Here's a quicky diary, unedited and basically a spill it on the floor and see if the cat licks it up idea.
Before explaining this, I have to note that much of what you read on DK about the mortgage backed securities issue is factually wrong. You're more likely to read what people want to hear than what actually happened. For example, there is a diary with some good information about banks' failure to properly transfer mortgages to mortgage backed security trusts, but it's mixed in with so much bad information that I can't really recommend it.
For example, that diary makes a big deal about "states' rights" in arguing that the mortgage backed securities underwriters had to follow state law, while lambasting Attorney General Eric Holder for not investigating the issue vigorously the way state attorneys general are. But logically, if we're talking about state law, why would you expect AG Holder to get involved, when his job is to enforce federal law? The answer is that AG Holder's role should be in prosecuting violations of federal securities law, ie the fraud on purchasers of mortgage backed securities if the prospectuses and registration statements for those securities promised that the mortgages had been properly transferred to the trusts. And those prosecutions would come after the federal SEC has completed their investigations which are ongoing.
But that's a topic for another diary.
Here I want to look at a potential bright side to this mess, and would particular like to hear from other people who are familiar with the actual finance and real estate issues raised.
As some of the articles on this topic have pointed out, if it turns out that mortgage originators, like Bank of America, did not properly transfer mortgages to the mortgage backed security trusts, then that originator may have to take back the mortgage. A number of commentators have noted that this would saddle those banks with massive amounts of defaulted mortgages.
But here's the interesting upside. Those contracts which require the banks to take back bad mortgages often also require the banks to replace the bad mortgages with good mortgages. In other words, the mortgage backed security trusts do not want cash; they want good mortgages.
We also know that the mortgage market and mortgage backed securities market that funds it have been all but dead since 2008. Almost all the mortgages that have been made since the crisis (as well as car loans and student loans) have indirectly been funded by the Federal Reserve Bank. This is why many progressives who understand finance think that Ben Bernanke has been a terrific fed chairman, even if he doesn't explain what he's doing for fear of spooking the markets. The Fed cannot be the nation's retail bank forever.
We also know that the banks and corporations have been sitting on trillions of dollars of cash.
So the interesting question is this: If the banks are forced to take back bad mortgages and replace them with good mortgages, will this force them to get off their asses from sitting on those trillions of cash and start making mortgages and car loans again? In other words, to replace bad mortgages with good mortgages, they're going to have to "originate" mortgages, and because they have to be good mortgages and they will be under the spotlight, they will have to use good underwriting standards.
Could the "put back" and "replace" clauses of mortgage backed securities trusts revive the housing market?
Inquiring minds want to know!