Chicago Foreclosure Lawyer Blog

I have written a few posts about the abandoned housing ordinance that the City of Chicago enacted this year. The original version was abandoned for a version that was supposed to be a compromise with mortgage lenders and servicers. The Federal Housing Finance Agency has filed a lawsuit seeking to block enforcement of the ordinance. It claims that the City of Chicago cannot regulate a Federal regulatory body.

It would appear that Gerri Willis of Fox Business is a bit late to the party. She posted her analysis of the situation to her blog on December 27. As is to be expected, she is not a big fan of the ordinance. Once you get past the talking points and rhetorical flourishes, what remains is her proposal for fixing the abandoned property problem in Chicago: speed up foreclosures.

She claims that speeding up foreclosures would speed up the market's recovery. On one hand, it is plausible. Forcing foreclosures through the system would finally bottom out the market, leaving housing values significantly lower than they are now. Once the market bottoms out, we can finally get back to buying properties. After all, we know the prices can't go any lower, right?

Wrong. Speeding up the foreclosure process will do very little to address the two elephants in the room. First, speeding up foreclosures will increase the number of vacant properties in Chicago, not decrease them. Second, speeding up foreclosures does nothing to address the fact that almost 50% of Chicago mortgages are underwater. In order to truly end the foreclosure crisis, we need to address the need for principal reductions -- a move that FHFA has tried to block at every turn. Moreover, the derelict properties that are currently out there are falling into a further state of disrepair and continue to cause a serious risk to public health and safety.

The City's ordinance is not perfect. It does seem that the ordinance would impose duties on mortgage lenders and servicers that are normally the responsibility of the property owner. At the same time, but for an unwillingness to complete the foreclosure process, these properties would have already been repossessed by the banks, properly placing the burden of maintaining them on the banks.

I would also like to point out that Ms. Willis' assertion that Freddie and Fannie being forced to comply with the ordinance will cost taxpayers money is a bit off. Freddie and Fannie are not "federal mortgage giants," they're government sponsored enterprises that received a healthy bailout along with the major mortgage lenders and the too-big-to-fail banks.

The American taxpayer is losing money every day that properties sit derelict and abandoned. These abandoned properties are stripped clean of any valuable metals and hardware. The resale value on many of them is approaching zero. The true loss of cash here is not via the ordinance, but due to the FHFA's unwillingness to pursue a program of true principal reductions. Stabilizing housing prices can be done by allowing them to fully crash and burn or by taking a short-term loss (principal reductions) for a long-term gain (interest paid on loans that don't go into foreclosure).

The City's solution is not the most elegant, but it's the best thing that's been brought to the table so far. I'd also like to point out that the Chicago City Council and Rahm Emmanuel are relatively limited in their ability to shorten foreclosure timelines as Ms. Willis suggests. Any modifications to the Illinois Mortgage Foreclosure Law would have to be passed by the General Assembly in Springfield.

In the meantime, the urban blight in Chicago will continue to spread. Speeding up foreclosures won't stop that. It will, however, add to the number of empty properties. When you're trying to combat a disease, it's always good to add extra vectors by which it can spread. That works every time.

ProPublica has published a well-written piece that summarizes the foreclosure crisis and where it stands at the end of 2011.

It is so well done and succinct that to paraphrase it here does it no justice. You can read it here.

Although yesterday's post indicated that I'm not too hopeful about the quality of the OCC-mandated foreclosure reviews, I did find this article at ProPublica very useful. Most helpful was the list of specific areas that regulators will be checking.

In addition to potential robosigning, it appears that regulators will be paying attention to issues with the loan modification process including specific kinds of dual-tracking and failure to honor a permanent modification. Dual-tracking is when a servicer or lender considers a loan modification or issues a trial modification yet still pushes forward on the foreclosure side of the process. If you were being considered for a modification and the lender moved on to foreclosure before you received an answer on the mod, you may be entitled to . . . something.

Sadly, nobody knows what, if anything, will be done when an issue is discovered. Since the order focuses on financial harm to borrowers, it may be difficult to put a number value on some of the specific servicer shenanigans that auditors are supposed to be finding. At the end of the day, this program may result in absolutely bupkis.

However, ProPublica is a great resource, and I fully expect to see their FAQ updated as readers report in with information related to the review process. Maybe time will prove me wrong. Given that ProPublica also agrees with yesterday's post indicates that time probably won't.

Chicago Magazine's Dennis Rodkin recently posted a new video to his Deal Estate blog. In it, he shares some information about short sales, deficiency judgments, and ways to avoid liability on an underwater home.

I emailed him my thoughts, and he was kind enough to share them. Here's the video:

Thanks, Dennis!

Dennis' blog can be found here.

Adam Levitin at Credit Slips posted two items about job listings for foreclosure auditors. As you may recall, most of the major lenders entered into a consent order with the Office of Comptroller of Currency and the Fed to avoid being sued for servicing fraud. One of the main elements of this fraud was the rampant robosigning that was taking place (and is still taking place) in the servicing industry.

As part of this settlement, lenders were required to hire independent auditors to review foreclosure files for evidence of wrongdoing. Prof. Levitin sums up the basics of the file review:

The ad is for a Mortgage Foreclosure File Reviewer Level 2 (whatever Level 2 means). It states that the: Key responsibility will be to determine if there was financial harm to the borrower.

It further states that the MFFR-L2 will:

Conduct a complete review of the foreclosure file to ensure all default timeframes were processed accurately.

Review to determine if ownership of the note and mortgage was properly documented when foreclosure was initiated, and document any exceptions.

Determine if the foreclosure was processed in accordance with applicable state and federal laws, to include SCRA and US Bankruptcy Codes, and document any exceptions.

Validate fees and penalties charged and assessed were reasonable, customary and within the applicable state and federal laws, and document any exceptions.

As you may have guessed from that quote's context, Prof. Levitin is quoting from a job listing for a Level 2 file reviewer. As he aptly points out, these are largely legal questions that must be answered by the file reviewer. With the vast number of law school graduates and licensed attorneys looking for work, surely the banks hope to tap that well-spring of talent for this task. Right?

Wrong. A Level 2 file reviewer only needs one year of mortgage servicing experience to qualify for the position. No J.D. or law license required.

But the problem is even deeper than that. Even if these job listings were for attorneys, the biggest question -- was there a financial harm to the borrower -- may be impossible to answer. I won't re-hash the good professors points here. Instead, I will provide some examples from my own experience.

1. A borrower in default on his mortgage files a Chapter 13 bankruptcy in an attempt to save his home. Nevertheless, the lender proceeds forward with a foreclosure action, in clear violation of the automatic stay. The foreclosure is eventually halted after spending time and money to bring an adversarial proceeding in the bankruptcy court. The borrower begins repaying the arrears on his mortgage and makes plan payments as scheduled. However, the bank is holding payments in a suspense account and tacking on massive fees as a result. This also violates the automatic stay, and will ultimately harm the borrower when he exits his Chapter 13 plan.

Will this be detected in a file review? Probably not. If the foreclosure is ultimately dismissed, and the borrower is current after the Chapter 13 plan is completed, the file didn't result in a foreclosure, so it likely won't be reviewed. Moreover, since most servicers don't seem to be set up to effectively handle bankruptcy filings, there's little chance that the individual reviewing the file would catch the discrepancy -- payments in a Chapter 13 plan work as if the borrower's loan was modified. There should be no suspense accounts or penalties.

2.) A borrower in default enters foreclosure, fails to defend himself, and is ultimately foreclosed upon. The entity foreclosing doesn't really own the loan, and all of the documents required by the court are robosigned. Will a random file reviewer catch the standing issue? How does one value the standing issue? In this scenario, assume that the bank has repurchased the home. Did the bank make a full credit bid, or did it bid a significantly lower sum? Was that sum lower than market value at the time? The file won't indicate these things. Moreover, in Illinois, it is generally presumed that the sale price at auction is the fair value of the property. So there's no reason to analyze the file that deeply, especially for a file reviewer with no legal background or real estate experience.

3.) A borrower in default enters foreclosure. A default judgment is entered, and the borrower hastily seeks a loan modification. After significant effort, a trial modification is offered. The borrower accepts the modification and makes timely payments for the duration of the trial period. The lender extends this trial period three times. After a year of trial payments, the borrower has found a better job with higher pay. The bank re-evaluates the borrower's financial situation, decides the borrower makes too much money, and denies a permanent modification.

As a result, the bank moves forward with the foreclosure action, but first tacks the difference between the unmodified payment and the trial payment plus fees and penalties onto the amount owed. This results in a significantly higher judgment amount and a significantly higher deficiency than had the bank simply foreclosed a year earlier. Since this tactic isn't technically illegal, there's no reason to identify a mistake and the file is marked as A-OK. Meanwhile, the borrower is on the hook for significantly more money. That sure seems like financial harm to me.

Both posts are a good read. I highly suggest checking them out.

I've written about the "just walk away" movement before. I've pointed out that the "safety in numbers" theory is flawed -- there may be too many people to come after right now, but lenders have quite some time (seven years or more, depending on the facts), to come after you for a cash judgment. I've pointed out that the effect on your credit and ability to rent may be greater than you think.

This latest "walk away" article at the Huffington Post has given me something new to talk about. Ryan J. Downey opens his article with a great attention-grabber:

I made my last mortgage payment on November 1, 2009.

Bank Of America changed the locks on my house on September 29, 2011.

Almost two years mortgage payment/rent-free? Sign me up!

Before you start making origami cranes out of your mortgage statements, let's take a closer look at his article. Page one describes Mr. Downey's failed American Dream with the bravado of 20/20 hindsight. While recounting his tale, which is all-too-familiar for many Americans, he quips about the inefficiencies of First Franklin's staff, the lack of assistance from Washington, and other issues.

He is 100% correct. Too big to fail has become too big to function. Trying to obtain a loan modification or other assistance from a lender or servicer has been and continues to be a Byzantine process full of red-tape and incompetency. So far so good, right?

Downey debunks the "moral hazard" arguments we've all heard in the media. He does it succinctly and to great effect:

The banks call it "writing off a bad investment." But when a private citizen does it, we're scum? Please.

I have made the same points on this very blog. So why do I think this article could be misleading? The answer lies on page two.

Downey's home was located in Riverside, California. California is a non-recourse state. This means that banks can only repossess your home, they cannot pursue for a deficiency judgment. Again, they cannot collect a single red cent from you. There may be exceptions to this rule, but I am not a California attorney.

On the other hand, Illinois is a recourse state. The Downeys of Downers Grove are personally liable if they default on their underwater mortgages. That liability will take the form of a deficiency judgment. In the case of a wholly underwater second mortgage, it may take the form of a lawsuit for the full value of the second mortgage.

To make matters worse, you can never be sure whether you will be pursued or not. While the common folklore in Cook County, Illinois is that lenders don't pursue deficiencies in Chicago, don't expect this to hold true for very long. Bank of America just imposed a $5/month fee for using your debit card. As the #OccupyWallStreet movement gains steam, the financial sector is screaming about class warfare. And well they should, because they know their own creation.

There will come a day in the not-too-distant future when lenders will aggressively seek deficiency judgments. You see, the folks who walked away early are starting to recover their credit. They may even find the means to purchase a new home, albeit one at a realistic value and a more traditional loan structure. Those people will have properties ripe for a judgment lien.

The people just entering foreclosure now may find themselves ending the process with a wounded bank on the other side of the "v." Have you ever seen a huge animal that is injured, scared, and angry? Expect similar behavior from lenders as they scramble to recover whatever they can to keep their balance sheets in the black.

To reign the invective back in a bit, much of the "walk away" movement is founded on real frustration and an accurate picture of what's happening for the haves vs. the have-nots. A lot of these folks live in states that provide them immunity beyond a shattered credit score and the loss of their home. Illinois does not.

There are three sure-fire ways to protect yourself in Illinois: 1) Deed In Lieu of Foreclosure; 2) Consent Foreclosure; and 3) Bankruptcy. If you are ready to ditch your home and don't want to risk a deficiency, those are your best options.

Simply walking away in Illinois is a bad idea. It may work for some, but in the end, truly managed risk requires a bit more effort.

I saw this post on the Huffington Post and I find it to be pretty darn close to concern trolling. I have no idea what background the author, Brian Reed, has, nor do I know what his political ideology may be.

What I do know is that the use of the word, "terrifying," in the headline of his post is obviously intended to make filing bankruptcy seem like an ordeal best avoided. For some people, it most certainly is a bad deal. But the truths that Mr. Reed calls terrifying are not that terrifying. In fact, they're not even that bad in many cases. Let's address his points one-by-one.

1. It Will Remain On Your Credit Report For Years

Yes. This is true. In fact, most debt remains on your credit report for years. So do judgments obtained by your creditors, foreclosure lawsuits, &c. If you are filing bankruptcy on a whim, you should fire your attorney and stop. If you are filing bankruptcy as part of a well-considered and measured plan, odds are that the bankruptcy remaining on your credit is something for which you have already planned.

Again, if you were not made aware of this by your attorney, you need a new attorney.

2. Bankruptcy Filing Becomes Public Domain

Yes. This is also true. However, Mr. Reed fails to mention that the most vital personal information (account numbers, social security number, etc. ) must be redacted from all filings specifically because the information is part of the public record. Your personal information is by no means secure -- if you have interacted with a government agency, if you drive a car, if you are registered to vote, if you own a home, if your phone number is listed, if you use Facebook or other social media, your information is not secure.

I can find out all kinds of things about you from public records and a simple Google search. So can anyone else. With law student access to Lexis Nexis, I used to be able to find out what people paid for their homes. There are also plenty of paid services out there, including the Lexis Nexis people finder.

Basically, filing bankruptcy is not the first or the last time your personal information was put out into the public domain.

3. Filing Doesn't Erase All Debt

True. But how is this terrifying? If your attorney has not fully disclosed to you which debts cannot be discharged, you need a new attorney. To bolster Mr. Reed's non-terrifying point, you also cannot discharge child support payment obligations or judgments against you for injuries you caused while driving under the influence.

4. Filing Is Expensive for Those Without Money

True. You also get what you pay for. Bankruptcies starting at $100 never end up costing $100. Again, this is just part of the process. Hiring a lawyer for anything costs money. The entire concept of "hiring" someone necessarily involves the exchange of cash for services. How this is terrifying, I do not know. If your attorney is not fully disclosing fees, get a new attorney -- and possibly come after the old attorney for violations of the Bankruptcy Code.

5. Good Luck Finding a Decent Home Loan Any Time Soon

True. Mr. Reed seems to think that there are people out there in dire financial situations who are also thinking of purchasing property. In practice, this is not what we see on a daily basis. Many people considering bankruptcy are trying to save or surrender a property, not acquire new property.

For those surrendering, home ownership is not the only solution. As someone who still rents, I can say with the utmost assurance: renting is just fine and dandy.

6. Good Credit Card Offers Will Be Hard to Come By

True. However, there really aren't that many "good" credit cards out there. Many of the cards offered to poor-credit borrowers do have high interest rates and annual fees. They are also a first step towards better offers. Rebuilding credit after a bankruptcy takes time. Part of that process is the responsible use of credit. One low-limit card that is paid on time will do wonders for your score in a few months to a year. Going crazy with credit cards? That may be what put the consumer into bankruptcy in the first place. Mr. Reed seems to assume that the best plan for a recent bankrupt is to jump right back into the behavior that likely caused the filing.

Again, if your attorney is not telling you this stuff up front, you need a better attorney.

7. Missed Payments Under Chapter 13 Can Be Personally Devastating

True. Missing a Chapter 13 payment can cause your case to be dismissed. However, no trustee can force the conversion of your case to a Chapter 7 liquidation. There is an exception to that statement. If you initially file a Chapter 7, then convert to a Chapter 13 with the intention of causing your case to be dismissed (we call this "bad faith"), your case can be converted back to a Chapter 7.

The only other way you can convert a Chapter 13 to a Chapter 7 is if you voluntarily do so.

I also think that Mr. Reed overstates the zealousness of trustees in Chapter 7 liquidations. While it is true that any non-exempt assets may be liquidated to satisfy your creditors, it is also true that many trustees will only try to liquidate things that are easily liquidated. You may find a trustee who is willing to sell every last scrap of non-exempt assets, but good luck finding a buyer for that old couch or a scratched up 45 RPM version of "U Can't Touch This."

At the end of the day, Mr. Reed's post has some useful information. However, the tone contains and undue amount of sturm und drang for general "know before you file" factoids. If you are considering filing a bankruptcy, these are the things your attorney should address with you. A major part of filing a bankruptcy petition should be the careful selection of your attorney. You need an attorney that you can trust and that will give you the best possible advice given your individual financial situation and needs.

It is possible that a bankruptcy is not the right solution for you. It is possible that you cannot qualify for a Chapter 7 and that your income is not stable enough to advise a Chapter 13 filing. Anything can happen in three to five years, and that should be taken into account.

If there's one "terrifying" truth about filing for bankruptcy is is that even a mediocre attorney can do you more harm than good. Take time to interview attorneys, find one that you like. If that attorney has not advised you about Mr. Reed's seven "terrifying" truths, DO NOT HIRE THAT ATTORNEY.

It's really that simple.

This concludes this edition of "Someone Is Wrong On The Internet."

The Home Owners Loan Corporation (HOLC) was part of the New Deal, and it worked to stabilize the housing market during the great Depression. Some commentators think that it would be worth revisiting. I tend to agree.

The HOLC issued bonds and used those bonds to purchase loans from lenders. The bonds paid 4% interest and were certainly more lucrative than the non-performing mortgages they replaced. The bonds also cleared risk off of the bank's books, allowing them to lend more money.

The HOLC then refinanced the purchased loans, giving borrowers longer-term mortgages (mortgages in the 1920s and 1930s tended to mature in five years) at fixed interest rates. The interest charged by the HOLC made up for the losses associated with the bonds, and eventually allowed the HOLC to turn a profit.

The Obama Administration has proposed a refinance plan to save homes, but strictly refinancing won't do any good. However, a hybrid of the HOLC model could help stabilize the housing economy. Instead of simply issuing bonds as part of QE3600, we could be issuing these bonds to lenders in exchange for underwater mortgages.

Here is the tricky part -- the new HOLC would have to take a loss to get the mortgages back to positive equity (or at least break-even). Once those mortgages were written down, the HOLC could begin to collect revenue based on the interest charged. For mortgages where the borrower defaulted regardless of any assistance from the HOLC, the HOLC can rent the foreclosed property -- either to the defaulted borrower or someone else. The idea would be to keep the homes occupied and generating some kind of revenue.

Much like the original HOLC, this concept could pay for itself over time. Sadly, in this highly-divisive era of hyper-partisan politics, I doubt a program that requires up front deficit spending would gain much traction. Let's face it; the programs we've rolled out so far don't work. It's time to get a bit creative, and borrow some ideas from the last major depression.

Financial Sense has posted an interesting interview with Professor of Economics and Law William Black.

I'm not going to simply rehash the interview here, it is well worth reading in its entirety. However, there are some key points that can be taken away from it which I think are worth restating.

During Prof. Black's tenure as a litigation director for the Federal Home Loan Bank Board, he was responsible for working on the investigations into the Savings & Loan scandal that resulted in the convictions of people like Charles Keating. During that investigation, his agency made over 10,000 criminal referrals that resulted in over 1,000 convictions. At the peak of the S&L crisis, there were over 1,000 FBI agents working on the investigation.

At the peak of the mortgage crisis, there were 120 FBI agents working mortgage fraud cases nationwide. These agents were parceled into groups of two or three in an office. This meant that they could only handle small cases. When the DOJ was asked to put together a task force to deal with the crisis, it determined that there were only small cases out there, and a task force was unnecessary.

This is a classic example of garbage in, garbage out. When you put regulators in place that don't want to regulate, you get poor regulatory results. When you shift hundreds of agents away from financial crimes and don't replace them, you end up with a small group of agents that can only handle small tasks. If we want to prevent another financial crisis, we need to put people in place that are willing to prevent it. We also need to have enough people in place to act effectively.

This means that we cannot trust financial firms to regulate themselves. We cannot allow them to hire their own "impartial" third-party investigators. History tends to indicate that those investigators will not be as impartial as we'd hope. When there is a financial incentive involved (being hired), there is a strong disincentive to reveal information that may adversely affect your patron.

Go read the interview, it's worth your time.

I am sure that this will never be abused or gamed for less-than-legitimate or sophomoric uses.

The White House has announced that it is rolling out a new function on the Whitehouse.gov website. Called, "We The People," the new application will allow citizens to submit petitions directly to the White House. Petitions with less than 150 signatures will not be searchable via the website; petitions with at least 5,000 will receive a response.

I have signed up to be updated via email when the service goes live. I plan to submit a petition related to housing policy and bank regulation. If a "More Cowbell" petition is also submitted, you can rest assured that it was not me -- but that I wish it was.

I recently discussed document fraud in the context of MERS and briefly mentioned the GMAC/Ally document fraud revelations.

In that context, Abigail C. Field hits it out of the park with this blog post. She draws a great parallel -- GMAC/Ally is pursuing a whistleblower who took a position with the company with the apparent intention of digging up internal documents that demonstrated what was happening at GMAC/Ally. At the same time, GMAC/Ally continues to engage in document fraud.

Whether GMAC/Ally has a right to pursue this whistleblower is irrelevant. It is obvious that something is rotten in the mortgage lending industry. On a daily basis, I see documents that are as suspect as a three dollar bill. The main challenge for attorneys defending foreclosure cases is educating local judges about the issues.

In Illinois, our Mortgage Foreclosure Law sets forth the minimum pleading requirements for a foreclosure complaint. If a lender does not comply with the law's requirements, the case is improperly pled and will be dismissed. However, many lender's attorneys try to claim that satisfying the minimum pleading requirements is all that they must do to win their cases.

This cannot be further from the truth. There is limited case law on this subject. Why? Before the housing boom and bust we didn't see the volume of foreclosure cases we see now. There weren't as many cases filed, which means there weren't many defended cases, which means that there were even fewer cases appealed. Without appeals, there's not very much case law generated.

For Illinois attorneys seeking to defend mortgage foreclosure lawsuits, it is important to remember that the IMFL's minimum pleading requirements are just the cost of entry. They are like the bouncer outside a nightclub. If you meet the standards, you get in. If you don't, you're out on the street. However, once inside, you must still follow the other rules of conduct. If you don't, you're out on the street and possibly a bit roughed up.

A foreclosure lawsuit is no different. Just because a plaintiff got in the door doesn't mean that it is entitled to remain. Regardless of what some local judges may think, if the plaintiff does not have the authority to enforce the mortgage and note against the home owner, the plaintiff has absolutely no business bringing the foreclosure action.

In light of the rampant document fraud in the mortgage lending and servicing industry, it is important to scrutinize every single document filed by the plaintiff. If you have a question about the authenticity of a document, demand to see the original. If you still have questions, depose the person who signed it.

The attitude in the trenches (at least on the plaintiff's side) seems to be: "They signed the papers; they owe someone the money." We need to be 110% sure that if a home owner is losing his home, the proper plaintiff is taking it away. If a lender cannot prove that it owns the loan by producing legitimate documents, that lender cannot enforce the loan obligation.

A foreclosure is much different than a credit card case. While both can have an effect on your client, the former can put your client out in the street. We need to take the time to educate our local judges. If they don't buy the argument, try it again in another case. Keep on pushing. Appeal where you can.

At very least, don't take any document at face value. That value may be zero.

Outgoing FDIC Chairwoman Shelia Bair's recent statements may not shock some observers of the mortgage crisis. Of course the industry didn't want to help borrowers. After all, helping borrowers doesn't rack up the lucrative fees that foreclosing on them does.

What is amazing about her statements since her resignation from the FDIC is that they represent an industry insider confirming what those of us on the outside already believed to be true. Quite simply, mortgage servicers had zero incentive to help borrowers.

Ms. Bair's Op-Ed in the Washington Post is even more telling. In an industry where you can create interbank loans that are due literally overnight, you discover a theme of short-termism. Long-term growth is nowhere near as important as short-term returns. This kind of thinking is what led to the last financial meltdown.

After all, why would anyone care about the long-term? The short-term mentality is perfect for the "forget you, I've got mine" set. If it's possible to make a truckload of money in a short amount of time, what does it matter what long-term consequences it may have? The person who made the truckload of money is long gone by then.

In many ways, Ms. Bair's derision of the short-term mentality is a cautionary tale similar to The Sneetches by Dr. Seuss. The Sneetches only care about the short-term (who has stars and who does not). Sylvester McMonkey McBean was more than happy to fuel the short-term star-on star-off needs of the Sneetches. At the end of the story, he leaves with a truckload of money. The Sneetches, on the other hand, are left broke and bilked.

Fortunately, the Sneetches learned a lesson from Sylvester McMonkey McBean's scheme. Sadly, I don't know if we have learned a similar lesson from our own Sylvester McMonkey McBankers. Most of them have driven off in trucks laden with our money. At what point will we learn to look further down the road? This analogy breaks down in the sense that the Sneetches de-regulated their society as part of their lesson learned.

If anything, we need more regulation. We need to be sure that when consumers borrow money, they fully understand what they are borrowing and how much it will cost them. Moreover, as Ms. Bair aptly points out, we need to take care of delinquent and underwater borrowers now. Banks will take a short-term financial hit, but the long-term benefits of getting out from under the mortgage crisis are increased stability and a return to normal economic growth.

The FDIC recently passed rules that allow it take back two years worth of executive compensation from the executives and managers that cause the collapse of systemic non-bank financial firms. Taking away the ability to ride off into the sunset with a truckload of money is a good first step. We also need to abandon short-term thinking for longer-term planning. Hopefully, people will read Ms. Bair's OpEd and take note. For those that don't, I have a star-off machine to sell you.

It has been rumored that a second attempt at a settlement between the 50 states and mortgage servicers is in the works.

Adam Levitin at Credit Slips has a great post giving his take on the settlement, actual numbers that may be bandied about, their application to reality, and how he thinks principal write-downs should work.

My only issue with his thoughts is that I disagree about preventing defaulted home owners from obtaining a principal write down. While I agree that someone who is more than two years behind on payments won't really be able to benefit from a principal write-down alone, it isn't impossible to imagine a principal write-down that also includes spreading those missed payments out over 30 years and tacking them onto the payment due with the principal reduction.

Sadly, I doubt that we'll see too many people pushing for case-by-case write-down packages -- it would take considerable manpower and record keeping abilities to manage it. We've seen that servicers aren't equipped for the task, and without the CFPB up and running, we don't have a federal regulator that we can trust with the task.

George Mason University's Todd Zywicki recently wrote a column for Forbes.com entitled, "Deutsche Bank A Scapegoat For Bad Housing Policy." It is probably unsurprising that I disagree with him. (I'm at comment #24 or thereabouts.)

Given that I vented some snark in the comment thread, I'd like to look at his logic and some of the law behind his assertions. Let's start by summarizing his argument. Prof. Zywicki's premise is that the government enticed lenders like Deutsche Bank to lend money to people who are generally under-served by traditional lenders. He further contends that holding lenders accountable for their actions is unfair, as the housing mess really was the fault of poor regulation and government policies. This so-called scapegoating serves to provide political cover to obfuscate the government's role in the meltdown.

Although he doesn't name the mechanism through which lenders were enticed, I'm guessing that it's a combination of the Community Reinvestment Act (CRA) and the FHA's Direct Endorsement Lender program. The CRA only applies to specific lenders -- those that are depository institutions (banks) insured by the FDIC. The CRA was designed to encourage banks to make loans to people in lower-income neighborhoods.

The CRA did not apply to the vast majority of the subprime lenders, in particular those that weren't depository institutions. Those subprime lenders were lending to lower-income individuals because there was a heavy demand for those loans on the secondary market. Many of these lenders issued loans that did not meet even the most lenient underwriting standards. I will also defer to this paper, which rather aptly demonstrates that the CRA wasn't the root cause of the housing bubble or the subprime boom.

Turning to the FHA's Direct Endorsement Lender program, let's be honest for a minute. According to the government's complaint, the program was designed to back up banks that issued specific loans to lower-income borrowers. Those loans were to be reviewed by the lender based on the FHA's guidelines for issuing insurance. This was a bad idea on the part of the government, to be sure. Letting the fox guard the hen house is never a good idea. The lenders were tasked with acting as fiduciaries of HUD. That is, they owed the highest standard of care to the government, and ultimately to the American taxpayer.

Deutsche Bank issued some bad loans. It lied about those loans. It also acquired MortgageIT, a company that had issued many bad loans about which it lied. When businesses purchase other businesses, they generally review the books of the businesses they're purchasing. During that review, it should have become obvious that MortgageIT had lied about its bad loans. Deutsche Bank knew or should have known that it was lying when it certified the quality of those loans.

That Prof. Zywicki chooses to trivialize the nature of lying to the government does not change the fact that lying to the government is a bad idea, in particular when doing so exposes you to some serious liability. Pointing out that Deutsche isn't a U.S. institution is a canard of the highest order. It falsely certified loans as being eligible for FHA insurance. When those loans failed, we paid out on that insurance. That's right, taxpayers ultimately bailed out these liar loans. Deutsche had a fiduciary duty to the government and to the people. It breached that duty.

Holding an entity accountable for its actions is always appropriate. Trying to excuse or hand-wave away that accountability is not. Arguing that banks were tricked or enticed into lending to those dirty subprime borrowers just doesn't cut it. You can't have it both ways. If the borrower is to be held accountable for taking the loan, then the lender should be held accountable if it obfuscates and lies about the nature of the loan in order to obtain an advantage.

I do agree with Prof. Zywicki in the sense that I'm a bit disappointed that we are only pursuing Deutsche Bank. One can only hope that this is the first in a series of lawsuits.

In this situation, housing policy isn't to blame. Deutsche Bank is to blame. The CRA didn't lie to HUD, Deutsche Bank lied to HUD. When it acquired MortgageIT, it knew or should have known that other liar loans were in the mix. The right thing to do would have been to disclose that information, not ignore the problem and continue to certify loans as insurable.

This is not a case of some poor, innocent bank having its name dragged through the mud to serve a sinister political purpose. Nobody in the DOJ is twirling a handlebar mustache while tying a free-market fairie to the railroad tracks. Deutsche and its subsidiary lied to the government. That lie harmed the government and the American tax payer. The government now seeks redress. That seems like justice to me.

This article at Bloomberg.com has me a bit confused. The headline, "'Squatter Rent' May Boost Spending As Mortgage Holders Bail on Payments," and the article itself both leave me unsure what message the good people at Bloomberg.com are trying to send.

On one hand, it's impossible for a homeowner who has defaulted on his mortgage to be a squatter. I'll chalk the term "squatter rent" up to poetic license. On the other, it makes it sound like people are robbing Peter to pay Paul. I think the reality is somewhere in the middle. While being unable to make mortgage payments may free up some funds for people who could make a partial payment, I highly doubt many people are choosing to default on their mortgages in order to afford shiny new toys. There are always people who will exploit the system, but they are about as common as Cadillac-driving welfare queens.

Could the upswing in consumer spending be the result of people in foreclosure not making mortgage payments? Sure. Are people not making mortgage payments in order to help drive up consumer spending? I highly doubt it.

The longer I practice in foreclosure defense, the more I wonder if this "strategic default" phenomenon is more of a macguffin created by the financial sector than it is an actual widespread movement.