Monday, June 6, 2011

The ethics of mortgage loan default

There is an incredible article up at ZeroHedge, On The Ethics Of Mortgage Loan Default, in which the anonymous author argues that the past decade's securitization of mortgages has so debased the system of recoding property titles in the United States, that it now makes more sense - financially and ethically - to NOT pay your mortgage, but put the money in an escrow account. The "titles to some 60 million homes in America are badly clouded." But even more compelling is the argument that
encouraging investment in an asset class that has been artificially inflated, then deliberately destroying the price of the asset, as part of a separate profit making scheme is unethical, and any agreement based on this type of fraud is grounds to consider the original debt instrument used in the agreement null and void. Fortunately these grounds are unnecessary, as increasingly US courts are ruling that these mortgages are already invalid for numerous other reasons.
So, the mortgage foreclosure fraud crisis may turn out to be a backdoor way to achieve a "Year of Jubilee" in which debts (or at least a massive chunk of debt in the U.S.) are forgiven, and the people set free from debt peonage. What U.S. political and business elites are struggling mightily at this point to not understand, is that debt forgiveness is inevitable. In Elevator Speech #2--Continuous geometric growth in a finite biosphere is impossible, Jon Larson explained why this is so. In part of that "speech" Larson quotes Michael Hudson:

Debts grow by purely mathematical principles, but “real” economies taper off in S-curves. This too was known in Babylonia, whose economic models calculated the growth of herds, which normally taper off. A major reason why national economic growth slows in today’s economies is that more and more income must be paid to carry the debt burden that mounts up. By leaving less revenue available for direct investment in capital formation and to fuel rising living standards, interest payments end up plunging economies into recession.
The anonymous author on ZeroHedge explains that, for now, though, the banksters have every incentive to seize and foreclose on as many homes as possible. It is worth thinking this through, because the implications are, well, revolutionary. At least, they should be.
The only way out this time has been excessive liquidity, to blanket over the fallout, like snow over an ugly landscape. Yet, with excessive money supply, comes excessive inflation, and with excessive inflation comes a preference for hard assets over fixed income; in short, your bank would rather have your home, than your mortgage payments, modified or not. Imagine, at the rate we are going now, what the value of your future mortgage payment denominated in dollars will be at the expiry of your loan term say 25 years from now. No interest rate is high enough now to outpace the real rate of inflation. . .
The ZeroHedge author has quite a bit of advice for people who are facing foreclosure. Even if you're not nw facing foreclosure, given the dynamics of the U.S. financial collapse, as explained immediately above, it is more than likely that you may be facing foreclosure soon. No action has been taken to force the banksters to cease their predatory behavior, so the only sane thing to expect is for that predatory behavior to continue. Some of the advice:
Possession is an important part of the law. If there is a serious and legitimate dispute over ownership, which has now been well established for about 60 million properties and some 7 trillion in securitized mortgages, why would you give up your legitimate claims? Perhaps you would do this only if you did not realize just how legitimate your claims are (default or not), and how illegitimate theirs are, because after all it is not the topic of the many phone conversations with your servicer.

An objective review of the evidence does not indicate the players involved in your mortgage have your best interest in mind. It would be best to accept that upfront, so that a reasonable plan, that actually has a chance at success, can be made.

. . . . In qualitative terms, the business of the lender is a) risk assessment and b) asset appraisal. In a consumer society it is critical that entire generations of consumers (including consumers of financial products) never learn how to do either competently. We have largely succeeded at this task in America. The result is that the intricacies of risk assessment are overwhelmingly within the circle of competence of lenders, and completely outside that of the barrowers. Again the balance of power is asymmetrical.
In the November 2010 article we wrote:
“Americans have a duty to ask critical questions about the operations of their financial institutions, and if evidence has been presented that a deal was made, but not everyone was playing by the rules, than those deals need to be looked at again. It is not good enough any longer to say, if it doesn’taffect“me” than, I’m not getting involved. We have a duty to one another as Americans, and more importantly as human beings, to care about truth and justice. What’s more, apathy, so long as we are not affected, is a short lived consolation. Ultimately, this crisis will affect everyone …”
One final excerpt to whet your appetite:
Mr. O’Brien goes on to say of Massachusetts homeowners who have not necessarily defaulted on their mortgages, but whose mortgage documents have been perjured:

"They may not be able to sell their home, and they may not be able to refinance their home. And that is a major, major problem."
Here is another excerpt taken from the November article:
"It has been made to appear as if those who have fallen on hard times are a matter of "incidental" inequalities in an otherwise procedurally just system. However, it is precisely the opposite which is true. Our financial institutions have created deliberate inequalities, through the use of procedurally unjust systems."
Marie McDonnell, a Forensic Mortgage Analyst provided the following comments in the same May report (referring to the titles to Massachusetts properties):
"I'm speechless. The scope of the problem is unimaginable; the depth of the fraud is shocking."

On the ethics of mortgage loan default
Is it ethical for the American homeowner whose mortgage has been securitized to default, even If they are not financially distressed?
First, consider it is unlikely that marketable, fee simple, insurable title can be obtained as a result of fulfilling the obligations of the related promissory note. On the contrary the titles to some 60 million homes in America are badly clouded. Secondly, encouraging investment in an asset class that has been artificially inflated, then deliberately destroying the price of the asset, as part of a separate profit making scheme is unethical, and any agreement based on this type of fraud is grounds to consider the original debt instrument used in the agreement null and void. Fortunately these grounds are unnecessary, as increasingly US courts are ruling that these mortgages are already invalid for numerous other reasons.
On November 12th, 2010 we published our article “Tattoos, Pyramid Schemes and Social Justice” in which we advocated that homeowners consider suspending their mortgage payments. In the article we enumerated reasons why we felt this action is both ethical and prudent. On January 11th, 2011 we published our articles “Ibanez– Denying the Antecedent, Suppressing the Evidence and one big fat Red Herring” which outlined the legal realities of securitized mortgages, and the impact of the landmark Ibanez decision on homeowners, particularly in Massachusetts. We affirmed our conviction that Massachusetts homeowners with securitized mortgages might want to consider suspending their mortgage payment, and place instead their funds into an escrow account.
Both articles were widely published and read, and in both cases we received also some negative feedback, although strangely, only from foreclosure defence attorneys. Their sentiment was universal “we would never advise a client to stop paying their mortgage” - we marvelled. When challenged on this point, or presented with the evidence, none could provide any reasoning for this advice that they would so confidently given their clients, nor could they identify a fallacy in the arguments we had made, or a fact we had misrepresented.
Perhaps they recognized the intrinsic problem in responding simply “because that is what people do, and we should take it for granted that because people do it, it is correct.” Such inductive reasoning at the corporate level can not be defended as anything more than “group think".
In such a case, we suspect fear, shame and guilt are more powerful drivers than reason. Further, such thinking serves only to exaggerate the anxiety that stems from the perceived consequences of default. This is not a coincidence, or something which is “hard-wired” into the human person. These are emotional controls that have been cultivated over many decades that encourage borrowers and in particular homeowners (those in possession of real property), to follow unnatural social norms, even at the expense of critical thinking and reason. Thus the context in which such financial obligations exist go almost entirely unexamined.
Financial and ethical considerations in which default is not only feasible but perhaps even a moral imperative are ignored. In sharp contrast are the standards lenders within the same culture abide in their quest to maximize profits. Needless to say, this asymmetrical ethic, leads to the possibility of abuse, and widespread economic injustice. In our society, it is now the case that debtors, and in particular home owners are akin to indentured servants. The severity of the condition is directly and inversely proportionate to the misdeeds of the financial system which gave rise to it.
Read more.
There were more articles over the weekend on the mind-numbing extent of the fraud involved in the mortgage foreclosure scandal. Naked Capitalsm has this article, Fortune Confirms Pervasive Defects in Bank of America Mortgage Documents, which concludes thus:
. . . the only reason for attorneys to be engaging in widespread document fabrications and forgeries was if they have a very bad fact set on their hands. Perversely, things have to get worse before they get better. The mortgage securitization system, which could have operated well if the industry had not gotten greedy and violated its own procedures, is hopelessly broken. The industry has engaged in a massive PR campaign to deny that fact but too much contrary information keeps coming forward. We can only hope that enough judges have become skeptical of banks to give the documentation a real look. Only when we admit the depth of failure can we have a chance of addressing the mortgage crisis and reconstituting our system of transferring residential real estate.

Read more.
And, Georgetown University Law Professor, Adam Levitin, who served as Special Counsel to Elizabeth Warren's Congressional Oversight Panel , has an article entitled About Those Notes…Evidence of Securitization Fail over at Credit Slips. .
Since last October, shortly after the robosigning scandal broke, I've been talking until I turned blue in the face about robosigning being the tip of the iceberg with mortgage problems and that the real issue was chain of title. Robosigning appeared to be an almost unexpected deposition by-product; the real goal in the depositions that uncovered the robosigning was exposing the backdating of mortgage endorsement. And that they did--the notaries' whose seals were on the documents didn't have their commissions when the assignments supposedly took place.

Read more.


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