Why the Middle Approach to the Flawed Home Foreclosure Crisis is Best

The news about banks temporarily stopping home foreclosures has been gaining momentum. Just last week, Bank of America, JPMorgan Chase, and GMAC (a unit of Ally Financial Inc.) all announced that they were halting foreclosure proceedings.

But what would prompt our country’s largest lenders to do such a thing? Basically, banks are now responding to a phenomenon that many homeowners, lawyers and analysts have long known about: that there is a widespread problem of lenders using improper procedures and paperwork to handle home foreclosures.

For example, many employees responsible for initiating foreclosure proceedings have publicly admitted that they did not review the documents before signing off on them. This included not verifying critical information such as the home price or the amount of the loan still owed. These employees, or “robo-signers,” admit they would sign off on as many as 10,000 foreclosures a month, leaving them with little time to actually review the accuracy of what they were signing.

In other cases, lawyers and other transactional agents were sloppy about documenting the transfer and sale of the mortgages. As a result, many banks have claimed ownership on the same mortgage, and in short, no one knows who actually owns the mortgage.

In still other cases, it is highly questionable whether documents were properly notarized. For example, the document may indicate that it was notarized on a date earlier than the date when it was actually prepared. Other documents seem to have suspicious signatures. This issue has come up when multiple documents require signatures from the same person, yet the signatures from document to document vary radically.

But not everyone is on board with slowing down foreclosures as banks try to sort through this mess. The thinking is that slowing down foreclosures will have an adverse effect on the economy. This theory has been verified by recent studies as well. In California, foreclosures are not under court supervision and are allowed to proceed more freely. There, home prices are recovering more quickly than in Florida, where foreclosures are court-supervised and take longer to process.

Additionally, the thinking is that slowing down foreclosures only delays the inevitable. Most of the homes will eventually be foreclosed on anyway, and the argument is that most of these problems cases just involve mere, technical errors.

So is it better to turn a blind eye to these injustices, in order to speed up the recovery of the housing market? On one hand, I understand where these naysayers are coming from. The mortgage system was poorly designed to begin with, and the best thing would be to just restore the housing market as quickly as possible.

However, allowing foreclosures to proceed as they are right now may hurt more than just the individual homeowners. By turning a blind eye to these injustices, there will be legal ramifications that will no doubt impact society as a whole.

For one thing, our legal system, banks, and regulatory agencies will all lose their credibility. While in many cases banks may try to brush off flawed paperwork as a mere technicality, the same mistake committed by homeowners or lawyers elsewhere would not past muster in courts. If a lawyer were to commit these same mistakes in court, the lawyer would be liable for malpractice and/or other sanctions. Additionally, improper procedures are a clear violation of the Due Process Clause, which basically guarantees that rights will not be taken away without the proper procedures.

By allowing banks to forgo the proper procedures, it further perpetuates the idea that “big corporations” win while the little guys lose. More importantly, it also creates uncertainty for the homeowners going forward. If flawed paperwork in home ownership becomes a way of life, then how can homeowners really be sure they own their homes? What’s to convince them to keep making their mortgage payments if they can’t be sure that they will own these homes afterwards?

Right now banks are taking the first step in halting foreclosure procedures in order to remedy mistakes. Courts, legal officials, and other political agents are following suit. I don’t envy the decisions they need to make with regards to how quickly to speed up or slow down the process. Like all matters involving a large segment of society, there is no right or wrong answer. In my opinion the best thing to do would be to find a compromise somewhere down the middle.

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