Foreclosuregate: Mortgage banks hit by putback time bomb

It has become a national scandal that has obsessed the US media before mid-term elections on November 2. It’s even been granted the highest honour a scandal in the US can achieve – the suffix ‘gate’. For banks whose reputation among the US electorate could hardly have been lower, Foreclosuregate has engulfed them in a further tide of public fury.

But behind the headlines the flaws in documentation that foreclosures have so brutally brought to light are a far bigger problem for the banks than the one so dominating the national discourse. Delinquent disclosure has called into question the very engine of housing finance in the country – mortgage-backed securitization. It is not just that investors in soured RMBS deals are increasingly attempting to force underwriters to buy back the bonds if they can prove failures in underwriting (putting back the bond). Beyond this, and perhaps most shocking of all, is a recent challenge to the legality of mortgage transfer into securitization vehicles – in other words the suggestion that the entire $1.3 trillion non-agency RMBS market in the US could be invalid

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