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Why a Foreclosure Compensation Fund Is a Bad Idea

posted by Ethan Cohen-Cole

The Washington Post yesterday wrote

"State attorneys general and the country's biggest lenders are negotiating to create a nationwide fund to compensate borrowers who can prove they lost their home in an improper foreclosure"

The fund is being compared to the BP oil spill and other general compensation funds.

A general compensation fund is reasonable if a large, non-specific damage has occurred. In such a case, one needs some intermediary to figure out who was damaged and by how much. In the foreclosure example, we don't have generalized damage; each bank in question had the ability (and the responsibility) to evaluate each document. 

A compensation fund would validate the idea that foreclosures are necessarily an error-ridden and imprecise process; that is, that robo-signers are the way of the world. 

Do we really want to put the burden of proof on borrowers? If the note holder can't figure out ownership, how could we expect a homeowner to do it? See huffpost on this.

Anything short of holding the banks fully responsible for current legal requirements is yet another subsidy.


"A compensation fund would validate the idea that foreclosures are necessarily an error-ridden and imprecise process; that is, that robo-signers are the way of the world."

It would, and they are, particularly in the sub-prime market.

Why is it error-prone? Because it can be. There is no penalty for error because in the vast majority of cases, the victim of the error can accomplish nothing without costly legal assistance.

The entire foreclosure process is designed to operate at maximum throughput. The collateral damage has been acceptable for almost a decade and now, suddenly, everyone is somehow exorcised and carrying torches and pitchforks.

If there is a fund established for this kind of thing, the money should come from the foreclosure mill firms and their malpractice insurance carriers with a major contribution from Bar Association professional oversight entities.

Imagine where we'd be today if a servicer couldn't find local counsel to file a bogus foreclosure?

A Trojan Horse for sure.

"Plenary indulgences" went out of style long ago.

The only thing I'll add to JRB's statement is that should such a fund be created it WILL unavoidably be paying off a certain percentage of servicers', and to a lesser extent note holders', ILL GOTTEN GAINS.

The Association of Mortgage Investors apparently felt strongly enough to release a press statement recently that stated, among other things, "that mortgage servicers should no longer place their conflicted interest ahead of homeowners.

"We urge all the major bank servicers to invest the time and resources necessary to allow for borrowers to find sustainable solutions in a timely manner and customary fashion," said AMI Executive Director Chris Katopis. "No one should lose their home solely because of paperwork mishandling or lack of due process.""

Hang on - that's the version that HousingWire apparently cut/pasted together rather creatively.... http://www.housingwire.com/2010/11/16/bofa-finds-securitization-investors-limit-options-for-mortgage-servicing

The actual AMI PR can be found here: http://www.the-ami.org/wp-content/uploads/2010/11/AMI_press_release_11_16_2010.pdf

This is the first graph:

Washington, D.C. – As the Senate Banking Committee reviews the mortgage and foreclosure crisis, the Association of Mortgage Investors (AMI) wishes to clarify the record in response to the recent press statements regarding the housing and mortgage foreclosure crisis. The AMI believes one of the primary goals for all should be helping all willing homeowners find long-term, effective, and sustainable solutions. “No one should lose their home solely because of paperwork mishandling or lack of due process,” explained AMI Executive Director Chris Katopis.

and yet, FINALLY, the money might actually trickle back to main street. Lets not forget the down payment, where did that money go and why doesn't the homeowner get access to a portion of it when foreclosed upon, otherwise there is a MOTIVATION to foreclose as it ensnares the original down payment plus a new down payment from the next homeowner.

Request for Congressional Foreclosure Panel to Examine Foreclosure Lawyers

"Although increasing numbers of courts are continuing to reject improper and fraudulent foreclosures, the Congressional Foreclosure Panel examination of mortgage services and foreclosure practices did not include foreclosure lawyers.

Lawyers are officers of the court; knowledge of applicable laws and civil procedure is not required from mortgage lenders.  In states that require judicial foreclosures, lawyers are the ones who file lawsuits to seize and sell property; and lawyers are responsible for filing and recording foreclosure property deeds.

An investigation could prove helpful to sorting out whether improper and illegal foreclosure proceedings are linked to any self-dealing conduct disadvantaging lenders, investors, homeowners, and city governments. . .”

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