Last decade, liberal Democrats decided to impose a system that encouraged and enabled home ownership by people who could not afford to buy homes. This decision played a major role in nearly wrecking the banking system and in throwing the economy into a deep recession.
Now, even as the economy labors to overcome the effects of that recession, the same crowd is about to strike again. In combination with lawyers and some judges, liberals Democrats are seizing on what appears to be a technicality to enable people who can’t afford to keep up payments on their homes nonetheless to keep the homes.
Harry Reid, desperate to find an issue that can save his job, has sent a letter to major banks asking them to suspend foreclosures. Bank of America has halted evictions in all 50 states. And senior Obama administration officials are saying that a nationwide moratorium on foreclosure sales may be inevitable.
As I understand it (and I’m hardly an expert in this area), the technicality in question appears to arise from the speed at which mortgages were sold from institution to institution and the fact that the paperwork did not always keep up with these transaction. Liberals and their friends the trial lawyers are calling this fraud and using it as a pretext to seek relief for people who indisputably can’t pay their mortgages. As noted above, they seem to be succeeding in this effort.
If these liberal have their way, it’s easy to imagine that both the housing market and the banking industry will be thrown into turmoil, with dire consequences for our fragile economy.
It won’t be much of a consolation, but in this scenario I think President Obama can forget about being re-elected. He’s already cornered the deadbeat vote. The rest of us won’t be amused if, in the name of relief for deadbeats, we experience another recession.
I’m probably missing something here. Please tell me that I am.
UPDATE: The Wall Street Journal has basically the same take as I do on this potential crisis. Here’s how it characterizes the “scandal” that is driving the push for a moratorium on forecloses:
A consumer borrows money to buy a house, doesn’t make the mortgage payments, and then loses the house in foreclosure–only to learn that the wrong guy at the bank signed the foreclosure paperwork. Can you imagine? The affidavit was supposed to be signed by the nameless, faceless employee in the back office who reviewed the file, not the other nameless, faceless employee who sits in the front.
It concludes that a moratorium would “further politicize the housing market and further delay a housing recovery.” Thus, “in an economy and a financial system engulfed in Washington-created uncertainty, the political class has decided to create still more.”
However, one of our favorite readers, who has knowledge of some of the litigation swirling around this issue, offers a somwhat different perspective:
I agree with you that the left is seizing on this issue as a means of changing the subject, but it is not just a stupid technicality. The issue arises in the states, 23 I believe, that only permit judicial foreclosure, and in any case in which the borrower has filed for bankruptcy. In the latter case, the lender must obtain relief from the automatic stay in order to foreclose. In both situations, the lender must submit proof that it owns the note and holds at least a beneficial interest in the mortgage or deed of trust. Otherwise, the lender lacks standing.
The standard practice is to have someone working for the lender sign, under oath, an affidavit asserting on personal knowledge that the lender did own the note (usually by possession of a note endorsed in blank) and deed of trust or mortgage. In all too many cases, that affidavit was false. The affiant had no idea whether the lender had the required documentation; s/he just signed an affidavit prepared by some other functionary. The problem came to light when several bankruptcy judges, tired of seeing what amounts to perjured testimony in their courts, refused to lift stay.
The lenders need to get their ducks in a row before starting the foreclosure process. A judicial order such as lift stay or foreclosure that is procured by fraud is vulnerable to a collateral attack. Suppose the lender does foreclose and then, six months later, the borrower claims fraud and files a lis pendens. That will not do wonders for the lender’s ability to resell the home. I would think that the ultimate purchaser could claim to be a good faith purchaser for value without notice, but an argument that the widespread publicity about the lenders’ misdeeds is notice to the buyer does not strike me as frivolous.
Obviously, the sooner the housing market hits a bottom, the sooner it will recover. Lenders that foreclose based on false affidavits reduce the speed with which that bottom will be hit, not least because their misdeeds open the door for some demagoguery from the left.