By Joshua Ruby and April Kuehnhoff
In the years leading up to the current economic crisis, a boom in real estate prices, fueled in part by relaxed mortgage underwriting and predatory lending practices, left the real estate market vulnerable. Since then, falling home prices and unemployment have made it difficult for many homeowners to sell or refinance their homes. This confluence of factors led to a surge in foreclosures, which now take place at rates unseen since the Great Depression.
Simultaneously, changes in the mortgage industry have introduced new uncertainties into well-settled areas of law. Lenders used to retain most mortgage loans they originated, but today most securitize and sell them. In this process, loans are grouped or “pooled,” and investors buy securities backed by specific slices or “tranches” of each pool, entitling them to a portion of the revenue generated from the homeowners’ payments. These practices mean that courts now hear foreclosure-related proceedings involving mortgages (the security interest in the home allowing home to be sold if loan is not repaid) divorced from promissory notes (the promise to pay the loan) and review operative legal documents without complete records of their long transaction histories.
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