by Jerry O’Driscoll  

The New York Times reports that GMAC (now a subsidiary of Ally Financial) has admitted that it filed “dubious” financial documents.

The problem goes beyond GMAC. A Florida circuit judge is quoted as saying some of the documents filed by lenders are “incompetent,” some “just sloppy,” and he suggests “there could be a fraudulent element.”

In boom times, lenders cut many corners including loan documentation.  In the 1980s Texas banking crisis, regulators taking over failed banks often found it challenging to find loan documents.  Even if found, they could be defective.

Securitization has greatly complicated the problem.  Mortgages are sliced and diced into separate tranches of securities.  It can difficult to prove ownership of the mortgage. If the originator was sloppy in preparing the underlying loan documents, it can be an impossible task.

The temptation for lenders can be to fake documents and falsify affidavits. Read the NYT story if you doubt that.

Judges in some jurisdictions have reacted by routinely throwing out foreclosures if the documents are not up to snuff.  Interestingly in a high proportion of cases, the foreclosure is never refiled. 

(In some states, like Texas, you need not even go before a judge to foreclose on a property. But there are treble damages for legal chicanery.)

Some on the political right have reacted with horror at what they view as a populous impulse to favor borrowers over creditors. Let’s leave motivation aside. Protecting property rights in a legal proceeding is a combination of substance and process.  The minimal substance for a purported lender to seize collateral surely must be to prove he is the lender, i.e., has title to the loan.

Classical liberals are not pro-business, but pro-market.  They do not favor creditors or borrowers, but property rights.  The judges rejecting dubious claims of creditors are supporting not over-riding property rights.

9 thoughts on “Foreclosures

  1. Then there were the tweekers at WaMu who loaned a house on the basis of a picture of a man in a mariachi outfit:

    “Liar loans” were an industry standard in SoCal — the documents may have been in perfect order, but they were completely fraudulent none the less.

    Note well, the FBI gutted it’s mortgage origination fraud units in the early 2000s.

    Here’s the short version of the story:

  2. Pr. O’Driscoll,

    “In boom times, lenders cut many corners including loan documentation. In the 1980s Texas banking crisis, regulators taking over failed banks often found it challenging to find loan documents. Even if found, they could be defective.”

    Considering the FDIC reportedly practiced forbearance of failed banks for as long as a year during the savings and loan crisis I suppose it shouldn’t be very surprising. Do you have any further readings to suggest on this subject?

  3. Bad loans are made in good times.

    There are many books on the S&L crisis by Ed Kane and others. I await the definitive work on banking practices and regulation leading during the housing boom. What I have read so far doesn’t go into enough depth.

  4. That’s a very important point, Jerry. The object in these situations should be to minimize damage to two sets of property rights– the creditors and the debtors. That is, not to do too much damage to one side in the name of protecting the other side.

    You suggest that lack of proper documentation justifies refusing foreclosure, thereby going against lenders’ interest. Obviously this could be taken too far, further encouraging irresponsible borrowing. But the general point is to consider both sets of property rights.

  5. Chidem,

    A lawyer friend tells me the problem has been festering for 25 years. Securitization of mortgages proceeded with little thought about establishing title. The I-banks didn’t care and I guess the bankers were asleep at the switch.

    Even under the old system of originate and hold mortgages, there was a lot of sloppiness with loan documents. Most homeowners did’t hire lawyers when being foreclosed. I’m assured that, if they had, this issue would have arisen sooner.

    Now people are aware. In Florida, it is apprently increasingly difficult to foreclose. So mortgages will become loans without collateral.

    The bankers did it to themselves.

  6. The problem does sound acute in Florida. I’d guess it varies a lot by location. Probably less of an issue in some states.

    RE “So mortgages will become loans without collateral.” That leaves the question of how this will be resolved.

  7. @Chidem,

    Going back to originate and hold would address a good part of the problem. In any case, one would expect banks to demand higher downpayments

  8. There are good examples of provably fraudulent documents, where judges have thrown the foreclosure cases out, and sometimes even referred the plaintiffs and their counsel to the district attorney.

    Having personally examined a number of foreclosure case files filed in Florida I can say, without reservation, this is not a few rushed documents but widespread deliberate use of fraudulent or deceptive documents.

    Fraudulent and deceptive documents created by companies, who are not the orignal lenders, to foreclose. Often illegally. With the most of the judiciary turning a blind eye to the obvious fraud in the files.

    There are a few judges who have seen the light and are starting to seriously question the documents presented, but mostly the Florida judges are rubber stamping the foreclosures via a summary judgement, without even a trial.

    There is widespread fraud going on right now, not by borrowers who were given loans the sellers of the mortgages knew they could not repay, that happened years ago. No, the current fraud is the manufacture of fraudulent documents and inaccurate affidavits in order to foreclose on property that the plaintiff often never held an intrest in when filing the action.

  9. this problem did not start overnight but yes has been gradually building with document standards constantly lowering till e now have this .

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