Saturday, October 02, 2010

Toxic Titles - The Spawn of Toxic Assets

First there were subprime loans which turned into Toxic Loans - now these Toxic Loans have spawned a whole new mess that is making national headlines - Toxic Titles. The Bloomberg article I link to above reports:

“A mortgage has to follow the proper trail every step of the way, or you have title problems,” he said.

In some cases, mortgages were conveyed using the Reston, Virginia-based Mortgage Electronic Registration System, or MERS, designed to cover transfers among system members. Promissory notes also often were endorsed as payable to the bearer to avoid the need for multiple transfers. Both practices have been challenged in court.

Copies of documents aren’t enough to establish rights, just as copies of dollar bills wouldn’t be honored by a bank, said Geoff Walsh, an attorney with the National Consumer Law Center in Boston. In cases of lost or mishandled paperwork, attorneys may file affidavits and other evidence to correct omissions and establish a claim, Walsh said.

“Wall Street was very good at packaging loans and making sure the money flowed to the right people, but not so good at keeping track of mortgage documents,” Engel said. As a result, “we have a growing number of toxic titles,” she said.

Essentially, millions of Titles (a title is what represents ownership) and current and prior Title transfers are at-risk because of sloppy paperwork and a system (MERS) that is increasingly being questioned by the courts as to whether or not it has standing.

The avalanche of disclosure this week (BofA, Chase, GMAC) that their foreclosure mills were not being run properly is but a symptom of the overall problem - Toxic Titles. If this situation is not resolved it quite literally threatens to invalidate millions of title transfers and with it, potentially trillions in value - essentially cratering the entire global economy.

Of course the powers that be would never allow this to happen, but a legal decision must be made and the courts are beginning to see the light on this issue. You can bet that the banks and Fannie/Freddie are fighting this hard and are running scared.

Scott Dauenhauer, CFP, MSFP, AIF