The mortgage morass
American officials
used to lecture other countries about their economic failings and tell
them that they needed to emulate the U.S. model. The Asian financial
crisis of the late 1990s, in particular, led to a lot of self-satisfied
moralizing. Thus, in 2000, Lawrence Summers, then the U.S. Treasury
secretary, declared that the keys to voiding financial crisis were
“well-capitalized and supervised banks, effective orporate governance
and bankruptcy codes, and credible means of ontract enforcement.” By
implication, these were things the Asians lacked but we had.
We didn’t. The
accounting scandals at Enron and WorldCom dispelled the myth of
effective corporate governance. These days, 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.
The story so far:
An epic housing bust and sustained high unemployment have led to an
epidemic of default, with millions of homeowners falling behind on
mortgage payments. So servicers – the companies that collect payments
on behalf of mortgage owners – have been foreclosing on many mortgages,
seizing many homes.
But do they actually have the right to seize these homes?
Horror stories
have been proliferating, like the case of the Florida man whose home
was taken even though he had no mortgage. More significantly, certain
players have been ignoring the law. Courts have been approving
foreclosures without requiring that mortgage servicers produce
appropriate documentation; instead, they have relied on affidavits
asserting that the papers are in order.
And these
affidavits were often produced by “robo-signers,” or low-level
employees who had no idea whether their assertions were true.
Now an awful truth
is becoming apparent: In many cases, the documentation doesn’t exist.
In the frenzy of the bubble, much home lending was undertaken by
fly-by-night companies trying to generate as much volume as possible.
These loans were sold off to mortgage “trusts,” which, in turn, sliced
and diced them into mortgage-backed securities. The trusts were legally
required to obtain and hold the mortgage notes that specified the
borrowers’ obligations. But it’s now apparent that such niceties were
frequently neglected. And this means that many of the foreclosures now
taking place are, in fact, illegal.
This is very, very
bad. For one thing, it’s a near certainty that significant numbers of
borrowers are being defrauded – charged fees they don’t actually owe,
declared in default when, by the terms of their loan agreements, they
aren’t.
Beyond that, if
trusts can’t produce proof that they actually own the mortgages against
which they have been selling claims, the sponsors of these trusts will
face lawsuits from investors who bought these claims – claims that are
now, in many cases, worth only a small fraction of their face value.
And who are these
sponsors? Major financial institutions – the same institutions
supposedly rescued by government programs last year. So the mortgage
mess threatens to produce another financial crisis.
What can be done?
True to form, the Obama administration’s response has been to oppose
any action that might upset the banks, like a temporary moratorium on
foreclosures while some of the issues are resolved. Instead, it is
asking the banks, very nicely, to behave better and clean up their act.
That’s worked so well in the past, right?
The response from
the right is, however, even worse. Republicans in Congress are lying
low, but conservative commentators like those at the Wall Street
Journal’s editorial page have come out dismissing the lack of proper
documents as a triviality. 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.
What should be
happening? The excesses of the bubble years have created a legal
morass, in which property rights are ill defined because nobody has
proper documentation. And where no clear property rights exist, it’s
the government’s job to create them. That won’t be easy, but there are
good ideas out there. For example, the Center for American Progress has
proposed giving mortgage counsellors and other public entities the
power to modify troubled loans directly, with their judgment standing
unless appealed by the mortgage servicer. This would do a lot to
clarify matters and help extract us from the morass.
One thing is for sure: What we’re doing now isn’t working. And pretending that things are OK won’t convince anyone.
© 2010 New York Times News Service
