Our economy is being stolen from us, and our nation’s real estate crisis is providing cover for what will — if it goes unchallenged — go down as one of the greatest heists in our country’s history.
Yes, a mortgage crisis of historic proportions has now suddenly become a foreclosure crisis of historic proportions. And it’s front page news, too, bringing the market pundits out of the woodwork
to exclaim as loudly
as they possibly can
that the entire U.S. mortgage system is a fraud. Banks are admitting to having taken shortcuts with their paperwork, or not having notarized documents properly, or delegated signing authority when they should not have. Yes, procedures haven’t been followed. And, yes, banks are going to pay for it, some far more than others.
I’m even sure all of these procedural errors — and some that have yet to come to light — are on varying levels endemic and common throughout the mortgage servicing industry.
But in the end, am I the only one asking: who really cares?
Does any of this make it more likely that a borrower will suddenly be able to afford their mortgage? Isn't that what really matters?
What really should matter is this: as a nation, we have lost at least $2 trillion in wealth thanks to the economic downturn, led by an absolute collapse of our housing and mortgage markets. It’s a collapse we have all yet to recover from, as a host of well-intentioned but ill-fated policies have done nothing except prolong pain — not only for banks, who are still playing hide-and-seek with bad assets on their balance sheets, but also for borrowers, who are being lied to by our government and by the very consumer advocates who claim to wish to help them.
The results emerging here threaten our nation’s very system of private property rights — a fundamental aspect of our democracy. But not because the banks have abused procedure, as so many pundits have conveniently alleged; instead, it’s because the very procedures designed to protect our nation’s property rights are now being used as a weapon against us.
And most of America doesn’t even know it’s happening.
An economy of lies
Just how much hide-and-seek is still out there, playing games within balance sheets of major financial institutions? Plenty. In March, I highlighted analysis
from Laurie Goodman at Amherst Securities
, who found that of more than $1 trillion in second mortgages outstanding, $963 billion remained on the balance sheets of commercial banks, thrifts and credit unions. As another way of slicing it, a look at Federal Reserve data shows that as of Sept. 22, U.S. commercial banks held $592.1 billion in revolving home equity loans — essentially unchanged from August of 2009, when banks held $605.2 billion.
If you believe that the second liens and home equity loans banks are holding on their balance sheets are worth anything close to what they’re being booked at, you haven’t looked at what second liens tend to bid at on the secondary market: anywhere from 5 to 7 cents. And that’s for performing second liens.
Layer on top of that millions of borrowers who aren’t deleveraging yet, because Uncle Sam is telling them not to, and consumer advocates have swooped in to help. We’ve sold the American populace on the idea that their home truly is the American Dream, and that saving that dream is worth wallowing in bad debt and insolvency for years — rather than simply leaving it behind, deleveraging and moving on with their lives.
Toward this end, the HAMP program is an outright and unmitigated disaster: Consider that through August 2010, 468,000 of the 1.4 million homeowners offered trial mods had received "permanent" modifications. Even if only 40% of these “permanent” modifications redefault — an incredibly low redefault rate — that’s 280,800 borrowers that get to stay in their homes. Assume that number triples between now and 2012, when HAMP is slated to expire: that means 842,400 borrowers will be assisted by HAMP when all is said and done.
HAMP's program cost? $50 billion. The final price tag? $60,000 per success. We might as well have just given the whole lot of our nation’s delinquent borrowers a year’s worth of mortgage payments as a cash advance — it would have been just as effective.
But HAMP’s real crime isn’t its inefficiency and cost to the taxpayer. It’s the culture of ‘indentured servitude’ that it has spawned upon an unwitting American public. Our government has convinced millions that it is better for them to wait to resolve their bad debt, to wallow in insolvency — that they should attempt to see that debt restructured into some other bad debt, with much of this new, still-bad debt now guaranteed and backed directly by the U.S. government.
The result is that bad debt lurches along in our financial system, never really cleaning itself out; and borrowers are left with horrible credit for years as they work through attempting to restructure their debt again and again, damaging their future hopes of ever really contributing to GDP growth again.
It’s a crime upon our nation, financially and socially, yet it’s one that the American people have allowed themselves to be subject to. We are, after all, a government by the people and for the people.
But the real reason we aren’t seeing the sort of economic growth most have expected is precisely because we haven’t allowed the consumer to repair their balance sheets, a necessary and positive thing for the economy in general: we’ve encouraged them to do the exact opposite.
It’s somewhat convenient for the nation’s banks, too, that consumers decided to hold onto all of this debt, too — because doing so allows our financial institutions to continue to play hide-and-seek with their bad assets. Which avoids the need for messy additional government bailouts, politically untenable as they are these days.
So everyone plays along with the ruse.
Regardless, the inconvenient truth here is that until we allow this billions of dollars worth of bad mortgage debt to truly course through our economic veins, to work itself out, we won’t see an economic recovery. Deleveraging privately — and now, through transfer of debt, publicly — is a necessary prerequisite to future economic growth in our country.
Love me tender
Foreclosures, then, aren’t really the enemy at our gates; they’re instead a necessary and healthy indicator of market correction. They are proof that our nation’s well-developed system of private property rights is, indeed, actually working as it should.
But our government has instead made foreclosures into a “last stop” measure instead, something to be avoided at all costs as well as something that probably rates just below Big Tobacco on most American’s scale of corporate loathing — this is a huge mistake, as NYU law professor Richard Epstein notes in a brilliant column
published in Forbes magazine.
By giving in to sensationalism over robo-signers and who notarized what, we’ve allowed procedural gaffes to substitute for true substance. And we’ve forgotten why those procedures really exist in the first place — not to protect the hapless borrower, who has already defaulted, but to instead protect our nation’s sacred system of land rights. To protect the foundations of our very democracy.
“Foreclosure should be understood as a healthy form of market correction of prior transactions. It should not be regarded as a form of original sin, to be tolerated only under the most extreme circumstances,” writes Epstein. “The older rules were designed to allow strict foreclosures in order to clear title. The new rules will result in short-term victories for some besieged landowners — and fresh losses for everyone else.”
California, at least, seems to have had its priorities straight. Under California law, borrowers looking to challenge a foreclosure sale on grounds of any irregular procedure (like affidavit signing, notarization, and the like) must first make a “valid and viable” tender offer to the lender for the amount due on the loan. In other words: a procedural error doesn’t matter, if the borrower still can’t pay the debt.
After all, as I noted before and will say again: our nation’s detailed and paperwork-heavy procedural requirements don’t exist for the protection of the borrower in default. They exist to protect our nation’s very system of property rights.
California’s "tender rule" has helped the courts in the Golden State avoid much of the same fate as those in Florida, which have quite literally been besieged by claims of procedural irregularities. It’s why California is more able to work through foreclosures, and the single largest reason why the state is closer to finding an equilibrium in housing than Florida is.
But California attorneys I speak with now say that the “tender rule” in California is under heated attack from consumer attorneys that would see the rule turned around, allowing California’s courts to resemble the mess that is Florida’s.
Rather than fighting California’s “tender rule,” what we really ought to be doing is considering a national, federal law that makes something like the “tender rule” a national requirement. In other words, if you can’t make good on your debts anyway, procedural missteps in a foreclosure are immaterial and something for attorneys and their bar to worry about.
By subverting our nation’s real estate law to favor borrowers who have no intention of fulfilling their debts, we risk undermining everything that establishes private property rights in our country — and perhaps the coup de grâce of it all is that the American public will be cheering when it happens.
How very eerily Orwellian of it all.
The enemy at our gates threatening our very republic isn’t Wall Street, isn’t banks, isn’t foreclosure mills, isn’t botched paperwork, isn’t loan officers making empty promises, isn’t investment banks rolling loans into CDOs and other esoteric investments, isn’t rating agencies. Instead, we've met the enemy, and it’s us.
Paul Jackson is the publisher of HousingWire Magazine and HousingWire.com. Follow him on Twitter: @pjackson