The Next Phase of the Crisis: Will Investors Force Lenders to Buy Back Toxic Mortgage-Backed Securities?

It can be hard to keep track of all the poison spewed by the deregulated mortgage-backed securities industry.  The disaster runs so deep, and in so many directions, that it keeps cropping up in unexpected ways and places.  As we know, in lenders' frenzy to sell mortgage-backed securities to investors, they made mortgage loans to absolutely anybody with a pulse -- and even that might have been optional.  Lenders couldn't have cared less about the loans people took on, because they got paid by securitizing the mortgages and selling the securities to investors.  The unethical goldrush was so frantic and slipshod that in many cases lenders never even properly documented the loans, which is why many foreclosures are now in limbo.

But the negligent record-keeping may have yet another consequence for both the lenders and those of us forced to bail them out.  Lenders packaged and securitized pools of mortgages, and sold those securities to investors, with the representation that if payments weren't made on the loans, losses would be recouped through foreclosures.  Now it appears that was a misrepresentation, since the lenders hadn't bothered to maintain records that would permit them to foreclose (in fact, in at least one case, it appears lenders sold securities in mortgages it didn't even own).  

Now, investors who purchased securities under that misrepresentation are demanding that at least one lender -- Bank of America, which now also owns the notoriously toxic assets of AIG and Countrywide Financial -- buy them back if they can't foreclose.  But if the lenders buy the securities back, they will increase their holdings of toxic assets.  That, of course, is what caused them to fail, setting off the economic crisis.  

So, we are left with three broad options: (1) tell investors, who purchased mortgage-backed securities under lenders' misrepresentations that they could foreclose, they have no recourse; (2) allow lenders to foreclose on homes when they don't have the proper documentation to do it; or (3) increase the toxic asset holdings of banks we already bailed out, and are still supporting.  

Meanwhile, the serious regulatory reforms intended to prevent a recurrence of this mess are in grave danger.  But hey, at least the bankers are doing well again.  Grrrrrrrrr.

Mark A. Edwards

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