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Strong Medicine: The Long-Term Health of the Housing Market Requires a National Foreclosure Moratorium

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What is it about due process that people don't understand? The reason for a national foreclosure moratorium at this time is to preserve things as they are for a brief period of time until questions about the validity of the banks' claims against homeowners allegedly behind in their mortgages can be answered. The purpose of such a moratorium is not to bankrupt the banks. It's not to give borrowers a holiday from their mortgages. It's not to deprive potential first time homebuyers of the chance to buy homes out of foreclosure. Rather, the idea behind such a moratorium is a simple one: one does not send in the crime scene investigators while the fire is in progress -- one sends in the fire department. Similarly, while a nationwide investigation is underway that will determine whether banks have engaged in widespread fraud, we cannot stand idly by as homeowners may be victimized by that fraud, and lose their homes while those investigations run their course.

Three major banks have already admitted to what was essentially widespread criminal activity. Yes, there are borrowers who have failed to pay their mortgages on time. Yes, there are some who knowingly took out mortgages they could not afford. But many borrowers are victimized twice: first when they take out risky and sometimes fraudulent mortgage; and second, when their bank attempts to foreclose on them without proving it is entitled to bring the foreclosure action in the first place.

This question -- whether banks have the authority to pursue many of these foreclosures -- lies at the heart of "foreclosuregate." The robo-signed affidavits may have been an attempt to mask a dirty little secret about foreclosures: that bank records are so shoddy that the banks may not be able to prove that they have an interest in the underlying mortgages or that the borrowers are even behind on those mortgages.

On the first issue, anyone following foreclosure cases in the courts knows what judges and borrowers' attorneys have known for years: because of the speed with which mortgages were sliced and diced, repackaged and resold to feed the voracious appetite of investors for subprime securities, the companies that were originating these loans and the investment banks working with those originators often failed to document the sale and resale of these mortgages properly. Their practices were so poor that now that the music has stopped, it is not clear who is left holding the mortgage. As far back as three years ago, a federal judge in Ohio slammed banks in a group of foreclosure cases, saying that the banks there had failed to prove that they owned the underlying mortgages and had failed to establish that they had the right to foreclose on them.

In those cases, Federal Judge Christopher A. Boyko of the Northern District of Ohio bristled at the attitude of the banks' lawyers -- who insisted that the way the banks handled complex mortgage instruments was not only proper, but perhaps above the judge's head. Judge Boyko responded as follows: "Plaintiff's, 'Judge, you just don't understand how things work,' argument reveals a condescending mindset and quasi-monopolistic system where financial institutions have traditionally controlled, and still control, the foreclosure process." Judge Boyko, in dismissing the cases, insisted that such action was necessary because judges have an independent duty to monitor the foreclosure process and ensure the integrity of the courts. He did not inquire into whether the borrowers were behind on the mortgages; he stopped the foreclosure process in its tracks to protect the due process rights of the litigants.

Since these dismissals, whenever they can, borrowers' attorneys have attempted to challenge the right of banks to foreclose on properties when a doubt exists about their ability to do so. The problem in so many of these cases is that borrowers are rarely represented by counsel, and in some courts as many as 85% of borrowers go unrepresented. Even with just a small number of borrowers' attorneys in the fray, it was legal challenges by these attorneys that exposed the robo-sign scandal in the first place and brought things to the point where several major banks have voluntarily ceased foreclosures (though some will recommence such cases next week), all 50 attorneys general are investigating bank foreclosure practices and the federal government has apparently instituted its own full-scale investigation into such practices.

But the arguments of the banks and their supporters opposing the foreclosure moratorium are similar to those made before Judge Boyko years ago: those advocating for a moratorium do not really understand how things work. Some have gone even farther in their defense of the banks, saying a moratorium will only hurt consumers, like prospective homebuyers who wish to buy homes out of foreclosure. But saying the moratorium may hurt some future homebuyers when hundreds of thousands of current homeowners fear foreclosure on faulty grounds misses the mark.

Days ago, HUD Secretary Shaun Donovan, a long-time advocate for sensible housing policies, argued that a foreclosure moratorium will harm any housing recovery because first-time homebuyers will not have the ability to purchase homes after foreclosure if a temporary moratorium goes into effect. Yet Secretary Donovan says nothing about the shadow inventory of properties that banks are holding in reserve: properties they have already foreclosed on yet have not placed on the market. Perhaps laws of supply and demand dictate that the banks should keep these properties off the market at this time. But if the foreclosure pipeline to the market should dry up because of a temporary moratorium, banks could release some of these properties into the market so that first-time homebuyers may purchase homes from that inventory while the foreclosure mess works itself out.

More importantly, there are hundreds of thousands of first-time homebuyers who are presently in homes who may be behind on their mortgages and who now face the prospect of foreclosure: perhaps on trumped up charges, perhaps from banks that have no right to foreclose on them, and perhaps on loans that were themselves fraudulent from the outset. Certainly Secretary Donovan is as concerned that first-time homebuyers already in their homes will lose those homes through improper foreclosures as he is worried that prospective first-time homebuyers may be itching to buy those homes after those faulty foreclosures are completed.

Similarly, if we are to worry about the interests of prospective homebuyers, what is unquestionable is that any such homebuyer looking to purchase a home out of foreclosure will need to ensure that the bank from which he or she purchases that home had the authority to foreclose on the property in the first place. Bank foreclosure practices are so bad at this point that any prospective homebuyer may have a hard time securing title insurance should he or she wish to purchase a home out of foreclosure. The cloud on title is so dark that purchasing a home in these uncertain times may invite a lawsuit from an ejected borrower or some other party claiming an interest in the underlying mortgage who was not a party to the original foreclosure action. Until the full scope of what I will euphemistically call "the irregularities" of foreclosure practices is understood, borrowers in default and prospective homebuyers all face an uncertain future. Simply put, letting foreclosures proceed apace will not make the housing market more liquid, transparent or robust.

Instituting a temporary foreclosure moratorium in the face of admitted and widespread irregularities is not that radical an idea. Trampling on the due process rights of homeowners, engaging in widespread criminal conduct and jeopardizing the integrity of our property title system: those are the radical -- and risky -- actions. The practices that have weakened the housing market are the same practices that must be halted, even temporarily, while investigations are underway to determine how deep the problems lie. A foreclosure moratorium may seem like serious medicine: but the patient is sick, and her long-term prospects require a heavy dose of that medicine to bring her back to health.

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