Enough is Enough

Last week I was on the phone with an attorney who represents one of the big lenders in town.  I was calling him to check on the status of a settlement in a small matter involving his big lender client and one of my contractor clients. 

The attorney explained to me that the reason for the delay was the large number of cases he was defending against borrowers who were being foreclosed on by the big lender.  I jokingly asked if the claims in these cases were that the big lender should have known better than to lend to the borrower.  Sadly, he told me that a significant number of the claims were just that.

It is unfortunate what happened in the U.S. regarding the housing market.  There is enough blame to be spread amongst multiple parties, but the groups that, in my mind, fueled the problem the most are the folks who bought more house than they could afford, and the lenders who made the loans to these individuals.

The market has cleared out most of those who fall into the second group with the collapse of the subprime lending market.  As for the first group – those who bought houses they simply could not afford and who are now unable to pay their mortgages — Federal and State governments, along with several attorneys whose hearts are bigger than their heads, are seemingly doing everything possible to prevent market forces from affecting this group.

Just last week, the Minnesota Supreme Court issued a ruling which will ultimately shut down a Federal lawsuit against Mortgage Electronic Registration Systems, Inc. (“MERS”).  The Court held that MERS does not have to disclose the holders of the notes which are secured by mortgages identifying MERS as the secured party. 

Presumably, the Plaintiffs in the case sought such disclosure in order to file a myriad of claims alleging violations of the Truth In Lending Act (“TILA”) and thereby halt impending foreclosures.  In such cases, which are fueled by “mortgage loan audit companies” who review a person’s loan documents in an attempt to find violations, borrowers attempt to rescind a mortgage loan which may have been made years ago for technical violations.  Others involve “securitized mortgages” where the note has been divided up and held by multiple parties through the sale of mortgage-backed securities, and no one lender can “produce the note” as part of a lawsuit. 

Not to be outdone by the consumer law bar, Federal and State governments have enacted new laws and programs in the name of “justice” and “fairness”.  President Obama in March launched his “Making Home Affordable” program which devoted $75 Billion to refinance or modify mortgage loans which meet a certain criteria.  Not to be outdone, and after failing to enact a foreclosure moratorium in 2008, Minnesota passed a new law which went into effect on June 15, 2009 which allows homeowners to postpone a foreclosure so that they might have more time to bring their loan current. 

All of this is occurring, mind you, as the market statistics for the Minneapolis-St. Paul metropolitan area show a marked decline in foreclosures and short sales even before these programs and the latest wave of lawsuits were initiated.  In other words, what all of this legislation, regulation and litigation designed to postpone foreclosures is doing is simply postponing the recovery of the housing market overall.

The people who bought more house than they could afford made a mistake, but the government and the consumer law bar should not make the rest of us who followed the rules pay for these mistakes and postpone the recovery by enacting additional laws or commencing more frivolous lawsuits against lenders.  There already exists a government-provided solution for these people; it is called bankruptcy protection; those who are in financial difficulty because of overbuying can take advantage of this option.  What is needed now for the real estate market as a whole is to rip the band-aid off, let the foreclosures commence and conclude, and let the lenders dispose of their inventory so that the market can finally and fully recover.