Foreclosure Moratorium: Cracking Down on Liar Liens

Monday 18 October 2010

by: Dean Baker, t r u t h o u t | Op-Ed

http://www.truth-out.org/foreclosure-moratorium-cracking-down-liar-liens64281

photo The Bank Of America Plaza in St. Louis where
"People's Settlement" protesters established a tent
city across the street. (Photo: tolkien1914)

As we all know, there is a major philosophical divide
in US politics. On the one hand, there are those who
think it is the role of government to help ensure that
the vast majority of the population can enjoy a decent
standard of living. On the other side are those who
believe the role of government is to transfer as much
money as possible to the rich and powerful. The latter
group seems to be calling the shots these days.

This is seen clearly in the "liar lien" scandal: the
flood of short-order foreclosures that ignore standard
legal procedures. The banks have been overwhelmed by
the unprecedented volume of defaulting mortgages in the
wake of the housing crash. Even under normal
circumstances, foreclosure rates that in some areas
exceed ten times normal levels would create an
administrative nightmare.

But these were not ordinary loans. The highest rates of
foreclosure are on the quick and dirty loans made at
the peak of the bubble. These loans were issued to be
sold. Almost immediately after the ink was dry, the
issuers would sell these loans off to Citigroup,
Goldman Sachs or other investment banks to turn them
into mortgage-backed securities. The investment banks
themselves were running short order operations. More
rapid securitization meant more profits.

In this process, the paper work often came as an
afterthought. As a result, necessary documents weren't
signed, title transfers weren't properly registered,
the notes tying loans to specific properties may not
have been properly filed and other paperwork errors
went uncorrected.

If the law were being followed, these issues would
create serious problems for servicers trying to
foreclose on homes where the owner had defaulted. Banks
would have to spend the necessary time, paying high
cost lawyers for their work, to reconstruct the paper
trail needed to establish clear title to the house and
the documentation that would allow them to foreclose on
a delinquent borrower.

In some cases, this may not even be possible. Many of
the issuers that dominated the nonprime mortgage market
at the peak of the bubble are no longer in business.
They probably did not make sure that all the
documentation went to the right place before they
closed their doors.

If the Wall Street banks were like the rest of us, the
policy response would be simple: follow the frigging
law. If banks want to foreclose, then they should have
to present the court with the proper documents, end of
story. Anyone who has ever bought a house or refinanced
a mortgage knows the headaches involved. Everything
must be in order, a process that can cost thousands of
dollars in fees, as a long sheaf of documents is signed
in the presence of a lawyer. This process can easily
take two hours.

The banks don't think that they should have to endure
the same expensive tedium as the rest of us. For them,
these processes are simply formalities that can be
circumvented. Hence, the "robo-signers," who are paid
to put their names to documents that they know nothing
about.

Some people have been wrongly foreclosed in this
process, precisely the sort of mistake that the
bureaucratic formalities are intended to prevent. More
frequently, homeowners have probably been assessed fees
and penalties that they do not actually owe. To the
banks, this is just another unfortunate error in the
high-speed foreclosure process.

In this context, the demand for a foreclosure
moratorium makes perfect sense to those who think that
it is the responsibility of government to protect the
majority of the population. After all, if someone has
fallen behind in paying their bills, they still have a
right to expect that the law get followed.

A foreclosure moratorium would allow regulators to
ensure that the servicers have systems in place that
guarantee that the right procedures are followed. A
moratorium on foreclosures would serve the same purpose
as the moratorium on deep-sea drilling following the BP
disaster. The alternative - that we should trust the
banks - doesn't pass the laugh test.

By contrast, those who believe that government exists
to serve the rich and powerful point out that these
procedures will raise costs for banks. In some cases,
they may not even be able to carry through a
foreclosure, since the proper documentation does not
exist.

The result could be billions of dollars in losses for
the Wall Street banks. That may not put them out of
business, but it certainly could knock a few million
dollars off the bonuses of some top executives.

So, there you have it: the question of whether the Wall
Street banks should have to follow the same rules as
the rest of us. It is one of the most central
philosophical questions underlying politics today.

_____________________________________________

Portside aims to provide material of interest
to people on the left that will help them to
interpret the world and to change it.

Submit via email: [log in to unmask]
Submit via the Web: portside.org/submit
Frequently asked questions: portside.org/faq
Subscribe: portside.org/subscribe
Unsubscribe: portside.org/unsubscribe
Account assistance: portside.org/contact
Search the archives: portside.org/archive