By Paul Krugman, New York Times
Excerpt: The accounting scandals at Enron and WorldCom dispelled the myth of effective corporate governance. These days, the idea that our banks were well capitalized and supervised sounds like a sick joke. And now the mortgage mess is making nonsense of claims that we have effective contract enforcement — in fact, the question is whether our economy is governed by any kind of rule of law.....
The story so far: An epic housing bust and sustained high unemployment have led to an epidemic of default ... on mortgage payments. So servicers ... have been foreclosing on many mortgages, seizing many homes.
But do they actually have the right to seize these homes? ... Courts have been approving foreclosures without requiring ... appropriate documentation; instead, they have relied on affidavits asserting that the papers are in order. And these affidavits were often produced by “robo-signers” ... who had no idea whether their assertions were true.
Now an awful truth is becoming apparent: In many cases, the documentation doesn’t exist. ... And this means that many of the foreclosures ... are, in fact, illegal.
This is very, very bad. For one thing, it’s a near certainty that significant numbers of borrowers are being defrauded — charged fees they don’t actually owe, declared in default when ... they aren’t.
Beyond that, if trusts can’t produce proof that they actually own the mortgages against which they have been selling claims, the sponsors of these trusts will face lawsuits from investors who bought these claims — claims ... in many cases worth only a small fraction of their face value.
And who are these sponsors? Major financial institutions ... supposedly rescued by government programs... So the mortgage mess threatens to produce another financial crisis. (Read more)