In recent weeks the business headlines in the US have been dominated by the news that financial institutions have made a terrible mess of the home repossession process. It turns out that paperwork has been tossed into the garbage, affidavits have been forged and the seizure and sale of homes hasn’t been documented correctly. The mortgages themselves may even have been sold without proper transfer of the physical documents that show who actually owns the loans — despite the fact that only the holder of the physical documents is supposed to have the right to ask the court to foreclose.
In one telling of this sad tale, it’s all just a procedural issue. As US Senator Bob Corker, a Republican who sits on the Senate banking committee, told the American Banker: “I’ve seen no evidence that has shown people who have been put out of their homes that shouldn’t have been.”
That was echoed by JP Morgan’s chief executive, Jamie Dimon, who told investors last week: “We are not evicting people who deserve to stay in their house.”
ILLUSTRATION: MOUNTAIN PEOPLE
Really, who cares if the proper procedures were followed when it’s so utterly clear that deadbeats owe money they’re not paying back?
There’s just one problem with this — actually, there’s more than one problem. Let’s start with the fact that the US’ capitalist system supposedly works because it is built on a system of laws. Indeed, we purport to believe in laws so much that we run around the globe preaching to others about their importance. Does the forgery of documents or any of the rest of it sound like what should happen in a nation that believes in the law?
The importance of the letter of the law explains why corporations try to dot every “i” and cross every “t” in their dealings with each other. If the transaction goes sour and the two parties end up in court, judges don’t look kindly on missing or forged documentation, whatever the merits of the case. Even more, the importance of following the proper procedures under the law also explains why convicted murderers or apprehended felons go free because of tiny violations in the way their cases were handled, even when it’s crystal clear that they’re guilty. So why are homebuyers subject to a different standard?
And it’s not as if the industry was unaware of the problem. In the bubble years the financial industry made a choice not to invest in doing things properly. Today, shouldn’t that be their problem, rather than that of the homebuyers? After all, nobody has any sympathy for someone who for years neglects basic maintenance on their house and then complains that the roof has caved in.
Lastly, the notion that the homebuyer deserves to lose their home in each and every case, and that these problems haven’t caused any big mistakes, is patently false. (In fairness to JP Morgan, which is generally a well-run firm, it might be true for that institution. However, it’s not true overall.) My personal favorite is the often-repeated story of the guy who was foreclosed on even though he didn’t actually have a mortgage. You don’t need more than one piece of evidence like this to show that when procedures aren’t followed, things can go seriously wrong — and there’s a lot more than one piece of evidence.
Yet despite the fact that what’s happening is wrong, it’s likely that homebuyers are going to learn that the law and the US way get thrown under the bus when the fate of the economy hangs in the balance.
The controversial Troubled Asset Relief Program (TARP) may be the right analogy. With TARP, of course, everyone admitted that it was unfair to force taxpayers to bail out the banks. However, the argument was that if we don’t do it, taxpayers will suffer the consequences of that inaction. According to the Mortgage Bankers Association, close to one in 21 residential mortgages are already in foreclosure, up from just one in 100 four years ago. If you force the financial industry to pay for its sloppiness and you throw sand in the gears of the machinery that is supposed to clean up the mess, we’re right back in the autumn of 2008 — and then the economy does grind to a halt.
And so a few things are likely. One is that the solution to foreclosure, as it was to the financial crisis (or to put it more accurately, the first wave of the financial crisis), will have to be political. Maybe, just maybe, there will be a trade-off, in which lenders finally agree to substantial principal reductions in outstanding mortgages in exchange for a dismissal of the paperwork follies. After all, research firm Amherst Securities estimates that if government policy doesn’t change, one out of every five borrowers — or 11 million homebuyers — is in danger of losing his or her property. That’s not good for anybody.
However, the solution won’t be “fair” to homebuyers, in the sense that in the end they will be subject to a different legal standard than, say, murderers. OK. We get it. But here’s a memo to the financial industry: How much more of this do you really expect people to take?
Bethany McLean is co-author of The Smartest Guys in the Room, an expose of the Enron scandal.
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