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Foreclosures: What About the States?

posted by Adam Levitin
Here's something that's puzzled me:  no state has yet to enact any serious foreclosure moratorium.  In the 1930s, these moratoria sprouted up all around the country, and foreclosure rates (but not default rates), were much lower than today.   California imposed a 90 day moratorium, but that's not going to do much.  Why haven't Nevada or Arizona enacted a more serious foreclosure moratorium?  What's the political economy story in those states?  Any thoughts?


First Theory - America was still an agrarian society in the 30's ( ½ the people lived in rural enclaves) and those foreclosures were farm foreclosures - a much more dramatic loss than today’s foreclosure and eviction from a house that is just an investment and not a family heritage. If 10% of today’s farms were in foreclosure Americans would make it stop.

Second Theory -Spiritualism and Communism were big in the 30's and gave Capitalism a run for the money. The current Zeitgeist has moved “right” of the 30's whereby populist ideals have given way to entrepreneurial ambitions favoring non-intervention, making anti-foreclosure legislation unpopular.

Third Theory (soon to be tested by Jerry Brown’s candidacy for California Governor) - Control of finance, foreclosure, and bankruptcy are federal functions, unless your state is as big as a nation and in tune with the 30's.

Since you mentioned California, I can offer some real insights.

The politicians in California are owned, lock, stock and barrel, by the banks. SB-94, which was the legislation aimed at "controlling" rogue loan modification companies and attorneys started out in the Senate Banking Committee. If a person looks at every politician that voted for the bill, it will be found that each received large contributions from the banks for their campaigns.

SB-94 had one goal. It was designed to eliminate all loan modification companies in the State. Nothing more. Prevent up-front fees being paid, and tell the people that the banks would do the mods for free, and you have the mod companies closing down, which is what has happened.

(Yes, there were many fraudulent companies, but other actions could have been taken to stop them.)

SB-94 had "unintended consequences" that the banks did not count on. Attorneys decided that loan modifications were no longer effective, so the attorneys resorted to litigation. Since litigation is different, SB-94 had no effect.

Now, a new "salvo" has been fired by the banks. Jerry Brown and the CA BAR have decided that Loan Audit companies are all frauds and that people should not use them, nor should attorneys. Granted, 98% of those companies are not competent, but even the bad ones can find some "violations". And attorneys use the violations to support their litigation efforts. As a result, I expect that there will be new statutes coming out to shut down the Audit Companies. I don't know how I will be affected, since I only work through attorneys, and do not do retail clients.

The banks are doing everything to foreclose. This is likely in conjunction with a "wink and a nod" from the US Government.

Every program that the Government comes out with has holes in it that lenders can exploit. I know the problems the second that the lenders announce the programs. It is evident for all, if they understand the lending process and the securitization process.

I expect some "shocking" things to come out soon, in the court rooms in CA. Part of this is because of arguments that I have put together that form the basis of a number of Class Action Lawsuits. I have a number of firms interested in what I found, but the issue will be the cost of litigation. And the fear that the Fed will step in and squash the actions.

I can prove that Indymac, and many other lenders, have no intent to modify loans. They engage in sham negotiations, only to waste time so that it appears they are complying with HAMP, Shared Loss Agreements, etc. But, they have no lawful authority to do a mod and other agreements prevent them from doing mods. As a result, there is proof of No Intent. No intent means fraud, under several court rulings that I have found. This will be huge for any attorney who takes up the challenge.

I also have another Class Action Scenario that should be very significant for a certain class of borrowers.

BTW, the CA Moratorium was a sham. If lenders had an "approved" mod program in place, HAMP for example, they could apply for an "exemption" from the law, and the 90 day requirement disappeared. Of course, all true lenders and servicers had HAMP, so everyone was pretty much exempt. Anyway, we have seen how HAMP has worked out.

So where do we go from here? No idea.......

Patrick Pulatie

Maybe because after the 1930s, many countries made their foreclosure schemes more debtor-friendly, so that the process is already relatively long?

Maybe because servicers already are much slower to foreclose than the law would permit, with large inventories of delinquent loans not yet in foreclose?

Maybe because moratoriums don't accomplish much of anything?

Hmm...Probably an over-simplified thought but securitization wouldn't be created for another 50 years, there was no "note interest" or CDS/CDO investment, no NIMs, no way to quickly make staggering amounts of money to, in turn, use as political donations to further your lobbying campaign to create more favorable legislation.

This is obviously an over broad statement but look at who the "big" House and Senate people are in any given state and see who butters their bread year in and year out... As one quick, inapplicable example, then Sen. Clinton had been taking PAC money from at least 20 financial groups that even *I* knew were on the "bad guys" list - including three that had attempted to steal my home beginning in 2002. (And yet, her campaign still invited us to her local "Predatory Lending Policy" roll out stop.)

It CAN be done. It may take a court order to make it stick for any length of time as was seen in West Virginia with then Fairbanks Capital. But somehow I get the impression that the help is going to HAVE to come, at least initially, from the court system and not from legislation if anything is to really be done to put the brakes on the immediate problem. IF that happens, then it may give legislation enough time to catch up.

But even when you've got mounting evidence out there now like the signature database on mortgage assignments that Attorney Lynn Syzmoniak is building ( Fabrications and Forgeries http://www.scribd.com/doc/25420484/Fabrications-Forgeries-Comparing-Signatures-Titles-on-Mortgage-Documents ), the issue that Prof. Porter spoke of a few weeks ago in her "Produce the (Bogus) Paper" piece http://www.creditslips.org/creditslips/2010/02/follow-the-paper-to-nowhere.html and one that Judge Arthur Schack has questioned on several occasions with regard to various industry employees "wearing multiple hats" (Linda Green, Scott Anderson, Laura Hescott, Erica Johnson-Seck,) etc.) and still no one is willing to take any appropriate action on it what can possibly be expected for any kind of realistic solution to the problem?

In New York, a judicial foreclosure state, we have a new rule requiring a settlement conference in all residential, owner-occupied foreclosures. The conference continues, and the foreclosure is held in abeyance, until the hearing officer presiding over the conference is satisfied that the parties (meaning the lender) has negotiated in good faith-- so these conferences may take anywhere from a few months to a year to complete. This means that, at least in the counties where the new rules are taken seriously, a foreclosure will not go thru where the borrower shows up for the conference and has appled for a HAMP modification, unless the lender provides a written reason, backed up by figures, for not approving a HAMP mod. Even then, the lender is expected to explore other options before the foreclosure can go thru. It's not a moratorium, but it's substantially slowing down the rate of foreclosures. And the new York laws that are having the most effect now do NOT regulate lending (thus no pre-emption problems) they regulate access to the courts.

I work mostly in Kings County, a hotbed of predatory lending, and the judges there are fed up. Our state legislature is famously dysfunctional, yet they've passed two important bills in two years in an effort to not only level the playing field in the foreclosure process, but also to protect borrowers going forward. Maybe it's because our elected officials, mostly democrats, see these borrowers and not the bankers as their political base.

BTW, Adam, we missed you at the NY Fed symposium on consumer financial protection in January. Professor Warren held the fort pretty well, though.

I am an assistant for an attorney in the California Central Valley (non-judicial foreclosure state) and we are trying a new approach to stopping foreclosure by using bankruptcy. Each of our clients was rejected for a loan modifications so we filed bankruptcy days before the foreclosure sale and revised the loan modification as part of our chapter 13 plan. The banks always object so we sue them under 1639a of TILA (I know all the criticisms). Fortunately, in one of the cases the bank was Onewest and their purchase agreement with the FDIC requires them to modify loans to preserve Net Present Value - if possible, so they capitulated and gave the mod instead of litigating. In two of the other cases we appealed right after the court sustained the bank's objection to the plan and the banks immediately settled by offering a modification - making the appeal moot. Lots of obstacles and pleadings. We are waiting for the court’s ruling on Onewest’s motion to dismiss our remaining complaint (fourth case).

@Robert White - I'd be interested to know how that motion turns out. I've been curious to know how that strategy is working out.

Didn't read all of that but this is something I have been pushing for in Texas for a couple of years now. Not a moratorium but to change our foreclosure laws (something we do have control over) to help nudge Mortgage Mods in the right direction.

@ White...Man that sounds like a lot of work! 13 Schedules and Plan W/ an adversary on top? But you get fees for the 13 and whatever up front for the Adv.. Seems somewhat effective tho.. What we have been working on is objecting to Beneficial POCs (Mortgage) and nudging them to Modify the loan pursuant to that Allen v. Decision One Mortgage Class Action Settlement. Making it part of the Plan is an "Idea"... Works the same way though, objecting to the POC or them Objecting to our plan. That's why I think changing the individual states foreclosure laws (in non-judicial foreclosure states, like us) might nudge them in the right direction because if they don't do it right you have a good adversary for wrongful foreclosure as well as a right to cure in 13.

I think Katie is on to something. Many of the anti-deficiency statutes were enacted in the 1930's. I know that Georgia's arcane "confirmation" procedure dates to that time. So moratoria were a way of preserving the status quo while those kind of debtor protections were developed, and precluding an epidemic of deficiency judgments.

Also at the time there was no such thing as Chapter 13.

Lastly, Fannie and Freddie did not exist until 1938 and 1970 respectively. Most (nearly all?) mortgages were held by the community based banks that issued them. So a tidal wave of foreclosures did not affect a bank "somewhere else"; its impact stayed at home (and that impact could be catastrophic before the FDIC came into existence in 1934).

IIRC, the Constitutional law on the matter is that too serious a moratorium is a taking. Blaisdell was constitutional because the moratorium was in aid of a workout process.

Did I say "taking"? Whoops, I mean "impairment of contract."

I think the reason for the differences is along the lines of Robert White's first post. The current problem started with subprime borrowers who had just bought homes with little money down, in many cases falsifying, or being excused from honest, disclosure. The 1930s were family farmers with long ties to the land and a history of working it hard. So even though the current problem has spread, public perception is already set. Just a wholly different appeal to empathy/sympathy in the two cases.

I'm reminded of the old saying about rearranging deck chairs on the Titanic.

The real problem is the victims of this debacle just don't have the clout to make something happen.

Instead, they are marginalized while the various tiers of industry players do a rain dance in the hopes that Washington will once again produce clouds from which they can start farming again.

Washington can't possibly come up with a solution because Washington is a fundamental part of the problem. To put it simply, DC doesn't have clean hands.

We're asking crooks to fix the thing they built without having to admit they built it.

What do you expect?

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