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[[Update 1: Added the response of the City of Chicago.]]
The ongoing malaise in the capital markets is shedding some light on one important truth: America has lost her moral compass, leaving her afloat on a wild rapids ride, where the water is muddied by poor rule-making and lackluster legal writing.
Federal Reserve Gov. Sarah Bloom-Raskin sounded the alarm on the issue when she charged the nation's attorneys with improving the representation and warranties clause tied to pools of securitized loans.
To put it simply, the clause is supposed to ensure any party representing the underlying quality of loans sold into securitization is telling the truth about the characteristics of those mortgages.
Yet, many of today's residential mortgage-backed securities lawsuits involve financial firms, investors and bond insurers who are fighting each other, claiming misrepresentations were made on loans, justifying the need for banks to buy them back.
If reps and warranties had been standardized in the first place, Raskin believes much of the litigation plaguing the markets would be nonexistent. Speaking to the Maryland State Bar Association, Raskin told the attorneys, "Your country needs you to tackle it with the same vigor and energy that you have brought to other legal challenges in this housing crisis."
The point of the rep and warranty debate is simple: draft the law clearly and market players have few choices but to follow it.
Under the Raskin theory, drafting the law with clarity and punch makes RMBS players accountable upfront as opposed to later on.
Ancient Greek playwright Sophocles once wrote, "Nobody has a more sacred obligation to obey the law than those who make the law."
But what happens when those drafting laws fail to address various conflicts with existing rules and regulations?
Once such example is the Chicago ordinance that puts financial firms on the hook for the upkeep of properties in foreclosure. The legal questions stemming from the ordinance continue capturing headlines.
The code, which passed with an endorsement from Mayor Rahm Emanuel, will force lenders to pay for maintenance on vacant properties, leaving them potentially responsible for upkeep of a property without having regained full ownership of it, according to one report from Moody's Investors Service.
Yet, legal analysts claim the ordinance could face a constitutional challenge since the requirement to care for a property you don't own is a possible violation of the lenders' equal protection rights under the 14th amendment.
HousingWire reached out to the Chicago City Council they replied back, saying "The City of Chicago believes its foreclosure ordinance is constitutional and enforceable. Recently an amendment to the existing ordinance was introduced for consideration which distinguishes a mortgagee from an owner."
But one thing is sure, the vein of the legal system runs throughout the entire body of the mortgage crisis. Without a respect for what the law says before drafting new ones or what the law means before attacking existing ones, the financial markets will be shaky and disoriented.
Sophocles would not be proud.
Write to: Kerri Panchuk.