Who has the right to foreclose?

Let’s review: a collapsed housing market and sustained high unemployment have left millions of homeowners falling behind on mortgage payments. Until early September, home foreclosures and seizures continued at a record pace. But who, if anyone, has the right to seize these homes? Based on the discovery of apparently flawed foreclosure documents and likely criminal industry procedures, the answer is very unclear.

Legal analysts see one gigantic problem: How do you foreclose on a home when you can’t figure out who owns it? Since the mid-1990s, original mortgages have been sliced and diced so many ways as part of a “derivatives” investment package that legal ownership is often unrecognizable.

As if that weren’t enough, many of those who sign off on foreclosures are so-called “robo-signers” tied to a computerized program that is often identified in proceedings as the owner of record. Roughly 65 million homes are potentially affected. Employees at some lender banks have also admitted to signing off with absolutely no review.
As the public learned all this, it also got wind of The Interstate Recognition of Notarizations Act, which would have forced state courts to ignore many of the most commonly cited flaws, potentially streamlining and accelerating the already record pace.

The Act, first passed by the House in April of this year, sat quietly in the Senate Judiciary Committee until the day before Congress recessed for its midterm-election break. On September 27, with little attention or public debate, the bill was unexpectedly brought to the Senate floor and passed. A little over a week later, President Obama broke with his own party's leadership and announced that he’d veto the legislation.

Then, in mid-October, fifty-one Attorneys-General (including D.C.) simultaneously launched investigations into allegations that flawed documents were used in hundreds of thousands of foreclosures. Critics found it hard to imagine manufacturing $14 trillion worth of mortgage-backed securities and other games of mathematical chance in five years without cutting a lot of corners.

Within days, major lenders announced actions ranging from a temporary nation-wide moratorium on foreclosures to promises to hire “outside” reviewers or to review for potential defects even though lenders “had discovered no problems.” By month’s end, Bank of America had reinsituted foreclosures in 23 states, amending its declaration of “not one case” of error to read “a tiny number,” generally “misspellings and omissions.”

Sadly, the White House warned of the “unintended consequences to a broader moratorium.” Treasury Secretary Geithner cited “too many people taking on debt they couldn’t handle,” plus “Don’t hurt the recovery!” and “the Wisdom of Markets Forces” as reasons to oppose an extended moratorium while neglecting to show how to detect and quantify people who were “foolishly overextended.” He also failed to note that “the recovery” is 25-30% fueled by sales of foreclosed properties, or that the Free Market allowed banks to launch this “runaway train.”

Some prominent economists believe Geithner’s reluctance to back a moratorium is based on the fact that the government owns or is backing trillions of dollars in assets that no one wants, predicated on the same or similar suspicious loans that defaulted during the last Bush years, when the White House did nothing to stop the wave or force banks to restructure.

If foreclosed homes couldn’t be sold because of fraudulent paperwork or had to wait for more detailed inspections, imagine how difficult selling assets stuffed with faulty loans might be.

If it’s tough to find a title for a foreclosed home, think how tough it is to extract the related loan from a pyramid of securities sitting on top of it.
If a foreclosed property isn’t selling, it’s not recovering any money back to any asset waiting for it. What that can do to the value of toxic assets living at the Fed and the Treasury Department is simple: kill it.

Geithner’s stance is a reminder that business as usual has resumed. Candidate Obama advocated a foreclosure moratorium, as did his opponent. So did newly sworn-in President Obama. That was when things were still bad for the banks and the markets. Then profits, bonuses and stock prices got stronger. So did the power of the TooBigToFails.

The response from the Right is even worse. The GOP is mum, but its media surrogates (esp. The Wall Street Journal editorial page) have dismissed the lack of proper documents as a triviality. Paul Krugman put it best: In effect, they’re saying that if a bank says it owns your house, we should just take its word. To me, this evokes the days when noblemen felt free to take whatever they wanted, knowing that peasants had no standing in the courts. But then, I suspect that some people regard those as the good old days.

In 2000, then-Treasury Secretary--and now soon-to-be-departed White House economic guru Lawrence Summers--declared that the keys to avoiding financial crisis were “well-capitalized and supervised banks, effective corporate governance and bankruptcy codes, and credible means of contract enforcement.”

Back to Professor Krugman: The accounting scandals at Enron and WorldCom dispelled the myth of effective corporate governance. The idea that our banks were well capitalized and supervised sounds like a sick joke. And now the mortgage mess is making nonsense of claims that we have effective contract enforcement — in fact, the question is whether our economy is governed by any kind of rule of law.