*By Lilac Sunday; cross-posted at Lilac Sunday: Red Girl in a Blue State
This week, the Obama administration took two steps designed to bring the housing foreclosure process to a grinding halt. In doing so, he has delayed the recovery of the housing market and the economy as a whole, although he has bought a few votes from community organizer types and from delinquent borrowers who will be able to stay in their homes for free.
First, Obama vetoed the Interstate Recognition of Notarizations Act, which would require state and local jurisdictions to accept signatures notarized out of state and online in certain circumstances. The banks want this law because, increasingly, banking (especially mortgage banking) is an interstate affair. If you've got a mortgage with a big bank, they are probably managing your mortgage from out of state; the Act would allow lenders to have their foreclosure documents notarized electronically or in whatever state their employees sign the documents, rather than requiring signatures and notarization in the delinquent borrower's jurisdiction.
Second, Freddie Mac, the government-run mortgage financing giant, is pressuring lenders to stop the foreclosure process altogether and search for problems with the foreclosure documentation process, specifically the use of "robo-signers." So far, Bank of America has caved, and many other lenders are delaying the foreclosure process in some parts of the country.
The so-called robo-signers are individuals at lenders or mortgage servicing firms who sign affidavits in support of the foreclosure, claiming personal knowledge of the legitimacy of the documentation. Unfortunately, many of these robo-signers are signing the affidavits based on file reviews performed by other personnel, without actually reviewing the documentation themselves; the name "robo-signers" caught on because of the inhuman volume of affidavits these people are signing, sometimes thousands or tens of thousands every month.
A process where employees feel obligated or empowered to falsify their personal knowledge of foreclosure documentation is a bad process, and should be fixed. But it's still just a paperwork problem; even if the wrong signature is on the affidavit, that doesn't mean there's anything wrong with the substance of the foreclosure.
These efforts aren't designed to prevent fraudulent foreclosures, those exceedingly rare instances where, through malice or mistake, a lender forecloses on a house when the owner is current on payments. By focusing on the jurisdiction of the signature or the identity of the signer, these efforts are intended to prevent legitimate foreclosures with arguments about process.
This whole kerfuffle reminds me of the legal precedent that has developed around Fourth Amendment search and seizure cases. While we can all agree on the importance of the Bill of Rights and our freedom from government intrusion, there's something broken when a court rules that a lifeless body in the trunk of a car is inadmissible at a murder trial because the cop failed to follow the correct process when pulling over and questioning the suspect.
What are the consequences? Borrowers who are delinquent in their payments will be able to stay in their houses for free until the banks can resume the foreclosure process. As we've seen from the well-intentioned but wildly unsuccessful federal efforts to assist borrowers in distress, the overwhelming majority of these borrowers will be unable to afford to keep their homes, and the homes ultimately need to go back on the market through a short sale or a foreclosure so they can be bought by owners who can afford them. By keeping delinquent borrowers in homes they cannot afford, the Obama administration is only delaying the day of reckoning, and delaying the opportunity to bottom out the housing market by clearing the backlog of foreclosures so the market can find its equilibrium again.
Furthermore, if foreclosing on a home becomes more expensive for banks, what else becomes more expensive? That's right, buying a home becomes more expensive. The risk of foreclosure delay and expense will be passed along to consumers in the form of higher mortgage interest rates and tighter qualification guidelines.
This week, the Obama administration stalled the economy in an attempt to buy a few votes. November cannot come soon enough.
*By Lilac Sunday