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].
Immaculate documentation--awesome.
As I've discussed before, piss poor behavior--not to mention law breaking--by elites has social ramifications: only suckers would, at this point, believe in the sanctity of contracts. Numerian:
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...
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So, exactly how far are the social ramifications likely to spread? Sanction from higher judicial authority? Criminal or Civil liability for individuals in those elites who have been abuse both before and on the bench? Impeachment? Legislation to institute social reform, either at the level of ordinary Federal/State law, or full Amendment? Or breakdown to open violence, civil disorder, and collapse of rule of law?
And, more in theme with the Science aspect of ScienceBlogs, can anyone point to peer-reviewed sociology/anthropology papers regarding the degree that social ramifications can be expected to associate with degree of misbehavior by elites?
In a few cases, the judge has figured out that something is fishy and dismisses the case. Occasionally there are even sanctions imposed on the lawyers. But these cases seem to be the exception rather than the rule. Some state AGs have also announced investigations, but it will be months to years before we know the outcome of those investigations.
So far the most egregious examples have been mainly in Florida, where the legislature explicitly set up a "rocket docket" to handle the backlog of foreclosures (before these special courts were set up, according to a Miami RE lawyer who regularly comments at Calculated Risk, delays of two years or more were routine). But nasty cases have turned up in other states; I've heard about one case where the judge, in Brooklyn, determined by looking up the land record himself that the subject mortgage had in fact been satisfied, and he issued a demand to the lawyers to show cause why they should not be sanctioned for a frivolous filing.
I'm not sure where it goes from here, but it seems likely that a big chunk of real estate in Florida (and maybe other states as well) is now effectively worthless. Mike's mention of insurance companies presumably is a reference to the decision by some title insurance companies that they will no longer underwrite mortgages on foreclosed homes, at least by certain banks and in certain states. No title insurance -> no mortgage, so only people who can pay cash will buy such real estate. Not that paying cash guarantees that you won't be foreclosed on; there is at least one documented case in Florida of a bank foreclosing on a house which an investor had purchased with cash.
So, exactly how far are the social ramifications likely to spread? Sanction from higher judicial authority? Criminal or Civil liability for individuals in those elites who have been abuse both before and on the bench? Impeachment? Legislation to institute social reform, either at the level of ordinary Federal/State law, or full Amendment? Or breakdown to open violence, civil disorder, and collapse of rule of law?
And, more in theme with the Science aspect of ScienceBlogs, can anyone point to peer-reviewed sociology/anthropology papers regarding the degree that social ramifications can be expected to associate with degree of misbehavior by elites?
Sigh... I'm plagiarized by a spambot. Ah, well.
So, assuming Eric is right:
1) A lot of people will get screwed over
2) The rule of law may eventually grind out some retribution for some of the worst malefactors in the usual "too little, too late, if at all" way
3) The consequences may drastically affect the future of the real estate marketplace, but not society overall
4) The underlying system flaws are unlikely to be addressed
Oh, well. Armed revolutions are usually messy things, anyway.
I think that this advice is golden. The mortgage meltdown is the unfortunate, but inevitable, result of poor mortgage lending regulation. I think we have forgotten that borrowing money is a privlidge and not a right. Once we realize that lending is suppost to be a profitable, low risk business - the economy will improve again.