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The problem here is in the origination of the mortgages. These mortgages were being given out like candy to fill the orders for Mortgage Backed Securities. The demand for MBS was so great that they were being sold money before there were mortgages to bundle. I'm trying to find the reference for this part of the story, but I read it in the last few weeks. Essentially, a pension fund or other buyer would approach Goldman-Sachs or whoever and want to buy $100 million worth of MBS at a certain interest rate or coupon. GS would then say, "Sure, we can sell you that, no problem", then take their money and send it down the line to create the mortgages to fill out the securities bundle (after taking their fee). Mortgage brokers had all this money to lend (adding to their fees) and came up with all sorts of creative ways to do so. All this money was driving a bubble in housing prices, which led people to believe that their house value would only go up. So many people took out ridiculous loans that they couldn't afford or hope to pay off eventually, which mortgage lenders where happy to make since it wasn't their money. The borrowers thought that they could always refinance at some future date after their house gained some paper equity.

The volume of the loans, and their nebulous final status of ownership (who holds the deed in trust? The MBS owner?) meant that there was extreme looseness, nay, even criminal sloppiness in the handling of the origination paperwork. After all, these loans were going to be refinanced long before anyone needed to look at the details.

Boom! The recession hits with a hike in oil prices in 2007. People who are barely making their mortgage payment start defaulting, drying up the MBS interest payments enough to scare off future buyers and, more interestingly, triggering credit default swap payments that insured the aforementioned MBS. Long story short, the bubble bursts.

Now that the banks are trying to recoup (in order to stave off their own bankruptcy) these properties through foreclosure they are finding the things aren't going so smooth. The paperwork is missing and they can't quite establish that they have standing to foreclose. They forge ahead anyway.

Sorry for the pedantic outburst, I really wanted to get it down to establish for myself what I think is going on. I don't think that people who defaulted on their loan should get a free house, they too are culpable. The mega banks that are up to their necks in this mess should taken over and dealt with like any normal bank that goes into receivership. They are bankrupt right now and no public money should be used to help them or special legislation passed to haul them out of the fire. Stupid and greedy should hurt.