‘Puter’s written on populism and the housing/financial/consumer confidence crisis for over a year now. ‘Puter’s been critical of both the Bush Administration and the Obama Administration for creating, mishandling and exacerbating the crisis through government intervention. Today, a new low is reached.
President Obama vetoed (pocket veto, natch) a relatively simple bill related to interstate recognition of notarization of documents. The bill is intended to smooth interstate recognition and authentication of legal documents, such as mortgages and affidavits. Relatively uncontroversial, as ‘Puter mentioned. However, the bill got caught up in the current furor over foreclosure documentation problems. Bear with ‘Puter as he walks through (1) the cause of the foreclosure documentation problem and (2) the stupidity of populist cries for a foreclosure moratorium.
Like most causes of the crisis, American have Wall Street to thank for the foreclosure documentation issue. Simply put, foreclosing entities such as banks and investment trusts are having difficulty proving ownership of the mortgage to be foreclosed and the underlying promissory note.
Proving ownership of a note and mortgage should be simple. In the olden days, way back in the 1980s, it was unusual for mortgages to change hands with any frequency. Lenders made loans and held them. In these cases, the note identified the lender who would foreclose, as did the mortgage. In the instances where mortgages were sold or traded, banks execute an assignment of mortgage which is recorded in the clerk’s office in the county where the real property is located, and an allonge or endorsement of the underlying promissory note, which is not recorded but held by the new owner. When the assignee of mortgage goes to foreclose on a defaulted note, the assigned could produce the recorded assignment of mortgage as well as the corresponding endorsed note. It’s a relatively straightforward process.
However, in the 1980s, with the S&L crisis (and the auctioning of all the failed banks’ assets), the rise of Fannie and Freddie, the process became more complicated. Mortgages were changing hands with greater frequency, frequently sold in liquidation by the FDIC and the RTC, and ownership became fuzzier. In the 1990s, Wall Street further exacerbated the problem by bundling mortgages into bonds, then selling tranches of the bonds to multiple investors (each tranche with different priority and terms). If this weren’t enough, some financial wizard (probably a quant running computer simulations somewhere in the bowels of Goldman Sachs) determined Wall Street could make even more money by selling derivatives on the bonds. Essentially, derivatives permit investors to bet on the over or underperformance of the underlying bonds, secured by the mortgages assets. And mortgages are where ‘Puter started this trip down the rabbit hole.
Currently, many mortgages are held in trusts, such as MERS to name but one. The mortgages are frequently swapped between funds and between tranches in order to keep the mix of supporting collateral assets as advertised to the bondholders. And the beneficial owners of the mortgages are the bondholders, usually bulk purchasers such as pension and mutual funds. In many instances, Wall Streets hunger for the mortgage backed securities and their derivatives led investment banks to take shortcuts. In transferring mortgages, the law firms and others responsible for documenting the transfers did not, or did so sloppily, or figured they’d get to it tomorrow and never did. In many cases, the ownership of the mortgages is not documented, or is documented poorly.
And now we are back to the foreclosure process. In states that require judicial foreclosure (where a mortgagee must sue on the documents in court), a complaint must prove the mortgagee has standing to sue. That is, the mortgagee must show that it is the owner of the mortgage and the underlying note. Usually, this is a simple process where the mortgage has not changed hands repeatedly. But who is the real owner, and how do you prove it?
You prove it just as the originating bank would. Either you are named as mortgagee in the mortgage, or you have a recorded assignment assigning the mortgage into you. The current holder must plead this in its complaint. But as noted above, much of the documentation related to transfer of mortgages held by mortgage backed securities was not done, or was done shoddily. So what’s a foreclosure mill masquerading as law firm and it client to do? Why, falsely manufacture the assignment documents of course.
Seeing the problem crop up in their own portfolios, banking giants Chase, Citigroup and Bank of America have self-imposed moratoria on foreclosures in many jurisdictions. The banks are taking a pause in order to document properly their ownership of mortgage assets. And ‘Puter is in favor of this voluntary action. Foreclosing entities should have to prove ownership of the underlying mortgage prior to foreclosure.
But this leaves a different problem. What happens to the defaulted borrowers while the banks sort proper ownership out? Why, they get to stay in property rent and payment free, likely for a period of many months to several years. In most cases, defaulted borrowers are not claiming that they have paid on the mortgage, or that they now have or will have resources to pay the mortgage. These borrowers have defaulted. They are using a technical defense to hold up the inevitable liquidation. This only exacerbates the housing crisis.
In order for the housing market to return to normalcy, housing prices must find a bottom. Prices will not find a bottom until all the defaulted prices are returned to the market and prices adjust to the glut accordingly. Putting off the day of reckoning helps no one, except the wrongdoing borrower and the “social justice” activists.
Were ‘Puter a judge (which he will never be due his unfortunate participation with the Czar in the Tunguska Event), he would solve the problem thus. If a foreclosing bank could not conclusively prove ownership of the relevant mortgage, ‘Puter would require the borrower to submit an affidavit attesting that he is current on the mortgage and otherwise not in default. ‘Puter would also require borrower’s counsel to submit an attestation that he has seen proof of borrower’s payment of the mortgage. If the borrower and counsel provided such affidavit, ‘Puter would stay the foreclosure pending proof of the mortgage’s ownership. ‘Puter would also require monthly proof of payment of the mortgage, whether to the court or to the purported owner. If borrower and counsel cannot produce such an affidavit, ‘Puter would permit the foreclosure to go forward, with all proceeds (or the resulting deed) held by the court until such time as ownership of the mortgage is proven. The property, if taken by the mortgagee at foreclosure sale by credit bid, would be marketed and sold on court approval, with proceeds paid into court until such time as the foreclosing bank proved ownership.
‘Puter’s plan has the following salutary effects. First, wrongdoers are not rewarded. Nonperforming mortgagors do not get to stay rent free in houses they cannot afford, and sloppy banks do not get the benefit of their bargain immediately. Second, houses are returned to the market in order that prices find the bottom and the markets stabilize. Last, it allows the rule of law to triumph.
People who don’t pay their bills should suffer the contracted for consequences. In this case, loss of their house. Creditors who are sloppy should pay the consequences. In this case, delayed or no recovery.
Creating a federally mandated nationwide foreclosure moratorium spits in the face of Lady Law. It endangers any nascent recovery, rewards wrongdoers and prolongs the crisis. So, of course organized labor wants the Democrats to push the issue before they lose the House.
If ‘Puter were a betting man, he’d wager that the Democrats propose moratorium legislation (cynically with no intention of passing anything) in the runup to their impending November slaughter. ‘Puter would also bet that they achieve at least a temporary voluntary foreclosure halt, as banks are too chicken to stand up to an overreaching Congress.
Every day, ‘Puter loses a bit more hope for the future.