One more problem with securitization.

This morning, Yves Smith over at Naked Capitalism has a sobering article about a not-very-well-known time bomb in real estate. Here’s a relevant section:

Given how many sales will be done out of REO, and the rising number of problems surfacing with making sure that mortgage securitizations took all the steps to become the real party of interest in a particular property, it is only a matter of time before we see some blowups of the sort the attorney was worried about, of a buyer shelling out hard dollars for a house, or taking a big mortgage, and winding up with nothing. And a few incidents like that getting the press they deserve will put a pall on REO sales.

Think the risk isn’t real? Then why has Wells bothered to insist that REO buyers sign a new type of addendum, when it has been selling REO for decades? This effort to shift all title risks on to the buyer is a tacit admission of problems. And look at the document itself. The buyer has to initial it in eight places as well as sign it. That’s a clear statement of Wells’ intent to shift the risk to the buyer.

“REO”, by the way, means “real-estate owned.” Wikipedia defines it as “a class of property owned by a lender, typically a bank, after an unsuccessful sale at a foreclosure auction.”

Read the whole thing.