International Investing

Imagine if all of those derivatives floating around were not secured at all. If the security for the CDO’s was non-existent how would you price it? Deutsche Bank is probably considering the question now after a district court ruling prevented the bank from foreclosing on defaulted mortgages:

A U.S. District Court judge in Cleveland tossed out 14 foreclosure cases Oct. 31 on the grounds that the bank suing to repossess the properties, Deutsche Bank National Trust Co., didn’t actually own them. Deutsche Bank held debt securities that were linked to the mortgage loans on the properties, not the mortgages themselves. And the judge ruled that a security backed by a mortgage is not the same as a mortgage.

That’s a distinction that could make all the difference in the world — especially to the millions of Americans facing potential foreclosure in our crumbling housing market.
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The trouble is, these securities are now so complex that it’s become nearly impossible to know who actually owns the underlying properties in a typical mortgage pool. The mortgages are like sticks of chalk pounded into powder. When the dust settles, no one can tell what the original pieces looked like.

This, in effect, is why Judge Christopher A. Boyko of the federal District Court in Cleveland dismissed those foreclosure cases. Boyko had asked Deutsche Bank to produce documentation proving that the company held the mortgages on each property it wanted to seize. But after reviewing the paperwork, Boyko ruled that “none [emphasis his] of the assignments show [Deutsche Bank] to be owner of the rights, title and interest under the mortgage at issue.”