The first thing that needs to happen is...

October 15, 2010 9:04 AM

"The first thing that needs to happen, I think, is to get these people out of their homes," a man wearing a bespoke blue-striped shirt, a Hermés tie patterned with elephants and Ferragamo loafers said recently. But, maybe Wall Street doesn't understand why foreclosure fraud is so dangerous to property rights? And, the Obama administration doesn't understand why HAMP has been a portrait in failure for homeowners (in eight parts I, II, III, IV, V, VI, VII, VIII.)
posted by ennui.bz (107 comments total)

A bespoke suit, you say?
posted by fourcheesemac at 9:06 AM on October 15, 2010

Was he also wearing a monocle and a top hat?
posted by spicynuts at 9:12 AM on October 15, 2010 [4 favorites]

Know them by the lighting of their cigars with hundred-dollar bills.
posted by Mister_A at 9:13 AM on October 15, 2010

Did he have a jetpack?
posted by thirteenkiller at 9:14 AM on October 15, 2010

you need to go back to people living in houses that are consistent with their income levels.

Which in many cases means living in a washing machine box.
posted by Mister_A at 9:15 AM on October 15, 2010 [7 favorites]

So at what point do we just rise up and start pushing Wall Street bankers out of windows?
posted by Pirate-Bartender-Zombie-Monkey at 9:16 AM on October 15, 2010 [9 favorites]

When construction companies start building houses that are consistent with people's actual income levels rather than giant redonkulous ego massaging mcmansion monstrosities, maybe people will actually be able to find houses they can afford.
posted by spicynuts at 9:16 AM on October 15, 2010 [4 favorites]

This is one of those topics where I find myself not liking the hyperbole on either side of the fight. A mortgage is kind of like a weird rent you pay to the bank. I'm all for banks having to jump through the hoops properly to foreclose, but just the mere fact of being a so-called homeowner shouldn't really give one protection to live somewhere without paying.

Blaming construction companies is silly--there are plenty of smaller, less bling homes being built and for sale.
posted by Burhanistan at 9:19 AM on October 15, 2010 [6 favorites]

I'll tell ya, anyone arguing that it's okay to borrow a million bucks, fail to make the payments, and then extend a big middle finger to the lender is supporting deliberate fraud. If you really believe it's okay, "hey, I'm just stealing from the banks", then you hereby and forever give up all rights to criticize any corrupt entity anywhere in the country. When the rubber hit the road, you showed you were just as corrupt as they are, if not more so.

It's the ethics of convenience.... you want to keep your house, you don't want to keep making those annoying payments, so hey! it's all good to steal the house.

It's no different than putting on a bandanna and robbing the bank at gunpoint. "You can't prove it was me, coppers!" is precisely the same as "You can't prove you own my house, bank!"

Now, I'm totally supportive of giving up on a house if it's underwater. If it makes financial sense for you to default and give up on a house that will never make you a profit, do it. The lending system in this country is remarkably supportive of the little guy in this instance; the lender takes on most or all of the risk of the transaction, without being able to keep much of the profit. They knew exactly what they were getting into, so if you're underwater, hell yeah, mail in your keys and walk away. You don't have an ethical responsibility to keep making the payments, you have an ethical responsibility to fulfill the contract, one clause of which gives you an escape hatch.

But outright stealing the house? Fuck that noise. That's corrupt as fucking hell. You have no further right to complain about the state of society, because every time you look in the mirror, there's someone just as bad or worse staring back. First chance you had to be a villain, you grabbed with both hands and hung on tight.
posted by Malor at 9:20 AM on October 15, 2010 [30 favorites]

"You do need to foreclose, and you need to go back to people living in houses that are consistent with their income levels."

So at what point do we just rise up and start pushing Wall Street bankers out of windows?

Why is only one of these statements criticized as "class warfare?"
posted by Naberius at 9:21 AM on October 15, 2010 [8 favorites]

When construction companies start building houses that are consistent with people's actual income levels rather than giant redonkulous ego massaging mcmansion monstrosities, maybe people will actually be able to find houses they can afford.

Come on. Wall Street is run by jerks, but without a doubt people were putting themselves in way too much debt to buy the gigantic house they didn't need. The idea that it simply wasn't possible for them to find reasonable houses is silly- these people wanted brand new houses in new developments that took up 90% of the yard. A lot of these homeowners made very bad decisions; the fact that a slimy merchant is very eager to sell you posion doesn't mean you have to drink it.
posted by spaltavian at 9:26 AM on October 15, 2010 [3 favorites]

"Never Mistake Incompetance for Evil" I think is the operavtive term here. No money to be made in handling the documents, so no one ever cared about doing a good job of it. The fact remains you didn't make the mortgage payments, you lose your house that's deal.

What I'll never understand is why people associate some stigma with deed-in-lieu (aka walking away), foreclosure, or bankruptcy. Shit happens to people.
posted by JPD at 9:27 AM on October 15, 2010 [2 favorites]

Fair points but I don't think I was actually implying that the entire thing rests on the shoulders of construction companies. There's a shit ton of blame to go around. I was just tossing off a comment in the same vein as anyone trying to put all of the blame on greedy consumers.
posted by spicynuts at 9:29 AM on October 15, 2010

What I'll never understand is why people associate some stigma with deed-in-lieu (aka walking away), foreclosure, or bankruptcy. Shit happens to people.

What I'll never understand is why people associate some stigma with bank failure, bond default and market crashes. Shit happens to investors.
posted by ennui.bz at 9:32 AM on October 15, 2010

I've seen the word "bespoke" used with increasing frequency over the last two months. Can we please stop it?

Back on topic, Barry Ritholtz has a good linkfest about the underlying problems in the housing market. The banks have been committing fraud on a massive scale. It's asset stripping on the level that we've never seen in the US.
posted by ryoshu at 9:32 AM on October 15, 2010 [3 favorites]

Never Mistake Incompetance for Evil

The cleverest thing I've ever heard a Republican congressman say is: "Sufficiently advanced incompetence is indistinguishable from malice." I don't know if the riff on Clarke was original with him or not.
posted by empath at 9:33 AM on October 15, 2010 [7 favorites]

What I'll never understand is why people associate some stigma with bank failure, bond default and market crashes. Shit happens to investors.


snark if you want even though you don't understand what I was saying, but I don't disagree with your point either.
posted by JPD at 9:34 AM on October 15, 2010

Why is only one of these statements criticized as "class warfare?"

They are both class warfare. That's the important thing.

In this kind of war, what really gets stuck in people's craw is a feeling that the government is supporting one side or the other unfairly.

From the lenders' side (in the article): "but now they want to stay. And the government wants to let them stay, because they're voters".

In other words. "The gov't is unfairly supporting the borrowers."

From the borrowers' side, we see that the banks want to kick people out without following the rules. The rules they themselves wrote and profit by. The lenders make incredibly weak arguments like "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?"

Well yes, we can imagine, because you require us to follow the letter of the contact, but you yourself don't have to follow the letter of the contract. How is that fair? How is it right to use the gov't courts to prosecute us without yourself being bound by the same rules?

I'm not going to call it a moral failure on either side, I simply want the contract to be followed to the letter. If it isn't, and it is impossible for the contract to be followed because the lenders themselves screwed up, well then yes, I deserve a free house, think of it as a penalty for failing to follow the law. The banks would be the first to suggest the reverse.
posted by Invoke at 9:35 AM on October 15, 2010 [19 favorites]

Actually let me take that back - I feel even more strongly about what you said ennui.bz then what I did about the stupidity of stigmatizing people having housing issues.
posted by JPD at 9:35 AM on October 15, 2010

The fact remains you didn't make the mortgage payments, you lose your house that's deal.

A mortgage is a legal contract. Failing to follow the contract or the law to the letter causes a lot of people to lose money or lose their homes. When the banks do the same thing, they too should have to pay a price. That's the deal.
posted by East Manitoba Regional Junior Kabaddi Champion '94 at 9:36 AM on October 15, 2010 [8 favorites]

I'll tell ya, anyone arguing that it's okay to borrow a million bucks, fail to make the payments, and then extend a big middle finger to the lender is supporting deliberate fraud.

Is anyone arguing that?

What I see is that the banks knew full well what the foreclosure process entailed. If they didn't want to have to deal with properly processing hundreds of thousands of foreclosures, they shouldn't have issued the dodgy loans. It is absolutely not the homeowners fault that the banks find the process difficult. By and large the homeowners did not shape the process; the banks surely have vastly more influence on the legal system. And the homeowners merely asked for the loan. The banks were under no obligation whatsoever to actually give it to them.

Furthermore, the banks have mechanisms for handling risk. Among other things, they can set the interest rate on the loan and require mortgage insurance. They had the means to hedge against the risk of a lot of foreclosures. If the banks gambled and lost, that's their problem.

Yes, forcing the banks to do it right may result in windfalls for some homeowners, possibly even including some unscrupulous ones. But allowing the banks to get away with slipshod foreclosures would definitely result in innocent homeowners having their property rights infringed. We know this because it's already happened.

This is essentially the civil law version of "better a thousand guilty people go free than a single innocent person be found guilty."
posted by jedicus at 9:37 AM on October 15, 2010 [15 favorites]

you need to go back to people living in houses that are consistent with their income levels.

Which could be accomplished by writing down the loan to a level commensurate with their incomes, as is done with other types of loans in bankruptcy proceedings.
posted by deanc at 9:37 AM on October 15, 2010

They are paying a price - it will go to the courts they will pay massive fines, they will have to reimburse all sorts of monoline insurers, etc, etc.

But that doesn't mean you get to keep the house you didn't pay for. It just takes a lot longer for the sheriff to change the locks.
posted by JPD at 9:38 AM on October 15, 2010

Oh, another thing. The banks draft the contracts. It's an important rule in contract law that contracts are construed strictly against the drafters. Where it's an issue of following the contract to the letter, the burden is on the banks. After all, they wrote it.
posted by jedicus at 9:39 AM on October 15, 2010 [4 favorites]

No ones denying the burden isn't on the banks or that they didn't massively fuck up. But painting this as some massive cabal to defraud holders of mortgages that they have defaulted on is comical.
posted by JPD at 9:40 AM on October 15, 2010

"You had people putting zero down to get massive houses they couldn't afford to be in,"

I find it uncomfortable that the Wall Street banker asks as though the banks weren't approving these loans left and right. Isn't that why we have long loan approval processes? So that the banks can look at the information available and decide if someone can afford the loan? Absolutely people were buying houses they couldn't afford, (I was one of them) but the banks were encouraging this and approving. The banks and the people buying houses all seemed to agree this was a great idea, and a great time to buy a house. Making one or the other side out to be crooks seems ridiculous, it feels more like a pyramid scheme: everyone thought they were going to get rich, unfortunately it doesn't work that way.
posted by thankyouforyourconsideration at 9:43 AM on October 15, 2010 [1 favorite]

The problem is they don't deserve to be in that place. They probably deserve to be there less than they used to," the source continued, referring to incomes lower now than they'd been when the loans were made in the first place.

I'm disturbed the the equation of having money with being more deserving. It's like being able to afford something is a kind of moral worth. It's yucky.

At this point I have no comment on whether foreclosures should go through, whose fault it is or any of that. I just wanted to say that the quoted statement makes me think that the speaker's worldview is fucked up and I would be a lot more comfortable and less judgey if he had said "The problem is they can't afford to be in that place. THey can probably afford it less now than before." Would that have been so hard?
posted by If only I had a penguin... at 9:44 AM on October 15, 2010 [3 favorites]

It's the ethics of convenience.... you want to keep your house, you don't want to keep making those annoying payments, so hey! it's all good to steal the house.

Receiving an unexpected windfall is not the "ethics of convenience." The banks knowingly took serious risks by not following protocol in order to increase their profit margins. Their incentives were misaligned (shocker) when it came to following the letter of the law and they chose not to do so, often at great profit to themselves at the time.

If I run a widget shop and have a single competitor, is it "the ethics of convenience" for me to increase my market share if my competitor's shop burns down? What if they chose not to insure, in order to increase their earnings? What if the fire was caused by their lack of safety protocols and intentional corner-cutting?

It's an unexpected windfall, sure, but not something the homeowners brought about intentionally.
posted by allen.spaulding at 9:47 AM on October 15, 2010 [3 favorites]

Did he have a jetpack?

He is said to have a jet-propelled yacht called Misunderstood.


Yeah, yeah...not the same guy, but it made me laugh.
posted by JaredSeth at 9:47 AM on October 15, 2010 [1 favorite]

I'm on board with incompetence. Have you guys ever tried to do business with a bank? I don't think I've ever had an interaction with the banks I've used more complicated than a simple deposit or ATM withdrawal that wasn't unnecessarily painful in one way or another.

Those HAMP stories are really harrowing are are another example of people in the financial industry just not really knowing what to do, caring, or having any particular timetable to accomplish things.
posted by ghharr at 9:48 AM on October 15, 2010 [1 favorite]

But that doesn't mean you get to keep the house you didn't pay for. It just takes a lot longer for the sheriff to change the locks.

What about the house that I keep paying for, and can afford, but can probably never sell, because I no longer have clear title to it, because Countrywide sold my mortgage, and then it was sold seven or eight times after that, and along the way the paper trail vanished.

In the contract it said that if I made all my payments, I'd get clear title to the property at the end of the process. Now what I see is the bank not having upheld their end of the process.
posted by anastasiav at 9:50 AM on October 15, 2010 [13 favorites]

But painting this as some massive cabal to defraud holders of mortgages that they have defaulted on is comical.

Yes, but what about a massive cabal to defraud buyers of mortgage-backed securities?
posted by ennui.bz at 9:51 AM on October 15, 2010 [4 favorites]

It's no different than putting on a bandanna and robbing the bank at gunpoint. "You can't prove it was me, coppers!" is precisely the same as "You can't prove you own my house, bank!"

Supposing it wasn't any different, you can't go to jail if they can't prove it was you, so why should we expect they should be able to foreclose?

Second, even if we didn't have an adversarial legal system and the homeowners ought to confess, they can't. It isn't like the homeowners actually know that the bank claiming to own the house actually has the right to foreclose. The securitization process splits up the bundle of rights among a variety of entities, and the homeowners aren't privy to the transactions. They know their originating bank and their servicer, but neither of those own the mortgage or the right to foreclose. So when the banks themselves can't establish who holds the right to foreclose, how can we expect the homeowners to do it for them?

And that's just assuming that the only problem is finding out who has the documents granting the right to foreclose. There's the additional problem that the actual fraud in producing the documents is such that they don't actually convey the right to foreclose at all!

All of that is really important because homeowners attempting to negotiate with the foreclosing bank aren't able to do so, even when local rules mandate pre-foreclosure mediation. That matters because foreclosures aren't always the most economically efficient solution, which is a whole other issue.

Finally there's the economic argument: The banks fucked up with their legal compliance to save money. How on earth can you justify homeowners insuring banks against the risks of cutting costs on their legal compliance processes? The shareholders reaped the profit; the shareholders bear the risk.
posted by Marty Marx at 9:52 AM on October 15, 2010 [7 favorites]

Blaming construction companies is silly--there are plenty of smaller, less bling homes being built and for sale.

This seemed markedly untrue during the boom where I was living. Yeah, you say new condos and townhomes come on the market, but they were selling for 2-3 times what you could buy old 2-3 bedrooms for. At least, until the bubble inflated and the old stuff became increasingly rare or inflated in price itself. And almost nobody was building 2 bedroom homes with less than 1400 sq feet anymore, or studios, heck, even 1 bedrooms were increasingly rare. Heck, anything new without required ownership in an expensive HOA was increasingly rare.

This is what the market was making. OK, it's not all the market. Part of this is code, actually -- minimum spaces. Which is fine with me. But I think it's important not to pretend this doesn't have unintended consequences. Marginal housing has a place, and if the market and community policy eliminate it, then people who suddenly have marginal incomes have nowhere to go.
posted by weston at 9:52 AM on October 15, 2010 [2 favorites]

A lot of these homeowners made very bad decisions; the fact that a slimy merchant is very eager to sell you posion doesn't mean you have to drink it.

The problem involved slimy merchant selling poison and packaging it as chai latte. They did this at every step of the process. The originators would push people to buy too much house with crappy Option-ARMs and they would forge loan documents in order to get the loans. In some cases the originators would tell borrowers that they didn't qualify for a 30/20 (traditional mortgage) when they actually did. They would pay off property assessors to inflate the value of the property and kick backs would be handed out.

The bundlers would sample a loan shit pile, pull the bad ones out of the sample and negotiate a lower price, then get the entire bundle rated AAA and sell it off to investors. (You know, fraud) Even worse, the notes may not have been transferred to the trust for the MBS, so there may be a ton of empty Mortgage Backed Securities sitting out there (pension funds, 401ks and the Fed have these).

The banks also decided they didn't need to deal with archaic land title system we use in the US so they created their own electronic title system, MERS. The legal title system requires doing pesky things like going down to a court house, paying fees and signing paperwork. Funny thing is, counties and states don't like it when corporations skirt the legal process in order to make higher profits. Now the same banks that wanted to avoid paying the fees for tracking mortgages want to use the legal system they were cheating out of money to foreclose on houses. Good luck with that.

What we are seeing here is barely scratching the surface. Things were fine when the money was still flowing because the shoddy paperwork didn't matter. Now that the banks are foreclosing on properties, the paperwork is being scrutinized and all of those cut corners are going to cost a lot of money.
posted by ryoshu at 9:53 AM on October 15, 2010 [18 favorites]

Now what I see is the bank not having upheld their end of the process.

Absolutely. Regardless of intent the banks have fucked up and they should be punished for them. You should sue them and sue them and sue them. That's what they'd do to you, so now that the shoes on the other foot have at it.

Yes, but what about a massive cabal to defraud buyers of mortgage-backed securities?

no cabal there either - but if they were harmed because of incompetance, they should sue and get their money back.
posted by JPD at 9:55 AM on October 15, 2010

I've seen the word "bespoke" used with increasing frequency over the last two months. Can we please stop it?

Some words should never bespoken.
posted by Mr. Bad Example at 9:58 AM on October 15, 2010 [7 favorites]

> The problem involved slimy merchant selling poison and packaging it as chai latte.

This is more or less true, but at the end of the day buyers had all the information they needed to make a proper decision: their paystubs and the monthly mortgage payment amount. I'm all for making everything in the process transparent and honest, but if someone can't make a rational decision about spending within their means then they really can't be helped.

This is getting away from the post, however.
posted by Burhanistan at 9:59 AM on October 15, 2010

No money to be made in handling the documents, so no one ever cared about doing a good job of it.

Sounds like the kind of thing markets are inherently unable to handle well. If only there were some other kinds of social institutions that might do this kind of thing for the sake of having a fair and functional system.

Of course, that would either require some kind of collective funding or fee for service, and since the former is Socialism™, we can't do that, and the latter would cut into private profits, so you couldn't fault the market for trying to come up some private alternative which, for a lower fee, will not do a good job of it, since there's no money in it. But it would get the government off our backs.
posted by weston at 10:00 AM on October 15, 2010

No I'm pretty sure the mortgage-backed securities mess was cabal-driven. The key players knew they were putting lipstick on pigs and getting bogus AAA ratings. That's fraud. And conspiracy to commit fraud.
posted by Mister_A at 10:01 AM on October 15, 2010 [4 favorites]

at the end of the day buyers had all the information they needed to make a proper decision: their paystubs and the monthly mortgage payment amount

Ah, but the banks told them that didn't matter. See, housing prices were going to keep going up, so they would be able to refinance, thus making an interest-only loan or ARM sensible. And surely the banks knew best, right? They had all of those smart number crunchers and analysts. And it wasn't exactly in the banks' interest to make unsustainable loans, right?

Yeah, no doubt some people were in on it, and everybody should have known better. But let's be clear: the banks were trying really, really hard to encourage people to make bad decisions.
posted by jedicus at 10:04 AM on October 15, 2010 [3 favorites]

if someone can't make a rational decision about spending within their means then they really can't be helped.

The thing is, Burhanistan, that in the "bubbles never burst" days, the lenders turned their backs on their own best practices and approved large loans for people with shaky credit, often pushing more exotic vehicles like interest-only loans, balloon loans, ARMs, etc. to make the immediate future in these oversized and overpriced houses seem affordable. People trusted the "professionals" in the process, and they were (in many cases) misled.
posted by Mister_A at 10:05 AM on October 15, 2010

> It's no different than putting on a bandanna and robbing the bank at gunpoint.

Are we supposed to take this seriously? You really don't see the difference between not complying with a contract, and threatening to kill someone if they don't let you steal money?

Now, I think there there's a lot of moral blame to go around here, and definitely some of it lies with people who got into homes over their head.

But the lion's share, the overwhelming share, lies with the professionals who were being paid the big bucks to make sure that the loans that they gave out had a reasonable chance of being repaid.

If I'm a regular guy and I go to the doctor and he tells me I need an operation, I get the operation. Me, personally, I'm a little more skeptical - I avoided an operation about 15 years ago for a supposed torn ACL that has never given me a moment's trouble, but I got a second opinion before I did that. But you can't blame some no-brighter-than-average-guy who says, "It's the doctor's job and he's a highly-trained and paid professional, I'm going with his opinion."

In the same way, when a banker tells you that you can afford a given mortgage, he's really the expert in the situation - he's the idiot if things fall apart.

Don't get me wrong, I know a lot of these people misstated their incomes which is at least unethical and IMHO criminal fraud in some cases. But if we aren't going to prosecute the bankers who committed even worse frauds at a much higher level of financial expenditure, then why would we get the small fry?

Overall, a contract is a contract. Not living up to the terms of that contract is a civil matter. Both as a matter of law, and a matter of custom, society treats this as dramatically different from armed bank robbery.
posted by lupus_yonderboy at 10:07 AM on October 15, 2010 [3 favorites]

no cabal there either - but if they were harmed because of incompetance, they should sue and get their money back.

28% percent of the loans that were bought by the investment banks with the intent of turning [around] and selling them did not meet the investment standards the banks agreed to...
posted by ennui.bz at 10:08 AM on October 15, 2010 [1 favorite]

> People trusted the "professionals" in the process, and they were (in many cases) misled.

Oh, yes, indeed. I suppose I'm a bit unsympathetic to people who listened to this, but there did seem to be a de facto conspiracy to dupe them.
posted by Burhanistan at 10:08 AM on October 15, 2010

No I'm pretty sure the mortgage-backed securities mess was cabal-driven. The key players knew they were putting lipstick on pigs and getting bogus AAA ratings. That's fraud. And conspiracy to commit fraud.

It gets better! The FBI had identified massive amounts of mortgage fraud back in 2004. But hey, who wants to pull the punch bowl when everyone is having a good time? Even when the state AGs wanted to pursue the issue, the Bush administration's OCC sued to stop them. Want to guess how many mortgage servicers the OCC has gone after? Zero. Cabal? I wonder how Goldman benefited with Paulson as the head of the Treasury?

It's fraud from top to bottom and ground zero is the banks.
posted by ryoshu at 10:08 AM on October 15, 2010 [10 favorites]

jedicus, quit reading my mind. Also worthy of note - loan originators are not always banks these days. I had great success with a mortgage co. that sold my loan to the bank, because my broker said, "listen - first house, you want to stay there for a while, you want to know what to expect financially - you need a 30-yr fixed rate."

Whereas many other brokers were doubtless assuring borrowers that the gravy train would never end, that they would want an even larger and more fabulous home in 4 years, and so why bother with a traditional loan? You'll be gone long before the new rates clobber you. Which ain't the way it panned out.

Anyway, before the advent of predatory mortgage brokers and their willingness to relax requirements or even falsify docs, people would have been approved for more modest sums.
posted by Mister_A at 10:09 AM on October 15, 2010

Are we supposed to take this seriously? You really don't see the difference between not complying with a contract, and threatening to kill someone if they don't let you steal money?

Everytime I see the formulation "X crime is no different from Y crime", it's almost always a load of horse shit.
posted by empath at 10:11 AM on October 15, 2010 [3 favorites]

If I had a mortgage right now, I'd be damn sure to check my bank has clear title to it. It would suck to pay all that money and still not own your house.
posted by empath at 10:13 AM on October 15, 2010

I think McArdle's take* on the subject is actually pretty much on point: this is a way bigger problem for the system at large than it is for the people being foreclosed on. The people being foreclosed on were almost universally in default, i.e. they hadn't been making the payments they promised to make, so foreclosure was entirely appropriate.

The problem is that this boondoggle is really calling into question the legitimacy of the title to hundreds of thousands of parcels of real estate. That's an absolutely huge mess.

Though it's possible that something good could come out of it. Our property law system still has plenty of vestiges of the medieval common law property system--just ask anyone who's taken the bar exam--which was designed to protected the interests of landed aristocracy. In addition to not really having such a social class anymore, real estate isn't anywhere near as essential to family fortunes** as it was five and ten centuries ago, when land was wealth. So instead of viewing this as yet another chance to man the barricades shouting "Fuck the rich!" perhaps this should be viewed instead as an opportunity to completely change our property law system into something more modern and rational, which isn't bogged down by centuries of cruft designed to handle situations and social arrangements which simply no longer exist. This has been suggested by legal scholars for years, but it's such a huge project that legislators have been generally unwilling to do much about it as long as the system was generally working most of the time.

Well now it isn't, so maybe we'll finally get some legislative attention there.

I mean, really, title insurance? Insurance to make sure you have clear title to a piece of property you just bought? What kind of bizarre through-the-looking-glass system could you even come up with which would produce such a result? You couldn't design a system like that if you tried.

*I know some people around here don't like her, but overcome your prejudices for a second and read the damn thing.

**Lots of people own a home, but in the vast majority of cases this does not represent an income-generating asset. More like a huge chunk of sterile equity. Most of the truly wealthy only count real property as a tiny fraction of their actual wealth, though there are obviously exceptions to this.
posted by valkyryn at 10:14 AM on October 15, 2010 [3 favorites]

I'm visiting home. I just heard my Dad turn on cable news (CNBC?) in the other room. One talking head said this foreclosure mess is only a problem because the media is blowing it up and it's hurting the banks because of proposed lawsuits, and another said that this isn't really significant and he's sure in a few weeks we'll have this all straightened out.
posted by weston at 10:15 AM on October 15, 2010

I just heard my Dad turn on cable news (CNBC?) in the other room. One talking head said this foreclosure mess is only a problem because the media is blowing it up and it's hurting the banks because of proposed lawsuits, and another said that this isn't really significant and he's sure in a few weeks we'll have this all straightened out.

One of the safest investing strategies I've found is to do exactly the opposite of whatever the talking heads on CNBC suggest.
posted by ryoshu at 10:18 AM on October 15, 2010 [2 favorites]

What I'll never understand is why people associate some stigma with deed-in-lieu (aka walking away), foreclosure, or bankruptcy. Shit happens to people.

Well, for a lot of these homeowners it's not just deed-in-lieu. In the majority of US states, lenders are allowed to write mortgages as 100% recourse debt: the debtor is on the hook for any difference between the balance of their mortgage (including interest and fees) and the revenue from the foreclosure sale of the property.

So, for these people it's either delay the foreclosure or get hit with an immediate debt burden of hundreds of thousands of dollars; even if they live in a non-recourse state (where the sale of the house satisfies the mortgage, no matter how much money is involved), any loss by the bank is treated as taxable income for the newly evicted homeowner.

So yeah, maybe these homeowners never should have bought into the game. But the deck is ruthlessly stacked against them.
posted by xthlc at 10:24 AM on October 15, 2010 [1 favorite]

But that doesn't mean you get to keep the house you didn't pay for.

Now here's the thing: who does get to keep the house? And not only that, if I'm a bank, do I even really want a house? And if I do want a house, does that mean I can just take one? A lot of this involves banks trying to pretend that they have more assets than they actually do, which would allow them to keep lending.

The people being foreclosed on were almost universally in default, i.e. they hadn't been making the payments they promised to make, so foreclosure was entirely appropriate.

Really? Foreclosure is not the universal recourse for someone who has a hard time paying debt. Sometimes the debt restructured by lenders. Sometimes it's reduced by a bankruptcy judge to something that the borrower can pay and commensurate with the resale value of the underlying assets. It seems to be like some institutions that are obsessed with foreclosing are just claiming that they are the rightful property owners when the ones with the actual rights might be willing to go in some other direction when dealing with poor debts.

While you are correct to argue that our system from English common law probably isn't the most efficient way to look at home ownership, these specific laws concerning homeownership and foreclosure are the ones that are motivating the lenders to do what they're doing. If the laws as written are not effective for the situation, then you must accept that the lenders trying to foreclose are not doing something particularly effective.
posted by deanc at 10:27 AM on October 15, 2010

I mean, really, title insurance? Insurance to make sure you have clear title to a piece of property you just bought?

I know a few people who were saved by title insurance. When some unrecorded easement, mechanic's lien or other failure to satisfy some tax bill crops up, you'll be glad you have it.
posted by electroboy at 10:29 AM on October 15, 2010 [1 favorite]

I know a few people who were saved by title insurance. When some unrecorded easement, mechanic's lien or other failure to satisfy some tax bill crops up, you'll be glad you have it.

Right, but my point is that a property system so baroque as to need such a device to protect from things like that is broken beyond repair.
posted by valkyryn at 10:31 AM on October 15, 2010 [2 favorites]

The banks approved the loans, because they figured they'd make their money on the interest and ancillary costs, and if there was a default or two or three, cool, they'd own the houses again, and all the payments, so it was all good. And housing prices will go up forever, because banks (and most other corporations) seem to have a memory window measured in quarters, not years or decades, and they WANT US TO BELIEVE in their superior abilities and resources. They wrote lots of mortgages that they knew would be bad, because they figured that, like the casino, they'd never lose. And when their systemic, institutional fraud starts to implode, they're pointing their fingers at the cursed customers, federal policy, liberals and socialists, the government, gerbils, assigning blame to anyone but themselves and their own raw greed. Corporate feudalists, destroyers, the house of cards they built is coming down, and they want to blame the fucking tabletop? That's pretty rich of them.
posted by dbiedny at 10:41 AM on October 15, 2010

Foreclosure is not the universal recourse for someone who has a hard time paying debt. Sometimes the debt restructured by lenders. Sometimes it's reduced by a bankruptcy judge to something that the borrower can pay and commensurate with the resale value of the underlying assets. It seems to be like some institutions that are obsessed with foreclosing are just claiming that they are the rightful property owners when the ones with the actual rights might be willing to go in some other direction when dealing with poor debts.

Umm.... No.

Foreclosure is the recourse for banks whose debtors are in default. They are secured creditors who don't need to sue or seek other recourse to recover their money, because they have a property interest in the house.

Even if the chain of exactly who holds the mortgage isn't clear, the person or persons who do hold it have little incentive to do anything but foreclose, because modifying the loan costs them more money than taking the house and trying to resell it. Of course, with so many houses not selling at any price, that's questionable, but there really isn't any reason for a mortgagee to agree to a modification out of the goodness of their heart.

And that isn't really how bankruptcy works, either. Not for private individuals with secured debts anyway. A Chapter 13 plan must provide for the full payment of all secured debt.
posted by valkyryn at 10:41 AM on October 15, 2010

my point is that a property system so baroque as to need such a device to protect from things like that is broken beyond repair.

The lien system strikes me as one of the most effective parts of property law: liens are attached to the property, not the owner, so collecting on a debt associated with a lien is simplified-- otherwise the debt-collector has to go through the above-mentioned-mess of trying to find the "real" property owner.

Granted, the problem, of course, is this: these laws were all meant to ensure that the people who are selling property and owning property are the actual owners. It's fair to argue, of course, that there should be a better way of knowing who the actual owners are.

I know some people around here don't like her, but overcome your prejudices for a second and read the damn thing.

It's not a matter of personal like or dislike of Megan McArdle-- it's that she's frequently uninformed and clueless. She might be right this time, but it's hardly inappropriate to be prejudiced against someone who's usually wrong.
posted by deanc at 10:48 AM on October 15, 2010

"ethics of convenience": The Mortgage Bankers Association strategically defaults on its loan after shaming homeowners who do the same.

Mortgage Bankers Association “Walks Away” from HQ

And none of their individual credit ratings get destroyed! Yippee!

Just a reminder, full financial disclosure and disclosure of any conflicts of interest is not required for commenting on Metafilter. Thanks.
posted by peppito at 10:50 AM on October 15, 2010

Yes, yes, this is all fine and good and I respect everyone opinions and all that. But the real question is, how can I make money off of this?
posted by wcfields at 10:52 AM on October 15, 2010

dbiedny: "The banks approved the loans, because they figured they'd make their money on the interest and ancillary costs, and if there was a default or two or three, cool, they'd own the houses again, and all the payments, so it was all good."

Not really. The banks would bundle the loans into Mortgage Backed Securities and sell those to investors and make money on the fees. The more paper they pushed, the more money they made. The risk was pushed off to 401ks, mutual funds and pensions so there was no real incentive to verify the loans were good. Well, in Goldman Sachs' case they would bundle a bunch of garbage loans with one hand and short the security on the other side. Win-win for everyone except Goldman Sachs. But there's small problem in this grand scheme (besides the fraud). The banks that created the MBSs may have to eat them.
posted by ryoshu at 10:53 AM on October 15, 2010

I find it interesting to see how hindsight lets us demonize people who were acting completely in good faith to try to maximize the value of their housing dollars.

To wit: It's 2004, and you're living in the outskirts of Phoenix, AZ, working a minimum-wage job because you only have your GED. You and your wife make a little more than $25K a year, and are using that money to support yourselves and your two kids. You're paying $500 a month in rent for a 2.5-bedroom place that's really too small for you, but it's all you can afford on two minimum-wage incomes. You have friends in just-slightly-better financial straits than you, who two years ago applied for a mortgage for a $200K house across town. They didn't really meet the standards of what you conventionally thought was necessary for home ownership, but they had almost no problems getting financing, and had been making payments on their interest-only loan since then. Interest-only payments on the house are less than what you pay in rent, and for a much larger house. Last week, they told you that after having their third child, they moved out of their old place and into a larger place down the street. They had sold their old place for $250K, and pocketed the difference in equity. They made more money holding the house for two years than they did working full-time jobs. They are now wondering why you don't just buy a house, to hedge against rising rents and to start building equity.

Now. Which of the following two statements seems (to you, in 2004, when the phrase 'subprime crisis' does not exist, and real estate values had consistently increased by 10% per year for the last decade) like the more likely thing to take away from this situation?

1. Buying a house would be taking advantage of a broken system. We should not listen to the people we know who have made money from their houses, or to the loan officer who is willing to approve our no-money-down 90/10 mortgage. We should instead consult a lawyer to explain to us what will happen if housing prices stop increasing (which hasn't happened in 20 years). Buying a house is likely to contribute to a unprecedented financial crisis that will occur in five years' time.

2. Some of the old chestnuts about home ownership are outdated. Mom and Dad used to say 'only a buy a house that costs less than 3x as much as your yearly income,' but literally every person we know is breaking that rule, and banks (who employ lots of really smart people who know about these things) are falling over themselves to make it happen. Everyone we know who has bought a house has realized a larger return-on-investment than they would have in any other available investment. Meanwhile, our rent keeps going up commensurate with the increase in property values in the city, and if we don't do something, we're going to be priced out of the place in a couple of years

Are we really arguing that the people who chose option 2 were somehow negligent or malicious? Five years ago, if I had just gotten married and was watching the situation unfold as it did, my first thought would have been "oh shit, I'd better buy as soon as I can or I'm going to get priced out of everything because this trend doesn't look like it's ever going to stop." But now that we've seen what actually happened, we're going to blame the people who applied for mortgages, got the stamp of approval from their banks, and now find themselves buried underneath a collapsing housing market? Instead of the banks, regulatory agencies, realtors, mortgage-securitized portfolio managers, and assessors who were actually negligent? What the hell?
posted by Mayor West at 10:55 AM on October 15, 2010 [20 favorites]

One of the safest investing strategies I've found is to do exactly the opposite of whatever the talking heads on CNBC suggest.

Indeed. Had the country as a whole followed your lead this past decade, most of these underwater houses would never have been bought in the first place.

Hold on long enough, however, and the government's current efforts at debasing the dollar may just inflate your problems away.
posted by IndigoJones at 10:55 AM on October 15, 2010 [1 favorite]

But now that we've seen what actually happened, we're going to blame the people who applied for mortgages, got the stamp of approval from their banks, and now find themselves buried underneath a collapsing housing market? Instead of the banks, regulatory agencies, realtors, mortgage-securitized portfolio managers, and assessors who were actually negligent?

I think there's more than enough blame to go around for everyone. But the argument that just because everyone else was doing it somehow makes taking a loan that you're never going to be able to repay even if nothing bad happens defensible doesn't have much going for it. The fact that said people may or may not have been snookered does not change the fact that they were unwise. Understandably unwise perhaps, but still unwise.

Don't get me wrong: I'm all for prosecuting the fraudsters. But I don't see why the fact that we can identify bad actors on one side of the transaction means we can't find them on the other side too.
posted by valkyryn at 11:06 AM on October 15, 2010

Hold on long enough, however, and the government's current efforts at debasing the dollar may just inflate your problems away.

Given that I'm renting an apartment and sitting on $140k in student loans, I'm having trouble coming up with a set of facts that makes this bad for me, personally. I'm cognizant of the larger problems with inflation, but I could use a bit myself.
posted by valkyryn at 11:07 AM on October 15, 2010 [2 favorites]

Speaking as someone who may or may not work for a small debt buyer that perhaps purchases charged-off credit card accounts from vendors like Bank of America, Chase, Citibank, etc.: Debt buyers have had very similar problems with affidavits, and most have long since resolved these issues. Because the big banks are cut so much more slack, they simply didn't attempt to make the changes that any reasonably competent counsel could tell them was necessary. They brought this upon themselves out of laziness, greed, and overall a pervading (and mostly rational, borne from experience) belief that they are above having to follow the same rules as everyone else.

Once they have had corporate counsel rewrite their affidavit templates to more accurately describe the automated process, and have their affiants swear that they are familiar with the computer system, and not individual accounts, and that they know the system is reliable because of X, Y & Z, the wave of foreclosures will rise up anew. Fret not.
posted by [citation needed] at 11:11 AM on October 15, 2010 [1 favorite]

But outright stealing the house? Fuck that noise.

And as soon as the entity that actually has the note appears before a court, they can foreclose. But banks and servicers decided the note wasn't important. They paid millions for, well, nothing at all. They were required to transfer those notes to the clearinghouse for the MBSes they sold them to, and they did not do so.

And, of course, you make the mistake that having the foreclosure debt quashed means that they will walk away with the home. The debt is still valid, once you can prove that you are, in fact, the person who the debt is owed to. It may be unsecured after your fuckup with the note, but it's still a valid debt, one that you can file a lien on -- indeed, you probably never lost the lien, you just lost the right to foreclose on the lien, which means you may have to wait longer for your money.

And, of course, the bank has made a bad investment in making that loan. They didn't do due diligence. They didn't check the three Cs. If they're so afraid of losing money, why the fuck did they make that loan?

But that's not *the real problem*. The real problem is fraud.

Or, if you wish:

I'm foreclosing on your property. Now. Get out.

Now are you interested in who actually has the right to throw you out? The reason for the processes was that, in darker times, this is exactly what would happen. Either someone would fraudulently file a foreclosure, or someone would sell you a title they did not own.

The whole point of the system is to prevent that, but the system was too inconvenient. So, they're now lying to the courts and committing fraud against other investors.

Back when we followed the rules, foreclosures were rare. Banks would try to work the problems out first, because it was more profitable to keep the owner in the house, even if paying less, than it was to foreclose -- even if you got back what you loaned, you'd lose the interest. But you might just hit a complete loss, in which case, you would very carefully go to your document storage area and get The Note, and head to the courts to file the foreclosure The Note, and only that exact note gave you the right to file.

Of course, these notes could be lost. In which case, you would have an officer of the bank search everywhere reasonable that could be searched, or prove that the note was lost, and then file a Lost Note Affidavit stating that they, after enormous effort, could not find the note, or that the note was provably lost, and in either case, they could prove that the note was definitely in their possession before that loss occurred.

Example: You would file a *certified true* copy of the airbill in the loan file whenever you sent a note by FedEx. If FedEx lost it, they would provide you with a document stating that shipment was lost. You would file the *certified true* copy of the airbill, a *certified true* copy of the loss notice, and a *certified copy* of the note, dated *after* you made/bought the note, but before you lost it, all attested to by an officer of the bank. You would not hire someone, declare them an officer, and tell them to start signing LNAs when you never even had the note in the first place. Doing so is lying on an affidavit, which is perjury. Doing so in a systematic way is perjury in furtherance of fraud.

I keep hearing, but not yet have heard proof, that some banks simply counted on MERS and destroyed the original notes. Guess what? Deliberate destruction of those notes means you have deliberately destroyed your ability to foreclose! If that's the case, filing an LNA is automatically perjury -- you are lying to the court. You didn't lose the note. You know exactly what happened to that note. You chose to destroy it, and with it, the rights that note gives you.

So, now, you claim to transfer a note. You get bought out. The note never left. The transferee files an LNA and forecloses. Then, your buyer notices this note -- and forecloses again. The foreclosed house was already sold.

Who gets fucked here? Well, until last week, title insurance companies. Now, they won't offer title insurance on foreclosed properties, because *they cannot prove who actually has legal title.*

Oops.

This isn't about deadbeats. This is about the destruction of the ability to sell real estate in the United states. Without TI, it is not safe to buy property in the US.

Oh, it gets better.

Those MBSes? They required a full transfer of note and mortgage within 30-60 days of the creation of the pool that backs those securities. You know, the ones that are now in the toilet. They're looking at those pools now, and what they're going to find is that, in fact, they were never fully transferred. Those notes are not where they are supposed to be, and it is too late to put them there.

So, those trustees are going to shove those recording right back at the banks who sold them, and demand their money back by virtue of non-delivery -- and get their money back at the full value of the note.

So, those banks? They save some money by not doing the paperwork to properly register the notes, and they saved money by not worrying about document storage.

And they are totally and utterly fucked if that did that to an MBS administrator who's down hard, but just saw the chance to take every losing mortgage in that MBS and make the originator buy it back at full value.

Which is exactly what they are going to do.

The shlub who gets to stay in a house for another six months to a year? That's the *least* of the bank's problems. They're going to be forced to pay for a huge stack of mortgages that they cannot get the note on, and cannot file for an LNA because the chain of title is broken.

Thus, they can't foreclose, and they won't have the money to cover depositors.

OOPS

And who's going to get screwed by this? We are, because they're too big to fail.

And you're worried because someone may not have to make a few payments?

FUCK THAT NOISE

They made bad loans, they failed to properly register them, and we're going to end up bailing the banks out again because of what they did. And you're worried about kicking the guy in the house out?
posted by eriko at 11:14 AM on October 15, 2010 [31 favorites]

Foreclosure is the recourse for banks whose debtors are in default. They are secured creditors who don't need to sue or seek other recourse to recover their money, because they have a property interest in the house.

If they want to, sure: that's written into the mortgage and into the law. But, quite honestly, you have to imagine that some banks would figure they have better things to do than become homeowners: but banks have become uninterested in writing down the loans, and they've found it more convenient to maintain the fiction that these properties are worth much more than they actually are so that they can claim enough assets on their balance sheet to keep lending.
posted by deanc at 11:15 AM on October 15, 2010

eriko: I keep hearing, but not yet have heard proof, that some banks simply counted on MERS and destroyed the original notes.

They admitted it to the Supreme Court of Florida.

The reason "many firms file lost note counts as a standard alternative pleading in the complaint" is because the physical document was deliberately eliminated to avoid confusion immediately upon its conversion to an electronic file.

Whoops.
posted by ryoshu at 11:24 AM on October 15, 2010

"Bespoke" is a perfectly legitimate word that means "custom-made" and whose usage dates back to the mid-1700s. I'm sorry it bothers you?

For what it's worth, "fighty" and other Whedonisms set my teeth on edge.
posted by entropicamericana at 11:24 AM on October 15, 2010 [2 favorites]

they've found it more convenient to maintain the fiction that these properties are worth much more than they actually are so that they can claim enough assets on their balance sheet to keep lending.

Well that's certainly true. But it isn't just self-serving maliciousness. There's also the deluded hope that they might actually be able to get more out of the house than the borrower can currently pay. It may not be true, but they do have the right to try. I'm thinking that at some point they may realize that foreclosure is more trouble than it's worth and just decide to take a haircut on their own terms rather than spend the money trying to resell a house they don't actually want. But forcing them to do that when they think it is in their interest to do otherwise strikes me as unjust.
posted by valkyryn at 11:29 AM on October 15, 2010

People may still be laughing at my Beanie Baby collection, but hey! At least I have clear title.
posted by malocchio at 11:29 AM on October 15, 2010 [4 favorites]

The problem is they don't deserve to be in that place. They probably deserve to be there less than they used to," the source continued, referring to incomes lower now than they'd been when the loans were made in the first place.

HAHAHAHAHAHAHA a bailed out banker taking people to task about fiscal responsibility! Good one!
posted by Brocktoon at 11:36 AM on October 15, 2010 [5 favorites]

But forcing them to do that when they think it is in their interest to do otherwise strikes me as unjust.

That sound you hear is me playing the world's tinyest violin. Using the legal system to make it painful for the banks to do something stupid in order to get leverage to get them to do something else seems fine to me. They used the law to their advantage when they could (and have no problem restructuring their own loans when they have the leverage to do it). Dealing with not being able to do something you really, really, really want to do isn't "unjust." It's part of being a f'ing grownup.
posted by deanc at 11:37 AM on October 15, 2010 [1 favorite]

"You do need to foreclose, and you need to go back to people living in houses that are consistent with their income levels."

So at what point do we just rise up and start pushing Wall Street bankers out of windows?

Why is only one of these statements criticized as "class warfare?"

They're both statements of class warfare. However, only one of these classes takes class warfare seriously. Guess which one?
posted by carter at 11:51 AM on October 15, 2010

I know a few people who were saved by title insurance. When some unrecorded easement, mechanic's lien or other failure to satisfy some tax bill crops up, you'll be glad you have it.

Within a minute or two, it's possible to get an authoritative picture of title (no paper or chains of custody needed), tax liabilities, leins, even easements and right-of-ways on just about any property in Ontario. It's all in one central electronic database that's publically acessible. For the public, you have to go down to the land register's off ice and use one of their terminals (for free), but I hear that lawyers can pay to do this from their offices.

Title insurance is exceedingly uncommon in Ontario.
posted by bonehead at 11:56 AM on October 15, 2010

What about the house that I keep paying for, and can afford, but can probably never sell, because I no longer have clear title to it, because Countrywide sold my mortgage, and then it was sold seven or eight times after that, and along the way the paper trail vanished.

In the contract it said that if I made all my payments, I'd get clear title to the property at the end of the process. Now what I see is the bank not having upheld their end of the process.
posted by anastasiav at 12:50 PM on October 15


my head is so confused about all of this. how does a mortgage holder make sure they or their bank have clear title? if you have title insurance and you are in a situation like anastasiav, how on earth do you rectify that? isn't that what title insurance is for?

or is that precisely what the whole mess is about...that the mortgage holder has no recourse, unless they want to pay lots of money for a lawyer?

i'm going to check out Planet Money and see if they've done a show on this yet, because then i might have a chance at understanding this.
posted by sio42 at 11:57 AM on October 15, 2010 [2 favorites]

Right, but my point is that a property system so baroque as to need such a device to protect from things like that is broken beyond repair.

Very true, a point well taken. As soon as I hit post, I realized what you were getting at. My initial thought was "Sweet fancy Moses, do you know what can happen without title insurance?!?"
posted by electroboy at 11:59 AM on October 15, 2010

Got partway through one of the links and saw Ken Bentsen, who used to be the congresscritter for the old 25th District of Texas. He was never my congressman when I was at Rice, but if I'd registered on campus instead of across town at home, he would have been. How disappointed I am to see that he's whored himself to the banksters.

Also, I've been following this story through various political blogs, and as someone who randomly found the perfect house and is buying it right now, without anything fancier than an FHA loan, this is scary, scary stuff. I'm a good record-keeper after working for a lawyer for a few years, and it's saved my ass more than once in my dealings with the legal system. The idea that banks are destroying the original notes is terrifying.

We've known how to convey land in common law for centuries. There's no excuse for these screwups.
posted by immlass at 11:59 AM on October 15, 2010 [1 favorite]

Title insurance is exceedingly uncommon in Ontario.

Title insurance is exceedingly uncommon everywhere outside the US.
posted by valkyryn at 12:08 PM on October 15, 2010 [1 favorite]

Dealing with not being able to do something you really, really, really want to do isn't "unjust." It's part of being a f'ing grownup.

You seem to be operating from the assumption that if given course of action striking you as silly is sufficient justification to use the legislature to force people not to do it, regardless of whether said people have a contract saying that they can.

If that's true, then your position is certainly coherent, but I don't want you or anyone who thinks like you anywhere near a position of actual influence.

Which is kind of too bad, because those people seem to be called "progressives," and there seem to be a lot of them.
posted by valkyryn at 12:13 PM on October 15, 2010

"The first thing that needs to happen, I think, is to get these people out of their homes," a man wearing a bespoke blue-striped shirt...

Regardless of what one thinks about the morality of either party in this situation, I am completely at a loss for why anyone thinks there is any sort of efficiency to be gained by the specific action of kicking people out of their houses in this market, as opposed to stripping down the lien to the current value of the property and re-capitalizing the loan at that value.

Let's walk through both scenarios. First, the lien stripping. Imagine that someone is in a house that used to be worth $150K, is now worth $100K, and they are in default. Now imagine that the bank, either voluntarily or at the behest of the (also imaginary, not currently in existence) bankruptcy laws, reduces the principal of the loan to $100K and recapitalizes this amount into a 30-year fixed-rate mortgage for the current occupant, allowing the occupant a repayment schedule he can afford. Now, the bank is getting consistent payments on a 30-year fixed-rate mortgage at prevailing interest rates, AND the original purchaser / current occupant keeps his home, avoids pulling his kids out of school, can keep his job, and has an incentive to continue maintaining the property.

In addition the community benefits by the house not becoming blighted, relevant comps not being affected by yet another involuntary sale, and general community cohesiveness that comes from neighborhoods not being torn apart.

Now, scenario #2. The bank forecloses and repo's the home. The original purchaser is out on his ass. Kids pulled out of school to move 2 towns over, next to whatever low-rent place the parents can afford. Job potentially lost (or much less sustainable) due to increased commute time & expense. In addition, former occupant saw the foreclosure bearing down on him and had no incentive to maintain the property, letting maintenance slip. Another "For Sale" sign goes up, neighborhood comps reduced. Neighborhood cohesiveness reduced due to involuntary moves and communities being torn apart. Neighborhood desirability decreases.

But how does the bank benefit? What do they (and their investors) get out of this? They get to sell the property at the current market value ($100K) and give the next guy a mortgage on it = they get consistent payments on a 30-year fixed-rate mortgage at prevailing interest rates. The bank's position was not materially improved!! Maybe it was made even worse because the house wasn't maintained.

Look. Regardless of what you think about the morality of the situation, the bank's right to foreclose cannot push the value of the property above fair market value. If anything, foreclosures are worth LESS. They will only ever be getting mortgage payments on the current FMV of the house. This is true whether the original buyer was a saintly victim of originator fraud, or the scammiest scammer that ever scammed. Why does anyone think that moving the foreclosures and evictions along is going to solve jack shit?

(None of this is to distract from eriko's excellent comment on the broader implications of this mess).
posted by rkent at 12:18 PM on October 15, 2010 [6 favorites]

You seem to be operating from the assumption that if given course of action striking you as silly is sufficient justification to use the legislature to force people not to do it, regardless of whether said people have a contract saying that they can.

Our conservative friend dios was fond of arguing that all he wanted to do was have the law be followed. I think he called himself an authoritarian libertarian or something. In this case, the legislature demands that you produce the damn note. If you can't produce the damn note, and the homeowner uses his leverage to ensure that foreclosing on the house is really, really difficult, then too damn bad. And if the law, in its wisdom, created a system where it was preferential and easier for a bank to foreclose rather than renegotiate the loan and then changes the law because the outcomes of this system were poor, then too damn bad. How nice of you to stick up for the "justice" of a bunch of mortgage lenders having it be as easy as possible for them to do what they think is in their best interest and then rail against anyone else preventing them from doing that based on their best interest. And what is so "just" about one lender getting to control the house rather than another institution or another set of bondholders? It sounds to me like you have some irrational need to kick people out of foreclosed houses because that offends your sensibilities.

part of it is that we have a revenge fantasy: we pay our rent/mortgage/etc every month, so we demand that people who don't be "punished." The jokers on CNBC are taking advantage of our instincts here in order to benefit the corrupt and fraudulent mortgage lending industry.
posted by deanc at 12:29 PM on October 15, 2010 [5 favorites]

valkyryn: "And that isn't really how bankruptcy works, either. Not for private individuals with secured debts anyway. A Chapter 13 plan must provide for the full payment of all secured debt."

This is not really correct. One of the cardinal principles of bankruptcy is that the secured creditor is only secured to the extent of the value of the collateral. So if you've got a $300k mortgage on a property worth $200k, you're a secured creditor only as to $200k. As to the deficiency, you're unsecured which means that, in the general case, you're not going to collect more than a few pennies on the dollar. Second mortgages on underwater properties are completely wiped out. Also, even though the debtor will still be on the hook for the $200k, the court can essentially write new terms for the loan, e.g., stretch the payments over 30 years. It is essentially a forced mortgage modification at the hands of the court.

This is crucial to the functioning of the bankruptcy system. It means that the undersecured creditor doesn't get to crowd out everybody else. Fair's fair. But there is a very narrow exception to this: a mortgage secured by "real property that is the debtor's principal residence" cannot be modified in a chapter 13. Vacation homes, rentals, second homes --- the debtor in bankruptcy can force the modification of mortgages secured by any of these, but not a mortgage on his principal residence. There have been attempts to remove the special protection granted to residential mortgagees, but the Mortgage Bankers Association has been effective in keeping it in place.

So, valkryn, your comment above about chapter 13 is wrong in general, but correct in the special circumstances of the home mortgages which are, of course, at the core of this whole freak-show.
posted by lex mercatoria at 12:59 PM on October 15, 2010 [4 favorites]

The thing about foreclosing is, it's not cheap to begin with. In some articles I found from a quick search (admittedly they're mostly 2-3 years old, but the figures of cost are likely still valid), Freddie Mac and the Joint Economic Committee of Congress both say that a foreclosure costs $60-80K per house, )while preventing a foreclosure costs around $4K). Those costs don't only fall on the banks, but also the foreclosee, neighboring homeowners and local governments. And in all, it seems that this "little problem" with bad paperwork trails could cost the banking system something like $70billion.

This whole thing ain't cheap, no matter where you look, unless the banks start finding ways to make these house loans work for those who signed them.
posted by hippybear at 1:09 PM on October 15, 2010

How nice of you to stick up for the "justice" of a bunch of mortgage lenders having it be as easy as possible for them to do what they think is in their best interest and then rail against anyone else preventing them from doing that based on their best interest. And what is so "just" about one lender getting to control the house rather than another institution or another set of bondholders?

I have no idea what you're going on about, nor what it has to do with anything I said.
posted by valkyryn at 1:50 PM on October 15, 2010

Why does anyone think that moving the foreclosures and evictions along is going to solve jack shit?

Because it makes the loss real to the bank. The price of a home is whatever someone will pay, and in a market like this, that's a hell of a lot of downward pressure. Property owners don't like that. But it's great for buyers. Except if there's no pressure to accurately reflect the true value of a home by putting it on the open market, the prices don't drop. So the buyers, they wait. And wait. And wait. All the while telling themselves, "This is bullshit."
posted by Civil_Disobedient at 4:01 PM on October 15, 2010 [1 favorite]

Why does anyone think that moving the foreclosures and evictions along is going to solve jack shit?

Servicers get paid to foreclose. They don't get dick if you're not making payments, but they get paid to foreclose on you.

Banks that actually own the loans they make see better results by modification, rather than foreclosure. However, those banks are rare indeed.

So, because are paid to foreclose, they do so, which helservicersps destroy the value of those MBSs, when, in a rational world, the actual holders of the note would vastly prefer a mod that kept you making payments.

A fundamental rule of market economics is that when incentives don't align, you get perverse results.
posted by eriko at 4:18 PM on October 15, 2010

spicynuts writes "When construction companies start building houses that are consistent with people's actual income levels rather than giant redonkulous ego massaging mcmansion monstrosities, maybe people will actually be able to find houses they can afford."

It's a lot more complicated than If you build it they will come. And in general people don't want to buy small single family houses. Also keep in mind that the mortgage clusterfuck isn't only in single family homes. Plenty of this bad paper was written on townhouses and condos. Some of the bubble I observed, from a distance, in California had the same nothing special condo go from $70 a square foot to over $200 a square foot in the course of a couple years.

weston writes "This is what the market was making. OK, it's not all the market. Part of this is code, actually -- minimum spaces. Which is fine with me. "

I'm not up on the minutia of the assorted US codes but I can't imagine them be much more restrictive than the NRC in this regard because generally the NRC is more restrictive (God the stuff Americans can legally build in the way of spiral stair cases makes me drool and recoil in horror all at the same time). With that in mind it is very possible to build 2br homes well under 1400 square feet. Heck you can do 600 square feet and not even push the minimums:

• 110 sq feet per bedroom.
• 40 sq feet for the bathroom. That gives you a standard 30x60 tub with integral shower, toilet and vanity. Bump it to 64 if you want to include laundry in the bathroom.
• 70 sq ft for Kitchen. Gives you 14 linear feet of counter, a single basin sink and stove/fridge/dishwasher.
• You can get away with 6 square feet for the mechanical room, though 8 is better, if you either go radiant heat or roof mount your furnace with a packaged heat/cool unit.
• That leaves you with 238-264 square feet for living room, entry, linen/broom closets and storage.

Very livable and at worst one pushes the minimums is with the bedrooms and even then you've got 10% to play with. I'd probably make one bedroom 100 square feet which is tight but livable with kid sized (IE: Single) built in bed and clothing storage and the other 120 to make it easier to place a double bed.
posted by Mitheral at 6:57 PM on October 15, 2010

I am no financial wiz kid, but these same faceless, pan continental, inhuman entities write the rules that let them charge me $35 for being $.11 short on a transaction they don't even pay out on. If they make any slight misstep in rules they helped write, then they should be gutted in any manner most painful for them. Revenge fantasies? Fucking right. I'll take that charge happily. These aren't friendly institutions trying to help out their fellow humans. More like soulless parasitic mercenary enemies, using our basic needs to crucify us and drain our talents and productivity for their own enrichment. They couldn't be bothered to keep track of the paperwork? It's what they are made of! Such incompetence in their own sphere of experience should carry the financial version of a death sentence. Their corporate corpses should hang from the gates as a warning to those who would come after them to do a better job. To remember that, legalese aside, this is still a world of people who should work together for the common good. Take a lesson for the late 1700's in France. Has big business ever grown into anything other than a corrupt aristocracy? Fuck 'em, fuckin fuckers
posted by Redhush at 7:23 PM on October 15, 2010 [5 favorites]

With that in mind it is very possible to build 2br homes well under 1400 square feet. Heck you can do 600 square feet and not even push the minimums:

That's interesting. I'd gotten a different impression from a conversation with a friend a few years ago who was, like me, looking for real estate on the smaller side. She seemed to have the idea that Utah code specified a minimum of 800 sq feet, maybe that's not the case.
posted by weston at 8:05 PM on October 15, 2010

It's possible I suppose though that kind of regulation tends to be a zoning or HOA/deed restriction kind of thing. There are plenty of developments in Canada that specify minimum house sizes but those restrictions are usually put in place by developers who seek to maintain property values until they can sell the last house and small houses bring down the comp values on the larger houses around them.
posted by Mitheral at 9:53 PM on October 15, 2010

without a doubt people were putting themselves in way too much debt to buy the gigantic house they didn't need.

I saw prices in the building I live in, built in '69, go from $175K to $410K in six years. A lot of people believed that the only way to own a home was to BUY NOW BEFORE THE PRICES GO EVEN HIGHER and then figure out how to pay for it. Almost everyone believed that real estate never goes down. Yeah, there were overpriced McMansions being built, but even existing older units had their prices inflated out of sight.

Bunch of almost affordable stuff in my neighborhood now, but my building seems to be holding value...dammit.
posted by Jimmy Havok at 3:02 AM on October 16, 2010

Anyone who doesn't see the enormous disparity in wealth, power, and knowledge between the mortgage lender and the average home buyer is either morally bankrupt or as ignorant as the day is long.
posted by Mental Wimp at 8:06 AM on October 16, 2010 [2 favorites]

With that in mind it is very possible to build 2br homes well under 1400 square feet.

I'm currently buying a two-bedroom house that's about 1200-1300 sq. ft. I think the big house in this development is about 1500. Austin has a big "problem" in that its zoning is set to keep residents from adding on to small houses on small lots, so many of the houses are 800-1200 sq. ft. (or so I'm told) in the older neighborhoods. This is considered "too small" for people with kids, so the suburbs are getting built out with giant houses. I don't know what the codes are out there, but all the houses are built to be huge.

We couldn't afford one of the older houses because of the land values, and even if we could afford a suburban monstrosity, we're child-free and would prefer a smaller house and city amenities. I had thought we would continue to rent, or might end up in a condo, until we found this house. We had the same problem in Houston in the late 90s, where we ended up in a "small" 1800 sq. ft. older house in our desired neighborhood instead of the new construction, which was 2500 sq. ft. in two lot-buster Creoles on a single lot.

tl;dr: Large houses are a combination of perceived preferences/perceived lack of market as much as HOA codes/zoning. But there is a market for smaller free-standing houses that's probably underserved.
posted by immlass at 8:47 AM on October 16, 2010

This is one of those topics where I find myself not liking the hyperbole on either side of the fight. A mortgage is kind of like a weird rent you pay to the bank. I'm all for banks having to jump through the hoops properly to foreclose, but just the mere fact of being a so-called homeowner shouldn't really give one protection to live somewhere without paying.

There was an article a while back about a couple who were foreclosed on for $3000 or something in HOA bills. The house had been paid for with cash, and there was no mortgage. A mortgage is not rent, it's a collateralized loan, but after you've made a lot of payments you should have equity in the house itself.

But the real problem for the banks is going to come not from homeowners, but rather people who bought the mortgage bundles. The banks represented those securities as having been fully legal, and they weren't. That means all those investors who got scammed might now have a legal recourse against the banks. It will be interesting to see how that all turns out.

---

Oh and I thought this needed be pointed out (I saw this linked off Krugman's blog a while back)

you need to go back to people living in houses that are consistent with their income levels

Yeah, of course housing prices have crashed since the bubble popped. So if the house was foreclosed on, they could probably just re-buy it with a new mortgage. At least if it wasn't for the fact that there credit would have been ruined. One way to effectively do that would have been to allow cramdown modifications -- but that didn't happen.

What about the house that I keep paying for, and can afford, but can probably never sell, because I no longer have clear title to it, because Countrywide sold my mortgage, and then it was sold seven or eight times after that, and along the way the paper trail vanished.

Squatters rights? After living in, and paying property tax for X years, don't you legally have the right to claim the property as yours?
posted by delmoi at 9:28 AM on October 17, 2010

part of it is that we have a revenge fantasy: we pay our rent/mortgage/etc every month, so we demand that people who don't be "punished." The jokers on CNBC are taking advantage of our instincts here in order to benefit the corrupt and fraudulent mortgage lending industry.

Alternatively, a Justice Fantasy: We pay our rent/mortgage/etc (etc?) every month according to old fashioned rentmortgage/income ratios and now it is suggested that people who bought houses they could not afford should be getting a pass? That not only did they get to live above their means these past several years but now that the market is going against them they get a do-over on the price? Bit of slap in the face for those who settled for crappier accommodations while waiting for the insanity to end and the market to turn.

Like most things in life, all a matter of perspective.
posted by IndigoJones at 10:58 AM on October 17, 2010 [1 favorite]

Bit of slap in the face for those who settled for crappier accommodations while waiting for the insanity to end and the market to turn.

Yes, envy is a good basis for a moral system.
posted by Mental Wimp at 5:02 PM on October 17, 2010 [1 favorite]

We pay our rent/mortgage/etc (etc?) every month according to old fashioned rentmortgage/income ratios

Even if you bought a smaller, more affordable house, you've been hurt by the bubble, since a) you had to buy less house in the inflated market, and b) you've lost equity and are now paying an inflated price for a less valuable property. Pissing about people who did the best they could in a bad situation and are being hurt now doesn't do anyone any good. Better you reserve your ire for the people who caused the problems, not the victims.
posted by Jimmy Havok at 6:54 PM on October 17, 2010

Yes, envy is a good basis for a moral system.

That's not such a hot foundation, but rewarding prudence most certainly is.
posted by Malor at 7:41 PM on October 17, 2010

That's not such a hot foundation, but rewarding prudence most certainly is.

Which is why, if you vote for me, I will not stop until I return every bankrupt to a debtor's prison. How dare they walk freely while those more prudent watch with shame.
posted by allen.spaulding at 9:32 PM on October 17, 2010 [1 favorite]

Yes, envy is a good basis for a moral system.

Again with the sarcasm! Bear in mind that personal attacks are a red flag for a weak argument.

Anyway, why is this envy any worse than the envy that got the guy who couldn’t afford the nicer house to gamble on a bubble that he could buy the nicer house?

Even if you bought a smaller, more affordable house, you've been hurt by the bubble

Depends on when you bought your house. Ten years ago when things were just beginning to go nuts, you’re probably going to be okay. Five years ago, of course, not so much. But clearly the signs were there. Hell, they were there ten years ago.

(By the way, ninety five percent of Americans think that gold would make a good investment right now. Something for them as have or them as are thinking of having might want to bear in mind.)
posted by IndigoJones at 12:24 PM on October 18, 2010

Again with the sarcasm! Bear in mind that personal attacks are a red flag for a weak argument.

So are double standards. You seem to be more upset that someone in similar circumstances to yours might "luck out" by getting a cheap house when you didn't, yet I don't really see the same level of envy aimed at the money bags who stole billions through the mechanisms that may have made it possible for that little guy to luck into a cheap home. It's a little odd.
posted by Mental Wimp at 12:47 PM on October 18, 2010

That's not such a hot foundation, but rewarding prudence most certainly is.

Is that why the crooks have made off with billions in public money, the rewarding of prudence? I get it now.
posted by Mental Wimp at 12:49 PM on October 18, 2010 [1 favorite]

Depends on when you bought your house.

So the only thing that defines prudence is when you happen to be able to afford a house? The whole market went crazy, and even the crappiest houses were going for incredible prices. I know, because I was looking at them.

You're still blaming the victims, and your rationale for it is getting more and more threadbare:

But clearly the signs were there.

Of course it's easy to predict the future! That's why no one ever loses money on the stock market...except for those imprudent ones who invest in things they should have known would fail.
posted by Jimmy Havok at 2:00 PM on October 18, 2010

Kaboom.
posted by ryoshu at 6:11 PM on October 18, 2010