There’s always something to howl about.

Rule of Law and All That: The Foreclosure Mess

Suffice to say, I take a different view of the current foreclosure – robo-signer – problem now confronting the mortgage industry. Where Greg calls the banks’ fraud upon the court “procedural laxities,” I say the banks are committing, wait for it, “frauds upon the court.”

Greg does a neat rhetorical trick, by shifting the focus from property rights to some kind of tort-based argument where the homeowner has to prove harm. Don’t be fooled. Property rights are not about harm. They are about who can prove superior title. And if banks bring fraudulent documents into court to assert that they own properties, they should be punished. In North Carolina, we call this Obtaining Property by False Pretenses, a Class H felony, punishable by up to 30 months in prison.

Where Greg says your home was foreclosed because you stopped paying it, I say your home was foreclosed because someone who could not prove an ownership interest in the home came along and committed a fraud by falsely asserting they could, thereby depriving you of your superior property rights in the home.

Where’s the “rule of law” I hear so much? Where are these sacred and inviolable property rights I hear about?

There’s been a lot of handwringing about consumers who should’ve known better when they were taking equity out of homes in 2005 and 2006. And about buyers who were mortgaging too much to buy those $400,000 homes on $50,000/year incomes. And about how, even though shady originators and greedy banks were selling these pipedreams, it was the buyer/consumer who should’ve known better because, after all, the buyer/consumer signed on the dotted line.

Now the shoe is on the other foot. In other words, cubicle dwelling robosigners (who I believe are not the real criminals, but merely patsies), were… ummm… not reading what they were signing.

Caveat emptor, and all that.

Yes, the timing is suspect because we’re in election season. This problem has been around for years. I first learned about it in detail last year, which means I was very late to the game. But better late than never, I say.

(I still contend that there was a better way to handle this mess, which was using bankruptcy to cramdown the mortgage.. But banks fought that tooth and nail because… a loan is a sacred contract etc. etc. and these were bargained for agreements. Well, indeed, they were, so if if you, as a bank, want to foreclose, bring the real documents to court and do it. By failing to provide a meaningful alternative that would’ve split the baby, we’re now in a place where it turns out banks themselves were mistaken about how much legal claim they had to certain homes.)

If some homeowners get some homes on the cheap, well, hooray for them. Banks should’ve invested something in maintaining their property rights – to wit, a decent filing system. And if they couldn’t have been bothered in 2005 and 2006 to do so, well, tough luck.

And investors who bought bonds backed by this… stuff… can take a hike.

Now, as to the stoic trial judge, I will say this: they tend to side much more with the consumer/debtor/homeowner than they do with the purported mortgage holder. And why’s that? Well, in certain states – North Carolina, for instance – judges are elected. Even where they’re not – federal bankruptcy court – they tend to frequently see better financed creditors overwhelming pro se or under-represented debtors. They’ll cut the debtor a break.

Where will this lead? It leads to an informal cramdown. Rather than getting the home free and clear, the borrower frequently settles, and in exchange, re-signs documents with the purported mortgage holder that, this time, the mortgage holder keeps in a safe place.

Now couldn’t this have been done more efficiently and fairly in bankruptcy court? Yes… Yes it could have.