Some sand in the gears of securitizing
Was the great securitization machine that made hundreds of billions of dollars in mortgage loans based on a legal foundation of sand? That possibility, raised by two law school professors, has begun to scare many jittery investors, causing bank stocks to plummet, although they recovered a little Monday. If they are correct, the best outcome for lenders would be a prolonged delay in completing foreclosures, raising costs still further and paralyzing an already depressed housing market. The worst outcome would be a conclusion that errors by financial institutions had decoupled the payment promises made by borrowers from the mortgages they signed. In that case, the mortgages would be invalid. Homes could be sold without paying off lenders. There also could be heavy tax consequences for lenders, both in terms of federal income taxes and in payment of back fees for mortgage registrations to local governments across the country.