Late last week, Massachusetts’ highest state court upheld a lower court ruling
invalidating two foreclosures due to improper paperwork by banks.1 In its decision, the
Massachusetts Supreme Judicial Court ruled that U.S. Bancorp and Wells Fargo had
failed to prove they owned the mortgages when they foreclosed on two homes.
While consumer advocates are hailing the decision as a victory for borrowers,
homeowners are more likely to suffer the downsides—not the benefits—from the
Massachusetts ruling. This case is certain to set off a massive wave of litigation by
borrowers and lawyers eager to challenge a pending foreclosure. This in turn will
create tremendous uncertainty in the still-wobbly housing market: Will homebuyers
who bought a home out of foreclosure worry that their purchase will be invalidated?
Will prospective homebuyers get too nervous to come off the sidelines, thereby
driving up inventory and driving down home values? Will some homeowners be
encouraged to “strategically default” in the hopes of winning a “free house” from
technically faulty paperwork?
Before “foreclosure-gate” opens the floodgates for both litigation and greater
market uncertainty, policymakers need to step in with a common sense solution. As
egregious as the paperwork failures were in the Massachusetts case, it would be far
more damaging to the American economy if every foreclosure and every securitization
were suddenly open to question.
This memo outlines a set of solutions aimed at ending the potential crisis touched
off by the Massachusetts ruling. In particular, this memo proposes a series of policy
ideas to achieve the following three goals:
http://content.thirdway.org/publications/362/Third_Way_Memo_-_Fixing_Foreclosure-gate.pdfYou can read more at the link, but the upshot is that their solution is to supersede established state laws in order to bail out the TBTF banks. See below:
This proposal guts state control of their own real estate law when the Supreme Court has repeatedly found that “dirt law” is not a Federal matter. It strips homeowners of their right to their day in court to preserve their contractual rights, namely, that only the proven mortgagee, and not a gangster, or in this case, bankster, can take possession of their home.
This sort of protection is fundamental to the operation of capitalism, so it’s astonishing to see neoliberals so willing to throw it under the bus to preserve the balance sheets of the TBTF banks. Readers may recall how we came to have this sort of legal protection in the first place. England learned the hard way in the 17th century what happens with low documentation requirements: abuse of court procedures, perjury and corruption become the norm. Parliament enacted the 1677 Statute of Fraudsto establish higher standards for contracts, such as witnessing by a third party, to stop the widespread theft of property that was underway.
The memo completely ignores the harm to investors from the bank mistakes and lacks any provisions for damage to investors to be remedied. Moreover, denying borrower rights removes their leverage to obtain deep principal mortgage modifications, which for viable borrowers produces lower losses than costly foreclosures and sales of distressed property. Thus this shredding of contractual protections in mortgages not only hurts borrowers but also harms investors.
So to save the banks from their own, colossal abuses of contracts that they devised, the Third Way document advocates Congressional intervention into well established, well functioning state law. This is a case where these matters can and should be left to the courts and ultimately state AGs to coordinate the template of a more broadbased solution.
http://www.nakedcapitalism.com/2011/01/dc-puts-its-bankster-friendly-solution-for-foreclosure-fraud-on-the-table.htmlI would urge everyone who is interested in the foreclosure mess to read both articles in their entirety.