A whole bunch of pixels and ink have been transmitted and spilled over the gathering realization that mortgage company foreclosure mills don’t often dot all their i’s and properly cross their t’s when foreclosing a mortgage.  

Ever since the securitization  and commoditization of residential real estate mortgages greatly enhanced the liquidity of residential real estate equity, foreclosure mills arose on the back side to ensure an easy and quick resolution of problem properties such that they minimized damage to the overall profitability of the mortgage operation.

Paperwork problems are nothing new to the foreclosure process.  Foreclosure mills have always done the bare minimum to get the foreclosures done and the property liquidated.  Every penny spent on foreclosure is another penny added to the losses already accrued because of the defaulted promissory note.

Judges in all the jurisdictions requiring court-supervised foreclosure didn’t just today discover that foreclosure mills cut corners so far as they are able.   But when foreclosure volume exploded, multiplying the court’s (and thereby the judge’s) work load many times over, judges decided to use the power of the bench to slow things down to a manageable pace, leveraging what they had always known–that there were always enough mistakes and outright fraud in the mortgage foreclosure process to hamper and delay a foreclosure if they wished to.    When a trickle of foreclosures became a deluge of their constituents losing their homes, judges realized they could not only lessen their madcap workload, but also make political hay out of their sudden concern over legal technicalities they had always before ignored.   National mortgage companies and banks were not their neighbors or political constituents, but the foreclosed homeowners were.   

So judges got religion, and started asking questions to which they already knew the answers.  Indeed, mortgage company assignments were rarely properly completed and filed.  Did it matter to the borrower, who indisputably owed the money?  No, the borrower still owed the money.  But the court could use the borrower as its foil, and claim he’d been injured by the lenders’ failure to properly dot the i’s and cross the t’s.  Bullshit.  The borrower still owed the money as the court well knew.  If the lenders had failed to keep a proper paper trail for ownership of the mortgage, that was a problem for them, and had no bearing on the borrower’s default.  So long as the fact of a mortgage and underlying repayment obligation (a note) were not in dispute, slowing down the process of foreclosure because the court didn’t like the foreclosing mortgagee’s paperwork operated as a windfall to defaulted homeowners.

Then, outrageously, some courts actually punished the lenders by awarding the house, obligation free, to the defaulting borrowers.  They didn’t care that awarding a $150,000 house to a defaulting borrower just put a $150,000 hole in some bank or mortgage company’s balance sheet that would have to be filled somehow, and that if enough judges decide to likewise behave, the only entity with the resources to fill those holes would be–you guessed it–the government, i.e., the taxpayers.  Tarp II, get ready.  But the defaulting homeowner receiving such a windfall would only pay a small, small amount as his share of those taxes.  He still gets a windfall.  Judges understand this.

The incentive now is to be the state with the greatest number of defaulting homeowners who have their mortgages and debt nullified.  They gain at the expense of those states where judges don’t have the opportunity to queer up the foreclosure process.  Though the mortgage funding market is national in scope, it is local in operation, and the majority of states don’t require court supervision to foreclose a mortgage.  But taxes to pay for Tarp II won’t single out for additional taxation the states that reaped the greatest windfall of nullified debt.

I often  wondered aloud during closings I conducted what would happen to the mortgage market if a calamity like the Great Depression were to hit again.  Would the notes the borrowers were signing before me be worth the paper they were printed on?  Now I have my answer:  No.   And it didn’t even take a Great Depression.  Just a bit of a hiccup contraction in economic activity.

During a market downturn, people naturally seek to avoid and have nullified obligations agreed upon during better times.  If enough are affected by the downturn and they yield enough political power in aggregate, this episode proves that politicians will find ways to abrogate obligations for them, including providing government resources to modify the obligations (i.e., HAMP, etc).  So far as the twenty-three states requiring court supervision of foreclosures goes,  it also proves that judges and politicians will gleefully help defaulting homeowners by using legal technicalities to void, or at least postpone, the consequences for failing to meet their obligations.   But bowing to political pressure to abrogate obligations is a dangerous road to tread.  Soon enough, everyone wishes in on the act, and otherwise plain-English obligations become like something out of Alice in Wonderland, meaning whatever the politicians wish them to mean.   Agreements among citizens become impossible.  The only enforceable agreement is the one imposed upon the citizen by the government.   Freedom dies. 

This truly is a values-free culture.   Dishonoring an agreement, so long as it concerns residential real estate in one of the states requiring court supervision of foreclosures, has little to nothing of the consequences anticipated by the contracting parties.  State court systems exist not enforce the obligations of contracts, but to abrogate them, and so much the better if the cost of abrogation will be borne by people the next state over. 

And that’s part of why I am… The Curmudgeon.

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