In the end, economic systems work, and judicial systems modify to accommodate that.  The only exception to that is when a culture is dying.

I have been scratching my head over all the problems in the residential mortgage market.  How can foreclosure take place, when there is no note, properly endorsed, to display?  How can certificate holders of securitizations be comfortable when the transfer of ownership interests in mortgages was never completed.

But, I’m not all that worried.  In one sense, the bigger the problem, the easier it is to solve.  Why?  Because the political systems that surround the economic systems tend to focus better on big problems than little problems.

As in Cordwainer Smith’s “The Instrumentality of Man,” the first priority of any government is to survive.  This is one reason why it is easier for them to survive large crises than small problems.  That’s why I give Rudy Giuliani relatively little credit for what he did on 9/11, but give him more credit for what he dealt with on budget issues.

In large crises, the range of options becomes limited.  Also, it becomes easier to see which option is the best one.

So, given the systematic and severe errors that occurred in residential mortgage securitization, shouldn’t there be an obvious answer to what must be done now?  Yes, but a solution here will take time.  Banks will have to make the effort to secure the notes that allow them to foreclose.  And then, they will foreclose.  Will that mean a lot of upset for the residential property market in the short run?  Yes.  Will the residential property market survive this?  Yes.

Foreclosures will take place.  But the legal niceties that protect our property rights in other areas must be observed by the banks.  Courts should not give in to pressure that they must do something to preserve the proper functioning of the market.  Yo, courts.  The markets will survive even if you delay.  Take your time and do it right. Yo, lenders; delay is the price for not having done it right in the first place.

As for the securitization certificateholders, let me remind you of the investment banks and AIG.  AIG absorbed subprime mortgage risk from all of the investment banks.  The investment banks thought they were pretty clever, until they realized that they all had taken advantage of AIG, and thus, AIG might not be able to make good on all the risks that they had absorbed.

In the same way, if all residential mortgage-backed securitizations are unwound at the same time, the sponsors of the mortgage-backed securitizations will not be able to make good on their obligations.

As I see it, residential mortgage-backed certificate holders have an incentive to work with the sponsors to see how this crisis can be worked through.  And as I see it, perhaps the solution is to pay a consent fee to the certificate holders in exchange for waiving their rights to sue over the malfeasance of not transferring the notes from the originator all the way to the trust.


As with other crises, the probability of total failure is remote.  Total failure only occurs when those at the top of the power structure are so self consumed that they do not see the threat to their lives.

That’s why I see a slow but reasonable solution coming through the court system to solve the malfeasance engendered through the sloppy execution of securitizations.  Yes, things are bad.  Yes, our current politicians are clueless.  But there is enough interest in coming to a solution for society as a whole that an equitable solution will be arrived at in the courts – not through Congress, not through the President.

That doesn’t mean that things won’t be choppy and messy.  Indeed, there will be many ugly times en route to a solution.  But things are not so bad in our judicial systems, as a whole, that we will not come to the correct solution, after exhausting all imaginable alternatives.


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