A Few More Thoughts on the Foreclosure Scandal
By Arnold Kling
I am not a lawyer, so treat the following as an amateur’s view.
When you obtain a mortgage on a home, two documents get recorded. One is a mortgage, which as I understand it is just a piece of paper that says (if I am the homeowner), “Arnold Kling cannot sell this house until he pays off his loan!” Another document, which we will call the mortgage note, gives the terms and conditions of the loan. The lender, who we will call the noteholder, has the right to foreclose if I do not meet the terms and conditions of the loan.
The “foreclosure scandal,” as I understand it, is that with securitization, the actual noteholder has changed in ways that may not have been recorded properly at the county records office. However, the identity of the noteholder is well defined in the trading systems used by mortgage securities traders.
Morally (as opposed to legally), the borrower is not really a party to this controversy. That is, the borrower did not abide by the terms of the note. The borrower has no moral claim to anything at this point.
The potential dispute is over whether the party demanding foreclosure is the rightful noteholder or not. That dispute should morally (again, not necessarily legally) be resolved among the parties that might claim ownership of the note. In theory, those parties could be getting all worked up over the documents, signatures, and so on being used in the foreclosure process. In practice, those parties are not disputing one another. The process that the industry uses for identifying ownership interests in the mortgages seems to be working, as far as the relevant parties are concerned.
However, the %&*#^ lawyers for the borrower come in and claim standing to challenge the foreclosure on the grounds that the foreclosure notice was sent by someone who has not properly documented that he is the noteholder. Legally, they may have standing to do this. Morally, they do not.
The sensible policy would be for the government to step in and legislate that borrowers have no standing to sue unless they are claiming to have complied with the terms of the note. If necessary, a Federal law could give precedence to the systems that the financial industry has in place for resolving potential conflicts among noteholders, rather than allow local rules to interfere with interstate commerce in lending.
What I think of as obviously sensible public policy looks like it’s friendly to “the banks,” and so the #@#%$^ lawyers naturally made a point of bringing the issue to the media’s attention three weeks before the election. That way, instead of responding with sensible policy, the politicians have to show themselves hating on the banks. But if there were any justice, this “scandal” would be regarded as nothing but baloney sandwich.