Esko Kiuru

According to Census Bureau statistics the U.S. homeownership rate remained at 66.9% in the 3^rd quarter of this year. It is actually at the lowest point since the end of 1999, the decline predictably brought on by the severe real estate turbulence that continues to roil the market to this day. For the last year the drop has been 0.7%. Interestingly, the West had the lowest percentage at 61.3 while the Midwest exhibited the highest at 71.1%.

It could lose more ground in the coming months since mortgage foreclosures seemingly are not abating, banks are still repossessing houses by the thousands and the weak economy waters down consumer interest in buying homes. Moreover, the government currently is heavily subsidizing housing, pushing the idea that every American should make an effort to own a home. But some real estate observers are beginning to argue that the subsidies should be curtailed. Homeownership isn't for everyone, they add. And they have a valid point by just pointing at today's high mortgage foreclosure numbers. Therefore, should Washington remove some of the subsidies, it would further erode the homeownership rate.

Now, let's consider something else that may happen.

The fact is that the deep mortgage finance and housing recession has dramatically scaled back prices, often more in the hardest-hit states like Nevada, California, Arizona and Florida than in some other parts of the country. In some newer Las Vegas suburbs values have crashed up to 60%, dragging them way down to levels last seen in the 90's. Understandably this kind of correction will put a smile on faces of many aspiring home buyers. What it does is bring the price structure to a level where consumers who couldn't afford to purchase a property a few years ago can now start looking. So long as they have confidence in the real estate market and can meet the current more stringent mortgage qualifying guidelines.

The reworked price framework could actually keep the homeownership rate pretty much where it now is, or perhaps even nudge it upward.

MERS is hardly a household name to many homeowners but the company now finds itself tossed right in the middle of the latest and rapidly-heating home loan challenge. It stands for Mortgage Electronic Registration System and the name pretty much says what it does. It records electronically, in proprietary software, mortgages that have been originated throughout the country, having currently over 65 million of them in its books, or better said in its servers.

The standard practice still is that local clerks record all mortgages and when ownership changes a new paper-based entry is created and notarized. Of course, all this is time-consuming, and this is how MERS came into being. Over ten years ago mortgage securitization took its first baby steps and quickly grew into a vibrant business model on the international securities arena. Large mortgage lenders, big banks and servicers were bothered, though, by the slow turnaround time of the local clerks, so they helped form MERS that could transfer information electronically. And really fast. And highly profitably. Bank of America, AIG's United Guaranty Corp., GMAC, Wells Fargo, Freddie Mac and Fannie Mae are a few of its prominent shareholders.

However, MERS has also blurred the real ownership of the mortgages it has in its system. Mortgage-backed securities with MERS ties were traded globally and supposedly the ownership of them was properly transferred with each trade. Or was it? There is no paper trail now to back anything up. As homeowners began struggling with payments in the collapsing real estate scene, lenders and servicers were promptly foreclosing on them using seemingly unreliable ownership chain.

And this is now the hot topic.

Increasingly, homeowners are challenging foreclosure action based on lack of clear ownership of the mortgages in MERS. And courts are starting to find that there indeed is a problem and have ruled several times already that MERS cannot foreclose because it does not own the mortgages. Class action lawsuits are underway in Nevada, California and Arizona - some of the hardest-hit states - against MERS over its lack of a legal standing to foreclose. JPMorgan Chase just announced that it will no longer use MERS due to the uncertainty over loan ownership, clear proof of something being wrong with it.

Hedge funds, pension systems and other wealthy investors bought mortgage-backed securities by the billions during the housing's go-go years and are now angrily licking their still-bleeding wounds. They are looking to make mortgage lenders to compensate them for their losses, or even cancel the securities trades altogether. Should they be successful in this, it could put the entire U.S. financial regimen in jeopardy once again. The predictable consequence is that the housing market's recovery would be pushed back further. Not only that, but the mortgage industry really needs to clean up the house to be able to attract the understandably skeptical investors back, because without them there isn't much to write home about.

The wounded mortgage industry has been working as best it can to pick itself up from the canvas, with massive support and guidance from the government. It has instituted many internal policy changes, on one hand, to correct the grave underwriting, mortgage-backed security and other mistakes made in the not too distant past. On the other, Washington has come up with its own legislative cures to prevent another spectacular mortgage and real estate collapse from creeping up on the country again. Despite the continuing uncertainty and weakness in housing, cautious optimism is also entering into the mix. Maybe the worst is over, or about to be over, many hope.

And then another unexpected lightning bolt strikes the still vulnerable home loan industry.

Evidently in their haste and lack of qualified staff - other valid reasons may come to light later - several large mortgage providers and loan servicers seemingly have signed off on foreclosures without bothering to read the documents. In essence, they have failed to carefully scrutinize them for accuracy before submitting them to courts. Borrowers are increasingly contesting their home repossessions because of this. If the process was flawed, the titles to the properties the banks received through foreclosure are smeared. While the courts are trying to untangle these challenges, in the meantime mortgage lenders can't sell their REOs - real estate owned - due to defective titles. It is possible many borrowers could get their homes back.

As a result, GMAC Mortgage - a division of Ally Financial - has stopped all evictions while it contemplates its next move. Similarly, JPMorgan Chase has requested courts to suspend foreclosure decisions for now. Bank of America has also held up foreclosures in 23 states while reviewing its documents. They - and predictably many others - are well aware of potential lawsuits and want to proceed cautiously. At this point several states - Florida, California, Iowa, North Carolina, Illinois, Connecticut and Texas - are investigating the matter. Conspicuously absent from the list are such hard-hit states like Nevada and Arizona. Logically speaking they have a load of mortgage borrowers whose homes were possibly repossessed under the faulty processes and should now be in the forefront in protecting their residents.

The worst of this could be that mortgage borrowers who lost their homes during this housing meltdown could challenge years later the repossessions. That puts a cloud on a title and the current owner, who probably purchased an attractively-priced foreclosure, say in Las Vegas, cannot now sell because of the defect. In fact, he likely isn't even the legal owner of the property at that point. Ownership rights normally surface during a title search when a property is under a sales contract. What a mess in the making. This could potentially blow up into a truly toxic situation for the mortgage lending and real estate industries desperately looking for more light at the end of the tunnel.

The current real estate meltdown has been a true testing ground for anyone involved in its devastating turbulence. Homeowners have watched helplessly as their property values have headed south with little resistance. Home loan providers have worked under pressure for years to stay afloat in choppy waters full of creepy icebergs and many other deadly maritime hazards. Real estate agents are fighting to secure deals in a marketplace shrunk to a flat pie on life support from a full-blown strawberry cheesecake. The support industries are in it as deep as anyone else.

Something intriguing that could be rather meaningful for many in housing is in the works right now. Namely, the U.S. House just introduced a bipartisan - yes bipartisan, for change - bill that would require mortgage providers to come up with an answer to short sale requests within 45 days. It's common knowledge that mortgage banks usually take their sweet old time in reaching a decision on them. Sometimes they can't even make up their minds at all, ever, no "yes" or "no" at all, just deafening silence or bureaucratic runarounds until participants just give up, throw up their arms in disgust.

Underwater - the mortgage balance is higher than the property's value - homeowners would be big beneficiaries here. They would be informed in 45 days whether a short sale will work or not and then make plans for their next move regardless of the answer. Now they often don't know anything for months and many finally just decide to walk away from the mortgage. Failed short sales are one of the main reasons to climbing walk-away numbers.

First-time home buyers as well as other purchasers would get a much faster response to their offers, helping them with their strategies. The attitude of scores of real estate agents would change for the better toward the frequently ridiculously lengthy and complicated short sale process. Actually, even the mortgage lenders themselves would come out ahead in this, as they would be forced to make a decision and move on.

The bill does have merit aplenty, and should be passed. Who says Washington can't introduce useful housing legislation? Since the private mortgage sector was unable to satisfactorily act on this, the oft-maligned government stepped up to the plate with a well-designed bill that would yield nice dividends for the entire housing industry.

It appears relative calm has descended on the long-suffering housing market, especially when it comes to price movement. For months now home values have shown signs of stability, and even moderate increases in some areas. Real estate observers of course like to see that but are generally unconvinced that a sustainable real estate recovery is imminent. Too many hazards remain in its way, among them the still notable oversupply, a weak job market and the potential of many more mortgage walk-aways.

Yes, that walk-away - a term that has finessed its way into today's popular real estate vocabulary - where a homeowner who can afford to make his home loan payments chooses instead to take a hike due to being severely upside down. This is the standard definition of it.

Walk-aways represent 15-35% of present delinquencies, according to housing industry estimates. The range is wide because it is hard to really figure out who can afford to make the mortgage payments and who can't. But really, what does it matter; walk-away is a walk-away regardless of the mortgage borrower's finances.

As things stand, the mortgage walk-away trend is likely to shift into a higher gear for the foreseeable future. There are quite a few reasons why so. Any intermediate-term price appreciation will be modest at best, leaving people in the suffocating embrace of negative equity for much longer than they feel comfortable with. They understandably start thinking of their options. If prices backtrack some more - as some real estate experts confidently predict - the decision will be easy. HAMP and other private mortgage provider modification programs are helping to some degree in alleviating pressures on struggling homeowners, but many don't qualify. They see an alternative in walk-aways.

In addition, the shame that has been associated with mortgage foreclosures and walk-aways is gradually dissipating. More people are tackling their distress from a financial survival standpoint instead of what the prevailing moral obligation calls for. They are making decisions based on what's best for them and their families. This is also made easier as mortgage lenders now are increasingly being perceived as being responsible for the housing wreckage.

These developments inevitably point toward the mortgage walk-away problem getting worse from here on out. For how long is impossible to say. It is going to cause trouble, however, for any durable real estate market turnaround hopes.