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Mike Konczal takes a closer look at the relevations of foreclosure fraud in Florida, and sees this correctly as a necessary by-product of a housing market that was broken from the start:
Given that the IMF and others believe a large part of the “structural unemployment” in our country is related to the struggling housing market and underwater and barely-hanging on homeowners, what is to be done? One option is to allow for options like lien-stripping in bankruptcy courts, reseting mortgages by zip code, etc. Another option is for courts to accelerate foreclosures by ignoring due process, proper documentation and legal process in order to kick people out of their homes and preserve the value of senior tranches of RMBS while giving mortgage servicers a nice kickback.
What option do you think our country is taking?
We should all be very concerned about the foreclosure situation in Florida. If you are a homeowner or potential homeowner, you should find it offensive that people’s property rights are being violated in such a flagrant way. If you are an investor, either as “bond vigilante” or someone with a generic 401(k), you should be worried that servicers have gone rogue and the incentive structure to maximize value instead of fees associated with foreclosures has broken down.
And if you care about basic Western liberalism–the classical kind, with a Lockean understanding of freedom to own property along with freedoms of speech and religion– you should be pissed off. This is a clear-cut instance of the rich and powerful decimating other people’s property rights, rights that are supposed to protect the weak from the strong, in order to preserve their wealth and autonomy. Unless you think property rights are mere placeholders for whatever the financial sector demands are, this should be resisted. This should be viewed as a problem an order of magnitude larger than Kelo v. City of New London.
“Investors” is a broad term, as Konczal describes it. Included in that is not just everyone with a 401(k), but every taxpayer, since the government has a stake in so many of these mortgages and these banks. In fact, that could be distorting the incentive structure in really horrible ways.
Konczal posits this as a way for lenders to speed up the foreclosure process, collect fees and avoid the fine print. After all, while there may be costs to banks associated with foreclosures, there’s no cost at all to re-selling a home you didn’t even own. But this also is a massive cover-up. Banks never had the proper documentation for these loans, after handing them out to anyone with a pulse, and slicing and dicing them through securitization. The fraud allows banks and the state and local governments explicitly facilitating this by setting up special, speedy foreclosure courts the ability to paper over these objections. If the lenders had to obey the law and use a deliberative process to affirm the title ownership, practically nobody would get evicted. If enough of those struggling can be forced out of their homes, and the fraudulent mortgages thrown in the dumper, the banks can save their balance sheets.
One problem with this – the number of struggling borrowers isn’t finite. In fact, as unemployment remains high and housing prices drop, the number is growing. The banks couldn’t possibly keep up this charade forever, and now the law has caught up with them.
UPDATE: The Washington Post, catching up on this story, has a good profile here.
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Questions -1. How does accelerating foreclosures “preserve the senior tranches of RMBS”? An avalanche of foreclosures will drive all values down and even the senior tranches could see previously solid mortgages in jeopardy if prices nose dive due to excess inventory. So, I’m not following that line of reasoning.
Q 2. “Another option is for courts to accelerate foreclosures . . .in order to . . . preserve the senior tranches of the RMBS while giving mortgage servicers a nice kickback”. That sentence implies that the courts themselves have as their PURPOSE preserving the senior tranches and giving mortgage servicers a nice kickback. I agree that those 2 results may accur as a product of the court’s actions, but is the author seriously stating that is their (the courts) actual motivation? What’s in it for the courts and the judges to promote those 2 causes?
So I wonder about that part of the blog quoted although I completely agree with the section that states that the willingness of the courts to throw due process in foreclosure to the winds is at least as great a threat as Kelo to the concept of private property ownership. Since we have now seen that greed, avarice, fraud and corruption are running amok in the mortgage banking and foreclosure industries, it would be no great stretch to imagine people colluding to foreclose mortgages improperly if they simply desired someone’s property. That is what the court is sanctioning by saying that all the power lies with the mortgagee with the barest minimums or even no minimum of proof required. Recall that many courts have even rejected Produce the Note as a defense. Surely someone foreclosing a mortgage should be required to prove that they are the legitimate aggrieved party?
This is one of those topics that is going to explode. People are following it closely and it affects millions and millions of people with more added everyday.
a lot of the crap mortgages are in the junior tranches. I think that’s Mike’s reasoning here. I think it’s not the courts’ purpose, but a nice side benefit for senior investors.