Arnold Kling  

Foreclosure "scandal" again

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Idea Rents... The Scientific Process...

I am starting to get angry with some of the pundits. I probably should just chill for a few days. A few random points.

1. I opposed TARP from day one. I wanted to see the insolvent banks put into bankruptcy. Now, some of the same folks who say that bailing out the banks was necessary to save us from another Great Depression are telling us that we need to stick it to the banks.

2. If you say that "the law is the law" and "rules must be enforced as written," that can be a consistent position and I can respect you for it. But then don't turn around and say that we should empower mortgage counselors to rewrite people's loans.

3. I wish that some of the pontificators had some business experience.

The way I look at it, we have two business processes and two record-keeping processes. One business process is old-fashioned lending, where the bank that makes your mortgage loan is still the holder of the loan years later. The other business process is securitization, where your mortgage loan is sold, pooled, sliced and diced, and could be sent around the world and traded every day.

The county record-keeping process is designed to support old-fashioned lending. The securitization process uses different record-keeping that is computerized.

The modern record-keeping process that supports securitization does work. These incredibly complex securities are tracked properly.

The interface between the modern process and the older process is, not surprisingly, a compromise. But to toss around words like "shoddy" or "sloppy" or "fraud" is going rather far. If you want the record-keeping process to adhere perfectly to the traditional process, then you effectively eliminate securitization. I think that would be fine, but it would have been more helpful to have made that determination in 1968, before the government created GNMA, and before it created Freddie Mac in 1970.

It is safe to say that what is going on now is not helping "little people" against "the banks." It is an assault on a process that has done little or no actual harm to borrowers, and which supports the complex allocation of mortgage cash flows under today's securities.

In the end, the biggest losers will be the unemployed, because the assault on the foreclosure process is going to keep the housing market in limbo for years. That in turn is going to make economic recovery something that does not begin until well after President Palin takes office.

Have a nice day.


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COMMENTS (19 to date)
Michael Sterling writes:

Arnold,

I agree with you that the documentation issues shouldn't lead us to give defaulting homeowners a free pass, but the big issue to me is between the issuers and purchases of securitized mortgage instruments. As you say, it looks as though securitization and our current legal mortgage laws may be incompatible. But the MBS were sold on the premise that the issuers had sorted these issues out. If the banks promised that they had sorted out the legal issues, and the terms of the MBS state that they are obligated to buy them back should it turn out that they had not, then aren't they obligated to do so?

In some ways, it seems like the products that banks sold came with a warranty. It may turn out that they have to issue a recall.

Æternitatis writes:

There is no argument that record keeping needs to be improved. There is no argument that lawyers, banks, and borrowers who submitted intentionally and materially false statements should be punished, possibly even criminally.(*)

But none of this is a reason to delay foreclosing on delinquent borrowers.

(*) By the way, dear Friends of the Little Guy, I trust you are equally eager to see borrowers who submitted false statements regarding income or assets in order to qualify for a mortgage thrown into prison as you are every bank clerk who failed to file out the foreclosure paperwork correctly?

Dan Weber writes:

Now, some of the same folks who say that bailing out the banks was necessary to save us from another Great Depression are telling us that we need to stick it to the banks.

You should name names.

John Morgan writes:

The property rights that the county record-keeping process is designed to support came first, then "old-fashioned lending". "Modern record keeping" may be necessary for securitization, but it shouldn't give lenders an excuse to subvert property rights that have a long history in common law.

John Jenkins writes:

I think that some people don't understand the purpose of the county land records. Those records show who has an interest in property. You record to defend your title as against third parties. The mortgage is enforceable between the parties irrespective of recording (except in cases where statute says it has to be recorded and taxes paid, but we're talking generalities here). County records are utterly irrelevant to the issues involved because you do not necessarily have to record an assignment of mortgage for the mortgage (or assignment, for that matter) to be valid.

At issue is who can enforce the mortgage, and if you can't show a valid assignment, you don't have legal standing to enforce it. That's it. If the banks' lawyers do their job right, it's not a problem, and if they don't, then the banks should have hired better lawyers.

Lord writes:

When a bank can foreclose on a house it doesn't own, I don't know what to call it other than shoddy or sloppy. Not that foreclosures should be stopped other than for as long as it takes to get their act together.

Lord writes:

Foreclosure scandal has some egregious examples. What should have been done with TARP was to make it debtor in possession financing, assuring liquidity but not preventing bankruptcy.

schooner writes:

@Æternitatis

Any Bank that lent money on "false statements" deserves to lose money. Outfits like WAMU didn't care about any info. They wanted to write it, securatize it and move on.

Æternitatis writes:

@schooner

Any Bank that lent money on "false statements" deserves to lose money.

Well, if you believe that everybody who trusts anybody else's signed legal statement clearly deserves to be taken for all they got, I imagine you are being consistent.

But you are changing the subject. What about all the borrowers who profited from fraudulently obtaining mortgages by submitting and signing false income or asset statements?

Do you hunger for them to be thrown into jail as much as for bank clerks who submitted false evidence to prove the truth that their banks owned the mortgages?

Rebecca Burlingame writes:

@John Jenkins,
I do not see how county records for title are completely irrevelent to the issues involved, because passive ownership (someone who once lived on the property who divorced and then would not settle title) can stop a bankruptcy or other proceeding with the property in its tracks, until the other property owner(s) dies, in some states.

Jeff writes:

There are a lot of people out there who are really angry about the bailouts, as it appears to many that the real purpose was to enable the bankers to continue ripping us off. People want to see the banks punished, and they don't much care how it happens. Al Capone got away with all kinds of murder and mayhem for years, but eventually drew a stiff jail term for tax evasion. Nobody felt sorry for him.

Politicians who voted for the bailouts are also desperate for cover. Hammering the banks is a way to pretend to be on the little guy's side. This will only work if the voters fail to realize that making mortgage lending riskier is a very bad idea.

Disempowered Paper Pusher writes:

The interface between the modern process and the older process is, not surprisingly, a compromise. But to toss around words like "shoddy" or "sloppy" or "fraud" is going rather far.

I'd use the term "hubris". As in, the banks had plenty of it. The existing interface between systems was well defined and had all the bugs worked out of it. They decided to create their own interface though, and are expecting the counties and homeowners to adapt themselves to it.

Disempowered Paper Pusher writes:

I'm copying and pasting a post made by Æternitatis from a post a couple of days ago.

The objections based on paper work problems in county courthouses are fundamentally frivolous—denial of a truth everybody knows for the sole purpose of prolonging the proceedings to the profit of the delinquent borrower who gets to live rent- and mortgage-free.

I haven't seen any reports of recording issues committed by the counties. The counties have followed their standard procedures. It's the banks and servicers who have been skipping steps in the chain and who (may) have FUBARed the whole system.

I don't disagree that delinquent borrowers are abusing the system. The banks should have been smarter though and remembered we live in an adversarial legal system. Lord knows they've abused it enough when it suits their interests.

john personna writes:

Daily Caller does tell the story of that guy who bought a house that ended up having been foreclosed on a secondary loan, with the primary hanging. That would seem to say that the electronic system can't get it right. It isn't just a question of getting paper to catch up.

Tom Grey writes:

It took me a week to review the TARP ideas before opposing it, and opposing McCain going to DC to save it.

Let the banks, and AIG, and the "top" finance system go thru bankruptcy, and let courts kill equity & bonuses & excess top management -- with the Fed doing "everything really necessary" for the finance system to do the one thing needed:
give loans to companies with good projects.
Of which, in summer of 2008, there were very few.

Let the lawsuits kill the banks now, too.
Better, mid size banks, are waiting (with CASH!), to lend to any Big Bank customers that lose their big bank supplier.


The banks should probably also sue both their lawyers AND the ratings agencies.

EmmaZahn writes:

"I wish that some of the pontificators had some business experience."

Word.

byomtov writes:

none of this is a reason to delay foreclosing on delinquent borrowers.

Of course it is. You can't foreclose if you can't prove that you are the mortgage holder. And you need the records to prove that.

And if the system works as beautifully as Arnold Kling says, why is it hard to get accurate, honest, documentation as to who is entitled to foreclose?

They are overwhelmed? Tough. Lots of people are looking for work. Go hire some to help out.

Dan writes:

Bankruptcy is not an option. While bank holding companies can file for bankruptcy, a bank (e.g., the entities that have N.A. at the end of their names), the entity that holds deposits and makes loans, cannot file for bankruptcy under the Bankruptcy Code. See 11 U.S.C. section 109(b)(2). Even if a bank could file, the bankruptcy system is not set up for banks. A depositor, for example, would be prevented under the Bankruptcy Code from withdrawing money (a depositor is, legally, a creditor of the bank).

Now maybe Arnold would argue for a change in bankruptcy law, but the changes would need to be so extensive in order to work that there is no way those changes could be made in a short period of time.

LJR writes:

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