The Foreclosure Mess: We All Need to Calm Down

Includes: BAC, JPM, PNC
by: Marc Gerstein

The paperwork chaos that caused major banks like Bank of America (NYSE:BAC), JP Morgan Chase (NYSE:JPM) and PNC Financial (NYSE:PNC) to suspend foreclosures is a huge mess; no doubt about that. But some of the rhetoric surrounding all this is just plain absurd, designed, it would appear, to bring attention and publicity to the writers rather than to shed light on the issues.

Details are sketchy, but as far as I can see at this point in time, the immediate problem is sloppiness in the paperwork needed to support a foreclosure case.

All real estate transactions involve lots of paperwork. Anyone who has ever bought or sold property, especially when a mortgage is involved, knows that. So naturally, when you foreclose, a lot of paperwork must be presented to the court to make sure all is as it’s supposed to be: the fact of homeownership, the existence of a loan, the existence of a security interest (the mortgage), the non-payment, notifications, etc.

Plan A for a creditor seeking to foreclose would be to supply each document to the court as part of the case filing. The positive, here, is that this process is usually bulletproof. The bad part is that it’s time consuming and expensive (in terms of many hours at the bank and probably billable hours at the law firm).

Plan B is for the creditor to supply an affidavit swearing (not a casual oath between friends, but a legal oath of the stature we see when a witness first comes up to the witness stand to testify) that the signer reviewed all the documents and that they are as they are supposed to be. The positive, here, is that this process is faster and cheaper. The bad part is... well, we’re seeing it now: it’s easy in this day when people are so accustomed to signing voluminous things they never read (including all those licenses we all sign when we install software and user agreements we all sign when we set up web accounts) for the presumably not-high-level employees to be similarly careless about the affidavits they sign.

So is this a fraud, as so many have been screaming about?

Strictly speaking, yes it is. Fraud is a knowing misrepresentation of material facts, and based on early indications, that is what those who signed the affidavits have done. Could they be sued? Could they go to jail? Off the top of my head and without looking more closely at the relevant laws, I’d say there is the possibility of liability, although I suspect it may more likely fall on the employer-banks rather than the individuals (as often happens in the principal-agent, employer-employee relationship). The letter of the law is one thing, but as anyone who has ever exceeded a speed limit or rolled past a stop sign without coming to a full stop knows, the justice system and possibly the social order would quickly collapse if every infraction were prosecuted to the max. Common sense and practicality usually rule. For the banks, this may be small comfort (penalties could be huge), but I don’t expect hordes of clerks to be rounded up and locked away.

Now, let’s move on to the delicate part. What kind of fraud is this?

Is this like Enron or WorldComm? Is this analogous to analysts who put Strong Buy ratings on stocks they privately disdain? It’s not even close.

Nobody is claiming that these properties didn’t deserve to be foreclosed. Nobody is denying that had the paperwork been in order, the foreclosures would have been slam dunk correct outcomes.

So please, commentators, calm the heck down.

We still have a problem, a big procedural mess that needs to be fixed, and it may be time consuming and expensive and it definitely will be irritating as heck. But it will not bust the moral integrity of our way of life. Actually, the moral integrity of our way of life looks to be doing just fine considering that the whistle has been blown and that we’re at step one of the process of repair.

Now, what about defective titles?

Well, I haven’t practiced law in a while so I may be rusty, but if a bank wanted to call me for an opinion, I’d say something to the effect that if there is a procedural error in a case, the only one who has standing to complain is the party that has been aggrieved by the error. English translation: If there has been a procedural error in a foreclosure, the only one who has a right to complain would be the borrower whose property was foreclosed. As long as the borrower had notice and an opportunity to challenge the foreclosure, if the borrower fails to do that within the legally prescribed time, then the foreclosure is valid, as is the title that passes to the next borrower.

To repeat, this foreclosure mess is troublesome enough as it is. There’s no need to listen to merchants of hysteria who want to exploit it.

Disclosure: No positions