Sunday, October 31, 2010

Fixing the Mortgage Mess

An opinion column in the Times is skeptical that the mortgage documentation mess can be fixed with legislation:
The banks and other players in the securitization industry now seem to be looking to Congress to snap its fingers to make the whole problem go away, preferably with a law that relieves them of liability for their bad behavior. But any such legislative fiat would bulldoze regions of state laws on real estate and trusts, not to mention the Uniform Commercial Code. A challenge on constitutional grounds would be inevitable.

Asking for Congress’s help would also require the banks to tacitly admit that they routinely broke their own contracts and made misrepresentations to investors in their Securities and Exchange Commission filings. Would Congress dare shield them from well-deserved litigation when the banks themselves use every minor customer deviation from incomprehensible contracts as an excuse to charge a fee?
It may well be inevitable that some lawyers would attempt to challenge a federal law, but is there a reason to believe that the litigation would be successful? Federal law can bulldoze state laws - it's called preemption. For the most part, even now, homeowners don't seem particularly inclined to fight the foreclosure process. Legislation would further narrow the pool of people willing to litigate, and banks could redouble their efforts to document those transactions so as to moot their cases.

Perhaps the author is speaking of the potential litigation between the various financial institutions involved - attempts to force buy-backs of mortgages or securities, fraud actions, breach of contract actions.... But the players seem to know the risks associated with that game, which is why they're presently working through their lobbyists as opposed to their law firms.
There are alternatives. One measure that both homeowners and investors in mortgage-backed securities would probably support is a process for major principal modifications for viable borrowers; that is, to forgive a portion of their debt and lower their monthly payments. This could come about through either coordinated state action or a state-federal effort.

The large banks, no doubt, would resist; they would be forced to write down the mortgage exposures they carry on their books, which some banking experts contend would force them back into the Troubled Asset Relief Program. However, allowing significant principal modifications would stem the flood of foreclosures and reduce uncertainty about the housing market and mortgage securities, giving the authorities time to devise approaches to the messy problems of clouded titles and faulty loan conveyance.
Unless the documentation is in order, how do you know you're dealing with the correct party? Or is the author's assumption that, despite the irregularities and fraud in banks' attempt to document mortgages, they banks have it right in the vast majority of cases and eventually the paperwork will catch up?

Also, which is more likely to come out of the next Congress - a law making it easier for financial institutions to overcome deficiencies in their documentation of mortgages, or another bailout of the financial industry? It may be easy to forget now that the astroturfers have redefined the movement, but the Tea Party Movement grew out of popular disgust at the first bailout.

Update: Who could have seen this coming.

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