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Am I Paying for My House or the Brooklyn Bridge?

posted by Ethan Cohen-Cole

The foreclosure mess has raised new tough questions. We once again seem back to distributional issues. If a foreclosure is in question for a homeowner that has not been paying and a bank that has no good proof of its ownership, what should happen to the house?

1. The bank should get it because a homeowner that fails to pay should forfeit his/her collateral. Morally, why should this deadbeat get an asset for free? Particularly if the whole thing was stirred up by a lawyer. (See the WSJ article on this).

2. We should work through the mess in the courts to determine the validity of the individual case. No one should lose their home based on falsified documents. Careful determination ownership is important.

I have a new suggestion:

3. Any payments that the homeowner made to the bank, the one with no evidence of ownership, should be placed into a third party escrow account. 

The bank that has no legal proof of ownership to substantiate foreclosure probably has no legal claim on the mortgage payments that are collateralized by the house. This means the entire history of payment made to the bank.

This step may seem radical, as it would remove trillions in assets from bank balance sheets while ownership is determined. However, segregating these funds is important, can we even imagine the legal headache if a  bank goes into receivership and alternate claims to the mortgage payments emerge?

There are tens of millions of individuals that have been paying servicers of pooled mortgages (myself included), with revenues accruing to a bank that may or may not be the legal owner of the loan. Maybe I’ve been paying for the Brooklyn Bridge all along?



What about the down payment? If the down payment didn't disappear over night, but was rather kept in its own trust, and the homeowner did not automatically lose it all through foreclosure, the bank may be more motivated to work with the homeowner.


This is almost a legal chicken and egg argument. ALMOST. I have yet to see an example but, depending on the assignments filed in any single chain of title, it may well be that somewhere in the United States, evidence exists to show that a promissory note and mortgage was actually assigned to an entity before the note and mortgage was even originated.

At some point, the argument has to focus on basic contract law. Securitization is complex, messy and confusing. The same can be said for chains of title. However, at some point in each and every mortgage that has actual issues within, there has to be a breach of the terms of the mortgage. The problem, as I see it, is that mortgage contracts are entirely one-sided contracts.

When you sit down and actually read a mortgage contract line by line, every possible scenario and consequence is spelled out succinctly for a breach by the borrower. Absolutely nowhere in any mortgage that I have read over the years, has there ever been a consequence for when a note holder breaches the contract.

It is all fine, well and good that a foreclosure takes place. Many of them ARE legitimate. But if an entity that is not the true holder of or has no legal standing, title or interest in a mortgage note has been or has been attempting to collect payment on that note, then that breach of contract should come before any conversation as to whether or not the borrower is behind in their payments. And if the entity attempting collection has no standing, then the mortgage itself is breached and should be voided thereby creating an unsecured promissory note. The debt represented by the note is still valid. It simply is no longer secured by the property.

Something similar would have happened two years ago if not for the fact that our government is hopelessly captured. Swedish model resolution of financial institutions would have spun off "bad banks" with sick assets for wind down.

Ethan, didn't you get the memo that TARP was the only way that Western Civilization could be saved?

I came up with a very simple, four point economic plan that actually helps Main Street get out of debt without requiring any bailout or credit card debt forgiveness.

Would like to get some feedback. Warning, the article is SHORT.

Re the down payment it goes directly to the seller. The bank has no piece of it, look at the HUD 1 some time and you will see on the sellers side amount to seller.
Assuming the note becomes unsecured, then the person better figure on bankruptcy as the collection agency will bother them until that. You may get the house, but will have to live on a very tight budget unless you can go chap 7. I have not understood why the banks don't go after deficency judgments and sell them off to the collection agencies for cents on the dollar (something is better than nothing). If this happens figure on a clogged bankruptcy system.

The bottom line line is, we are in the midst of the biggest interpleader in history. Debtors know they owe somebody but don't know whom they owe. Let payments be interpleaded until someone proves a claim.

As each day passes, I am more of the opinion that the best possible solution to this "crisis" is to take $200 +/- Million from the $50 or so Billion that has yet to be used in TARP and disperse it throughout the 50 state Legal Aid network thereby opening up the court system and allowing already financially strapped homeowners better access to the U.S. Court system. That way, borrowers have a better shot at due process, frivolous cases get bounced quickly, note holders get their assets back LEGALLY, and gee, it even stimulates the economy to an extent.

And I still say that part of this equation is "simple" contract law. The argument comes down to who breached the contract first - the note holder and/or it's associates, assigns and/or vendors or the borrower? Of course GETTING to that answer may be a tad tricky...

And were I to be REALLY ambitious, I'd say use another $200 million to help bolster the court system itself. This closing the Superior Court clerk's offices at 12p 2,3,4 days a week in addition to multiple furlough days in order just to keep the court system limping along in New Hampshire is absolutely killing us up here. In this age of technology, there is no GOOD reason why at least Superior Court systems can't be made electronically accessible.

"Morally, why should this deadbeat get an asset for free? Particularly if the whole thing was stirred up by a lawyer."

That's like asking "why should that criminal go free just because the police's evidence came from an illegal search and illegal interrogation?"

Following proper procedures isn't done out of arbitrariness; it's done because following the procedures is the only way to make sure innocent people don't get screwed over. And incentivizing the guilty to catch creditors who don't follow procedures is ultimately the only way to protect the innocent.

@Ken Arromdee
Bingo. The rule of law is dissolving into Rulers' Law. We have an economic ueberklass that loves the law as long as it can use the law as a club on everyone else. The moment the rest of use the law as a club or even a shield, the ueberklass gets all libertarian.

Who has paid on any individual loan? The homeowner. In 98% of the cases the homeowner doesn't know who the creditor is. Let's add the maintenance and improvements they provide. Taxes paid to the community. A family adding to the community with work and consumption.
Everyone works at this issue backwards. The homeowner is likely to be the only party that has paid anything toward the obligation that has been erased by the sellers of toilet paper. How many times can one property's loan be sold, have an insurance claim paid, bailed out, fully repaid for reconveyance by one or more parties, and then sold again after "forgetting" to tell the idiot homeowner they didn't owe anything any longer? How much fictional wealth was created by selling the notes and/or deeds to multiple recipients? Trillions correct?
Try looking at it from something other than from the top down. I know it is not pleasant if you invest in MBS and that reality now confirms was a fraud from day one. You know you are going to take a haircut because the parties you would sue are all bankrupt or about to become so. There is a lot of denial about the reality of property law by people with a real stake in seeing it vanish in the name of MERS. When you realize the bias against the individual loan or borrower is a non flammable straw man that no one is going to set ablaze to cover this up, we might rebuild this search for the truth starting with that only party that can be identified as having paid anything for the property/loan. They watched as their value was inflated, deflated, foreclosed on without cause, stolen, and the sale of which is now the last hope of desperate financial institutions to save themselves at any cost, in these few remaining weeks of their existence.

i am carrying a 2007 mortgage with a HAMP modification in 2009. my real anxiety right now is what happens if the current servicer, everbank, goes bankrupt. where does that leave me with whatever new entity supposedly owns this mortgage? my HAMP contract specifically states "I am in default." i was told i had to sign this if i wanted the modification. in fact, i have never missed a payment. i can't decide whether to ask everbank "where's the note" or just cross my fingers that as things continue to come apart, the chances of anyone being able to show they own my condo are pretty low. fortunately, i live in vermont, which passed a law in july, i believe, that anyone in foreclosure is entitle to a hearing and negotiation of some kind face-to-face with the foreclosing party. but why should i have to be worrying about this at all? uncle sam has taken care of me--right?

Martha, feel free to drop me a line directly through my site if you like. I'm easy enough to find on the web. Happy to discuss this in more detail if you like.

Mike Dillon
Manchester, NH

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