Foreclosure Fraud For Dummies, 4: How Could This Explode into a Systemic Crisis?
(This is a series giving a basic explanation of the current foreclosure fraud crisis: Here is Part One, Part Two, Part Three and this is Part Four.)
Right now the foreclosure system has shut down as a result of banks’ own voluntary actions. There is currently a debate on whether or not the current foreclosure fraud crisis could explode into a systemic risk problem that perils the larger financial sector and economy, and if so what that would look like.
No matter what happens, the uncertainty about notes and what is currently going on with the foreclosure crisis is terrible for the economy. Getting to the heart of this problem so that negotiations can be worked out is important for getting the economy going again. There is little reason to trust what comes out of the servicers and the banks in whatever they conclude at the end of the month, and the market will know that. Only the government can credible clear the air here as to what the legal situation is with the notes and the securitizations.
But I wanted to get some unlikely but dangerous scenarios on the table in which this blows up. Bangs, not whimpers. The kind where Congress is pressured to act over a weekend. I had a discussion with Adam Levitin about how this could explode into a systemic problem.
Title Insurance Market Breaks Down
First scenario involves title insurance. Specifically if title insurers decide to take a month off from writing title insurance even on performing and current loans to investigate what is going on with note transfers.
If that happened there would be no mortgage sales (except for those involving cash) in the country. The system would simply stop. Everyone with an interest, from realtors to Wall Street to construction to huge sections of the economy, would face a major crisis through this short-term pinch. There would be a call for Congress to step in immediately.
You can tell that the title insurance market, which is largely concentrated and also holding very little capital for a nationwide crisis scenario, is investigating the current problems. They are holding off on certain types of foreclosed properties; if they decide to hold off all together you could see a scenario where Congress is pushed to act immediately.
Lawsuits a Go-Go
The second would be a wave of lawsuits. As we discussed in Part Two, many of the servicing agreements allowed for the trustees to force the depositors and sponsors to purchase mortgages without notes
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Tags: Foreclosure, Insurance, mortgage sales, systemic crisis, systemic risk, title
Related Articles:
- Foreclosure Fraud For Dummies, 3: Why Are Servicers So Bad At Their Job?
- Foreclosure Fraud For Dummies, 2: What is a Note, and Why is it So Important?
- Foreclosure Fraud For Dummies, 1: The Chains and the Stakes
- Mortgage Refinancing: What Is a Foreclosure Bailout?
- 100-Year-OId Woman Faces Foreclosure, Latest Victim of the Foreclosure Crisis
