Missing Paper: How Mortgages Were Bundled Up and Sold As Securities

A friend of mine sat down one day and described to me the whole process of how Mortgage Loans were bundled up and sold as securities. Very interesting process. The clencher is, what mistakes were made along the way? The problem with the mortgages is in the "missing paper" trail. Mortgage lenders are having difficulty producing documentation proving they own the properties in attempt to foreclose.

Here is a link to an Associated Press explanation: Mortgage Process

Some lawyers for homeowners in foreclosure cases are challenging lenders to produce the original mortgage note -- something that is proving difficult, if not impossible to do because lenders have bundled and resold mortgages over and over in the past few years.

1. Investment banks and financial institutions create mortgage securities and Collateralized-Debt Obligations to sell to investors.

2. In any given mortgage security, there will be some loan defaults. It is difficult to determine the percentage of which mortgages will go bad.

3. This uncertainty makes their value equally difficult to determine, so investors refuse to invest.

4. Investment firms become stuck owning securities they could easily sell during better economic times.

5. Saddled with poorly performing securities, and having few healthy options for investors, these investment banks fall from favor. Investors redirect money away from them and into safe havens such as US Treasury Bills. Other lending entities are less likely to lend to investment banks, due to the uncertainty.

6. The reduction of money in the system, combined with a general feeling of mistrust in the marketplace slows the velocity of money to a crawl. The constricted money flow can seep into the broader economy.