HERE COME DA JUDGE by Bill Bonner Mr. C.A. Boyko recently fired a shot that was heard âround the world. At least âround the world of structured finance. Or, at least, âround the world of Deutsche Bank, who got a bullet in the head. Poor Deutsche Bank is the victim of its own avarice...its own stupidity...and the cycles of nature. Nothing to be ashamed of. In war, even the best soldiers get their brains blown out. In finance, they blow them out themselves. Before pulling the trigger, the judge was curious...a curiosity shared by millions, no doubt. He wanted to crack open a sophisticated derivative product â a mortgage backed security â and find out what was in it. In the event, he discovered that something was missing; structured finance was not structured quite as well as it pretended to be. Here unfolding is the story of a credit contraction. Its protagonist is neither a financier nor an economist. He is a U.S. federal judge. And at issue in his courtroom was whether Deutsche Bank National Trust Company could repossess 14 houses in the Cleveland area. The first part of courtroom proceedings always begins with a âwhereasâ: Whereas the homeowners were living in houses with mortgages, said the lawyers. And whereas said homeowners hadnât made their payments. And whereas Deutsche Bank was the de facto mortgage holder, the pleadings went on...said bank wished to foreclose on the 14 properties. Here, we add some whereases of our own. Whereas there is about $6.5 trillion worth of securitized mortgage debt in the United States alone. And whereas the value of the collateral â the houses themselves â is going down. And whereas the hotshots who securitized this debt operated so fast and loose they might have been undertakers in a plague year. And whereas standards of creditworthiness...and details of the mortgages themselves...were permitted to slip. And whereas the whole idea was to earn high fees for loading people down with debt, while pushing the risk of loss onto the naïve, the slow-witted and the unborn. And whereas the losses are now expected to tote to somewhere between $150 billion and $400 billion...and as much as $2 trillion, according to Goldman Sachs, in lost credit... And whereas every half-wit knew there would be hell to pay when the credit cycle turned down... ...this case might be a bigger deal than people realized. For his part, Judge Boyko showed little interest in the macro-economic whereases. What he wanted to know was: Where are the mortgage documents? It may be true that these people owe you money, he suggested, but we donât take a manâs house away from him without a valid mortgage contract. Not in the sovereign state of Ohio anyway. Deutsche Bankâs legal team looked at each other. Then, they looked in their briefcases. The lawyers had plenty of documents, including some clearly showing an âintent to convey the rights in the mortgages.â But as for the mortgages themselves, they had none. Again, Deutsche Bank is hardly exceptional. ***When a law professor studied foreclosure proceedings recently, she found that in 40% of cases, the creditors either did not or could not produce the vital documents, giving them the right to retake the houses.*** Apparently, the financial intermediaries who had bundled these 14 mortgages together with thousands of others to create the Structured Investment Vehicle (SIV) bought by Deutsche Bank had neglected to bundle in the actual mortgage documents. Searching high and searching low, they could not be located.
The mortgage would also have been recorded in the county recorder's office to make it a valid lien against the property. The mortgagees can therefore simply request a copy of this lien document from the county records. If they cannot find it this way then there is no lien and the issue is moot since they have nothing to foreclose against.