At right you see a story about a Simi Valley family with nine children breaking the locks on their foreclosed home and moving back in, after they questioned the eviction. The lender, GRP Financial Services, sold the home to an investor after evicting the couple in July, and the investor resold the home. The family’s attorney asserted that the lender used bad paperwork for the eviction, and that they padded the amount owed by the family, tacking on an extra $25,000 to the bill.

“This is only the beginning of this,” said the Earl’s attorney, Michael Pines. “I chose this family because we needed to get back in before the investor and the real estate broker defrauded a new family by having them move in, which would have created a bigger mess. (The Earls) have done absolutely nothing wrong.”

Police arrived at the home Saturday but did not take action to make the family leave.

This is what you’re going to see all over the country, and it’s a direct cause of the fraud at the heart of the origination, securitization, rating and now foreclosure operation in the lending industry. You can take one of two views toward this. You can either be a patrician like Steven Pearlstein and moralize about homeowners while indemnifying the lenders:

But if, as appears to be the case, the overwhelming majority of homeowners facing foreclosure have fallen far behind on their payments, then it is a good deal harder to summon up the same moral outrage over reports that the banks and loan service companies cut corners, failed to keep the right documents and engaged in shoddy and even fraudulent practices. Just because the banks and servicers have screwed up doesn’t mean they and their investors are no longer entitled to get their money back.

(Again, this is the same argument you would make to defend law enforcement for planting evidence on someone they know, just know, is guilty.)

Or you can take the position of top Democratic law enforcement officials across the country, who actually have an interest in following the law.

“We see what Washington doesn’t: the houses lying vacant, the eyesore stripped for copper piping with mattresses out back,” Mr. (Ohio Attorney General Richard) Cordray says. “We bailed out irresponsible banks, but we forgot about everyone else.”

It speaks to this political age that such words are more rarely heard from federal regulators, who walk quietly and carry big bailout checks. Instead state attorneys general, in this case, a sandy-haired 51-year-old Democrat who sits about 400 miles from Washington, are giving full throat to popular outrage.

If Eliot Spitzer, the former New York attorney general, was the prototype of this breed, a handful of current ones, like Mr. Cordray, Martha Coakley of Massachusetts, Lisa Madigan of Illinois, Tom Miller of Iowa and Roy Cooper of North Carolina, lay claim to his mantle. Like recessionary scouts, they spot trouble, like a rapacious foreclosure-rescue operator, a predatory credit card company or a financial firm draining a pension fund.

The blog Synthetic Assets gets at this very directly. We always hear from our “betters” the term moral hazard as it applies to maybe homeowners who “bought too much home,” or auto companies who failed to innovate. It doesn’t get applied in this case to the lending industry, who committed a series of illegal actions with regard to their housing documents, but on the expectation that they will eventually get legalized retroactively to protect them from losses. That’s essentially what Pearlstein said above.

Over the past half century the financial industry has not treated the law as a bedrock institution that constrains the nature of its activities, but rather as a set of rules that can be forced to adapt to the industry’s needs and desires. Thus, the industry knowingly and deliberately creates standardized contracts that are either designed to circumvent the law or in some cases flatly illegal under current interpretations of the law, and then when a case involving the contract arises (which in many instances happens only long after the standardized contract has become an institution), the financial industry tells the court that the dubious or illegal contract is so widespread that the court would create systemic risk by enforcing the law. (This idea was established by Kenneth Kettering in “Securitization and its Discontents” and the next two paragraphs draw very heavily from Kettering’s article and perhaps form little more than an opinionated summary of several of his sections.) [...]

We have a financial industry that views as normal the practice of deliberately creating systemic risk by developing financial instruments that will cause our largest banks to collapse, if the law in its current form is in fact enforced. The end result of this process is that we have a legal system that – at least when it comes to financial transactions – is composed of laws written by and for the benefit of financial institutions themselves.

Forgive me if I see these sins as more consequential than the short-term fluctuations of the housing market. Forgive me if I can’t stir up the requisite outrage over people who “bought too much home” when they were kicked out of it by a banking industry that knowingly falsified information and have enough influence and power to damn the consequences. Forgive me if I hold the banks and their flotilla of lawyers to a slightly higher standard, especially given the real cost from their actions relative to individual borrowers.

Now Pearlstein does essentially support a pause of a few months in foreclosure operations while the fraud is sorted out, and he does support principal modifications as the best way out of this mess. He even wants to hold lenders to a higher standard, with clear documentation, customer relations and procedures for loan modification and mediation before reaching foreclosure… next time, anyway. But it’s all lovingly couched with finger-wagging for those terrible, terrible people who had the audacity to allow themselves to get hoodwinked by mortgage brokers in the first place.

I will reserve such activities for the people who deserve it.