Everything that Americans should ask about home mortgages

October 20, 2010

Americans are discovering the concept of foreclosure and the loss of a home in a very real and disturbing way.  Despite the rhetoric from Washington and sensationalist media, the process of resolving defaulted mortgages is moving ahead, one reason why the U.S. will not be Japan.  But we have all forgotten the experiences of the 1930s when it comes to home foreclosure.

We seem to be moving from voluntary foreclosure moratoria put in place by banks for public relations purposes in 2010 to unilateral state law foreclosure moratoria like those put in place during the 1930s in 2011.  States such as Michigan are considering “new” laws to limit foreclosures by creditors.  But all Americans are also experiencing a journey back to the 1930s, a journey of remembering and one that is teaching this writer something new each day.

In the 1930s, a total of 28 states enacted foreclosure moratoria and a 1934 Supreme Court decision upheld such laws provided that a state of emergency existed.  Many of these state law moratoria remain on the books today and were last invoked during the 1980s.  The Iowa laws provided for suspension of foreclosures in the event of natural disasters such as drought, Neil Harl reported in his book, “The Farm Crisis of the 1980s,” or by order of the governor of the state.  These state moratoria drove the banking industry to look at changes in how home sales are financed and particularly the rights of investors.

Another Supreme Court decision that predated the Great Depression already had set in motion a series of changes in commercial practice in the U.S. regarding mortgages.  In Benedict v. Ratner, 268 U.S. 353 (1925), Justice Louis Brandeis simply and accurately said that ambivalent mixtures of possession and control of collateral for debt are “conclusively fraudulent,” veteran mortgage securities attorney Fred Feldkamp recalls. This decision and the resulting body of precedents would eventually lead to agreement on new disclosure procedures that would exempt validly secured loans under Article 9 of the Uniform Commercial Code, including possessory pledges of mortgage notes.

“To survive the Brandeis logic, one must assiduously follow the UCC and avoid all the pitfalls of the Uniform Fraudulent Transfer Act,” Feldkamp said in an email last week. “Otherwise the state mortgage recording laws and Benedict v. Ratner could turn an investment record error into a fraud and may require them to rescind the investment –either under securities laws or common law fraud.”  Then a young attorney, Feldkamp worked on an early legal opinion for one of the mortgage insurers in the 1970s that helped define the first loan servicer agreements and pave the way for the securitization boom.

What does the Benedict v. Ratner decision by the Supreme Court and the related agreement by the states in the 1950s mean to today’s families fighting foreclosure and communities striving to clear the real estate markets?   First and foremost, the key thing to understand is that the fundamental principles on which securitization was built are (1) sound financial assets namely homes and (2) ALWAYS remember — the collateral follows the debt –and ownership of the debt is most clearly represented by possession of a note.

The basis of the original “true sale” opinion for mortgages was that respected counsel in 48 states all agreed (and opined to attorneys such as Feldkamp and to the credit rating agencies) that if there is a dispute between a bona fide holder of a mortgage note and a different assignee of record of the mortgage, the note holder always wins.  The fact of the mortgage note coming under the UCC means that while the record at the courthouse regarding the assignee of record on the mortgage may be a complete mess, this is not necessarily evidence of fraud nor does it void the obligation of the borrower to repay.

Thus when that young activist lawyer is telling you and yours to fight a foreclosure — this even though you have not paid the mortgage in more than six months — it is time to start looking for a new place to live.   The fact is that despite all of the bad press, MERS (done correctly) eventually wins in most foreclosure hearings that are contested.  This is not reason for joy in terms of the human suffering involved in the loss of a home.  But the sad fact is that the family that is not paying the mortgage probably is unable to pay property taxes either.

Ultimately it is important for Americans to learn how mortgages are priced and sold, both to borrowers and investors alike.  There are big legal problems now being exposed in this multi-trillion dollar industry, a financial sector which is essential to the economic well-being of the U.S.  For example, what happens to the investor in a mortgage backed security if the underwriter fails to deliver the mortgage note to the trustee?   This is just one issue that will be litigated by the banks, investors and housing agencies in Washington for years to come.

But the most important thing for all consumers to understand is that when a mortgage is in default, the fact that the title records at the court house are in disarray does not void the mortgage note nor does it change the fact that the loan is bad.  Foreclosure is a tragedy for one family, but an opportunity for another and the means by which communities and financial institutions defend their tax base and financial health.  This process of liquidation and sale is why the U.S. will recover from the housing mess.

The bad guys in the housing bust are not the banks who must foreclose on homes, but the politicians in both political parties who used reckless housing policies to further their personal interests. This is a bipartisan national scandal.  Barney Frank, Chris Dodd, Phil Graham, Alan Greenspan and their contemporaries are the authors of our collective misery, not the local banker who must clean up the mess created by government intervention in the housing market.

7 comments

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“First and foremost, the key thing to understand is that the fundamental principles on which securitization was built are (1) sound financial assets namely homes and (2) ALWAYS remember — the collateral follows the debt –and ownership of the debt is most clearly represented by possession of a note.”

What happens if the note is destroyed, as many are saying is the case in the MERS-related loans? And why would you assume “the sad fact is that the family that is not paying the mortgage probably is unable to pay property taxes either”? Many states have very low property taxes. South Carolina has real estate taxes are as low as $8-900 per year for its median-priced homes.

Posted by Zoel | Report as abusive

This article does nothing to address the fraud in the original loan document perpretrated by the banks, where the heart of the foreclosure mess starts.

The rush to foreclosure is nothing other than a smoke screen to hide the fraud in the loan documents.

Posted by jessandjulie | Report as abusive

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Posted by Everything that Americans should ask about home mortgages | Home Buying and Home Selling Tips | Report as abusive

why isn’t this more common knowledge regarding the Senate Banking Committee, Barney Frank & Chris Dodd, others ….will these so-called representatives ever acknowledge their role as so many get hurt by this housing collapse ? i’d like to reference my own circumstances: in the year 2005 i thought i was doing the right thing, i bought a small condo & PAID ALL MY CASH for the condo, thinking that this is where i’d spend retirement. As a cash buyer, I’ve already lost 30% of my money & if i do not sell now, in another 5 years i will have lost probably well over 1/2 my money. in all my years of buying homes, they only went up, how was i to know that i was buying at the top of a credit cycle !

Posted by lynd | Report as abusive

Whalen wax philosophic. Each homeowner is a “straw man” conducting commerce. The battle is on: “Rule of the UCC” vs the Rule of Law.

Why waste any more time? Let’s really help dogpatch understand fractional reserve banking, dutch auction mortgage bidding and how the CDO/MBS ultimately
competed with the Fed in the creation of new money (hey, where is that M3 anyway?).

Those banks, auditors, regulators and financial professionals referenced in his Reuters bio must love this guy. Of course, it’s not the that poor banker’s fault. Don’t you know – they did nuthin wrong.

A beautifully written piece though.

Posted by residentialrisk | Report as abusive

Chris, what you wrote was interesting until you went off the rails blaming everyone except the local bankers. The money each person/group makes off the sales of houses undermines integrity up and down the ladder, from congress on down, including real estate reps, bankers, and whoever takes their cut and then passes the toxic mess on to someone else. Obviously anyone in the chain who had integrity could have stopped an improper or inappropriate loan, but then someone who is willing to bend to the rules or falsify documents steps in. And it isn’t over. Someone I know personally is about to buy a house where the mortgage lender, the real estate rep, and whoever else has their finger in the pie, is doing whatever they can to have a sale go through when the numbers violate all the rules of income vs. debt.It’s just a game of hot potato, and the bankers are as greedy, selfish and, ultimately, cruel as ever. The way you excuse bankers sounds like you are part of the ongoing problem. I hope you enjoy whatever number of pieces of silver you get.

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In your last sentence, I think you meant Gramm, not Graham. And, just wondering, why no mention of the Republican House Banking Chairmen (Leach and Oxley) who were in power 1993-2007? Yes, Barney was there, and no saint, but D’Amato (remember Alfonse?), Gramm, Shelby, Leach and Oxley were far more responsible than a relatively powerless minority. All Republicans no less.

Posted by fatbear | Report as abusive

A beautifully written and throughly misleading piece.
One has to wonder what his “Risk Analysis” stand was, back when all of the freshwater economists were poo-pooing the obvious fraud that the industry was so eagerly engaged in.

Despite false claims that “nobody-could-see-this-coming” many did.

At this point, there are all types of flavors of “how do we corrupt established rules” to prevent the widespread fraud from taking down the insolvent banking sector.

Most sickening is the excuses about “saving”; real estate, the economy, homeowners…etc. What Christopher and his lobbying ilk are trying to “save” is the corrupt insolvent institutions that played fast and loose with the law to make a bonus buck.

We don’t need to codify fraud, we need punishment to encourage honest players.

Christopher, the truth is that “The bad guys…” are, in fact, the banksters. No amount of shuffle and jive are ever going to convince the American people otherwise.

Posted by MediocreFred | Report as abusive

[…] commercial receivables to mortgage notes. We wrote about this important Supreme Court decision in a previous piece on Reuters.com. The key paragraph in the Brandeis decision in Benedict v. Ratner follows: But it is [268 U.S. 353, […]

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[…] from blurb receivables to debt notes. We wrote about this critical Supreme Court preference in a previous square on Reuters.com. The pivotal divide in the Brandeis decision in Benedict v. Ratner follows: But it is [268 U.S. […]

Posted by finance » Blog Archive » Putting “trust” back in American housing finance | Report as abusive

[…] commercial receivables to mortgage notes. We wrote about this important Supreme Court decision in a previous piece on Reuters.com. The key paragraph in the Brandeis decision in Benedict v. Ratner follows: But it is [268 U.S. 353, […]

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