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Friday, October 22, 2010

Has the Worm Turned?

As the foreclosure crisis developed, it became quite clear that lenders were more than willing to assert the full scope of their legal rights (and then some) in subprime lending, securitizing and selling mortgage-backed securities, and foreclosing on delinquent loans.  Castigated for reckless lending to borrowers who didn't understand and couldn't hope to re-pay their loans, lenders seemed to collectively shrug and respond, 'Hey, it's legal.' 

Repeated pleas that lenders not evict blameless tenants in foreclosed properties (if only as a matter of self-interest, since lenders would have some income from the property) fell on deaf ears, requiring legislatures to act.  And as Brent T. White incisively argued, underwater homeowners felt a sense of moral and social responsibility that was not shared by their lenders, who enforced the letter of the law to maximize profits and minimize losses.

Has the worm turned?  As Tanya noted her post below, foreclosures are grinding to a halt because borrowers are having the temerity to demand in court that every last bit of the lenders' paperwork is in order -- and as it turns out, because lending was so reckless, and loans were sold and re-sold and packaged and re-packaged with such velocity on the go-go secondary and tertiary markets, often by companies that disappeared with their paperwork when the crisis began, there is precious little valid paperwork.  I imagine that somewhere, in some road-side storage facility in Nevada, a lot of documents that once belonged to a fly-by-night 'no-asset, no-income' lender are yellowing and curling at the edges.

And today in the New York Times, comes the story of a bunch of buyers who are using the letter of the law to back out of condo purchase agreements with their deposits in tow.  They aren't using the law as it was intended, but they are using it to its letter.  Is that unfair?  Hey, it's legal.

I have to admit, I'm disturbed by my willingness to cackle and shrug my shoulders.  By doing that, I'm mirroring the attitude of the mortgage-back securities machine that caused the crisis in the first place, an attitude which has disturbed a lot of us for a long time.  But, since the New York Times also reported today that on Wall Street, average pay increased 20% this year, I think I'll savor the impotent sense of schadenfreude for at least a few hours.

P.S. If you need help maintaining your irresponsible sense of glee at lenders' troubles, give a listen to the first segment of this This American Life episode, in which we meet several sneeringly ungrateful Wall Street bailout beneficiaries.  That should help.

Mark A. Edwards

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