« Defense is to State as masculine is to feminine | Main | "One nation, under fraud" »

October 15, 2010

Comments

Hey, I'm right there with you. As far as I can tell the contract is so in dispute that no one can legally claim the property. I'm not clear why any one bank gets to seize the property by fiat just so it can kick the defaulted mortgage owner out.

That said, as an academic question, if two parties sign a contract then one party sells the contract to a third party and the third party loses the contract, who maintains the original property and what becomes of the contractual agreement?

If the Minnesota Vikings pick up Randy Moss's contract from the New England Patriots, and the Vikings throw the contract out an airplane window, to whom does Mr. Moss owe his services?

Am I wrong to assume that they *will* get away with it...?

No.

thank you.

What are the moral, legal, and social downsides to letting defaulting residents stay in possession?

None at all. Banks will continue to lend money to people who want or need to buy a home, even if the people who buy the home are free to default and retain possession. This is entirely consistent with the rule of law and so there is no reason not to let defaulting home buyers keep something they've ceased paying for.

We should have the same rule for cars and large screen TV's.


if two parties sign a contract then one party sells the contract to a third party and the third party loses the contract, who maintains the original property and what becomes of the contractual agreement?

If the third party cannot establish, in a hearing with notice to the defaulting(?) property owner who also has a right to appear, cross-examine, contest, etc, that he/she/it owns the contract, the terms of the contract and that a material breach has occurred and has not been cured, then that third party is SOL and the defaulting homeowner gets to keep the property. Which is different than just letting the defaulter retain possession against a lien holder who carries its burden of proof.

McTex, if I am understanding you correctly, what you are saying is that the third party first has to prove in court that they have standing. That is, they have to show some documentation that they have any interest at all in the property. If not, the case gets tossed.

But if it does get tossed, I wonder whether the party that sold the contract could then step back in and claim an interest. (You're a lawyer IIRC, and I'm not, so I'm asking.) Assuming that they still have copies of the original paperwork, would that be sufficient to show a legal interest in the property in question? I can't say I like the prospect of someone selling a mortgage, and then getting to come back later and own it just because someone else lost the sales paperwork. But would it be legal?

Thanks

what you are saying is that the third party first has to prove in court that they have standing. That is, they have to show some documentation that they have any interest at all in the property. If not, the case gets tossed.

"Standing" is a related concept but not applicable here. The third party must show that he/she/it is a good faith holder of the original note and security instrument. The original secured lender, having sold his/her/its interest in the property retains no latent interest. The defaulter wins. Even if the third party later finds the note, if the first foreclosure action ended in a judgment against the third party note holder, the third party is barred by res judicata from having a second bite at the apple. Further, the note could not be sold to yet another person and revive the rights litigated in the initial foreclosure action. The note became worthless when the case was lost.

Yes, I am a lawyer.

So, McKinney, the moral of this story is (assuming no one rewrites what I gather is a century or two of property laws)

There's a reason for all that legal paperwork, and you should do it even if it is "too slow"?

My general feel on this is -- I don't care about the relative few people who get free houses, or suddenly don't have a mortgage or -- in at least half the states -- get their home loan turned into a really nice signature loan. It's not going to be that many people, all told.

I suppose I can yank out the term 'moral hazard'. Letting the 'deadbeats' get the free house doesn't generate much -- it is a unique confluence of events, caused by wide-spread fraud (or at least massive and horrible negligence. I'm voting fraud, since I know they were aware of the requirements for proper registration and paperwork whenever the note changed hands) -- and unlikely to ever repeat in our lifetimes. Should they, like fools, decide they can then purchase, not pay for, and keep other big ticket items they will be quickly disabused of the notion.

However, if we rewrite property law, or go for a 'do-over' for the banks, or hand-waive it away, or otherwise let the large banks and mortgage companies get away with ignoring the law when it doesn't suit them -- that seems a MUCH more potent moral hazard.

"Too big to fail" apparently means "Too big to have to obey the law". That seems the sort of thing you'd want to try again, because while the odds are low for a homeowner to have his mortgage get so screwed up by others that he ends up with a free house -- the odds seem pretty darn high that a large corporation, having made untold billions flouting the law and then had the law changed to protect them from the consequences, will happily do so again.

For someone to prove real property ownership, one has to hold title. Because property ownership is so important in our country, passing title is subject to extremely exacting rules. When property is mortgaged, depending on the state's law, the owner either keeps title to the property, but the lender has a lien, or the lender actually takes title to the property.

If the state is a "lien theory state" and the lien paperwork is lost, then the owner has title to the property, and nobody can enforce the lien. If the state is a title theory state, establishing title might be a problem - I imagine the land records would be conclusive most of the time as to who holds title, unless the paperwork that's been recorded is proved to be fraudulent. I'm sure that a lot of mortgage transfers weren't recorded in the land records. The fact that there are known claimants, and lost paperwork makes anyone's claim to title very uncertain - which, since it is happening on a large scale, could (probably will - that's what's so newsworthy about this particular fraud, as opposed to all of the other bank fraud that seems to have gone on) create huge instability in our entire system of private property.

It will be interesting how this all shakes out. Our system is considered uniquely stable because of the legal details we insist on before title passed and recognized. Real property isn't the same as cars or large screen tv's, because although it is used as collateral for loans, it is considered to be something of eternal value. There are people way in the future that could be (theoretically) affected by things that happened way back in the past.


Morat--I may be missing your point. If the lienholder loses his/her/its paper and can't, through established rules of law, prove the terms of the documents, then the lienholder is out of luck. It's not moral hazard, it's dumba** lienholder.

I'm sure that a lot of mortgage transfers weren't recorded in the land records.

That would be really dumb if they failed to record, which is why, with a reasonable amount of diligence, a lienholder should be able to effect a legal, appropriate foreclosure. The mortgage (in Texas they are called Deeds of Trust) usually recites the material terms of the note and the terms of default. That plus a confirmation from the original holder that the note was purchased by the current holder plus proof of default should be sufficient to achieve a legal, appropriate, fraud-free foreclosure.

Failing to record a mortgage, in Texas and I suspect elsewhere, has the effect of allowing other lenders or creditors to lend against or foreclose on real property and extinguish the original holder's and all subsequent holders' security interests. The note remains valid, but there's no property to foreclose on. It's stupid not to record and recording is usually done at the time of closing by the Title Company.

McKinneyTexas:

It's my understanding that the "recording" part of the mortgage process was being handled electronically by MERS, and that's a large part of the problem. They tried to cut out the time-consuming "go to the county courthouse and change the record" step, and ended up cutting out the "prove who has a legal lien on the property" step.

Oops.

I actually appreciate that there is a downside to simply not foreclosing on anyone who has failed to keep up with their mortgage. It might be unclear whose house it is, but it actually isn't the occupants quite yet, either.

Assuming that we're talking about folks who are, in fact, behind on their mortgage, or even have a mortgage at all.

That said, here are some other issues that come into play.

In a context where we are likely to see hundreds of thousands or millions of defaults, I'm not sure a bank policy of "you're late, you're out" and a "stay out of it" public policy is actually that great of an idea.

It might appeal to folks who feel strongly that government should never meddle in private contracts, but the actual downstream consequences are likely to be pretty crappy. For everyone.

Another issue to consider is *who is bringing the foreclosure*. If it's the service company, their incentives may not really align with those of whoever it is that actually holds the note. I'm not completely clear on all of the details, but my understanding is that there are incentives for the service companies to foreclose, even if that's not really in the best interest of either the homeowner or the folks holding the paper.

Also regarding the service companies, it appears that they are frequently charging fees and penalties that *are not specified* in the original note. So, in addition to the question of who owns the note, it's not always clear what the penalties are actually supposed to be if the homeowner falls behind.

You don't get a free house if the lender loses the paperwork, so you shouldn't get whacked with stuff you didn't sign off on if the lender loses the paperwork.

To me, something like a short-term foreclosure holiday makes sense. 30 days, 60 days, 90 days. Give the various parties some small amount of breathing room to get their houses in order. For the duration of the holiday, the occupants should stay in the house.

Right now what we have is a lot of people running around and nobody has a freaking clue about what's going on.

Time for a time-out.

That would be really dumb if they failed to record, which is why, with a reasonable amount of diligence, a lienholder should be able to effect a legal, appropriate foreclosure.

That is the source of the problem. The banks and investment firms were so interested in slicing and dicing these MBSs that they decided to skip the whole recording process altogether. Many (most? who knows?) of the loan transfers that occurred since 2000 were never recorded at all, except in MERS' electronic database, and for a lot of those, the original notes appear to have been destroyed lost.

In an instance where the courts cannot discern who actually is the lienholder of record, because there is no record, why are we punishing the borrower again?

In England in 1381 it was the peasants destroying tax and rent records. Now it's the lords.

Oops.

Sounds like a job for a hungry, contingent fee lawyer. Dial 1-800-McKTexas!

Time for a time-out.

To me, it makes practical sense for banks to work with borrowers to rehabilitate their security and not loose a ton of money. That's the practical view. Absent legislation, I don't know how the feds could suspend foreclosures. As for fees not included in the notes, I agree. And foreclosing because a fee wasn't paid, as opposed to the note and escrow payments (if any), probably wouldn't pass muster. However, an unsuccessful foreclosure for that reason wouldn't void the note and the mortgage.

In an instance where the courts cannot discern who actually is the lienholder of record, because there is no record, why are we punishing the borrower again?

So that we are on the same page, if there is no document showing that X holds the note and the mortgage and if X can't produce the note and the mortgage, there is nothing for X to foreclose on. Or, at least there shouldn't be.

It might be unclear whose house it is, but it actually isn't the occupants quite yet, either.

Actually, again depending on the state, it is the occupant's "equitable title" and nobody knows or can prove legal title. Equitable title includes the right to enjoy the land. This isn't given up until a proper foreclosure occurs.

Property law is complicated, and that's why things used to be done so carefully. Rule of law!

Actually, again depending on the state, it is the occupant's "equitable title" and nobody knows or can prove legal title. Equitable title includes the right to enjoy the land.

Good to know this. All the more reason for the homeowner to stay put until the smoke clears.

May I point out that having or not having the original note is not a loser for the banks. Of course, the usual solution is an affidavit of lost note (I've signed a few over the years) and it's definitely not clear that the banks in question have anyone who can actually sign.
Taking the anti-banker pose is popular but why should the entire burden be on the bank as long as there is some paperwork indicating a loan. Why not depose the home(owner? sitter? squatter?) and see if he borrowed the money? S/He can make the payments (or not) to a trust and or sale proceeds can go to a trust for distribution later once the paperwork is sorted out?
It's natural to assume that each of these situations is a "home" with a wife and a dog and a cat but Florida, Nevada, California and Arizona were pretty well saturated with houses bought by speculators as well as second home owners. Shall we give them a house for free, too?

It's natural to assume that each of these situations is a "home" with a wife and a dog and a cat but Florida, Nevada, California and Arizona were pretty well saturated with houses bought by speculators as well as second home owners. Shall we give them a house for free, too?

I strongly suspect that the banks are not foreclosing on empty houses that speculators own because the fact that someone is living in a house means that it is probably worth more than an empty house in an empty neighborhood where 90% of the houses were bought by speculators. As far as they being second homes out there, I'd be interested to know what percentage of these homes are actually second homes where the family heads off for the vacation.

What I find fascinating is a passing comment over on one of the Economist's blogs (sorry, don't recall right off which one). The basic import is that, if the bank or whoever created the security messed up the paperwork (as seems to have happened in at least some cases), that company must buy back the security.

Having a little money in a mutual fund which invested in such securities, that sounds almost too good to be true. But the justice of the idea appeals, even absent my personal financial interest.

Tom M: "why should the entire burden be on the bank as long as there is some paperwork indicating a loan."

The entire burden should be on the person who has (according the rule of law) the burden of proof. Let the courts decide these matters according to the tenets of property law in their state without regard to the banks' hand-wringing that if they don't prevail in their massive screw-ups, the world will come to an end.

There were certain legal procedures required. They existed for a reason. Let them be enforced. If the banks (who had every possible resource) "screwed up", let them suffer the effects.

Instead of insisting that everyone you don't like adhere to the "rule of law," how about everyone do it?

It's natural to assume that each of these situations is a "home" with a wife and a dog and a cat but Florida, Nevada, California and Arizona were pretty well saturated with houses bought by speculators as well as second home owners.

Can't speak to the second home situation specifically. But folks are, frex, getting locked out of places they are renting.

And there are more parties involved than just "the bank" and the person living in the house.

There is the mortgage originator, there are the folks who assembled the notes into securities, there are the folks who hold the securities, and there are the companies that are servicing the loan.

Responsibility for screwups can fall on any or all parties.

I have no problem with expecting people who signed up for a mortgage to make their payments. I'm not sure it would be a good idea to just press the big reset button and give anyone living in a home title free and clear.

But it makes sense to me to not be making people move out of the place where they live until the folks who claim to own it can demonstrate that they, in fact, do own it.

If the note is just a formality, they can present that argument to the judge.

are not foreclosing on empty houses
Oh, yes they are. It's not clear how many in every market but I spent 18 months in Las Vegas working out bank loans to homebuilders. I talked regularly with guys doing the same for other banks (and the FDIC when the banks in Vegas went under) and there were plenty of see-throughs. Might have been 30% might have been 60% but a lot of what the banks held as well as held off the market were empty.
Phoenix and environs were very similar.

Sapient, I was questioning the idea of something for nothing for speculators or vacation homes. The sub-prime mortgage process was a shambles and I spent a long time working for a bank that avoided all the sub-prime deals so I support the principle of the rule of law. Don't confuse a question with a belief.

Tom M: I don't believe in something for nothing or punishing random parties. I do believe that the law should be applied as strictly as if a homeowner, who sold his house to another party, lent money to the buyer and took back a private mortgage. Then assigned it, or sold it or whatever. There shouldn't be some "Oh my God" response to protect banks who may have screwed up on a large scale. Those banks need to be as procedurally responsible as anyone else. People foreclosing need to prove their right to foreclose.

Looks like 3 links hung my comment up in spam. The links pointed three different manifestations of the foreclosure crisis, one in the West, another in urban areas and a third in more populated places like Florida where speculators were driving the foreclosure process ahead to secure cheap land. This is why I don't think a one size fits all solution is going to work.

Several observations,

1. L. Randal Wray is a proponent of modern monetary theory, and writes a lot of good stuff. Check out this blog: New Deal 2.0.
2. Some here express shock that undeserving homeowners will "get a house for free". Well, think of it as a lottery....there are winners. And really, we bailed out the reckless banker class, why should they be the only ones to receive social largess in times of crisis?
3. Yves Smith at Naked Capitalism has had a lot of commentary on precisely this aspect of the unwinding of the housing crisis for some time.
4. The real crisis for the banks is the threat that investors who bought that sliced and diced securitized dreck will now have legal means to make the investment bankers take that shit back. This would totally bust the large banks. This is the real threat and the prime reason for banks calling a temporary halt to the foreclosure circus.

One size fits all is highly unlikely to work. I my limited understanding the title process is specific to each state with some broad similarity but no uniform law. I understand there are 23 judicial process states and the rest are generally non-judicial processes with some exceptions.

This is going to take some time to work out.

To address this original point -

"(...)why is it that though people can't agree which faction of the rich and powerful is most to blame, there seems to be a consensus that regular people -- who are actually living on the disputed properties -- *must* be punished. And yet, no-one who puts most of the blame on bankers, regulators, speculators, etc., seems to have any rational expectation that any of these rich/powerful people will be punished in any real way."

(sorry. I don't seem to be able to do italics right now)

It might have something to do with the fact that the crafting of such rules are falling increasingly into the hands of the rich and powerful, coupled with the notion we've gotten larded with over the last 30 years or so that holds that rich people are smart and clever to have gotten their largess, and that anyone who isn't rich therefore isn't smart and deserves to get the shaft.

A lot of people have internalized this as well, with some reflexively blaming themselves and looking everywhere but up over this. Thanks as well to the fact that the rules have been written anymore by those responsible for the mess, it's easy to see why no-one expects them to do anything other than get away with it. And to make things worse, given how byzantine the contract aspect of this mess is, even more so as it may differ between states, it's no wonder the anger is confused and conflating: those who created the mechanisms appear to be able to change them willy-nilly while the most vulnerable get dumped with the consequences.

This might also be a consequence of a society where consumption, not production, is the defining driver. The subprime regime made it too easy to enter into these arrangements, with no foresight into the financial corruption underpinning the regime, or insight by the buyers that given the way things were written, this would all fall on them when the shit hit the fan.

Shorter http://obsidianwings.blogs.com/obsidian_wings/2010/10/should-possession-be-nine-points-of-the-law.html?cid=6a00d834515c2369e20134883b2c92970c#comment-6a00d834515c2369e20134883b2c92970c>sekaijin:

It’s the same the whole world over,
It’s the poor wot gets the blame,
It’s the rich wot gets the gravy.
Ain’t it all a bleedin’ shame?

I have a question:

If nobody can figure out who has the right to take my house if I default, how the hell can anybody figure out who has the power to restore my title free and clear if I pay it off?

Would I need to hire McKinney, AFTER paying off my mortgage, to sue "the bank" for title because they kept such lousy records that they can't find it?

--TP

The original secured lender, having sold his/her/its interest in the property retains no latent interest. The defaulter wins.

The defaulter may very well win, but if this re-tanks the banks, then we're going to bail them out again. And so someone will "get away with it." The actual foreclosures are kind of beside the point. Who gives a shit if a defaulted borrower gets to stay in a place due to a paperwork fraud (thoug, yes, it'd probably be better overall if more of them did than otherwise as a result of this, which is likely), or if he gets tossed. He deserves to get tossed if he's in default, but also deserves due process. If a technicality pusuant to due process gets him out of a foreclosure he in fact deserves on his economic condition, well hallefuckinlja. It's a moral wash.

It's dumb to try to make the question of whether we end up needing to bail out the banks again about morality play or someone getting away with something. It's just a question of whether it's in our interest from a collective perspective.

To my mind, it's quite simple: the banks are in the business of making home loans - so they should know what they're doing. If they suffer losses by negligently failing to follow the rules, too bad for them.

Case in point: someone in the Santa Cruz area recently paid cash for a house at a foreclosure auction. Unfortunately, the foreclosure was on the second mortgage - which was junior to the first mortgage. The holder of the first mortgage then foreclosed, and the buyer took a big loss. (Source: Boulder Creek family bought worthless second mortgage from Wells Fargo at foreclosure auction

The banks shouldn't be allowed to have it both ways - if a consumer can be stuck with a big loss because they didn't follow (or know) the rules, banks should also be held to that standard. If the banks chose not to implement good business practices, then they should pay the price.

May I point out that having or not having the original note is not a loser for the banks. Of course, the usual solution is an affidavit of lost note (I've signed a few over the years) and it's definitely not clear that the banks in question have anyone who can actually sign.
Taking the anti-banker pose is popular but why should the entire burden be on the bank as long as there is some paperwork indicating a loan.

I have a big problem with anyone coming into court with an affidavit (very hard to cross examine a piece of paper) claiming to be the holder of a note that can't be produced. Sure, you can depose a homeowner in default who can admit being in default, but how does that establish the bank's right, in the absence of producing the note, to kick the homeowner out? What if the bank is mistaken as to its ownership of the mortgage on the home and in fact has no right to foreclose? If someone buys a car and stupidly fails to get the title, not because of fraud by the seller, just out of administrative sloppiness, then tough s**t, that's bad business and gov't has no business, none at all, rescuing dumba**ses from their own stupidity.

Those banks need to be as procedurally responsible as anyone else. People foreclosing need to prove their right to foreclose.

Exactly. And for anyone to claim a need for expedited, i.e. screw due process, evidence, etc, means of protecting their interests because they haven't taken the time to competently maintain their own affairs is the polar opposite of the rule of law. In fact, why shouldn't a homeowner files his/her own lawsuit for the service company to show that it is, in fact, authorized to collect and disburse payments to the note holder? Doesn't the homeowner have a right to know that he/she is, in fact, paying the correct entity and not some scam bank account in the Caymans?

If nobody can figure out who has the right to take my house if I default, how the hell can anybody figure out who has the power to restore my title free and clear if I pay it off?

Would I need to hire McKinney, AFTER paying off my mortgage, to sue "the bank" for title because they kept such lousy records that they can't find it?

Just the point I was making above. How do you know you are paying the right entity?

The defaulter may very well win, but if this re-tanks the banks, then we're going to bail them out again. And so someone will "get away with it."

* * *

It's dumb to try to make the question of whether we end up needing to bail out the banks again about morality play or someone getting away with something. It's just a question of whether it's in our interest from a collective perspective.

Dispensing with due process because it's in our collective interest? If the banks fail again because they've compounded their stupidity by not even being able to track what they own and what they don't, then maybe it's better that they fail we be done with them.

A defaulting homeowner has no right of possession against the true mortgage holder. Fail to pay and lose your home, that's the law. Unfortunate, sad, etc. but that's the deal they made and they're stuck with it. Likewise, the mortgage holder is equally bound by the same rules and can't avoid the consequences of its failure to manage its affairs. Either establish in strict accordance with the rule of contract law your right to foreclose or lose your case.

"if the banks fail again because they have compounded their stupidity by not even being able to track what they own and what they don't, then maybe it's better that they fail (and) we be done them."

I'm increasingly persuaded by this argument, but it's mostly a morbid curiosity about what the first few hours and days of financial Armageddon (I assume unmitigated and unmediated by the dreadful government, with the exception of perhaps martial law) might look like.

Plus, I have a rather perverted jones on to capture the look on the Tea Partiers faces when their fondest dreams come true (a TARP-less world, chaos, government failing, Wall Streeters bodies hitting the pavement at a high unregulated, free-market velocity, their foreclosed neighbors eating the paperboy for Last Supper, Glenn Beck being hacked to death with machetes by his now homeless, starving followers who find out gold can't be eaten, etc).

Maybe, the word "maybe" is the most important word in the McKinney sentence above.

My sentence that starts with "maybe" runs (on) as follows:

Maybe, banks the world over, mortgage companies, any number of money market market mutual funds, bond funds, mortgage funds, should be bailed out again by the Government, because there is no choice, but this time, any number of quants, bonus babies, a good many professional investment bank managers/former Treasury Secretaries, the current bunch of low-level mortgage approvers, some hedge-fund types, a realtor or two, lots of other dreck, and of course a bi-partisan selection of political types (I'll round up Phil Gramm, Sharron Angle, Frank Luntz and every right-wing talk show effer in America for a start; bring an equal number of Democratic scapegoats of your own choosing), and they will be shot.

Then have the top dour bank regulator announce that should anyone in the banking "community" f*ck the world again like they just did, the same thing will happen to them.


I'm curious as to how much is known about these mortgages. Specifically, suppose we know the original amount of the mortgage, and the amount which was paid off before the default, though we can't locate the note holder. (Maybe this is not often the case - I don't know.)

Then why not do the following:

1. Nullify the terms of the original note.

2. Have the Federal government refinance the balance at some sensible market rate. Actually, this would just mean the homeowner makes payments to the government. No outlay is needed.

3. Permit the actual noteholder to take over the government's position if and when it gets its paperwork sorted out and can show that it is in, in fact, the correct mortgage holder. The holder would receive all payments the government had collected, (perhaps paying some fees to cover the govt's costs) and be allowed to take over as the recipient of future payments, but at the new rate.

This seems to me to avoid random bonanzas, to keep those who can afford reasonable mortgages in their homes, and to penalize the lenders without simply expropriating them.

BY--that's pretty damn smart.

Bernard, that's the most sensible proposal I have seen on the topic. Unfortunately, I just can't see it happening, for one simple reason: having the government involved would require Congress to pass legislation on the topic. Can't see it getting thru the Senate in the current Congress. And it seems even more unlikely in the next one. After all, government involvement is, by definition, socialism! and therefore must be rejected.

Thanks, McKinney.

You too, wj.

I don't know about the possibility of passing any legislation. If the problem starts to look like the worst-case scenarios then something will need to be done.

I hope the culprits are dealt with substantially more harshly than the last time around.

Others have suggested this -- and it is on-topic -- but all of you must read "The Big Short" by Michael Lewis -- I just read the first chapter -- to get a load of Steve Eisman, former Reagan Republican who learned first-hand on Wall Street how the banks, investment banks, consumer finance companies, mortgage financiers, etc made it their deliberate purpose to absolutely f*ck the poor and the middle class -- and f#ck them they did --- without even really understanding the arcane, esoteric financial instruments by which they were f#cking them ........ us.

--- a little googling of Eisman shows him now shorting the for-profit colleges -- they began tanking late last week .... for the same reason.

A guy like Eisman needs to speak in front of a few Tea Party functions and tell the truth about how Wall Street and the Republican Party (yes, some Democrats, too) are just f#cking everyone in the name of the so-called free market and financial innovation.

I suspect the result would be Tea Party on Wall Street/Republican Party violence 1000 times worse than 9/11 ..

.. but luckily for civil order ... we are in the grip of truly base ignoramuses in the Tea Party.

Carry on, America.

None at all. Banks will continue to lend money to people who want or need to buy a home, even if the people who buy the home are free to default and retain possession. This is entirely consistent with the rule of law and so there is no reason not to let defaulting home buyers keep something they've ceased paying for.

We should have the same rule for cars and large screen TV's.

Let me see if I have this right.

If one person has forfeited their right to the property (by not making payments on the mortgage) you think it's okay to give the property to someone else who has no right to it? You it's consistent with the rule of law to say "you don't deserve it, so we're giving it to someone else who doesn't deserve it either"?

I am in a position to say that in some cases at least, lenders *are* foreclosing on houses still owned by the builders, or by speculators. In my employment as a process server, I post the notices on these houses, and in my employment as a foreclosure auctioneer, I sell them. Most often lately, though, no one shows up to buy, so the lender has to take them back. I can't be sure, but I think foreclosures are slowing down as lenders realize that if that happens, they own the house (not something they really want), and the former owner, having moved away, is no longer obliged to send them payments. Owners, otoh, are realizing that no longer having to send payments can be a good thing, and can also mean not having to leave the house in a ready-to-sell condition.

The Big Short is indeed must reading, but be aware that it is a highly shaped narrative. It is not a birds eye view of the crisis. Michael Lewis himself said in some interviews that he wanted to treat the reader to a detective tale, following his protagonists as they unraveled the mysterious financial instruments that the big investment firms were peddling.

But other things were going on, too. For instance, there is just a bare mention of David X. Li, the Chinese mathematician who devised the formula which Wall Street misused to fool themselves about the worth of the credit derivatives they traded in. The story of his Gaussian copula is a tale in itself.

Also, since this is an anti-Wall Street morality tale, there is no discussion or even admission of Fannie Mae and Freddie Mac's roles in causing and prolonging the crisis. Just a brief comment about how both entities were swept up by the whirlwind.

Unfortunately, I just can't see it happening, for one simple reason: having the government involved would require Congress to pass legislation on the topic.

Well, there's another problem, and that is the real property law is a matter under state, not federal jurisdiction, and the Contract Clause of the U S Constitution wouldn't allow the state governments to mess with contracts. Although the Federal government has jurisdiction of bankruptcy, the solution proposed doesn't fit within the bankruptcy structure very neatly.

Sanity Inspector:

Good point. I'll look into what Eisman has to say elsewhere about Freddie and Fannie. Any suggestions on reading about their roles in the debacle?

Also, what do you suggest for deeper reading about David X. Li?

Between now and the elections, as a primer for what's coming, I'll be perusing Glenn Beck's reading list (Robert Welch, various anti-Semitic lunatics, etc), Richard Hofstadter's "Anti-Intellectualism in American Life", garnished with as many zombie movies I can Netflix between now and then.

Have a good evening.

There were some fairly in-depth pieces on Li in the financial slickzines over the past couple of years. Browse here: http://tinyurl.com/25jud9b

It's hard to find non-partisan treatments of Fannie & Freddie's role; the longest one I saw was a tirade in the WSJ. So caveat lector.

And it bears repeating: the short sellers who got rich off of the crash did not cause it. They took the time to discover that the contents of those repackaged mortgages were dodgy, and they had the steady nerves to keep betting against the bubble--i.e., public opinion--for years.

It's true that many of the people who did cause the crash also got rich, but that was because of their golden parachutes--standard equipment for their type. Up at that level of the economic food chain, you don't get what you deserve. You get what you negotiate.

If one person has forfeited their right to the property (by not making payments on the mortgage) you think it's okay to give the property to someone else who has no right to it? You it's consistent with the rule of law to say "you don't deserve it, so we're giving it to someone else who doesn't deserve it either"?

That was supposed to be a clever sally at Dr. S's proposal to let defaulters keep their property. As is often the case, "he shoots, he misses, no one notices."

Up at that level of the economic food chain, you don't get what you deserve. You get what you negotiate.

I thought the basic premise of The Free Market is that "you get what you negotiate" at ANY level of the "economic food chain".

Nobody "deserves" anything, in The Economy. Not housing, not medical care, not lunch. We can decide, as decent human beings, that people who work hard deserve a modicum of respect and security. But that's not an "economic" decision -- even though respect and security are largely purchased with money. It can only be a political decision. And it needs to be a political decision because The Free Market doesn't know from "deserve".

--TP

That was supposed to be a clever sally at Dr. S's proposal to let defaulters keep their property. As is often the case, "he shoots, he misses, no one notices."

And yet...he's correct. The actual problem isn't "oh, someone didn't sign the paperwork correctly". This isn't a technical flaw with the legal paperwork. This was multiple transfers of the note without accompanying paperwork.

Only the noteholder can bring a foreclosure action and seize the house. However, because the process was flawed, the law and common procedure not followed, and the note transferred so many times -- determing who is the actual, legal noteholder is going to be time-consuming and I suspect at times impossible (mostly the former).

However, foreclosures are being brought NOW by people who haven't shown they're the legal note-holder. Not as in "theoretically" but as in "it's actually happened".

Whatever you may think of deadbeats, debtors, the little man, homeowners, or people in general -- you should be aghast at the notion that someone can seize property they are not legally entitled to!

And to be blunt, the common 'argument' against the foreclosures -- that the homeowners didn't pay, so they should lose their house -- is born of either ignorance or malice.

Ignorance, if they are unaware that the problem isn't foreclosed houses -- but houses effectively being stolen, because someone other than the legal note-holder took it (or, in other cases, houses foreclosed upon incorrectly).

Malice, if they're aware of this but don't care.

Frankly, I'd expect libertarians and conservatives to be screaming down the rafters over this. Why the liberals are having to do the heavy lifting is beyond me. Isn't property ownership and rule of law one of the bedrocks of capitalism? How can you call yourself 'conservative' or 'libertarian' and be unconcerned with property theft under color of law?

To ENCOURAGE it under the auspices that the most obvious victims (the former homeowners) deserved it, and simply ignore the other victim (the person, company, coporation or whatever) whose actually OWNED that property that someone else foreclosed on.

And yet...he's correct.

She (or, ze, if one wants to be all 1337 and drop neologistic gender-neutral pronouns).

IMO,

"BANK ERROR IN YOUR FAVOR. COLLECT $200."

There is moral hazard all over the place here. For instance, if the banks (or 3rd party vendors) who just couldn't be arsed to keep the paperwork straight are allowed to do some end-around to "fix" the situation, I see THAT as a moral hazard. There should be some consequences.

I like Bernard's proposal above. I like it b/c it doesn't screw either party *and* it might re-introduce some stability & faith in the system. The last thing we need right now is another banking crisis.

Sapient,

the real property law is a matter under state, not federal jurisdiction,

I see. But how does that interact with the federal government's right to regulate all the mortgages and other financial instruments (some of them seriously out of tune) involved here?

Bernard, the Federal government has the authority to regulate banks. Fannie Mae is a federally created institution which deals with mortgage securities - the secondary mortgage market. Most mortgage loans are written to comply with federal regulations in addition to state laws (uniform commercial code provisions and real property recording requirements, etc.) so that they can be bought and sold in the secondary mortgage market.

That doesn't mean that the federal government can nullify promissory notes (taking property without due process). Someone owns the right to be paid. Someone owns an interest in the real estate under state laws. Somebody has a right to the land, other than the current occupant. These matters are determined by state law, and there are due process issues with interfering with people's property rights.

I'm not saying that nothing can be done by the federal goverment, but whatever is attempted will face some serious constitutional hurdles.

Seems to me that if the original note is lost and nobody can prove ownership, you end up with a "lost property" question. It's clear from record title that the homeowner doesn't own legal title. So letting the homeowner have a windfall without paying isn't an option to me. You can look to past payments to prove some of the terms of the note (interest, term). If who owns the note is the question, let the state claim it under lost property and let claimants make their case. Of course, those statutes don't come into play for three years or so. That would give the homeowner a huge reprieve. But if the banks can't prove ownership in the regular way, maybe that's where it ends up.

bc, so if nobody is able to prove ownership - then the mortgage escheats to the state and the state owns the right to foreclose? Then there will be massive foreclosures by the state, reclaiming property as public land? Maybe the state can then declare the foreclosed property to be public housing for the ousted homeowners!

It's clear from record title that the homeowner doesn't own legal title. So letting the homeowner have a windfall without paying isn't an option to me.

Actually, that varies from state to state. I believe half the states a 'mortgage' is closer to a securitized loan, wherein the homeowner is the sole title-holder but uses the house to secure the loan.

In which case, the homeowner DOES have legal title. What has been lost is the lender's legal documents allowing them to seize said property for failure to pay.

I think the other half of the states have a lien built into the original note, but I don't think even then that the bank retains title.

Home loans are not like normal securitized loans. Losing -- or clouding through fraud -- the note will effectively turn a "home loan" into a "signature loan" under the law. It's the note that specifies what, if any, collateral (the house) is underpinning the loan.

In which case, having the state -- or anyone -- seize your home without the proper paperwork is plain and simple theft, whether you've paid your mortgage or not.

That was supposed to be a clever sally at Dr. S's proposal to let defaulters keep their property. As is often the case, "he shoots, he misses, no one notices."

Right. I know what it was supposed to be. But my point is, if the bank made the loan and didn't follow the proper legal procedures to keep clear right to the title in the event of default, they don't have any more right to the property than the buyer does. Taking it from the buyer, and giving it to the correct claimant is appropriate - but first, you need to find that claimant, and that claimant has to make the claim.

If there is no possible claimant, then I do think that a resident buyer should be able to retain possession, unless/until someone comes up with a better idea.

I don't agree that there's any moral hazard attached to the buyer ending up with a windfall when there's no valid claimant. This isn't a case where the buyer did something wrong; it's a case where the banks did something wrong: failing to keep proper records.

Now, in cases where there is a clear claim, sure, foreclose away.

LHW--the thrust of my comments is that no note holder who cannot establish its right to foreclose should be allowed to do so. Which is not the same as saying that the defaulting homeowner gets a windfall by acquiring outright ownership of the home. Rather, the defaulter retains possession subject to a note holder proving a legal interest. Property ownership remains in limbo. Bernard Yomtov has the solution and it's not nearly as impractical as some say. I could outline a piece of legislation pretty easily. But if you think I'm in favor of letting someone foreclose on property without making all of the traditionally required proof, you haven't read any of my subsequent comments.

...letting the homeowner have a windfall without paying isn't an option to me.
I have two comments on this attitude. First, any effort to prevent homeowners from obtaining "windfalls" at the expense of incompetent investors involves changing the legislation governing a contract retroactively, which would almost certainly conflict with Article I.9 of the US constitution:
No Bill of Attainder or ex post facto Law shall be passed.
Secondly, I see no significant public policy imperative for government to intervene to prevent "homeowners" from benefiting from the bank's errors or incompetence.

I suggest that simply applying the law in place in each jurisdiction should suffice.

John Spragge--contracts are reformed retroactively all the time and have been for centuries under the common law.

John Spragge:

Perhaps I wasn't clear. I'm NOT in favor of some effort to wipe out debt to the bank (without even going to the issue of constitutionality). I'm also not in favor of legislation giving banks a break. I think we're on the same page. Let the law apply and see what happens. My 2 cents was that if the banks cannot prove, either the homeowner brings a quiet title action or the interest goes to the state as lost property, something like that.

FWIW, Bernard's proposal is essentially the lost property issue moved up in time. I like it. It takes the uncertainty out of the equation.

John Spragge--contracts are reformed retroactively all the time and have been for centuries under the common law.

I'm pretty sure that while contracts have been reformed retroactively, no one has yet tried to retroactively alter a long-standing, 50-state, two-century long approach to property law solely to prevent rampant lawbreakers from losing their investments.

The paperwork requirements were not onerous, nor overly technicaly, nor damaging to anyone. While complicated, so is the process of selling real estate, and yet it is not so complicated that it hasn't worked smoothly for a century or two.

I'm not sure what sort of damage would occur from simply changing the law to retroactively make the whole MERS snafu legal, but I'm going to go out on a limb and say "it's a bad idea to making sweeping changes to bedrock property law to keep lawbreakers from paying for their own deliberate bad choices".

I won't say "mistake". Mistake implies error, and you don't have an entire industry taking the laws they'd obeyed for decades, and start ignoring them from 2005 onwards by "mistake".

I don't see any problem with the actual homeowner retaining posession if clear ownership of the note cannot be determined. First and foremost, because if a clear note holder can't be determined, odds are SOMEONE is getting a house they don't technically have a right to. Not only does the homeowner currently have possesion, but the mistakes that led to the problem were on the banks side -- not the homeowners.

Or, if you prefer -- it seems self-evident that the moral hazard problem is entirely worse if you allow corporations to retain title, rather than individuals.

McKinney - "contracts are reformed retroactively all the time and have been for centuries under the common law."

What Morat20 just said, but also, contracts are reformed when there are two parties with "privity to the contract" before the court. That's the whole issue, isn't it?

oops - sorry McKinney - that was John Spragge, not you!

Oh, no. Totally confused. Wish we could delete previously posted comments!

Still, my 8:10 p.m. comment stands that in order for a court to reform a contract, the party seeking to have the contract reformed has to have privity of contract. In other words, the party has to prove that he or she is a party or successor in interest to the contract. The issues here seem to be that "privity" can't be established, because documents are nonexistent.

McKinney, if you can draft a legislative fix along the lines of what Bernard Yomtov has suggested, what would it look like? I don't think it's as easy as you say.

oops - sorry McKinney - that was John Spragge, not you!

I think it was me. My only point is that ex post facto etc doesn't impair the ability of the law to change the terms of a contract, or even to void them, e.g. a contract for the delivery of distilled spirits became void as against public policy and due to illegality of object when prohibition became the law. It was a technical point.

McKinney: I understand that the provisions against ex post facto legislation do not prohibit any and all legislation that might change the terms of a contract. I have some reservations about the constitutionality of a measure passed strictly to prevent homeowners from receiving so-called windfalls due to bank errors. Even more, I consider such measures highly unwise, and to the extent that they reflect an attitude that certain people do not "deserve" to profit, I also consider them mean-spirited and unworthy. Let the laws apply, including the laws on mortgage fraud.

The comments to this entry are closed.

Blog powered by Typepad