To Stop Fraud, Do We Need a Moratorium on Foreclosures?
The pros and cons of a complex problem
A group of some 40 state attorneys general from around the country are demanding an investigation into the nation's simmering foreclosure fraud scandal. The attorneys general are looking to pressure banks into rewriting troubled loans and may call for a halt on foreclosures nationwide. The White House, however, hates the idea of a national moratorium on foreclosures, arguing that it could impede economic recovery. What's the best policy for homeowners and the economy at large?
- Here's How This All Started, explains Massimo Calabresi at Time:
The foreclosure furor emerged initially from a deposition in a court case in Florida last month that alleged that at least one company had submitted false affidavits in support of summary judgments for foreclosure against homeowners who were in fact either current on or capable of paying their mortgages.
Alerted by media reports to the possible foreclosure short-cuts by big banks and mortgage servicers, State Attorneys General began looking into the practice and found that banks and mortgage servicers had been engaging in the practice all over the country. In an effort to coordinate their investigations, the state AGs decided to work together.
Several states called for a partial freeze by some of the biggest banks allegedly involved in the faulty foreclosures, including Bank of America, J.P. Morgan Chase and Ally bank. All three eventually agreed to a partial freeze. The partial freeze has snow-balled into calls from senior Democrats like Senate Majority leader Harry Reid for a national freeze on foreclosures.
- Here's the Root of the Banks' Problem, writes Diana Olick at CNBC:
Real estate law requires real paper transfer of documents and titles, and a lot of the system went electronic without much regard to that persnickety rule. Mortgages and property titles are transferred several times in the process of a home purchase from originators to securitization sponsors to depositors to trusts. Trustees hold the note (which is the IOU on the mortgage), the mortgage (the security that says the house is collateral) and the assignment of the note and security instrument.
The issue is in that final stage getting to the trust. The law demands that when the papers get moved around they are "wet ink," that is, real signatures on real paper... That's not the worst of it. Affidavits assigned to the notes and security instruments are supposed to be endorsed over to the trust at the time of sale, but in many foreclosure scenarios the affidavits have been backdated illegally.
- Now the Botched Documentation Will Lead to Mass Litigation, explains Adam Levitin, a Georgetown University law profess. He sets up a theoretical legal scenario:
The mortgage is still owed, but there's going to be a problem figuring out who actually holds the mortgage, and they would be the ones bringing the foreclosure. You have a trust that has been getting payments from borrowers for years that it has no right to receive. So you might see borrowers suing the trusts saying give me my money back, you're stealing my money. You're going to then have trusts that don't have any assets that have been issuing securities that say they're backed by a whole bunch of assets, and you're going to have investors suing the trustees for failing to inspect the collateral files, which the trustees say they're going to do, and you're going to have trustees suing the securitization sponsors for violating their representations and warrantees about what they were transferring.
- So Should There Be a National Moratorium on Foreclosures? No, argues Rich Sharga, vice president of the real estate data firm RealtyTrac: "The worse thing anybody could do right now is impose a lengthy moratorium on foreclosures, particularly if it results in people not being able to sell properties that have already been foreclosed on... Right now foreclosure properties represent about 30 percent of all home sales and to take 30 percent of sales out of the housing market at a time when it's already unstable could have pretty disastrous results."
- I Agree: A Moratorium Would Be Terrible writes John Cole at Balloon Juice:
I just don’t understand what good would come from a national moratorium. Forty state AG’s are on the ball, what exactly could a national moratorium do? The idea is to stop the bad foreclosures, not grind every single transaction in this sector to a damned halt.You aren’t hurting the banksters when you do something like that. You’re hurting every single buyer and seller in the market. It would be catastrophic. On top of that, under what legal authority does the White House declare a moratorium on a specific type of business transaction? How would that happen? Who would be in charge of it? Geithner? Warren? Under what legislative or Constitutional authority?
- John Cole Is Wrong: A Moratorium Makes Sense counters Marcy Wheeler at Fire Dog Lake:
John frames this as an issue of stopping bad foreclosures. But that’s not the problem, not by half. The problem is that the problems exposed by foreclosures in judicial states are problems that exist throughout mortgages that were securitized in the last 6-10 years. ...
Perhaps the best description of the stakes comes from that hippie publication, CNBC. It suggests the problems being exposed by the foreclosure process are probably systemic, affecting a good portion of mortgages securitized in the last six to ten years (or more). Which means it’s not entirely clear who owns a good percentage of the housing stock in the United States, which could set off a free-for-all among those trying to resolve that question...
I believe one reason to halt foreclosures is because the current default state in foreclosures gives banks an advantage over homeowners. What banks claim in non-judicial states is assumed to be accurate, which puts homeowners who would want to challenge their foreclosures at a big disadvantage. That’s a problem in any case, but particularly given the mounting evidence that the paperwork underlying these mortgages may be questionable. The best way to fix that power imbalance is to halt foreclosures until it’s clear foreclosures have some kind of paperwork to justify a foreclosure.