Robert Kuttner says the foreclosure mess may force a solution to the deeper economic drag of underwater mortgages and zombie banks.
The banking industry contends that these are isolated problems, but evidence is accumulating that such lapses are pervasive. Robo-signing and other careless practices occurred not just on the back end, when a bank tried to foreclose, but on the front end, in the creation and packaging of the original mortgages.
Evidence coming to light suggests that as subprime loan — origination mills went into overdrive during the boom, they got very sloppy. As loans were turned into securities, many of the trusts that supposedly hold the documents have neither the actual promissory notes nor the liens that give the lender the right to foreclose. The problem was compounded when lenders created an electronic database called the Mortgage Electronic Registration System, or MERS. Often, physical notes were eliminated in favor of electronic ones; however, the law in most states requires that the original note be endorsed — in “wet ink” — to each new owner at every step of securitization.
