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There’s always something to howl about

Foreclosuregate? A scandal? If you want to sue for damages, it behooves you to have suffered a real, actual, material injury.

I had buyers back out of a purchase contract at the last minute, earlier this year. They got cold feet, and they had no remaining contingencies, so they understood they were losing their earnest deposit. The seller’s agent wanted to fight about it, making a lot of noise about specific performance. But here is what was interesting to me, thinking about the legal issues in the abstract:

The deal was a short sale.

In other words, had the sale proceeded to closing, the seller’s actual material gain would have been zero dollars and zero cents.

Taking account that we cancelled the contract, the seller’s actual material loss was — wait for it — zero dollars and zero cents.

Arguably, the seller might have suffered financial damages as a result of losing the home to foreclosure, rather than losing it in a short sale, but these consequences could never have been subject to my buyers’ control.

In other words, though we did not go to court, I could not see a way for the seller to claim any sort of material injury by the cancellation of the contract. He had no real, actual, material consideration at stake.

Why bring this up?

Because I think this is the end of the road in the so-called “Foreclosuregate” “scandal.”

To bring us up to speed, the Wall Street Journal wonders if we’re headed for housing armageddon. Not to be outdone, CNBC insists that foreclosure fraud is worse than you think.

Here’s what I think: If there were procedural laxities in the handling of paperwork, there was no intent to defraud. And laying that aside, there are no former homeowners who can claim that they were avoidably injured by mis-handled paperwork.

Why was your mortgage foreclosed? Because you stopped paying it. Did you have any rational reason to believe that you could keep your house once you had stopped paying your mortgage? No. If the paperwork that led to your foreclosure was not prepared to perfection, does that give you the right to retain possession of a home you are not paying for? No.

Voters are fools, of course, and the Attorneys General of the many states are all up for reelection. This is a perfect “scandal” for getting lots of TV time — for both incumbents and challengers.

But judges are not fools — not the judges who do the everyday heavy lifting in the Superior Courts. If you want to be rewarded with damages for your injuries, you need to demonstrate an injury. Go tell a judge about how hurtful it was for you to be called out as a deadbeat with improperly-prepared paperwork, and you might just get to see a staid and stoical black-robed jurist have a good belly-laugh at your expense.

At the bundling level — and above — there may be hell to pay. And there may be a lot of catch-up work to be done at title companies, as they try to get their own paperwork in order. But I find it hugely implausible that any journeyman judge is going to let people call themselves injured for having gotten just exactly what they were asking for.

Am I wrong? I’ve got a boatload of REOs in the hopper — buyer’s side only — and I don’t want this mess to come grinding to a halt. And I’ve got quite a few buyers who are going to need financing, so if the lenders — or the title companies — go soft on us, we’re screwed.

But that’s the bigger picture, and, as much as I hate FannieMae and FreddieMac, they’re going to keep buying and bundling loans. The path through this morass may end up looking like the slaughterhouse floor, but we’re going to keep grinding sausage no matter how much papering over of bad paper we have to do.

This “scandal” is an excellent argument for getting government out of real estate — since it is the government that will ram its “solution” down everyones’ throats, thus to keep the sausage grinders running on time. But we are what we are, and we’re not going to cripple half or more of the American economy because busy people with no fraudulent intent did stupid things in a red-hot hurry.

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  • 34 comments

    34 Comments so far

    1. Byron October 12th, 2010 11:33 pm

      Mr. Swann excellent article with great insight to see pass all the bs that most are not aware of and are fooled by most of the time. The media is always looking for a story to blow out of proportion for ratings and hidden agenda.

    2. Tony Arko October 13th, 2010 6:09 am

      I think you are wrong on several different levels. To think that judges are not fools is one of the areas in which you are wrong. Here is a story about the judges doing the heavy lifting down in Florida. Safe to say, a judge hearing foreclosure cases who doesn’t know what HAMP is, is an absolute fool.

      http://www.nakedcapitalism.com/2010/09/floridas-kangaroo-foreclosure-courts-judges-denying-due-process-on-behalf-of-banks.html

    3. Thomas Johnson October 13th, 2010 6:13 am

      Agreed. The only damaged parties are those of us who are compensated by contingent performance.

      Completed foreclosures force the banks to realize the losses which have been papered over with the full cooperation of the regulators. Too big to fail means the banks’ assets on the balance sheet are carried at par and not at true market value. The foreclosure moratorium will enable the Banksters to carry the foreclosure inventory at par further into the future enabling more zombiebank “earnings” on which bonus payments are calculated. Watch for the record bonus payments for 2010 at year end. The looting of America continues.

    4. Tony Arko October 13th, 2010 6:29 am

      Watch this video if you want to really understand how the banks have completely screwed up the entire real estate industry.

      http://watch.bnn.ca/#clip359769

    5. Greg Swann October 13th, 2010 6:30 am

      > The foreclosure moratorium will enable the Banksters to carry the foreclosure inventory at par further into the future enabling more zombiebank “earnings” on which bonus payments are calculated.

      Now that makes sense to me. Not good sense, but it’s the way these goniphs behave.

    6. Greg Swann October 13th, 2010 7:29 am

      > Watch this video if you want to really understand how the banks have completely screwed up the entire real estate industry.

      As I said, the investors may have claims. But the mortgagees? It won’t happen because it’s not so. There is no injury. The newspaper article will be filed under “things deadbeats say,” and the TV clip will be preserved in the Grandstanding Bloggers Hall of Shame. To the extent anything is really happening, my bet is on Tom’s read.

    7. Payne October 13th, 2010 8:25 am

      Now if we could just get a majority to agree/understand that government is never the answer, it’s always the problem we might get ourselves out of this mess.

      Why are people so willing to take financial/regulatory advice from a group of people (Congress & Senate, President) who are running a bankrupt “organization”. They only know how to politic.

    8. Jolenta Averill October 13th, 2010 8:53 am

      Not so fast! You may well be right but I don’t think that argument will hold water in a court of law. After all, people get off on technicalities all the time, for instance if they’re not issued their Miranda rights when arrested. If MERS is not recognized by a state (and many do not recognize MERS which was hastily created by the banks to facilitate the recording of mortgages being resold), thousands of mortgages will not have been properly recorded when they changed hands or were split/repackaged and as a result, if a homeowner can afford to sue (or find an attorney to do it pro bono), they probably stand a good chance of preventing the foreclosure and claiming damages for their emotional pain and suffering, attorney’s fees, etc.

    9. Greg Swann October 13th, 2010 9:05 am

      Criminal courts can be daft. Civil courts not so much. Moreover, prior to a claim of having been injured, a mortgagee in default must dispense with a small problem: It is he who is the injuring party — by retaining possession of the property contrary to the terms of the mortgage. It would be better for all of us if the entire civil court system were run privately, with no fiat law. But even allowing for the current Charlie Foxtrot court system, the plaintive wails of aggrieved deadbeats will not fool many civil court judges.

      All that said, the actual resolution of this “scandal” will turn on Rotarian Socialism: Whatever might be the morally right thing to do, what will actually be done will be what is to the best advantage of the insiders — politicians, regulators and banks. IOW, the banks may pay big fines to the regulators (and big bribes to the politicians), but nobody in default on his mortgage — now or in the past — is going to get anything except newscaster tears. There was no intent to defraud, so these deals should not be undone, but, that notwithstanding, they won’t be undone because the financial consequences to the payers of bribes would be too great.

    10. Michael LaPeter October 13th, 2010 11:07 am

      I disagree.

      If you replace “borrowers” with “criminals” and “banks” with “police”, I don’t think your argument holds up. If you commit a crime, you expect and deserve to go to prison. However, the police and DA must also follow the law when prosecuting you. Breaking the law to punish a lawbreaker, even if just “technicalities”, undermines the entire legal system. What one person calls a technicality may be the sloppy evidence handling that convicts an innocent man.

      Homeowners who don’t hold up their end of a contract should face the consequences of breaching that contract. That’s fair. Banks that willfully lie on affidavits should be called on it, regardless of the consequences. That’s also fair. Even if the end result is the exact same, we all have a duty to follow the law, and one day we will look back at all these free passes we have given to banks/ homeowners/ wall street to save our economy, and realize we’ve gutted the moral foundation and rule of law upon which it depends.

    11. Greg Swann October 13th, 2010 11:38 am

      > Even if the end result is the exact same, we all have a duty to follow the law, and one day we will look back at all these free passes we have given to banks/ homeowners/ wall street to save our economy, and realize we’ve gutted the moral foundation and rule of law upon which it depends.

      I’m nor endorsing Rotarian Socialism. I hate it more than anyone you will ever know. But this is what’s going to happen. In a kleptocracy, the people with the fewest scruples win.

    12. Don Reedy October 13th, 2010 3:21 pm

      I’ve pretty much got the mind to agree with Greg, for the following reasons (although he may not agree with mine):

      The “rule of law”, as it is, lost it’s purity directly after the first citizenry adopted such. The cornerstone of society, though I wish it otherwise, has and never will be the rule of law. It is the mind of man himself, replete with all the foibles, flaws and splendor that adorn our species. Michael incorrectly assumes above that there is some baseline moral system or rule of law. Again, that it were only so.

      Next, all the law is based on the competing interests of parties, delineated mostly by what we all call “damages.” From the taking of a life, cheating on a tax return, praying in a public school, ad nauseum we have a favored party damaged by the other. Assignation of that damage is critical to any legal proceeding. Who did what? What was the harm? And then from that follows a significantly codified number of regulations by which are judged the outcomes.

      So Greg correctly points out that the only measurable damage may be to investors. Clearly the incidental damages experienced by the foreclosed upon homeowners does not rise to our standard for assigning enough “damage” to proceed. Sure, there are rogue lawyers, idiotic judges, and more crooked lawmakers than you can shake a Robo-signer’s pen at, but ultimately we discuss here the overriding principles that must apply. Do not be mislead by the argument either for or against “technicalities” in this situation. All the “technicalities” stem from egregious and real issues from which real, not perceived, injustice arises. Every day citizens benefit from “technicalities” of which most are unaware. Statute of limitations, hearsay evidence, Miranda, and other legal processes protect rather than limit…for the most part. In this discussion, the courts are flag bearers for all the rationales behind the need for “technicalities.” They will not be persuaded to assign more value to a technicality than is normative, and back to the point, careless signing and administrative wrongs will not be righted by gutting the entire system.

      Finally, we (many of us) are real estate professionals. We deal each and every day with blatant fraud, contractual technicalities and real life consequences. We are adept at assigning and working with buyers and sellers to bring them to a successful interaction, and none of us would or could do their jobs correctly if we line item vetoed every request for repair, counteroffer or sales objection. We, you see, have the same view of technicalities as will the courts. We know their value, abhor violations of them, but understand the context with which they are applied.

      Will what the banks and investment firms did bring further disrepute on the mortgage industry? Hard to assign a value to >infinity, isn’t it. But, will what the banks did bring the walls, the institutions and the “kleptocracy” down? Nope. The inmates, you see, built the walls…and most importantly…they are running the asylum.

    13. Thomas Johnson October 13th, 2010 7:27 pm

      JP Morgan Chase came in with better than expected earnings today. How? Wait for it— By reducing their loan loss provisions. How can they say with a straight face to the “regulators” that loan losses will be fewer? Investors didn’t buy it. the stock was down on the day as these “earnings” will enable more plundering to shareholder equity by management at bonus time in December.

    14. Kevin Dwyer October 13th, 2010 10:33 pm

      A little pre-election/holiday lull. Laws will be quickly passed (at the federal level) and the banks and title companies will skate. The banks will be churning out REO’s again by New Years. And the wheels on the bus go round and round…

    15. Crystal Tost October 14th, 2010 9:21 am

      I think the only one that stood to gain or lose anything was the list agent. Which is likely the reason they go so upset. Does he/she still get paid any commissions? Where we are if the deal falls last minute, the deposit is split in half half going to the seller and the other 50% goes to the agents for compensation.

    16. Interesting Pespective on Foreclosuregate October 14th, 2010 4:08 pm

      [...] Recent Blog Posts Interesting Pespective on Foreclosuregate Posted: 10/14/2010 01:23 PM Share Add Comment Article By: Mark Brian I found an interesting perspective on the Foreclosuregate problem from Greg Swann over at Bloodhound Blog: [...]

    17. Tom Vanderwell October 14th, 2010 6:25 pm

      Try this on for size – the legal system finds that numerous technicalities in the securitization (bundling) of the mortgages were illegally skirted around. How? Smarter people than I have already written about it. Go to http://www.nakedcapitalism.com/ if you want to read more. The rules were not followed and suddenly millions and millions of mortgages are found to be not valid. Why not valid? Because the investor who thought they owned the mortgage actually owns the debt but doesn’t have a valid and “perfectable” lien against the collateral. What do you think that does to the net value of the trillions in mortgage backed securities? What does that do to Fannie and Freddie? Do you think unsecured debt is worth as much as secured? That’s where we’re going to see the real mess unfold. Not on the borrower side, I agree with Greg on that, but the investor side has the potential to be a really really bad thing.

    18. Jim Klein October 14th, 2010 6:53 pm

      Great thread y’all; thanks. I too think Thomas has his part pegged, and that it could be the motive power.

      Natch Greg gets it all in a comment—”In a kleptocracy, the people with the fewest scruples win.” That’s big and it’s important, and it’s a plain fact.

      The dizziness comes in when people start believing that kleptocracy is actually good. After all, sacrifice is good on this theory, and look how much gets done.

    19. Thomas Johnson October 15th, 2010 6:45 am

      “the legal system finds that numerous technicalities in the securitization (bundling) of the mortgages were illegally skirted around.”
      “the investor who thought they owned the mortgage actually owns the debt but doesn’t have a valid and “perfectable” lien against the collateral.”

      Remember many of these investors are fiduciaries such as pensions both public and private. The public pensions will wail and try to raise taxes to cover the losses and ultimately get a federal bailout. The union pension funds, well, maybe some bespoke Bruno Magli concrete overshoes are being fitted for the Goldman Sachs bonus babies.

      Heh. Banksters hoist on their own petard.

    20. Greg Swann October 15th, 2010 6:48 am

      The more I think about this, the more I think the whole thing might be bullshit. Who do we dread in short sales? The investor, who comes on stage at the very last minute, often just in time to queer the whole deal. The idea that mortgage investors don’t know exactly where their money is seems a stretch to me. Paperwork issues might matter. Lawyers, judges and regulators love to squabble over paperwork. And there may have been real fraud at the investment bank level in terms of misrepresentation of underwriting quality of the bundled loans. But I don’t see judges dispossessing investors of the pledged security of their loans because the paperwork was mishandled with no fraudulent intent. Certainly in a short sale, no one doubts the investor’s veto power.

      On the plus side, this all might just smell bad enough for the American people to wake up to a sad fact: If it’s regulated, it’s corrupt. All laws do is give grafters the opening they need to ruin anything. A free market is not necessarily free of all criminal behavior. But a regulated market eventually becomes nothing but crime.

    21. Katie Dabe October 15th, 2010 10:51 am

      Yep nobody will collect damages except the AGs will settle, the banks will pay and there will be a new fund to either give out to voters or build a new school. Mortgage lenders are simply the new tobacco.

    22. Tony Arko October 15th, 2010 11:27 am

      Add the FDIC to the list of law breakers. And yes, perjury is against the law.

      http://www.nakedcapitalism.com/2010/10/not-to-be-outdone-fdic-joins-the-robo-signing-club-too.html

    23. Greg Swann October 15th, 2010 1:33 pm

      > And yes, perjury is against the law.

      That would explain all the lies one hears in courtrooms.

      Despite everything, justice is still about righting wrongs. Regulated institutions might get fined, maybe a lot. But no one is going to unring a bell until an actual avoidable material injury is demonstrated. The longer this drags on, the more it looks like a bubblehead thing: Hysterical screeching signifying nothing.

    24. Greg Swann October 15th, 2010 1:34 pm

      > Mortgage lenders are simply the new tobacco.

      That’s funny.

    25. J Philip Faranda October 15th, 2010 5:25 pm

      So your take is that a buyer who backs out of a short sale at the last minute leaving sellers to face foreclosure and the arduous process of another short sale approval is that the sellers suffered no damage? Wow, dude.
      Wow.

      I don’t want any agent-even one I disagree with- to lose a dime out of their pipeline. Been there, done that, bought the T-shirt. But poo pooing procedural laxities from the bank as OK is not a winning hand.

      Sure these people aren’t paying. Sure their loan is in default. But I know there are legions of these borrowers who are trying like hell to affect a short sale or loan modification so move on with their lives in dignity, not live rent-free. And that mad scramble to repossess their house and throw the banks yet another un earned mulligan serves no one. It harms earnest borrowers who may be back to work and can pay their mortgage but cannot cure their arrears.

      Lord knows the hell we pay if we leave a decimal off a mortgage check. The banks should held to the same high standard as anyone else.

    26. Jim Klein October 15th, 2010 6:01 pm

      Of course I think you’ve got it mostly correct, Greg, so I pick only two quibbles for now. Nothing to learn from agreement, right?

      >>The idea that mortgage investors don’t know exactly where their money is seems a stretch to me.

      Not to me. Your using a standard of quality and thinking of the guys who know what they’re doing. As Thomas noted, the actual referent of “mortgage investors” covers a huge swath, plenty of whom have no idea what happened or what is happening. It includes mutuals and insurance outfits and banks and trusts and those pension funds and even their employees. And face it…at least some of the “investors” who knew what they were doing, were doing plenty of wrong. We could probably figure it out by seeing who were the most protected and are still raking it in!

      >>>But I don’t see judges dispossessing investors of the pledged security of their loans because the paperwork was mishandled with no fraudulent intent.

      You set a very high standard of acuity, and by that standard I find this almost naive! Firstly, judges will do whatever they feel like doing. I share your sentiment that many, maybe even most, judges have at least a sincere desire to follow The Rule of Law. That in itself is a problem, albeit a lesser one than what you’re talking about. Maybe.

      In any event, surely disregard of Rule of Law, let alone Founding Principles, is something that’s been ubiquitous for at least 150 years. “State’s interests,” and basically whatever whimsical notions some judge imagines that to be, rule the day and have for a long while.

      Add in that it’s “investors” about whom we’re speaking, and you’ve nearly proven that by today’s standards, whatever is the current feeling is whatever will be enforced. The only question about investors, speaking by today’s ethic, is how evil they managed to be, in order to become investors. The more productive and more valuable they were, the more they deserve to be abandoned.

      As your catch-all here noted…in a kleptocracy, if they were /actually/ evil enough, then they might earn the protection of the Court.

      Point being, it’s almost impossible to seriously guess what may become of any of this. Obviously no paperwork trivia ought to impede property rights, at least under a Rule of Law system.

      OTOH when the RoL system itself becomes the greatest abridger of property rights itself, then it can be pretty tough guessing which madness will play out. IOW, when it comes to protecting anyone these days, and especially genuine investors who earned their investments, all bets are off. The answer lies on Facebook and not in legal documents…”Which judge and which investors?”

      Like you, I’m highly receptive to tangible and Earthly arguments. Our problem is, we’re on Mars!

    27. Greg Swann October 15th, 2010 6:04 pm

      > Wow, dude. Wow.

      A very stirring emotional appeal. I’ve watched you in the ActiveRain daily spam, and I like the way you write.

      But: Means nothing to me. Injuries that can be adjudicated must be measurable. Have there been any specific performance cases, seller versus buyer, over a buyer backing out on a short sale? In my courtroom, I would argue that the idea that a short sale is a contract with the seller is a fiction: There is no consideration being exchanged. A short sale is really three three different performance contracts — buyer/seller, seller/lender, lender/buyer — camouflaged under one essentially negligible instrument.

      Again and again: I am not endorsing any of this. I am 100% opposed to the way everything is done, right now. But this is the way things are done right now. You don’t have to like it. I don’t. But it is the way it is, for now.

      (Inlookers: It’s a good time to revisit that argument about practical anarchism, isn’t it? We have a rat’s-eye view of the charnel house and suddenly we see what coercion must always become. A nice opportunity to think about learning to live non-coercively, as much as possible — as much as you think you can stand.)

    28. [...] This post was mentioned on Twitter by Chris Johnson, Real Estate Feeds and silvergoldhedge, Patriot Connect. Patriot Connect said: On BHB: Foreclosuregate? A scandal? If you want to sue for damages, it behooves you to have suffered a real, actual,… http://ow.ly/19tvJp [...]

    29. Greg Swann October 16th, 2010 6:35 am

      CNBC yesterday morning:

      Bank of America’s recent decline—down almost 10% this week—is driven by fears that the bank could be hit with huge liabilities for faulty mortgage pools. And I’m pretty sure that is not going to happen.

      Why not?

      Because the politicians will not let the financial stability of the largest bank in the nation be threatened by contractual rights. Not when there’s an easy fix available that won’t cost taxpayers a dime.

      Here’s what is going to happen: Congress will pass a law called something like “The Financial Modernization and Stability Act of 2010” that will retroactively grant mortgage pools the rights in the underlying mortgages that people are worried about. All the screwed up paperwork, lost notes, unassigned security interests will be forgiven by a legislative act.

      There’s a big difference between the financial crisis of 2008 and the new crisis. In 2008, banks were destabilized by the growing realization that they were over-exposed to the real estate market. Huge portions of their balance sheets were committed to mortgage-linked investments that were no longer generating the expected revenues or producing losses. That was a problem of economics that could only be solved by recapitalizing banks or letting some of the biggest banks in the U.S. fail.

      The put-back crisis is not driven by economics. It is driven by legal rights. And there’s simply zero probability that the politicians in Washington are going to let Bank of America or Citigroup or JP Morgan Chase fail because of a legal issue.

      So here’s what I expect will happen. The lame duck session of Congress will pass a bill that essentially papers over the misdeeds of the banks that originated mortgage securities. Every member of Congress and every Senator who has been voted out of office will cast a vote for the bill. And the President will sign it.

      Will the public be outraged? Probably. Financial bloggers will scream from the high heavens against another bailout of the banksters. Congress may try to create some cost for banks in exchange for the forgiveness, perhaps requiring more mortgage modifications.

      But the much feared put-back apocalypse will be laid to rest.

      If you’re skeptical about the possibility that this will happen, you have greater faith than I do in the ability of the political system to resist doing favors for bankers.

    30. Teri Lussier October 16th, 2010 1:46 pm

      >All laws do is give grafters the opening they need to ruin anything. A free market is not necessarily free of all criminal behavior. But a regulated market eventually becomes nothing but crime.

      That’s a keeper.

    31. J Philip Faranda October 16th, 2010 2:09 pm

      Thanks. I’ll bet that 99.8% of short sale sellers don’t have the resources to sue. However, if a buyer’s bad faith yields a foreclosure and a deficiency judgement, then the amount of the deficiency judgement plus fees is probably something that would be easy to prove.

    32. Mark Brian October 16th, 2010 2:12 pm

      Foreclosures suck but we must not forget one thing: foreclosures happen because someone is not getting paid.

      I have to say even if it is not PC or nice or what-freaking-ever, Greg is right. At least Greg had the chutzpah to say it.

    33. Greg Swann October 16th, 2010 6:31 pm

      I live in a Deed of Trust state with a non-deficiency statute. However:

      > if a buyer’s bad faith yields a foreclosure and a deficiency judgement

      I would argue that these consequences, should they ensue, were caused by the seller’s failure to pay his mortgage. Even if the buyer had performed to the short sale contract in every particular, the seller could still suffer ” a foreclosure and a deficiency judgement.” Had the seller paid his mortgage, however, these unhappy events could not happen. The buyer is not the cause of the seller’s woes, not any of them. To the contrary, the buyer in a short sale is the seller’s salvation. In consideration for playing John to the seller’s role as pimp — or willing groom to a wayward daughter — the Buyer is assured of precisely nothing, and will not know for sure if he has obtained the property until it actually records. The seller and the lender can flake off at any moment before then with zero consequences. The right name for the buyer in this charade is: Sucker.

      As I said last night, and as I intend to elaborate on when I get a chance, there is no consideration being exchanged between buyer and seller in a modern-style, lender-takes-it-in-the-shorts short sale. There is no actual contract, so there cannot be damages for non-performance. No telling how a judge might rule, but, as a matter of contract law, the seller cannot be injured if he cannot be profited. Any losses the seller might suffer — period — will result from the prior contract with the lender, not from anything the buyer does or does not do.

    34. Richard Dillon November 23rd, 2010 2:26 am

      Having worked in the judicial system for some years. I can say that the Judge really does not necessarily know all of the solutions to a particular problem and or the specific details of the, as in this case, business area. It is the responsibility of the lawyers to ensure that the judge is given the information he or she requires. Hopefully, the Judge, is astute enough, to know when to ask specific questions in order to gain the knowledge.