Home foreclosures are still happening at record levels across the country. In some areas like Washington State, state legislatures are enacting laws that require banks to offer mediation to homeowners before they can start foreclosure proceedings. To understand why this fallout from the 2007 home foreclosure crisis has become just that – a crisis, you must understand the process of foreclosure and who stands to benefit from it. Here is the dichotomy in which the foreclosure crisis resides: Hundreds of thousands of Americans bought homes in the run up to the foreclosure crisis – many of whom were considerably irresponsible in analyzing whether they would actually be able to afford a home in the first place. They were lured by low interest rates and mortgage contracts that did not require proof of income. When the recession hit and people lost their jobs or had to come up with an exorbitant balloon payment they were sunk. When housing sales tanked and prices torpedoed downward, people all of a sudden found their homes were “underwater” and could not even sell to get out from under the mortgage. On the other hand, mortgage brokers and banks who actually knew that most of these mortgages would fail, bundled the loans, securitized them and sold them to Wall street as A paper investments. Once the loans hit Wall-Street, all hell broke loose. But let’s back up a bit. The root of the foreclosure problem has to do with who has clear title of the home and therefore who has the right to actually foreclose on the home. Here is how Occupy.com explains it:
A mortgage has two parts: the promissory note (the IOU from the borrower to the lender) and the mortgage, which creates the lien on the home in case of default. During the housing bubble, banks bought loans from originators, and then (in a process known as securitization) enacted a series of transactions that would eventually pool thousands of mortgages into bonds, sold all over the world to public pension funds, state and municipal governments and other investors. A trustee would pool the loans and sell the securities to investors, and the investors would get an annual percentage yield on their money. In order for the securitization to work, banks purchasing the mortgages had to physically convey the promissory note and the mortgage into the trust. The note had to be endorsed (the way an individual would endorse a check), and handed over to a document custodian for the trust, with a “mortgage assignment” confirming the transfer of ownership. And this had to be done before a 90-day cutoff date, with no grace period beyond that. -
