Final Exam

Case Study Write Up Draft

Foundation: As unemployment rate currently stands at 9.1%, U.S. sovereign debt downgraded by one notch, and shrinking consumer confidence, economists somberly observe the risk of U.S. sliding into a recession. Market professionals asserted several factors had led to slowing down of the recovery. Among them is the large number of foreclosed houses that have been on the market for over two years. As vacant properties fall even further into disrepair, real-estate owned properties (REO) are hurting the value of surrounding housing market. These REOs carry mortgages that were used to engineer the securitization of collateralized debt obligations, which triggered the housing collapse between 2007 and 2009.

Investigative journalism has demonstrated that a large percentage of vacant REOs were stuck on the market due to missing mortgage documents. In what was quoted as a wide-scale “absolute intentional fraud”, a CBS video clip revealed shocking findings that some banks have been forging mortgage documents in an effort to throw subprime home owners out of their houses.

Looking back at the market, as Wall Street’s demand for CDO squared exploded, mortgage underwriters were compelled to issue even larger volumes of subprime loans, and subsequently transferred default risks to institutional investors. Later on, as market crisis exploded, banks deploy forged signature mills to facilitate foreclosure process. At least 350 mortgage documents were being produced on an hourly basis. Those forged signatures flooded country’s courthouses with foreclosure lawsuits, and had sent millions of families out of their homes. Till this day, rotten mortgage documents still has a debilitating hold on our economy.

Analysis: The implosion of housing market had put tremendous distress on the U.S. economy. Buyers and underwriters, both carried asymmetric information of their credibility, were not alone in the mistake. Wall Street’s major players- Investment banks...