was that it never recorded anything to show that it held an interest in the property, so it really didn’t have much of an argument that it was entitled to notice of the foreclosure.

In order to address this problem, MERS joined in the case a couple of months later. MERS was essentially on Sovereign’s side, arguing that even if Sovereign wasn’t entitled to notice, MERS was on the original mortgage and was entitled to notice, and MERS would have notified Sovereign if MERS had received notice.

Not surprisingly, the judge held Sovereign was not entitled to notice because it didn’t register the assignment of the loan in the public records. The judge also held MERS was an agent of the lender at most, and did not have a sufficient interest to be able to show up late and overturn the judgment.

The Kansas Supreme Court upheld the judge’s decision, based in part on the conclusion that MERS didn’t own an interest in the note or the mortgage. This is what got a lot of attention on the internets, but most commentators seem to have missed the point. The court did not say the mortgage was invalidated because MERS separated the mortgage from the note. The court said MERS did not appear to own either the mortgage or the note. Part of the reason for the court’s conclusion was that you can’t separate a mortgage from the note it secures.

The key to the Kansas decision, like most judicial decisions, is in the details. The actual mortgage document required notice to the lender, not to MERS. The mortgage document listed MERS as a “nominee,” but never really defined what a nominee was or provided any basis for arguing that a nominee is entitled to notice above and beyond the notice given to the lender.

The only broad effect of this decision is that the court refused to make a special exception for MERS mortgages and require precautionary notice to MERS regardless of what the document said. Most MERS mortgages do say that MERS should get notice. If the mortgage document says that, most courts will enforce it.

There are other cases discussing MERS, some of which provide more general information than the Kansas case. One I would recommend is a decision by bankruptcy judge Linda Riegle on a group of bankruptcy cases in Nevada. The essence of Judge Riegle’s decision is that MERS isn’t entitled to any special status, and needs to have the note in order to take any action on it. The decision is available on Westlaw under the name Hawkins at 2009 WL 901766. Substantially the same decision is publicly available under the case name Mitchell, No. BK-S-07-16226-LBR .

What is the problem?

Mortgages are complicated. Most mortgage primers start with the distinction between states maintaining a “title” theory of mortgages and states maintaining a “lien” theory. This is mostly nonsense, as summed up by an eminent commentator nearly a hundred years ago: “There is no complete adoption of a logical theory in any of the American jurisdictions.” Manley O. Hudson, Law of Mortgages Real & Chattel, in 8 Modern American Law, at 297 (E. A. Gilmore & W. C. Wermuth eds. 1917).

So there are really two basic problems reflected in the MERS cases: (1) mortgages are complicated, and (2) the creation of MERS did not really reduce the complications, it just papered over them.

1. Mortgages are complicated

Mortgages are not homogenous. Not at any level. The borrowers are different, the mortgaged real estate is different, the practices of the banks are different, state laws are different, and federal government involvement is different for different types of lenders and borrowers. An important corollary of principle number one is that whatever a lender does, and whatever MERS does on behalf of lenders, will have different effects in different cases.

As Tanta wisely noted a few years ago, it is very difficult to see how an increasingly centralized industry can deal with all these details, and do it cheaply enough to make a profit when interest rates are at five percent and spreads are thin. In order to do it cheaply enough, the industry got rid of most of its Tanta-caliber people and replaced them with inexperienced temps, or perhaps with MERS. The main reason it worked for a few years was because problem mortgages could be refinanced so easily, and fees could be charged for each refinancing.

2. The creation of MERS did not really reduce the complications.

MERS undoubtedly provides some useful services to banks, but it does not “inoculate” them from dealing with necessary administrative costs. The administrative costs, especially in a lousy market, will probably make high-velocity mortgage loan trading and securitizing an unprofitable venture. As Tanta said, “the true cost of doing business is belatedly showing up.”

The goal of the people who created MERS was to design a system that has traction in local recording systems, and is flexible enough that it could be made to work under the law of every state. The MERS system probably meets this goal when it is done right. In theory, using the term “nominee” gives MERS flexibility in defining the duties and obligations of the relationship. It may also give MERS some flexibility in explaining how the court should treat a nominee after something has gone wrong, as the law of the jurisdiction or the facts of a particular case seem to require. Unfortunately for MERS, experienced judges are wise to this trick and will most likely to continue placing reasonable limits on the ability of MERS to claim it is all things to all lenders.

But setting all the cleverness of the MERS system aside, the system still requires the last lender in the chain to endorse the note over to MERS before the foreclosure can begin. If the lenders have been ignoring their paperwork because they think they are “inoculated against future assignments,” it is possible the lenders are worse off than they would have been without MERS. From what I can see, that is not the case. The way lenders were acting in 2005, if left to their own devices they would probably have lost about 90% of everything. With MERS, they probably did better than that.

So is this a nothingburger?

Sort of. MERS isn’t obscuring land titles in a way that will interfere with future transactions. If a mortgage is paid off, it should be released in the local public records. The odds that somebody screwed something up may go up a little or down a little, but a title company should be able to insure any subsequent sale.

We can also be reasonably certain the MERS cases are not going to invalidate millions of mortgages at one swipe. Because mortgages are complicated, whatever a lender does and whatever MERS does on behalf of lenders will have different effects in different cases. Most of the problems can be attributed to non-standard mortgage documents, poorly drafted foreclosure complaints, or foreclosure complaints filed prematurely without verifying the status of the mortgage and who is holding the note. These problems affect non-MERS lenders in more or less the same way they affect MERS lenders. Having MERS involved might help get things straightened out in some cases, or it might make the problem worse in some cases.

I think the important question is whether, on balance and in the aggregate, the MERS system works well enough to allow lenders to re-start the private label securitization money machine in a few years. I think the answer is probably no.

Of course, since the residential lending industry has effectively been nationalized, it would not be particularly surprising to see fundamental change on a national level that would allow the resumption of securitization. But that would probably bring us back to something like the plain vanilla Fannie and Freddie system that existed before 2000, not the insanely profitable liar loan system that Wall Street had created by 2005.

This post is intended as a tribute to Tanta, who already wrote pretty much everything you need to know to understand these issues, and did it much more cleverly than I can. I have not been able to read all the comments recently, so I apologize if I have inadvertently stolen anyone’s ideas besides Tanta’s.