Quoting the Crisis

» Landmark Decision Promises Massive Relief for Homeowners and Trouble for Banks

crazynutjob:

MERS as straw man lacks standing to foreclose, but so does the original lender, although it was a signatory to the deal. The lender lacks standing because title had to pass to the secured parties for the arrangement to legally qualify as a “security.” The lender has been paid in full and has no further legal interest in the claim. Only the securities holders have skin in the game; but they have no standing to foreclose, because they were not signatories to the original agreement. They cannot satisfy the basic requirement of contract law that a plaintiff suing on a written contract must produce a signed contract proving he is entitled to relief.

Fascinating. A bunch of homes have just become foreclosure-proof because those making the CDOs didn’t hire good enough lawyers (either at the stage of writing the CDO contracts or at the stage of pursuing the foreclosures in court). Unless the bank buys back the underlying mortgage, there doesn’t appear much to be done other than accept that these are now free homes. To complicate matters further, imagine that the current CDO holder has a CDS protecting against losses. The CDS counterparty has no ability to sell back the mortgage to the bank, but they may be the ultimate bag-holder. The CDO holder may have little (or even negative) incentive to sell the mortgage back to the bank.