There’s probably a full-fledged foreclosure crisis looming. Because the foreclosure problems faced by mortgage lenders go well beyond the issues of forgery and flawed paperwork I talked about last week.

It turns out that there’s a whole other dimension to the mortgage industry’s foreclosure problems. One that smacks of poetic justice, actually.

When you buy a house, it’s important to engage a lawyer to handle the closing. Partly because it’s important to ensure that all the right paperwork has been done to establish your clear title to the property you are purchasing. Well, the same principle applies on the financing side of the transaction. The lender who originates the loan needs to establish clear ownership of the loan. So, too, do all the subsequent financial companies of whatever stripe who acquire it, however briefly, once the securitization industry gets their hands on it, and the loan starts to whiz around the global financial system at the speed of light.

And establishing clear and incontrovertible ownership of a loan can only be done the old-fashioned way, by hiring a lawyer to fill out forms and pay filing fees every time a loan changes hands. This, unfortunately, can’t be done at the speed of light. So, with hundreds of thousands of mortgages ready to whiz through the global financial system at high velocity, merrily changing hands, this business of having to hire lawyers to fill out forms and pay filing fees every time a loan changed hands threatened to slow down the rate at which the goose could lay its golden eggs. And pesky paperwork really couldn’t be allowed to interfere with the serious business of churning out profits at the highest possible rate.

So the geniuses who brought us the financial global near-meltdown imperiously decided that local property laws which govern the recording of ownership of mortgage loans simply didn’t apply to their golden goose. And thus was born Mortgage Electronic Registration Systems:

The company, known as MERS, was created more than a decade ago by the mortgage industry, including mortgage giants Fannie Mae and Freddie Mac, GMAC, and the Mortgage Bankers Association.

MERS allowed big financial firms to trade mortgages at lightning speed while largely bypassing local property laws throughout the country that required new forms and filing fees each time a loan changed hands, lawyers say.

The idea behind it was to build a centralized registry to track loans electronically as they were traded by big financial firms. Without this system, the business of creating massive securities made of thousands of mortgages would likely have never taken off.

But, guess what? In foreclosure cases, judges have a regrettable tendency to want to enforce the law. And that somehow also includes local property laws which govern the recording of ownership of mortgage loans. So judges are now increasingly refusing to accept the proposition that this centralized registry that tracks loans electronically as they are traded by big financial firms establishes a clear legal title to the underlying mortgages:

Now, as many of these loans have fallen into default and banks have sought to seize homes, judges around the country have increasingly ruled that lenders had no right to foreclose, because they lacked clear title.

These fundamental concerns over ownership extend beyond those that surfaced over the past two weeks amid reports of fraudulent loan documents and corporate “robo-signers.”

The court decisions, should they continue to spread, could call into doubt the ownership of mortgages throughout the country, raising urgent challenges for both the real estate market and the wider financial system.

For struggling homeowners trying to avoid foreclosure, it could mean an opportunity to challenge the banks they argue have been unhelpful at best and deceptive at worst. …

For big banks, “there’s a possible nightmare scenario here that no foreclosure is valid,” said Nancy Bush, a banking analyst from NAB Research. If millions of foreclosures past and present were invalidated because of the way the hurried securitization process muddied the chain of ownership, banks could face lawsuits from homeowners and from investors who bought stakes in the mortgage securities – an expensive and potentially crippling proposition.

For the fragile housing market, already clogged with foreclosure cases, it could mean gridlock and confusion for years.

At one level, this is just poetic justice. But if this is indeed going to roil the real estate market all over again, there’s going to be a lot of collateral damage to innocent bystanders. If it comes to the point that some kind of bailout becomes necessary again, let’s hope that this time it’s only the victims who are bailed out, and not just the crooks.