In the short span of a week or so, the phrase "foreclosure freeze" has become part of the vernacular - millions of homeowners who are in default are wondering if the foreclosure freeze will stop the clock and give them a few more months, perhaps a few more years, in their home.
Perhaps, but I think this is more of a temporary stop on a trip to foreclosure hell.
In today's Washington Post, writers Brady Dennis and Ariana Eunjung Cha argue that there is more to the foreclosure freeze than simply flawed paperwork.
Their story centers around Mortgage Electronic Registration Systems, based in Reston, Virginia. The company, which is widely known as MERS, was created more than a decade ago by the biggest players in the mortgage business: Fannie Mae, Freddie Mac, GMAC (now owned by Ally Bank), and the Mortgage Bankers Association. (Click here to see who is on the MERS Board of Directors.)
It's purpose was simple: Act as an electronic trading house for millions of mortgage-backed securities to facilitate the virtually instantaneous trading required when retail lenders (the folks who lend to you) sell your loan to Fannie Mae and Freddie Mac, which then turn around and slice, dice, and repackage these loans for their investor.
(You didn't actually think there were people behind the curtains manually trading mortgage notes as if they were playing poker, right?)
My astute readers have already begun to point out the problems with MERS. One big problem is that everything is done electronically.
Think about it this way: MERS for mortgages is like holding stocks "in street name" in a brokerage account. It's all electronic, all about the database. You buy shares, sell shares and trade shares without ever holding a piece of paper in your hand. But what do you have that really proves the sale was done correctly and that you truly own those 500 shares of IBM or Google?
Nothing. You have the brokerage company's word that somewhere, in some corner of a massive online database, your 500 shares exist. That's why we have to trust the financial system, even as we're disgusted by the "Wall Street" mentality. They have control of our 500 shares of stock.
The difference between stocks and houses is enormous. Think about this: No one is likely to contest your ownership of 500 shares of IBM. There's no (identifiable) counterparty; no one with a competing claim. It's a whole different story with a house. Once a house goes into foreclosure, and gets sold to a new family, there are all kinds of folks who could lay claim to the property.
MERS worked well for a long time. The young brainiacs who programmed the coding built it to scale well. And it has. There are millions of homes going into foreclosure. And the paperwork is getting processed - perhaps not exactly the way it should be, or is required to be under the law. But it's getting done. But now attorneys across the country are arguing that MERS doesn't have legal standing to permit foreclosures. Some judges have rules in MERS favor, others have ruled against the company.
The only reason this is a problem is because so many people are in trouble. No one cares about shares of stock, but a house - well, that's an emotional problem, and in a mid-year election cycle, a big political problem.
It's probably true that the paperwork is faulty or was never done at all. And, perhaps millions of mortgages will fall under a foreclosure freeze for awhile.
That doesn't mitigate the problem that millions of people can't afford the mortgages they signed up for several years ago.
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Ilyce R. Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In!. She blogs about money and real estate at ThinkGlink.com and The Equifax Personal Finance Blog, and is Chief Content Strategist at RealtyJoin.com, a community for real estate investors.