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The Foreclosure Crisis Tilts Toward Total War

Attorneys General in 49 states announced a joint investigation into the foreclosure document mess.

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It's probably worth remembering that in nearly every foreclosure action that takes place, someone owes money to the bank and has stopped making payments. The possibility a bank may have lost the underlying documentation doesn't erase the fact that money was borrowed and is owed. The widespread documentation lapses that accompanied the frenzied securitization of the housing boom shouldn't be allowed to create a "free lunch" for defaulting borrowers.

We can imagine that right now it is probably impossible in many jurisdictions to bring a foreclosure action without actually having the note. Judges are surely reading the headlines and looking skeptically at lost note affidavits, where banks swear that they once had a note but its gone missing. Pretty much every single step in judicial foreclosures is probably much more costly.

We should also note that we probably don't want a world where banks cannot foreclose without physically possessing the note and bringing it to court. That will simply result in a huge misallocation of resources, and unfairly reward dishonest borrowers who want to avoid paying their loans.

Like so much else that's wrong with the world, Tanta at Calculated Riskwas warning us about this years ago. From February, 2008:

A financial institution in the business of making mortgage loans has no business routinely losing or damaging original promissory notes, and any institution that does so should be shut down by the federal regulators and I mean that.

But if consumer attorneys want to create a situation in which the simple fact of loss of or irreparable damage to an original note vacates the debt, I can promise you you will not like the consequences of that. If it turns into Total War here, don't ever lose an original cancelled check. You should know that there is actually one fairly respectable reason for doing FC filings with note copies, besides servicer laziness or loan sale screw-ups: taking your original note out of the custodian's vault to send to some local attorney to attach to a court filing creates several more opportunities for it to get lost. If it becomes a requirement that FC can proceed only with the original note in the courtroom, and the presence of an LNA always means dismissal, then the things are going to have to be handled and shipped and received with the same level of security as a million-dollar bearer bond. Like, a Brink's truck and a bonded courier carrying a briefcase handcuffed to his wrist. You want to pay the cost of that? No. You don't. But you will.

We're pretty close, it seems, to Total War on foreclosures right now.

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