Beyond sloppy documents, the foreclosure debacle has exposed one of Wall Street's little-known practices: For more than a decade, big lenders sold millions of mortgages around the globe at lightning speed without properly transferring the physical documents that prove who legally owned the loans.
Now, some of the pension systems, hedge funds and other investors that took big losses on the loans are seeking to use this flaw to force banks to compensate them or even invalidate the mortgage trades themselves.
Their collective actions, if successful, could blow a hole through the balance sheets of big banks and raise fundamental questions about the financial system, financial analysts and a lawmaker said.
If judges rule in favor of such lawsuits, "it could be 2008 all over again," said Josh Rosner, managing director at Graham Fisher & Co., referring to the Wall Street meltdown that occurred after Lehman Brothers collapsed.
How do you fix this? I have a bad feeling that you don't. But, probably you need Congress to come up with some patchwork retroactive fix. Basically, you have a bunch of people who can't pay their mortgages. But no one can prove that they have a right to their mortgage payment and, therefore, the right to foreclose on the home. Technically, there are millions of people who have the right to keep their home without paying for it because the real owners didn't follow the law.
So, what do you do?