After months of unrelenting deliberations about the source of our economic meltdown, we know that much of it was caused by subprime loans that were then sliced and diced and sold off by the original lenders in pieces to other investors. As these investors now attempt to foreclose on homes where the homeowners are in default, another glaring failure of the Wall Street Masters of the Universe is becoming apparent. They didn’t complete the paperwork. Apparently, in the rush to cash in, the big banks that made subprime loans and then dumped them off on investors failed to make sure that the promissory notes signed by the borrowers were actually transferred to the investors. So many subprime loans to make, so little time for paperwork and files.And now, a number of judges presiding over foreclosures are demanding that the investor groups submit actual proof that they own the loan and have the legal right to foreclose. The judges demand that the investor groups produce the actual original promissory note signed by the homeowner (generally required under applicable state laws for foreclosures) and are refusing to allow the foreclosures to proceed if the investor groups aren’t able to do so. Given the chaos of the subprime loan market and the many ways the loans were sliced and diced, the investor groups can’t find the original note and the judges won’t let the foreclosures proceed. If the lenders/investor groups can’t produce the original note by the time the statue of limitations runs for foreclosure, the borrowers presumably will be able to keep their houses without making further payments on their loans. Given the magnitude of securitized loans – an estimated 8 million of subprime mortgages valued at $797 billion in 2005 and $815 billion in 2006 as reported by the New York Times, this may result in a lot of unenforceable subprime loans. Not surprisingly, the Bankruptcy bar is gearing up to make sure this happens – banks’ sloppy paperwork is a primary topic of discussion scheduled for an upcoming bar meeting.

So those toxic assets we keep hearing about may be even more toxic if the investors who were suckered into buying subprime loans can’t foreclose on the collateral when the borrower defaults. And who will pay for these new losses? The big banks that screwed up the paperwork but are either defunct or too big to fail? The investor pools who failed to make sure they got what they were paying for? Their advisors? Or the shmuck that usually ends up paying – we the taxpayers.