home sales

The headlines announcing that Bank of America has stopped processing foreclosures in order to assess their internal controls are difficult to process.  On one hand, this sound like a good thing, because if the pace of foreclosures slows it will diminish the number of families under stress and lighten the overhang of foreclosed properties on the housing market.  On the other hand, you don’t get foreclosed on until you’ve stopped paying your mortgage, right?  So what’s the big deal.

To sort it out, I recommend you follow the five-part series that kicked off today at Barry Ritholtz’ The Big Picture.  The post is authored by Mike Konczal, a fellow at The Roosevelt Institute.

The big question at play isn’t just whether the mortgage processors have been playing fair with homeowners.  It’s whether the financial institutions actually know where the original mortgage documentation is.   Can they produce the piece of paper they need to have to demonstrate the lien on the property?

The issue is captured neatly in a two-part graphic, reproduced below.

As the post points out, the issue of whether or not the mortgages can be found has significant implications for the financial players.

So keep these frameworks in mind when you see the debate unfold in the next weeks. It is a problem of systemic risk, and it is a problem for the currently cratered securitization market. It will need to be addressed, the sooner the better.  But how?

What should we all make of this?  Consider it a last, bad joke on the part of the financial services industry.  This new “foreclosure crisis” has nothing to do with home values or the ability of home owners to make payments of mortgages.  But, it has a lot of potential to slow down the housing market, at a point that the market doesn’t need any more headwinds.

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