Saturday, October 23, 2010

Quite a mess

I realize this post will be boring to many who read it and I apologize in advance for that. I try to keep my entries warm and fuzzy and controversy-free but every so often I just have to write a little about business or politics. Check back soon for something more soothing.

You might have heard the latest in the continuing housing crisis. It involves foreclosures. Apparently some of the big holders of mortgages have been a little lax in preparing foreclosure documentation. A lady in Maine with a $75,000 mortgage contacted her local Legal Aid group, a representative of which discovered some errors in the foreclosure documents. It snowballed from there. GMAC, the holder of this mortgage, and other big name financial institutions, have halted foreclosure proceedings in a number of states while foreclosure processes among a number of lenders are investigated. Attorneys General in 50 states have joined in to look into it.

I find this interesting because (a) I have spent the major part of my working life in banking (although now I am mainly involved in the deposit and regulatory world); and (b) earlier in my career in Arkansas practicing law, I used to represent banks and mortgage companies and handled a ton of foreclosures.

It’s not the most tasteful work, I can assure you. When it’s a residential foreclosure, it involves putting people out of their homes. That’s painful.

The flip side is that it’s a legal proceeding and we are a nation of laws. Although it is hard to be a part of a process that causes a person to lose a home, the person chose to be a part of that process and agreed that, if he/she could not pay, the house could be sold to help the lender recover. In the vast majority of cases I handled, by the time it got to the foreclosure sale, the borrowers had already vacated the property, having come to terms with the fact that they couldn’t retain something they could no longer pay for.

The underlying concept is this: a person wants to buy a piece of property. If that person can’t pay cash, he/she has to borrow the money. The lender has to have security, or collateral, for the money lent. So the lender, in addition to receiving a promissory note from the borrower, has the borrower sign a mortgage or, in some states, a deed of trust (essentially the same thing) in return for lending the money.

The mortgage instrument is filed in the county real estate records and becomes a lien on the property until the loan is repaid, at which time the lender releases the mortgage and the lien no longer exists (unless, of course, you fail to pay, in which event the lender is able to exercise its right to foreclose on -- and ultimately sell -- the property).

You know if you have ever purchased a house that, when you go to closing, you sign a stack of documents. Among these are the aforementioned promissory note and mortgage or deed of trust. It is very important, both for borrower and lender, that all of this is done correctly. And you also know that, although you have the opportunity to do so, you don’t read every word of every document you sign (although I, much to the annoyance of my wife, have come close).

My position on this is that your failure to read what you sign is not the lender’s fault. If you don’t read what you’re signing and you think you might not understand, you should at least ask questions about it. Nobody is holding a gun to your head making you sign anything and there’s no time limit on a closing – everybody will stick around as long as necessary so your questions get answered.

That’s why, although I’m a very merciful person, I have a hard time always being sympathetic with people who have taken out loans and then later say they didn’t know what they were signing. And if someone doesn’t understand everything he/she is signing, surely that person has to understand that if the loan is not repaid, the property can be taken away.

So now we have a whole bunch of lenders being accused of maybe not dotting every “i” and crossing every “t” when they started the foreclosure process. As I understand it, thousands of foreclosures are being stopped while this is being investigated. And I guess a lot of folks are getting to stay in houses without paying for them.

While some might see this as some type of justice, I think most of us don’t even begin to understand the ramifications. To begin with, if foreclosures are halted, then that segment of homes on the market will shrink, causing (in my opinion) prices to go up, yet artificially. While that might give a temporary boost to the economy since decreasing real estate values have contributed mightily to the downturn, at some point those properties will return to the market, en masse, which will likely cause values to fall faster than they increased earlier.

In addition, the mortgage world is complicated. A large number of mortgage loans made by banks are immediately sold to investors. They are packaged and/or “securitized” and become part of mortgage-backed securities. You also have the whole government (FHA/HUD) and quasi-government (Fannie and Freddie) entities that have a big piece of the pie as well. Many of these securitized mortgages are parts of pension and retirement plans or other investment instruments. When a loan goes bad, it’s important to the investor, whoever it is, that the loss-recoupment process take place efficiently and promptly.

Even the Obama administration, which has tried fervently to paint itself as the champion of the little guy, is advising against an overall foreclosure moratorium. The president has received good advice that stopping this necessary process could have long-term disastrous effects.

This is not to say that holders of the mortgages should not be held responsible for any misdeeds. They must get their acts together on this. Although sometimes burdensome, the technical requirements for foreclosing on a piece of real estate, which vary from state to state, must be met. And there’s really no excuse. Burdensome and tedious? Yes. Difficult? No.

I suspect that, due to the rise in foreclosures, the culprits in this crisis got careless. They didn’t really review what they were signing. Notaries probably didn’t see folks sign papers. Again, there’s no excuse. Hire more people if you have to, but don’t cut corners.

In the end, however, you still have a promissory note signed by Mr. and Mrs. Jones, saying they will pay “X” every month. If they can’t pay, then they are going to lose their property. Even if it is discovered that the mortgage holders didn’t meet the legal requirements, I cannot imagine there is a court in the land that will say the mortgages are just released and hundreds of thousands of borrowers will get to have their homes free and clear.

No, what will happen is the lender will have to go back and correct the error. Mr. and Mrs. Jones might get to stay in their home a little longer but, in the end, they’re still going to have to pay up if they want to stay there. At least that’s my feeling based on experience. With the number of cases I handled, there were times when there were challenges to the process and there were times when corrections had to be made. That resulted in costly delays but I don’t recall anyone ever getting to just retain a property and have the mortgage released.

It’s a mess, that’s for sure. But it’s a mess that can and should – and hopefully will – be corrected. Last I looked there was still no free lunch.


Redlefty said...

You know I'm connected to this industry as well and you summed up the predicament nicely@

quid said...

I'm with you, Bob (spent 4 years as a contractor for the FDIC, cleaning up bad loans).....

It's a paper mess. Nothing more. No evil empire.

Debby said...

I'm of the opinion that greed was at the root of this. Greed on the part of the banks, to be sure, but also, the borrowers themselves were greedy and fiscally irresponsible. The thing that I hate the most is that this has lapped over to affect everyone. Tim just heard that he is probably going to be laid off again. It can't all be blamed on the housing situation. NAFTA is in large part responsible for the decline of the machinist trade. I try not to be discouraged, but you know, sometimes I am. We work so hard. We try to be so responsible. It doesn't matter. Who gets bailed out are the ones who didn't make responsible choices.

Kelly said...

Very good post, Bob.

I have a family member who works in the banking industry as a loan officer and I've been told he's very good with repos. Yet I know he makes every effort he can to work with the borrower to help them out. Ultimately, though....if they can't make the payments they can't keep the item. Life may not always seem fair, but that's the way it is.

Bob Barbanes said...

But Kelly, in this case life IS fair. Person agrees to pay- gets to keep the house as long as he keeps paying. If he fails to pay he loses the house. Sad, perhaps, but what's unfair about that?

In my experience with those who've lost their homes, lenders make every effort to work out some sort of deal with the borrower. It's usually the borrower who ducks and avoids the situation until it is well too late. Then the house falls into foreclosure and there's no turning back the eventual eviction. Delaying actions like focusing on paperwork technical errors only delay the inevitable.

We all know that borrowers gave mortgages to people who maybe weren't the best candidates for one. That doesn't excuse the borrower's obligation to pay. When it comes to 30-year financial committments we need to be a little more circusmpect: Can I *really* pay this off?

Life does sometimes suck. In the end, people do need to live up to their responsibilities, whether they think it's fair or not.

Pencil Writer said...

It is tough, but eventually everyone will be held accountable for each decision they've made in life. Sooner or later, the "buck" will stop with each of us.

If people don't ever have to feel accountable for their choices--paying for a car, a house, a meal--they think it's okay if they get a freebie? Meaning, of course, that you and I will have to pay for them? And, maybe lose our own house? I don't like that perspective. I don't like it at all.

Thanks for clarifying things, Bob. (It's okay not to be warm and fuzzy when you have to deal with some of the facts of life.) We all need to be careful about what we do with our names, etc.