Directors Beware! Next Crisis is Upon Us

Don't look now public company directors, but the next financial crisis may be upon us and it looks a lot like the 2008 crisis that was borne out of the housing bubble. Apparently, the underlying cause of the collapse of the mortgage-backed securities (MBS) and collateralized debt obligations (CDO) markets two years ago has not gone away.

The attempted resolution of millions of foreclosures on American homes by big banks (prior to Bank of America's decision yesterday to reinstitute foreclosures after a short investigation of its processes, many large banks had temporarily halted foreclosures) that have acted as servicers of those loans has exposed an ugly secret. It was that those banks may not have the legal right to seize those properties because the oversecuritization of the notes has made proof of ownership a problem. In short, one by one some state courts are finding the Mortgage Electronic Registration Systems (MERS) that was used to make securitization of those loans easier may have decoupled the payment promises made by borrowers from the mortgages they signed.

This possibility, as described clearly and succinctly by Floyd Norris in his High and Low Finance Column in yesterday's New York Times, could mean that although borrowers could be held liable for paying back the loans, the property could not be foreclosed. That potentially would mean borrowers could sell the properties for less than what is owed, leaving the banks with nothing to show for a non-performing loan. At the same time, it has been widely reported by the Times and other major dailies that not only are there legal flaws in these mortgage documents that will most likely be challenged by the MBS investors whose trusts technically own the mortgages, but many people hired by loan servicers (banks) may have fraudulently signed foreclosure documents ("robo" affidavits) without even looking at the paperwork. Attorneys representing thousands of foreclosed homeowners are challenging property seizures based on the alleged fraud.

Read the rest of this article on the Corporate Governance Blog