The Mortgage Foreclosure Crisis

The New American, November 8, 2010 | Go to article overview

The Mortgage Foreclosure Crisis


Let us be blunt: The mortgage foreclosure crisis, which first burst into full public view in October when Bank of America suspended all foreclosure s, has the potential to completely destroy the American real estate sector in an epic legal and economic meltdown that would make the crisis of 2007-2008 look like the proverbial Chinese tea party.

To grasp the enormity of the crisis now unfolding, it is important to understand the nature of mortgages. Until as recently as two decades ago, most mortgages were undertaken entirely by a single creditor, usually a local bank. The mortgage remained at the bank where it was issued, and was either repaid or defaulted on. In the case of the latter, the bank--holder of both the note (the IOU) and the mortgage lien--foreclosed and repossessed the property.

Beginning in the 1990s, it became fashionable to sell mortgages to other parties, and the mortgage securitization industry was born. Mortgages were sold, repackaged, and sold again, and a bewildering array of mortgage-backed securities was created to underwrite this new market. The United States mortgage business not only went national but international as investors worldwide rushed to get a piece of the lucrative American real estate sector.

To help streamline the process, Fannie Mae and Freddie Mac created a national mortgage electronic registry called MERS (Mortgage Electronic Registration System, Inc.), whose purpose was to streamline the transfer of mortgages by helping mortgage securitizers to avoid the costs and inconveniences of recording mortgages at local courthouses.

Unfortunately for the mortgage sector, there were two big problems with that approach. …

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