Foreclosure Moratorium: Cracking Down on Liar Liens

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Dean Baker

Dean Baker is co-director of the Center for Economic and Policy Research

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October 18th, 2010 5:00 PM

Foreclosure Moratorium: Cracking Down on Liar Liens

As we all know, there is a major philosophical divide in US politics. On the one hand, there are those who think it is the role of government to help ensure that the vast majority of the population can enjoy a decent standard of living. On the other side are those who believe the role of government is to transfer as much money as possible to the rich and powerful. The latter group seems to be calling the shots these days.

This is seen clearly in the "liar lien" scandal: the flood of short-order foreclosures that ignore standard legal procedures. The banks have been overwhelmed by the unprecedented volume of defaulting mortgages in the wake of the housing crash. Even under normal circumstances, foreclosure rates that in some areas exceed ten times normal levels would create an administrative nightmare.

But these were not ordinary loans. The highest rates of foreclosure are on the quick and dirty loans made at the peak of the bubble. These loans were issued to be sold. Almost immediately after the ink was dry, the issuers would sell these loans off to Citigroup, Goldman Sachs or other investment banks to turn them into mortgage-backed securities. The investment banks themselves were running short order operations. More rapid securitization meant more profits.

In this process, the paper work often came as an afterthought. As a result, necessary documents weren't signed, title transfers weren't properly registered, the notes tying loans to specific properties may not have been properly filed and other paperwork errors went uncorrected.

If the law were being followed, these issues would create serious problems for servicers trying to foreclose on homes where the owner had defaulted. Banks would have to spend the necessary time, paying high cost lawyers for their work, to reconstruct the paper trail needed to establish clear title to the house and the documentation that would allow them to foreclose on a delinquent borrower.

In some cases, this may not even be possible. Many of the issuers that dominated the nonprime mortgage market at the peak of the bubble are no longer in business. They probably did not make sure that all the documentation went to the right place before they closed their doors.

If the Wall Street banks were like the rest of us, the policy response would be simple: follow the frigging law. If banks want to foreclose, then they should have to present the court with the proper documents, end of story. Anyone who has ever bought a house or refinanced a mortgage knows the headaches involved. Everything must be in order, a process that can cost thousands of dollars in fees, as a long sheaf of documents is signed in the presence of a lawyer. This process can easily take two hours.

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The banks don't think that they should have to endure the same expensive tedium as the rest of us. For them, these processes are simply formalities that can be circumvented. Hence, the "robo-signers," who are paid to put their names to documents that they know nothing about.

Some people have been wrongly foreclosed in this process, precisely the sort of mistake that the bureaucratic formalities are intended to prevent. More frequently, homeowners have probably been assessed fees and penalties that they do not actually owe. To the banks, this is just another unfortunate error in the high-speed foreclosure process.

In this context, the demand for a foreclosure moratorium makes perfect sense to those who think that it is the responsibility of government to protect the majority of the population. After all, if someone has fallen behind in paying their bills, they still have a right to expect that the law get followed.

A foreclosure moratorium would allow regulators to ensure that the servicers have systems in place that guarantee that the right procedures are followed. A moratorium on foreclosures would serve the same purpose as the moratorium on deep-sea drilling following the BP disaster. The alternative - that we should trust the banks - doesn't pass the laugh test.

By contrast, those who believe that government exists to serve the rich and powerful point out that these procedures will raise costs for banks. In some cases, they may not even be able to carry through a foreclosure, since the proper documentation does not exist.

The result could be billions of dollars in losses for the Wall Street banks. That may not put them out of business, but it certainly could knock a few million dollars off the bonuses of some top executives.

So, there you have it: the question of whether the Wall Street banks should have to follow the same rules as the rest of us. It is one of the most central philosophical questions underlying politics today.