Ethics Of Foreclosures
An immediate effect of the action will be a temporary stay of execution for hundreds of thousands of borrowers in default. The bank said it would be brief, a mere pause while it made sure its methods were in order. As the story points out, there is considerable pressure on lenders to put the brakes on. Members of Congress and various attorneys general are suggesting that it would be wise to do so.
A few quick points about ethics:
• In case it’s not obvious, the freeze on foreclosures is an ethical issue, in addition to being a legal one. It involves shifting benefits, burdens, and risks among groups, including homeowners, banks’ shareholders, and taxpayers. (In this regard, it’s worth remembering that the banks are middlemen, essentially mediating a transaction between their shareholders, who have money to lend, and homeowners, who need to borrow. If there has indeed been any fraud or even lack of diligence on the part of the banks, it is an offence not just against homeowners, but against shareholders.)
• Mortgages are not just like any other product. For starters, a home is by far the biggest purchase most of us will make in our lifetimes. Scale alone makes this an important issue. Further, home ownership is for most people laden with emotion. When foreclosures happen, people aren’t just losing a product; in most cases they lose a home. This is both morally significant, and accounts for at least some of the political attention being paid to the issue. It’s not at all clear that a freeze on foreclosures is good for home-owners (or rather would-be home owners) over all. The ability to foreclose in the event of default is part of what makes it worthwhile for lenders to take a risk in lending money to buy a home in the first place. Also, foreclosures put houses on the market, helping to keep prices down. Fewer foreclosures may mean a rise in prices. Since ethics is, in part, about evaluating outcomes, recognizing the effects of the freeze on the full range of stakeholders is ethically important.
Ethics Of Mortgage Foreclosure Defense
Americans care about doing the right thing, both morally and ethically. Most of us have worked diligently over the years to make each and every mortgage payment in full, and on time (along with honoring all of our other obligations). This is a way of life for most of us. Finding ourselves in a situation where you can no longer do that is abhorrent to Americans, and troubles them deeply. So, having a clear understanding of just how we arrived at this low point of our lives, and what it all means morally and ethically, is important to us. The biggest banks in the world and the entire mortgage industry have worked very hard to label their victims as “deadbeats” in the public eye. This is part of a carefully coordinated propaganda campaign. The truth is that homeowners who are underwater and are now in default never had a chance against the overblown greed and ambition of these powerful institutions. They would also suggest that most people in foreclosure are “strategic defaulters,” i.e., they can pay the mortgage, but choose not to. In my experience, that is the farthest thing from the truth, and is just more bank propaganda. American families recognize that the middle class is under attack, and they are just trying to survive. This is the very hard reality which they are fighting:
• The Big Banks Created The Real Estate Bubble: Throughout the Nineties and the first decade of the 2000’s, many people, most especially the banking and mortgage industry, knew that we were in a real estate bubble, but the banks were no longer lenders, they had become mere paper-shufflers, who made huge profits off selling other people’s money in the form of mortgages. In order to make ever larger profits, they wrote as many loans as they possibly could, as fast as they could, and made huge profits for the wealthiest institutions in the world, with very little regard of the safety of the loans they wrote, or the stability of the global financial system as a whole.
• The Banks Engaged In Deliberate Wrongdoing: Just about every form of predatory lending that you can think of was carried out on a daily basis, year after year. If you went to your banker for a $100,000 loan, they talked you into a bigger loan, which is a complete departure from the prudence that has typified bankers historically. Is it the layman’s fault that he or she didn’t convince the financial professionals that they really could NOT afford that big loan? The lenders knew that appraisers were inflating property values, to make the loans go through whether they should or not. Those appraisers that didn’t join the (mostly) unspoken conspiracy quickly found that they didn’t get any more orders from lenders. Banks knew that many of the mortgage loans they were writing would ultimately fail, but they also knew (because they were so quickly sold) that they would be someone else’s loans when they did fail, so they didn’t care. That is not just morally reprehensible, it’s not just illegal, it was (and is) a crime, in most cases a felony. In order to make more loans faster, the bankers quit attending to the basics of their own business. They entirely stopped documenting the sale of the loans from one bank to another with proper endorsements and delivery of the original promissory notes and recorded assignments of the mortgage. Instead, they took the position that the borrower was no longer entitled to even know who really owned the mortgage, just who their servicer was, and they actively hid the name of the real owner of the mortgage from their customers. This was largely to keep from hiring American workers to do this work, so they wouldn’t have to pay them, and could put that money in their own pocket, instead. As a result, in the words of the Congressional Oversight Panel that was formed to investigate the rats’-nest they created, “in many cases, it is impossible to tell who really owns these mortgages.” Banks have always been given special consideration in the law, because they are regarded as part of the nation’s financial infrastructure. The reforms following the Great Depression in the 1930’s were designed to maximize the stability of the financial system. During the last several decades, however, the banks, as private investors, placed massive amounts of their own money as investments, betting against these mortgages’ success. They were, and are, in effect, betting against the American homeowner, so it should be no surprise that the homeowner is failing.
• The Banks Created The Economic Crash Of 2008: In reality, this was just one more huge Ponzi scheme, the biggest in history. They were taking money from investors (remember all those Triple-A rated bonds?), and putting it into mortgages that they knew would fail. They kept it up as long as they could, but it had to catch up to them, and it did.
• We Bailed Out The Banks: When it all came crashing down on their heads, we bailed the banks out, back in September of 2008. We gave them $750 Billion in TARP funds. We bailed out AIG, who insured them against their own recklessness. The crisis was so acute that the bailout had to be accomplished in the shortest possible time, with no time to procure any promises from the banks that they would use the money as intended, to support the economy. And, of course, the bailout was engineered by people who were part of the industry-regulator revolving door and influence environment.
• After The Bailout, The Banks Could Have Reformed Their Act And Saved The Economy: Honest, responsible professionals would have recognized the error of their ways, and made amends. If the banks had kept lending (using some of the bail-out monies) but responsibly, and the rest to lower the principal balances of mortgages to get their customers out from being underwater, the drop in property values would have stopped back in 2008-9 at 10 or 15%, instead of continuing to fall to this day.
• They Didn’t. Instead, They Continued To Lie, Cheat And Steal: The net effect of everything they did is that real estate values in the Tampa Bay area have now fallen more than 65%, and are still falling.
• The Natural Result Was That They Destroyed The Value Of Our Homes And Killed The Economy: The continuing greed and arrogance of these Banks kept the carnage going, and injury to America’s middle class became more of a mortal wound for many. During the Great Depression of the 1930’s, real estate values fell by 50% throughout the land. We have passed that mark here in the Tampa Bay area, so are we not in a depression, at least in real estate, a critically important sector of the economy? But the damage to homeowners wasn’t just in their home values. Also affected was everyone’s investments, their 401(k)’s, and other retirement accounts. Many of their jobs and businesses were lost, as a direct result of the massive economic damage this debacle inflicted. To fix it, once again, the Banks would have to hire people who have some background in business, to handle the details, but they have no interest in doing that. If it can’t be done offshore, they’re not going to do it.
• That Is Still Making Americans Lose Value In Their Homes To This Day: The important thing to remember is that, most of the loss in real estate value occurred after the bailout, when the Banks could (and should) have acted to stop it, but they refused, and they still refuse to do the right thing by the American people to this day.
• the economy will not rebound until mortgage balances are adjusted to reflect the current value of real estate: As long as these loan balances are artificially high (as a result of the Bank-induced bubble), homes will remain underwater in an absolute sense, and monthly payments will be way over market. If your home is under water, you naturally will (and should) ask yourself, “Would I: A. buy this home today for that price, and pay that large a mortgage payment, or B. would I buy something else much cheaper instead, and save many hundreds of dollars a month in payments as a result?” As long as the answer is “B,” mortgages will continue to fail, and the deadly foreclosure cycle will be maintained. The Banks should be giving homeowners modifications across the board, to repair their loan portfolios, and save the market.
• The Banks Will Never Do The Right Thing Until They Are Forced: Sooner or later I believe that will happen. The question is, who can (and might) force them? The government can, through the investigations of criminal wrongdoing going on, through governments’ basic regulatory authority, or by attaching conditions to further cash benefits that the government gives to Banks every day. But, the government consists of politicians who can be compromised by the money the financial services sector lavishes on their campaigns. That includes prosecutors, who (at the state level), are elected officials too. The marketplace can also force a change, and, I believe, will ultimately do so, as Banks slowly recognize that the posture they are taking cannot possibly succeed in the long run.
• Homeowners Fighting Their Foreclosures Have, And Will, Change The Formula: The individual homeowner can (and many have) changed the formula by aggressively fighting foreclosure. Two years ago, 95% of foreclosures went through the courts unopposed, as most people didn’t even consult attorneys when the Banks foreclosed. They just gave up, and moved out of their homes, never even suspecting that the mortgage may be essentially unenforceable because of all of the fraud, abuse, and reckless mishandling of their transactions. Today, many more people DO stand up and fight the banks, and, as a direct result of that, the number of foreclosures filed is greatly reduced. Those that are filed (and are defended by attorneys) take vastly longer.
Sooner or later, mortgage defense will defeat the Banks as an industry, and the Banks will recognize that the weight of history is on the side of fixing this problem by modifying mortgages, with a significant principal reduction as the very first step. Economics will ultimately force them to do the right thing where the politicians won’t. The first effort on the part of borrowers should always be to seek loan remediation agreements with their lenders/servicers. However, based on media and trade reports, there have been relatively few good outcomes from attempting to do this. The reality is that there are tens of thousands of people out there in similarly challenging situations who are watching as homes just like theirs sell for far less than what they still owe. We note that there’s no absolute guarantee in most states that a buyer can just buy another house and walk away unscathed from the other one, aside from absorbing that big, ugly credit splotch, of course.
That’s because states often give lenders latitude to sue borrowers in such cases. However, such “recourse” practices are seldom employed these days because of the expense and the fact that people in these upside-down situations typically have little non-housing wealth to pursue. Ironically, some credit experts say it will be faster and easier to re-earn a decent credit score after a foreclosure than after a bankruptcy especially if you have established a new mortgage in the interim.
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