"Think about when you buy a new or used car: no lender requires title insurance. Why not? Because there's no doubt about the car's provenance and ownership. US homeowners, though, are required to purchase this insurance to indemnify themselves against loss if the title is defective. Every time a house changes hands, there again are the surveyors out to check the property lines for the umpteenth time so title insurance can be written.
How, then, did today's crisis unfold? Incorrectly valued mortgages became speculative financial instruments for trading, which makes it possible to drive prices up or down seemingly without limit. And, as they traded downwards, they of course took the price of real estate down with them. Meanwhile, lending banks went over, the precipice of insolvency because the liquidity on which they depend dried up, all because their asset-backed securities have little or no value or even negative value.
Remember, a mortgage is called a 'security' because it is secured with a tangible asset. But if its value isn't real, it can't really be secure. That's the starting point for a toxic mix. Throw in excess liquidity (from 2000 to 2006) and housing demand, misvaluations and subprime mortgages to an already overstretched housing and real estate market, and it begins to be deadly unstabilising. Price becomes dependent on speculation, rather than on the actual value of the home and land."