The Congressional Oversight Panel reports that the effects of the current foreclosure documentation crisis may have been underestimated.

In a new study entitled “Examining the Consequences of Mortgage Irregularities for Financial Stability and Foreclosure Mitigation” the panel states that “companies servicing $6.4 trillion in American mortgages may in some cases have bypassed legally required steps to foreclose on a home. The implications of these irregularities remain unclear, but it is possible that `robo-signing’ may have concealed deeper problems in the mortgage market that could potentially threaten financial stability and undermine foreclosure prevention efforts.”

The panel believes that the trouble may be even worse than that. “The risk stems from the possibility that the rapid growth of mortgage securitization in recent years may have outpaced the ability of the legal and financial system to track mortgage loan ownership. In essence, banks may be unable to prove that they own the mortgage loans they claim to own.”

The Congressional Oversight Panel has been known to be harsh in its analysis, but that does not mean that its analysis is not accurate. The group says as many as 33 million mortgages could be affected, an avalanche almost beyond imagination.

Many experts have recently concluded that the reaction to “robo-signing” and its results has been overstated and that paperwork reviews will show that almost all foreclosures were done fairly.  But even if the results may be accurate, that may not matter in the short-term.

The rise in litigation over whether people were fairly thrown out of their houses in being met by litigation over whether banks properly documented securitized paper sold as mortgage derivatives to institutional customers. Even a modest drop in the vale of those instruments will draw investment banks and their customers into the legal system.

The real trouble with the mortgage problem and the reaction of most experts to it is that they have not properly recognized the extent to which America is a litigious nation. Paperwork problems should not be the cause of tens of billions of dollars in litigation. Perhaps the value of mortgage-backed securities should not be either. A similar problem arose between banks and their customers over mortgage derivatives during the credit crisis. The eventual resolution in most case was “caveat emptor.” Large institutions should ask the right questions about what they buy and their due diligence should be sufficient.

The real problem with the current mortgage debacle is the free access that all parties have to the court system. That access could cause traffic jams that will take years to sort out.

Douglas A. McIntyre

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