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By Ronald Fink
I've written a couple of pieces recently on courts challenging banks' rights to foreclose on securitized mortgages. But I assumed that those decisions wouldn't stand up for long, figuring that it was just a matter of time and money to get the paperwork right and so establish the necessary standing.
But a closer look suggests the issue might not be as simple as that.
In fact, the judges are challenging the legal basis of the major banks' representative in court, a bankruptcy-remote consortium they own called the Mortgage Electronic Registration System Corp.
At least one judge has ruled that MERSCORP is just a "straw-man" for the banks without a direct financial interest in the mortgages and thus no legal right to foreclose on their behalf.
And how that gets resolved seems like more than a matter of paperwork, as one of the judges pointed out. I suppose that putting these assets back on banks' own balance sheets, as a change in the accounting rules would require them to do starting next year, might solve the problem. But if so, it would be more than a little ironic that the end of qualified special purpose entities would turn out to be something that banks desperately need.
Any way you slice it, financial engineering has come back to bite the banks big-time, if only because the process has hidden their assets all too well.
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