When I’m writing about politics, I’ve been regularly discussing the legal problems related to the collapse of Big Shitpile (the foreclosure crisis). At Naked Capitalism, Yves Smith lays out why this matters (so I don’t have to stumble my way through this):
Make no mistake about it: the nature and scale of these frauds cut at the very heart of our judicial process. We didn’t call the Florida courts “kangaroo courts” lightly. A home is most people’s most important asset; shelter is a bedrock of personal security. Both the Fifth and the Fourteenth amendments enshrine the notion of due process, yet we see increasing evidence of it being violated on a routine basis in the Sunshine State.
I would add this failure is one promulgated by economic and political elites–our betters are not behaving themselves. And now we read that the chicanery gets even worse:
We finally have concrete proof of how widespread document fabrication was….
Not only are there prices up [in the discovered documents] for creating, which means fabricating documents out of whole cloth, and look at the extent of the offerings. The collateral file is ALL the documents the trustee (or the custodian as an agent of the trustee) needs to have pursuant to its obligations under the pooling and servicing agreement on behalf of the mortgage backed security holder. This means most importantly the original of the note (the borrower IOU), copies of the mortgage (the lien on the property), the securitization agreement, and title insurance.
Also notice that there is a price for creating allonges [covered here].
In fact, there may be yet another incentive for homeowners to strategically default, if theoretically the defaulter could live in the home free of charge should the party holding the mortgage be unable to produce the title. Already there are thousands of homeowners in the US who are living “rent free”, so to speak, while they wait for the bank to foreclose or for the courts to honor a bank’s foreclosure claim. These people are socking away tens of thousands of dollars in savings, or spending it for that matter, while the disposition of their property is in limbo. Even when the bank is finally able to proceed with the foreclosure, they are not suing the homeowner for back principal and interest due, in part because the delay may have been caused by the bank itself, and in part because some states do not allow banks to go after other homeowner assets once a default occurs.
As the months go by, the difference between a homeowner living rent free in their home, and de facto owning the home free and clear through a form of squatters rights, is becoming very gray. This is not going to sit well with the people who continue to pay down their mortgage even if they are underwater, nor will it sit well with those who paid off their mortgage. Good financial stewardship, a virtue in the past, is looking more and more like foolhardiness. There is both a legal and social breakdown that is occurring here, upending over a century of contract law and prudent behavior that underlay the housing market.
The tragedy, as even a Mad Biologist understands, is that this was utterly avoidable:
This is the road map for solving the foreclosure crisis. The banks could have solved this on their own by engaging in real mortgage modifications, including write down of principal to bring underwater mortgages even with current housing prices, but they didn’t. The federal government could have solved this with cramdown or with a real HAMP, including a tribunal that homeowners could appeal to if the banks didn’t do it correctly, rather than the fake program they gave us. . . .
So, it will now fall to individual brave litigants to blaze the trail for governments, once again, to follow. Let me make this clear, in addition to the successes that some homeowners have had getting their foreclosure cases thrown out, things won’t really change until courts start awarding punitive damages.
Cramdown could have averted this. Yes, some banks would have gone under, their shareholders and bondholders would have been clobbered (hint: next time, invest more wisely). But, if enough people are desperate, they’ll try anything to get by. So we now have lenders and insurers afraid to do anything, since they don’t know who really owns the house.
Given the paralysis of our political system, this is only going to get worse. I never thought the double dip would start with a fraudulent allonge…