Whalen touched on this theme in this clip yesterday. He expects a return to Depression era legislation banning all bank foreclosures on a state-by-state basis.
- "Pay your property tax. Stay in your house. Don't pay your mortgage."
This is part of his thesis that 2011 will also bring a new round of bank bailouts.
Guest post submitted by Chris Whalen.
Reprinted with permission.
Originally published at Reuters.
Everything Americans Should Ask About Home Mortgages
By Christopher Whalen
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.