Sunday, October 10, 2010

Obama Administration Falsely Frames Foreclosure Fraud As a "Paperwork" Problem

We knew this was coming:
The Obama administration opposes a moratorium on home foreclosures, but wants problems involving improper paperwork resolved as quickly as possible, senior adviser David Axelrod said Sunday.
"I'm not sure about a national moratorium," Axelrod said on the CBS program "Face the Nation." He said valid foreclosures with proper paperwork should go forward, and that questionable foreclosures need to be addressed right away.

"Our hope is that this moves rapidly and that this gets unwound very, very quickly," Axelrod said.
The Wall Street Journal simultaneously channels the same meme:
Talk about a financial scandal. 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.

The result is the same, but politicians understand the pain that results when the anonymous paper pusher who kicks you out of your home is not the anonymous paper pusher who is supposed to kick you out of your home. Welcome to Washington's financial crisis of the week.

In the 23 states that require judicial foreclosures, lenders seeking to seize property from a delinquent borrower must file a summary judgment motion in court. Typically, this document must be signed in the presence of a notary by a "witness" who has reviewed the relevant documents and confirmed that the borrower is in default and the lender owns the mortgage.
Recently GMAC Mortgage, whose parent Ally Financial is majority-owned by the U.S. government, suspended foreclosures in those 23 states after acknowledging that in some cases notaries may not have been present and the signers may have relied upon others to review the documents instead of doing it themselves. Bank of America and J.P. Morgan Chase then halted their own foreclosures in those 23 states to ensure they are following the letter of the law, and yesterday BofA announced its moratorium is now nationwide.
Notice how this piece focuses on notarization of affidavits in support of summary judgment motions instead of forged documents being used to fraudulently establish a chain of title? 

Steve Pearlstein at the Washington Post puts his own spin on the "paperwork" meme:
Listening to the fiery rhetoric about the mortgage mess emanating from politicians this week, you'd think that big bad banks were trying to foreclose on hundreds of thousands of homeowners who were current on their payments but had become victims of sloppy business practices. If that were the case, declaring a national moratorium on foreclosures would be the just and reasonable thing to do.

But if, as appears to be the case, the overwhelming majority of homeowners facing foreclosure have fallen far behind on their payments, then it is a good deal harder to summon up the same moral outrage over reports that the banks and loan service companies cut corners, failed to keep the right documents and engaged in shoddy and even fraudulent practices. Just because the banks and servicers have screwed up doesn't mean they and their investors are no longer entitled to get their money back.

Certainly banks and servicers should, at their own expense, be sent back to do things right. Those who engaged in fraud should be punished. And if there are legitimate questions about who owns a loan, those will need to be resolved before the proceeds of any foreclosure are distributed.

But none of that changes the basic reality that there are millions of Americans who took out mortgages they could not support on houses they could not afford. It may be necessary to postpone their day of reckoning for a few months to get the paperwork in order and ensure that all the proper procedures are followed, but the reckoning is inevitable.

. . .

The breakdown in the foreclosure system has also exposed serious weaknesses in the way mortgages are written, packaged and serviced that should force the industry to adopt instruments and structures that are simpler and easier to change when things go wrong. Based on the recent revelations, the consumer protection agency should require that mortgage servicers meet minimal standards of customer service and offer clear procedures for loan modification and third-party adjudication before the foreclosure process can be initiated. If this adds to the price of a loan, so be it.

That said, those who are cheerleading for a moratorium should realize they can only push things so far. It would not help the recovery of the economy, or the real estate market, if the foreclosure process became so hopelessly tangled that banks and investors effectively lose the ability to recoup the remaining value of their collateral. That would provide some immediate financial relief to households facing foreclosure, but it would encourage many more homeowners to begin shirking their mortgage payments in the belief that they would also be able to avoid the consequences. The long term consequences of that would be that mortgage rates would be higher and mortgage loans would be smaller and harder to get.

Perhaps it is only natural for Americans to take some guilty pleasure in watching as the big banks and Wall Street wizards who created this flawed and complex mortgage machine are hoisted on their own petards. But be careful what you wish for. The financial system is still fragile enough that we may not be able to afford a full helping of revenge.
It's just a "flawed and complex mortgage machine."  Nothing to see here.  Move along.

Expect to see this meme being pushed as a major talking point from all of the major media outlets and professional pundits of all stripes over the next week or so.  When everybody bursts into singing the same tune at the same time, you should be suspicious.