As we mentioned a few days ago about the next stages of the US housing debacle.

The loans on these foreclosed properties were on-sold ( in some cases many times ) into the MBS market. Given that the title documentation was not legally complete, then this should never have been allowed to happen. If there is legal doubt about the title of the securities on these “packages” then they are not worth their face value, and therefore will only trade at a substantial discount, if at all. Worse, If they are found to be illegal then what happens then ? Will the transactions be reversed?

Well it doesn’t look like it will be too long before someone tests the legal waters to find out.

Potential paperwork errors on some of the $1.34 trillion of securitized home mortgages may give investors an opening to challenge the legality of deals, threatening to unnerve financial markets, according to Joshua Rosner, managing director at Graham Fisher & Co.

Some loans to borrowers with poor credit before 2007 may not have been transferred to mortgage trusts in the manner required by their pooling and servicing agreements. That raises questions about the ownership of the loans and may allow investors to force lenders to buy back the securities, Rosner wrote yesterday in a note to clients.

The failure to include MBS trust names on documents and to properly assign loans to the trust may encourage MBS holders to challenge the entire securitization, rather than press lenders to take back individual loans that were fraudulently issued, according to Rosner, whose firm advises investors and regulators. That could set off legal fights over almost all subprime MBS sold to investors.

Tick.. Tick…Tick…

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