Speaking to Bloomberg, Graham Fisher & Co’s Joshua Rosner said that $1.34 trillion of securitised mortgage deals, carried out before 2007 in the US, could have paperwork problems which may allow investors in the mortgage books to force lenders to buy them back.
The failure to include mortgage-backed securities (MBS) trust names on documents and to properly assign loans to the trust means that MBS holders could challenge the securitisation which could result in many court cases.
The US stopped selling these so-called ‘private-label’ mortgage-backed securities in 2007 after borrowers with poor credit began to default, repossessions soared and the value of the MBS plummeted.
There are three possible outcomes for the problem. The best case scenario is that the paperwork problems are deemed to be legal technicalities, which would result in a delay to any repossessions in process; otherwise there could be years of court cases with a worse case scenario of the mortgage market in the US grinding to a halt as title insurers stop insuring mortgages.
But is this likely to be an issue in the UK? Tony Ward, chief executive of Home Funding, said: "I can’t see this being a problem in the UK but there’s always the risk that option 3 of the possible scenarios plays out and this just further damages the reputation of MBS worldwide."
John Charcol’s Ray Boulger said: “Tony's view is comforting but whilst this therefore doesn't look like a shock horror story for the UK, it nevertheless is an interesting development and, along with other factors such as the increased likelihood after Tuesdays Fed minutes that we will have QE2 from the Fed next month, adds weight to the indications that we are in for a long haul as far as the recovery is concerned, and hence a sustained period of low interest rates.”
