In January of 2007, Doom was reporting that a mortgage lender that had gone out of business had apparently left files and computers in the office.  Our principal worry at the time was the potential theft of personal data.  John however, pointed out another problem with sloppy paperwork earlier this week to me:

Looks like that blizzard of paperwork and files (electronic and otherwise) lost in the meltdown of the subprime originators could conceivably come back to bite bondholders in a way we didn’t anticipate. The short story is that default servicing gets problematical if you’ve lost all the paperwork on a mortgage, and this happened a lot in the chaos of crumbling initiators and over-complicated structured finance.

The quote below from this OpEdNews story also suggests that there could be horrible problems in Q-election with their QSPEs. Once again the story from years back about Fannie’s sloppiness with SFAS 140 is rearing its ugly head.

Here’s the OpEdNews article:

"The investors have another problem: the delay in assigning particular mortgages to particular investors means there was no "true sale"of the security (the home) at the time of securitization. A true sale of the collateral is a legal requirement for forming a valid security (a secured interest in the property as opposed to simply a debt obligation backed by collateral). As a result, the investors may have trouble proving they have any interest in the property, secured or unsecured.

This is not an uncommon problem.  Back in February Bloomberg reported:

Judges in at least five states have stopped foreclosure proceedings because the banks that pool mortgages into securities and the companies that collect monthly payments haven’t been able to prove they own the mortgages. The confusion is another headache for U.S. Treasury Secretary Henry Paulson as he revises rules for packaging mortgages into securities.

“I think it’s going to become pretty hairy,” said Josh Rosner, managing director at the New York-based investment research firm Graham Fisher & Co. “Regulators appear to have ignored this, given the size and scope of the problem.”

So who is hurt when these foreclosures don’t go through? According to the OpEdNews:

There is another class of victims in the sub-prime mortgage crisis: investors in MBS, including the pension funds and 401Ks on which many people depend for their retirement. If the trustees representing the investors cannot foreclose, the lucky debtors may be able to stay in their homes without paying. However, the hapless investors will be left holding the bag. If the investors manage to shift liability back to the banks, on the other hand, the banks could go down and take the economy with them.

Pretty hairy indeed.