Wall Street has always come up ways to make money.  Several years ago, it was corporate buyouts and arbitrage and then, some genius came up with derivatives. That is where the meatloaf theory came into being.  Instead of selling a mortgage note outright, maybe a few hundred mortgage notes were thrown into a hopper and out came a meatloaf.  It seems that anything that might be legal but unethical is Wall Street’s forte.  This is especially true of the housing crisis of 2008.  Banks and Wall Street sold, resold and resold again the mortgage notes of unsuspecting mortgagees.  All of these notes were dumped into the meatloaf and sold off in slices.  Oh, they were insured, of course, which is how AIG got into the picture.  Feeling really safe, purchasers of these slices of the meatloaf were entirely unaware it seems that there was nothing backing up the purchase except a piece of paper named securities.  All was well on Wall Street as long as the mortgagee was making payments.  Because dividends must be paid on the “securities”, the mortgagee’s interest payment went up staggeringly until they no longer were able to pay.

Journalist Bob Ivy tells an interesting story:

Joe Lents hasn’t made a payment on his $1.5 million mortgage since 2002.  That’s when Washington Mutual Inc first tried to foreclose on his home in Boca Raton, Florida.  WaMu failed to prove that it owned Lent’s mortgage note and dropped attempts to take his house.  Subsequent efforts to foreclose have stalled because no one has produced the paperwork. “If you are going to take my house away from me, you better own the note” said Lents, 63, the former chief executive officer of a now defunct voice recognition software company.

Judges in at least five states have stopped foreclosure proceedings because the banks that pool mortgaages 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 NY based investment research firm Graham Fisher & Co.  Regulators appear to have ignored this, given the size and scope of the problem.

More than $2.1 trillion or 19% of outstanding mortgages have been bundled into securities by private banks, according to Inside Mortgage Finance, a Bethseda, Maryland-based industry newsletter.  Those loans may be sold several times before they land in a security.  Mortgage servicers who collect monthly payments and distribute them to security investors, can buy and sell the home loans many times.

So ~ given this information, why wouldn’t those who are foreclosed upon just be willing to stay put and wait for the market to sort itself out.  It is clear that when lenders cannot produce the original note to argue their position in court, that judges have no recourse but to rule in favor of the mortagee.  After all, there is such a thing as “squatters rights”, and if there is no note, then there cannot be debt.

I believe that this is the core of the problem that faces the nation in this economic crisis.  The Fed as well as Fanny and Freddie can’t produce original notes.  It is not that folks are in such need of a “stimulus” such as the $275 billion that Obama announced to help these “homeowners”.  The Fed is probably downright mad that there have been some homeowners have figured out like Joe Lentz in the story above that they can claim what is no longer secured. Funny thing to me that economists, commentators, news agencies, etc., have never presented this angle.  Who do you think will win this round — Wall Street or the Joe Lentz’s of the world?