Thursday, November 15, 2007

Derivatives Quagmire

A federal judge in Ohio has thrown a spanner into the gears of America's subprime mortgage industry, one that could give a big advantage to troubled and cash-strapped homeowners.

Judge Christopher Boyko stopped Deutsche Bank National Trust Company in its tracks when it sought to foreclose on 14-properties. Boyko dismissed the cases ruling that Deutsche Bank had failed to prove it owned the properties it sought to seize.

The problem comes about from the practise of pooling mortgages and then flogging them as investment bundles called "derivatives." It's believed there could be as much as $6.5-trillion in outstanding securitized mortgages, about a third of that subprime.

Last month Boyko ordered the bank to produce the loan assignments showing that Deutsche Bank was indeed the owner of the note and mortgage on each property. All the bank's lawyers could come up with were letters of intent to convey the essential mortgage rights. Not nearly good enough, ruled Judge Boyko: “The institutions seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Finally put to the test, their weak legal arguments compel the court to stop them at the gate.”

It's beginning to emerge that the state of title to these bundled mortgages is a confused mess. Nobody was much concerned about it while the housing market was strong and prices continued to soar.

“This is the miracle of not having securities mapped to the underlying loans,” said Josh Rosner, a specialist in mortgage securities at Graham-Fisher, an independent research firm in New York. “There is no industry repository for mortgage loans. I have heard of instances where the same loan is in two or three pools.”

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