An epic housing bust and sustained high unemployment have led to an epidemic of
default, with millions of homeowners falling behind on mortgage payments. So
servicers - the companies that collect payments on behalf of mortgage owners
- have been foreclosing on many mortgages, seizing many homes.

But do they actually have the right to seize these homes? Horror stories have
been proliferating, like the case of the Florida man whose home was taken even
though he had no mortgage. More significantly, certain players have been
ignoring the law. Courts have been approving foreclosures without requiring
that mortgage servicers produce appropriate documentation; instead, they have
relied on affidavits asserting that the papers are in order. And these
affidavits were often produced by "robo-signers," or low-level employees
who had no idea whether their assertions were true.

Now an awful truth is becoming apparent: In many cases, the documentation
doesn't exist. In the frenzy of the bubble, much home lending was undertaken
by fly-by-night companies trying to generate as much volume as possible.
These loans were sold off to mortgage "trusts," which, in turn, sliced and
diced them into mortgage-backed securities. The trusts were legally required
to obtain and hold the mortgage notes that specified the borrowers'
obligations. But it's now apparent that such niceties were frequently
neglected. And this means that many of the foreclosures now taking place
are, in fact, illegal.

This is very, very bad. For one thing, it's a near certainty that
significant numbers of borrowers are being defrauded - charged fees they
don't actually owe, declared in default when, by the terms of their loan
agreements, they aren't.

Beyond that, if trusts can't produce proof that they actually own the
mortgages against which they have been selling claims, the sponsors of
these trusts will face lawsuits from investors who bought these claims -
claims that are now, in many cases, worth only a small fraction of their
face value.

And who are these sponsors? Major financial institutions - the same
institutions supposedly rescued by government programs last year. So
the mortgage mess threatens to produce another financial crisis.