The cleansing force of mortgage foreclosures
Mortgage foreclosures are back in the news big time, and that news is not good. The gist of the recent reports is that major banks have taken shortcuts with their paperwork — shortcuts that, under current law, stop the foreclosure proceedings dead in their tracks. These flaws in practice are not confined to a few random cases, but permeate entire loan portfolios as harried banks such as JP Morgan Chase and GMAC have seized up, putting their foreclosures on hold for the time being. The short-term consequence is that defaulting debtors will be able to remain in their homes indefinitely, again without paying down the mortgages. In addition, those purchasers who bought homes out of foreclosure proceedings may well be forced to defend their titles against the original borrowers who went into default. Their bank mortgagees may find themselves in the same boat, having lent money to these individuals who acquired that had been previously foreclosed. The legal costs of these cascading actions could easily lead to more bank failures, requiring yet another ill-conceived round of rescue efforts by the Federal Reserve. Prudent borrowers and lenders would end up footing the bill.