From the Washington Post:

“People thought people who didn’t pay their mortgages were automatically deadbeats,” he said. “People are educated now. They are realizing all of a sudden how many hundreds of thousands of these homes that were foreclosed may have been done so with fraudulent documents.”

Thus says the deadbeat homeowner, to whom a New York trial court judge awarded a home free and clear, wiping away nearly $300,000 in mortgage debt.  From the same article:

The judgment in favor of the homeowner, Diane Yano-Horoski, which is being appealed, has alarmed the nation’s biggest lenders, who say it could establish a dramatic new legal precedent and roil the nation’s foreclosure system.

It is not the only case that has big banks worried. [NY trial court judge] Spinner and some of colleagues in the New York City area estimate they are dismissing 20 to 50 percent of foreclosure cases on the basis of sloppy or fraudulent paperwork filed by lenders.

Their decisions illustrate the central role lower court judges will have in resolving the country’s foreclosure debacle. The mess came to light after lawsuits and media reports showed lenders were routinely filing shoddy or fraudulent papers to seize the homes of borrowers who had missed payments.

If this idea of awarding homes to people that have defaulted, in the process wiping out any hope of recovery for the mortgagee, gains traction, these will be a few of the consequences:

–Residential real estate markets will virtually freeze in those states requiring judicially-supervised foreclosure (23 states).

–The residential real estate securitization train will rumble to a halt nationwide.

–Banks would again be insolvent, not able to handle the gaping balance sheet holes that writing off as total losses all the defaulted mortgages on their books would entail.   

–The Treasury would have to institute Tarp II, while the Fed Reserve is busy implementing QE II.

–International investors would balk at buying Fannie Mae and Freddie Mac mortgage-backed securities, making trade imbalances even more difficult to fund.

–Ultimately, the dollar will dramatically suffer, both domestically and abroad.  Oil would hit $200 a barrel, which would paradoxically reduce the unemployment rate, as prices outpace wage gains, effectively yielding a cheaper wage rate.

And so on, ad infinitum, like giving a mouse a cookie.  Adopting this home give-away nationwide, or at least in the 23 states that require judicial foreclosures would ultimately be so destructive to the economy that ironically, the economy might finally have a chance to reach its natural bottom; to clear out the structural deadwood sucking up the nutrients and energy needed by new growth; in short, to so effectively destroy everything until individual priorities readjust and those ephemeral animal spirits  reappear and reinvigorate prospects for growth.

So, even though it would be painful, I sorta hope the idea gains credence.  A house for an affidavit.  It may be the last great hope for a sustainably growing economic system.