Turn On The Lights, Watch The Roaches Scatter, Part 56

The possible settlement by all 50 state AGs with the banks on Foreclosuregate may have just run into a concrete barrier in the Bay State.

Massachusetts’s highest court is poised to rule on whether foreclosures in the state should be undone because securitization-industry practices violate real- estate law governing how mortgages may be transferred.

The fight between homeowners and banks before the Supreme Judicial Court in Boston turns on whether a mortgage can be transferred without naming the recipient, a common securitization practice. Also at issue is whether the right to a mortgage follows the promissory note it secures when the note is sold, as the industry argues.

A victory for the homeowners may invalidate some foreclosures and force loan originators to buy back mortgages wrongly transferred into loan pools. Such a ruling may also be cited in other state courts handling litigation related to the foreclosure crisis. 

“This is the first time the securitization paradigm is squarely before a high court,” said Marie McDonnell, a mortgage-fraud analyst in Orleans, Massachusetts, who wrote a friend-of-the-court brief in favor of borrowers. The state court, under its practices, is likely to rule by next month. 

It's that third paragraph that has mortgage execs awake and sweating at nights.  We're talking a precedent here that could turn into a tidal wave of buybacks...potentially hundreds of billions of dollars worth.  It will rip the banks apart, considering they're still leveraged to the hilt.  It'll also throw the value of the mortgage loan holdings of all MERS banks into chaos.

No wonder the banks are so eager to settle now and make MERS the final word on mortgage paperwork legitimacy.  They're running out of time.