Earlier this month, President Obama announced William Daley (brother of Chicago Mayor Richard Daley and former executive at JP Morgan Chase) as his new chief of staff, replacing Chicago mayoral candidate Rahm Emanuel. Less well known is the fact that Mr. Daley was a member of the board of trustees for Third Way, which bills itself as an “influential think-tank that creates and advances moderate policy and political ideas.”
Therefore, last week’s release by Third Way of a domestic policy memo outlining a plan for “Fixing Foreclosure-gate” may well be a trial balloon for the Obama administration’s next set of policies for dealing with the ongoing housing crisis. We can only hope that it won’t be any worse than the administration’s ongoing, miserable failure known as the Home Affordable Modification Program, or HAMP.
Unfortunately, our hopes would be in vain, because this memo outlines a federal power grab, taking precedence over 400 years of well-settled real-property case law. Essentially, it proposes that Congress pass legislation that would, among other things, provide “a ‘safe harbor’ barring paperwork-related litigation on certain foreclosures,” and establish “a statute of limitations to limit the time period in which suits can be brought.” In other words, it would override states’ rights to decide real-property law and to “protect” the rights of “injured homeowners,” and it would simply eliminate many of those rights.
Why did Third Way release this memo now? It is a direct response to last week’s decision by the Massachusetts Supreme Judicial Court on the Ibanez v. U.S. Bank case, which found that banks must follow established state law when foreclosing on delinquent borrowers. Unfortunately for the banks, they simply do not appear to be able to meet these state requirements for foreclosing on a property - little things, such as proving that they actually own the mortgage and its underlying promissory note. As the first state supreme court ruling on this foreclosure issue, the Massachusetts decision sets a powerful and important precedent for courts in other states to follow.
In the rush to turn mortgages into tradeable securities during the last decade, Wall Street bankers cut corners - failing to document changes in the chains of titles of millions of mortgages and their underlying promissory notes, as required by state law in all 50 states. Much of this was done to avoid the usually minimal county-level fees charged for recording a mortgage; in other words, tax evasion. Everyone knows about the sloppy paperwork in extending mortgages to so-called “NINJA” loans (no income, no job or assets). Why would we think that their execution of mortgage securitization would be any better? We are now learning that it was not.
So, in order to save Wall Street for the umpteenth time during the ongoing crisis, Washington is flailing around, looking for a way to blunt this latest threat to big-bank solvency. The Third Way memo may be a glimpse of what to expect in the coming months. If the administration does go down this path, it will once again be setting itself up - and the economy - for abject failure. Any attempt to usurp states’ rights will be met with a flurry of lawsuits that will ultimately have to be resolved by the U.S. Supreme Court. During the interim, these pesky foreclosure lawsuits will continue to wind their ways through the remaining 49 states, likely leading to outcomes as unfavorable to banks as the Ibanez decision in Massachusetts.
More and more, it looks like the 2010s will be a “lost decade” for the U.S. economy, just as were the 1990s for Japan. Until we clean up the balance sheets of our financial institutions, our crippled economy will continue to limp along, unable to create jobs or meaningful growth. Trampling on the legal rights of states and homeowners in order to bail out the big banks is simply not the way to accomplish this cleanup. Instead, it is the sort of crony capitalism that is the trademark of Third World countries. The real solution is for bank regulators to “mark to market” the assets of the big banks and place the insolvent ones into receivership.
Rebel A. Cole is professor of finance and real estate at DePaul University.