Continued from Part One:
You would think that a lender would prefer to take a small loss on a loan in order to keep it “performing” – having the borrower make affordable payments and continue to live in the home and maintain it. But when those loans are owned by national banks and other remote lenders, the concern for the housing economy in the long term goes down. Instead, these investors look only to their quarterly returns, and push loans into foreclosure to avoid putting losses on their books as long as possible.
Now that those adjustable-rate hikes are kicking in, more and more homeowners are facing foreclosure. Foreclosure procedure is different in every state, but it always requires strict compliance with certain rules. The company doing the foreclosure must document that it owns the loan, that the homeowner has defaulted, that they gave the homeowner the proper notice prior to foreclosure, and that the property has been legally seized and put up for sale in a manner that insures that the highest possible price will be obtained. This is essential because if the home is sold at a profit, the profit belongs to the homeowner, and if the property is sold at a loss, in many states the homeowner can be pursued for the deficiency. If the wrong party forecloses – for example, a lender that believes it owns the loan when in fact the loan was sold – title to the property will be defective and subject future owners to potential claims by the real note owner.
The response of the big loan servicers to the huge number of defaults has been to mass-produce those foreclosures by committing fraud on an unbelievable scale. Employees are hired solely to sign documents attesting to the truth of facts of which they are completely unaware. These employees may sign hundreds of documents a day, each one swearing that the employee has reviewed the underlying documents, and each one notarized by a notary public who attests that the employee appeared before the notary and signed the document. In thousands of cases, as shown by the recent New York Times piece, each of those statements was false.
Falsely swearing in a notarized document is the same as perjury. Any homeowner who knowingly lies in a loan application is committing a felony that can trigger foreclosure just on the basis of the lie. Everyone knows that if you sign a loan document, the bank can hold you to what you signed. Yet these banks have put false documents in thousands of foreclosure files, and apparently think they are not subject to sanction.
Many smaller banks and loan companies have operated in a scrupulously honest manner. But that will not help if other banks have falsified documents in thousands or millions of foreclosure cases. Courts may invalidate those foreclosures, which will not free the homeowners from the underlying debt, but which will allow them to stay in their homes until the false documents are withdrawn and proper procedures are followed.
In states where foreclosure fraud was rampant, court intervention will help the homeowners get some breathing room, but it will cast doubt on title to any home acquired through foreclosure. Even a purchaser unrelated to any of the parties to the loan may find that selling the home may present a daunting challenge. This will impose additional costs on real estate brokers, lawyers and title insurance companies, which ultimately will raise the cost of any real estate transaction. And that will further depress home prices in high-foreclosure neighborhoods, just as the housing bubble raised them.
In all probability this uncertainty will persist for at least another few years, until all the adjustable-rate and other bad loans have come due and lenders have a better idea of how many of them will go into default. At that point, prices may stabilize and houses may become attractive to buyers – those buyers, that is, who have not been laid off and have the financial ability to meet the new, higher lending standards.
Thus far, Massachusetts has not seen an explosion of foreclosure fraud. That may be temporary good luck, or it may be the result of differences between Massachusetts and the states where that fraud has run wild. Although Massachusetts has a streamlined foreclosure process, the Land Court has insisted on strict proof that the party seeking to foreclose is legally the owner of the loan. And in Massachusetts, unlike some other states, real estate closings are handled by lawyers who have an ethical obligation not to cut corners, rather than by title companies rushing through a high volume of transactions. We also have stronger regulation against predatory lending, thanks to action in recent years by the Legislature and the Attorney General.
But all is not rosy. Many aspects of lending have been taken away from state regulators by a deregulation-happy Reagan-era Congress that blithely encouraged lenders to relocate to “friendly” jurisdictions and develop the exotic loan “products” that got us into trouble in the first place. Until we get back to the community banking model, where local bankers knew their borrowers and took responsibility for their loans, this could happen all over again.