Chicago Foreclosure Lawyer Blog

Pursuant to a consent order with the Office of Comptroller of Currency, 14 of lenders and servicers are beginning the process of sending homeowners and former homeowners letters. These letters inform the individual that they can have their foreclosure file reviewed by an independent auditor to determine whether they were harmed by any wrongdoing in the foreclosure process.

Although some are describing this as a positive step forward, I am a bit more skeptical.

On October 12, I posted about the job listings for foreclosure auditors that Georgetown's Adam Levitin discovered. It now seems absolutely clear that these positions were for auditors related to the OCC consent order. These are not attorneys doing the file review, yet they are to determine whether a borrower was financially harmed during the foreclosure process. How a non-lawyer is supposed to make a credible determination regarding a legal issue, I do not know.

Moreover, as I've noted several times on this blog, our regulators aren't really doing their jobs. Even though the audited files are to be reviewed by a regulatory entity, it seems unlikely that these reviews will be very thorough.

I'm also concerned that looking only to whether there was a financial harm is really the proper analysis. Arguably, anyone who bought or refinanced during the height of the real estate bubble was harmed by the bubble itself. That bubble was created by a lending industry hungry for loans to stuff into real estate-backed securitization trusts. It is widely accepted that property values were artificially inflated, and often done so in order to issue more loans. However, the analysis proposed by the OCC consent decree doesn't seem to touch on that.

Based on the prevailing attitude in the lending industry, I think the analysis be as follows:

1. Did robosigning occur?
2. If no, analysis over. If yes, goto 3.
3. Did the borrower default?
4. If yes, analysis over.

I really don't see how you can quantify a financial harm when what we're really talking about is violating the rule of law. What isn't being examined is the damage done to the substantive due process rights of homeowners. Forging documents in order to foreclose is absolutely wrong, regardless of whether the borrower is in default. Clouding title to millions of properties is absolutely wrong, regardless of whether the borrower is in default.

Let's face it, would you rather your file be reviewed by someone with a vested interest in protecting your rights or someone like this?

I'm going for the former over the latter.

The Nation recently published an excellent article discussing why we need to revive the bankruptcy cramdown legislation that failed to make it out of Congress in 2009.

Put quite simply, it is far and away the best possible solution to a rather big problem. Speeding up the foreclosure process (Hi, Mitt!) won't do anything to solve the problem of plummeting home values. It also means leaving over a million more Americans searching for a place to live while the most viable rental options dry up.

Allowing underwater homeowners to return their mortgages to fair market value stabilizes housing prices. It also frees up more disposable income. The payment on a $200,000 mortgage is significantly lower than the payment on a $300,000 mortgage. Here's an excerpt from the article:

According to a recent report by The New Bottom Line, a coalition of labor groups and grassroots networks, if all underwater mortgages were written down to market value and refinanced into thirty-year fixed mortgages, it would add about $71 billion a year to the economy and create 1 million jobs.

What's also interesting about the idea of a cramdown is that simply the threat of filing a bankruptcy and utilizing the cramdown power is a powerful bargaining chip for consumers. The consumer now has a clear picture of his best alternative to a negotiated solution (BATNA) -- use bankruptcy as a pressure valve, cramdown the underwater value, and move on.

But let's be clear. Cramdowns aren't some kind of "get out of jail free" card. If implemented as described in the 2009 bill, they would be an option in a Chapter 13 bankruptcy, but not in a Chapter 7. This means that anyone using the cramdown option would have to make partial to full repayments on other debts over a 3 to 5 year plan. Effectively, it would be better for the overall economy to allow Chapter 13 cramdowns because some money would be returning to creditors. A no-asset Chapter 7 filing doesn't do that.

At the end of the day, we need a real solution to the housing crisis. Cramdowns seem like one of the best options out there.

Todd Zywicki has an op-ed piece at Forbes.com that advocates rushing to a settlement regarding the robo-signing scandal. While the good professor states that he believes wrongdoers should be punished, he downplays the impact of robosigning:

At its worst, robo-signing is not an issue of whether someone has the right to foreclose--the borrowers invariably admit that they haven't made payments in months or years and have no intention of trying to bring their payment up to date--but which of several parties have the right to foreclose. That's a problem that needs sorting out, to be sure. But the virtual absence of real victims makes it highly unlikely that delinquent homeowners will receive more in court than they could under the proposed agreement.

This is, at best, a misunderstanding of the deeper issues. At worst, it is a serious whitewashing of the true impact of robosigning. In addition to muddying the "who has the right to foreclose" waters, robosigning represents fraud upon the court system. Moreover, it is simply one flavor of servicer abuses, which include telling borrowers that they had to be in default to qualify for a HAMP modification. Stringing a borrower along with the promise of a permanent modification, only to move forward with a foreclosure proceeding. The true harm behind these practices is that borrowers end up deeper in debt than if they had simply filed a Chapter 7 bankruptcy, severed their personal liability on the loan, and walked away from the property.

One more time for emphasis: honest borrowers attempting to save their homes actually harmed themselves more than if they had simply make a business decision to cut a bad investment loose.

He further argues that while the settlement talks have dragged on, time to foreclosure has increased. This is true, however, his subsequent conclusion is more than a bit disingenuous:

Most important, of course, allowing the non-paying resident to occupy the house indefinitely prevents it from being owned by someone else who will pay. Thus, while delay certainly aids some borrowers who are underwater, it also keeps non-paying borrowers in the house while keeping out new owners, to the detriment of those seeking homes and the operation of the housing market more generally.

Many of these non-paying residents wanted to pay. They attempted to navigate the ramshackle world of servicer red tape only to discover that their documents were repeatedly lost and promises of help were empty. Moreover, the vast inventory of empty REO properties indicates that we are not wanting for supply. There is likely even demand. Where we are running into problems is that a traditional 20% down, 80% financed mortgage is out of the reach of many Americans. If lenders won't issue loans, we won't see housing sold to anyone but speculators and investors who want to have a turn at playing landlord or house flipper.

Prof. Zywicki concludes his column by claiming that the extent of the harm is known, that nobody has been truly harmed, and that therefore we should simply sign off on the settlement to allow a housing recovery to begin:

But for a year now, class-action lawyers, attorneys general, reporters, and housing advocates have searched in vain for multitudes of wronged homeowners and have come up largely empty-handed. The size and scope of the problem is now well known and it seems straightforward to sign on to a final settlement that wraps up most of the claims, helps some genuinely needy borrowers, and protects lenders from still additional liability arising out of the same conduct. By contrast, walking away from the settlement will prolong uncertainty for little or no gain and at great cost to would-be homeowners and blighted neighborhoods that are caught in the current limbo.

Unfortunately, he fails to see the true impact of the various settlement proposals that have leaked to the press: a blanket release of all claims in exchange for $20 billion and a promise to really, truly, this-time-for-sure stop robosigning is a highly lopsided settlement. As I noted above, robosigning was merely one part of the problem. The deeper problem is just now coming to light, with many consumer defense attorneys saying, "I told you so." The behavior of our institutional lenders has gone well beyond robosigning and hackneyed attempts at loss mitigation services.

One only needs to look to the billions of dollars of HAMP money left on the table to realize that servicers were acting in their own interests, not those of the borrowers or the investors. This craven disregard for the well-being of the overall housing market is not lost on those with boots-on-the-ground experience in consumer defense work.

The argument that, "he signed the papers, therefore he must owe someone," is a truism that belies a deeper, underlying issue -- financial services institutions have long gouged consumers in the name of bigger profits. By treating the foreclosure crisis as a pile of paperwork to process as quickly as possible, we ignore the rights of consumers in the name of efficiency.

While borrowers may not be entirely blameless, the institutions that sold them a hunk of gilded lead must also shoulder some responsibility. But for the lending frenzy of the early 00's, we wouldn't be facing such a glut of foreclosures right now. One side of the equation made out like bandits, the other is just being kicked out. Rushing to a settlement won't fix the underlying problems. Banks were happy to take on ridiculous amounts of risk when it was profitable. Lamenting the "prolonged uncertainty" created by the crisis is merely handwaving and obfuscation.

Ultimately, every tax payer is a victim of the housing crisis -- our tax dollars propped up institutional lenders and investment banks. The tax dollars earmarked for propping up homeowners were never spent, largely due to inaction and malfeasance on the part of the mortgage servicers. There's plenty of harm and blame to go around -- a blanket settlement will simply concentrate the "harm" on home owners.

It seems that it's been a busy week for pointing fingers and assessing blame. One one side you have Gretchen Morgenson and the American Enterprise Institute; they blame Fannie and Freddie. On the other you have the vast majority of other financial observers and the Financial Crisis Inquiry Commission; they blame the institutional lenders.

It is important to determine what went wrong. WIthout that knowledge, fixing the underlying system to prevent further economic disasters is largely impossible. As is true with most disputes of this nature, the truth likely lies in the middle, in a space devoid of political haymaking.

More importantly: is all of this finger-pointing concealing a larger issue?

Obviously, the financial services industry played fast and loose with mortgage underwriting standards during the lead-up to the crisis. Freddie and Fannie also lacked significant regulatory oversight, and purchased loans that were facially defective. If one side is truly blameless, it shouldn't receive the brunt of new regulations, right?

I'm beginning to wonder if that is what's happening here. If Freddie, Fannie, the Communit Reinvestment Act, and Bill Clinton can be blamed, then the financial services industry can claim that the true regulatory force should be aimed at the GSEs. After all, if they hadn't continued to purchase those bad loans, institutional lenders would have never made them.

On the other hand, if the GSEs were unwittingly duped by a morally bankrupt financial services sector, then it was the GSEs (and ultimately American taxpayers) that were harmed by the, "lend first and request documentation never," attitude that was pervasive in the subprime lending market.

The more I read the competing viewpoints on this, the more that it seems like an elaborate chicken vs. egg argument. "But for the conduct of the GSEs, we wouldn't have lent this money." "But for deregulation, nobody would have been able to bundle these loans in the first place." "Nobody would have made these loans but for the implied federal guarantee attached to every Freddie and Fannie loan." "Too big to fail institutions knew they would be bailed out, so they engaged in risky lending behavior, counting on a future bailout if the market went south." "If Steve hadn't pushed me, I wouldn't have pushed him back." "If David hadn't made an inappropriate comment about my mother, I wouldn't have pushed him."

Fixing the root causes of the economic crisis is going to require a less-politicized solution. Given the nature of Washington, I doubt that this is truly possible, at very least until the 2012 election cycle is over.

One of the latest reports from the FHFA Inspector General indicates that Fannie Mae knew about allegations of improper foreclosure practices as early as 2003. For those who aren't aware, Fannie Mae and Freddie Mac both maintain a list of retained attorneys that handle foreclosure matters on behalf of the GSEs. Servicers who handle Fannie and Freddie loans must use these attorneys for foreclosure actions.

Some of these firms, like the now-defunct Law Offices of David J. Stern in Florida, were notorious for their practices. In some situations, Freddie Mac terminated the services of attorneys that Fannie Mae continued to utilize for foreclosure matters.

What we are seeing here is a complete lack of Federal oversight in the past decade. It's shocking to say the least, and it looks as if we're about to have back-to-back "lost decades" as a result. With our financial regulators asleep at the wheel, we allowed financial firms to run rampant. As it is right now, the housing market won't improve for at least three more years. Unemployment is high; it's even higher when you consider underemployment and people who aren't counted in the official unemployment figures.

It is unfortunate that these revelations won't make a difference for people already facing foreclosure or bankruptcy. Hopefully, we can learn from our mistakes and not repeat them.

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."

For those interested in some light reading, take a peek at the Federal Housing Finance Administration Office of the Inspector General's website. The OIG has released several reports, one of which I discussed the other day. At the risk of stoking the fires of small-government rhetoric, the titles of its reports are almost high comedy.

1. Evaluation of FHFA's Oversight of Fannie Mae's Management of Operational Risk
2. Evaluation of the Federal Housing Finance Agency's Oversight of Freddie Mac's Repurchase Settlement with Bank of America
3. Evaluation of FHFA's Role In Negotiating Fannie Mae's and Freddie Mac's Responsibilities in Treasury's Making Home Affordable Program
4. Evaluation of Whether FHFA Has Sufficient Capacity to Examine the GSEs

Having read all of these reports, I'm wondering if number 4 was just the OIG being sarcastic after drafting the previous three reports. Guess what? The agency that we created to oversee Fannie and Freddie after we, the people, purchased them is not exactly well-staffed and doesn't necessarily have its staff fully accredited and trained.

I will give you a moment to reign in your shock and awe. Yes, dear reader, it turns out that another part of our financial regulatory system is not doing the best job. In addition to failing to make Fannie improve its processes to weed out robosigning, it also completely dropped the ball when vetting the loan buyback settlement with Bank of America.

Sarcasm aside, it is a good thing that we have an OIG to issue these reports. However, it also highlights a bigger problem endemic in our system of financial regulation -- we need to put people where they're needed. If we cannot properly regulate our own GSEs, how are we supposed to properly regulate lending institutions? We can start by fully staffing these agencies.

Even with a hiring push, the FHFA will have serious staffing shortfalls going forward. Based on the OIG's analysis of FHFA's efforts in the Freddie Mac -- Bank of America settlement, it is evident that FHFA could use the added talent.

It would also help if that talent was not beholden to the lending industry. It appears that Freddie Mac entered into a settlement with Bank of America on some loan buybacks that had been improperly evaluated. Freddie Mac was aware of this problem, but settled nonetheless so as not to damage Freddie's relationship with BoA. This means that 300,000 loans were not reviewed for buyback potential. Per the report, this could have cost Freddie billions of dollars.

Perhaps with adequate staffing, this concern would have been addressed when a senior examiner raised it. Maybe there would have been more examiners to raise the same concern. Hindsight is always 20/20, but this sure seems like a situation where people with skin in the game at the time were calling the settlement a ripoff. At the end of the day, this seems to be a problem caused by an understaffed regulatory agency that did not or could not respond to the concerns of its examiners. The fact that a deal was approved in order to protect the business relationship between Freddie and BoA indicates that there is also likely cronyism involved.

The upshot to all of this is that FHFA has suspended any further settlements until Freddie can fix its methodology for loan reviews.

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.

On Friday, I was asked why robosigning is back in the news. The simple answer is that it was never out of the news. Robosigning is a symptom of a bigger problem: the massive number of real estate mortgage-backed security trusts that aren't properly funded.

Robosigning can take on many forms. A person who signs his own name to thousands of affidavits a week is likely a robosigner. He has no actual knowledge of the facts contained in the affidavit, but he is an authorized signer, so he will sign. A person who signs someone else's name on a similar affidavit is also a robosigner. So is the person who executes a "commemorative assignment" in order to establish a chain of title between lenders. These actions can be described as ranging from perjury to forgery.

I used to think that robosigning was the product of the real estate bubble years, especially when refinancing took off in 2002. It turns out that John O'Brien, the Southern Essex District Register of Deeds (Salem, MA), has discovered robosigned documents dating as far back as 1998. Kankakee County, Illinois' recorder of deeds sampled 60 documents filed since 2007. Each one contained the signature of a known robosigner.

So why did most people assume that robosigning ended in 2010? Because the banks promised that they would stop. "Too big to fail," also means, "too big to manage itself." Even if one bank executive issued a memorandum ordering that robosigning cease immediately, there is simply too much missing paperwork -- it is impossible to unring a bell.

The cause of all of this was largely unregulated mortgage securitization. Part and parcel of this system was Mortgage Electronic Registration Systems, Inc. MERS made it possible for lenders to avoid registering mortgage assignments with county recorders of deeds. One of MERS's key selling points was that it kept track of the assignments without the need for executing documents. The problem with that system is that now, lenders find themselves needing one key element of the foreclosure process: executed documents.

So, what to do? Robosign of course! Commemorative assignments are not true assignments. Some do not even recite the date of the assignment they claim to commemorate. We are faced with a situation where past malfeasance is now necessitating further fraud. This is a huge problem.

Solving that problem will result in at least one TBTF bank going under or breaking up into more manageable chunks. Bank of America seems highest up on the list of potential candidates. Essentially, many of our mortgage-backed securities aren't actually backed by mortgages. They need to be unwound, and investors need to get their money back. Once that is done, we can begin the process of unraveling the Gordian knot that is the chain of title for each individual mortgage loan.

If we allow robosigning to continue, or even allow it for the sole purpose of papering over the problems of the past, we're defeating the entire point of our system of real property. If anything is destroying consumer confidence, it is this crisis. If we continue to allow this behavior, it will never stop. Fixing the problem will be painful. So let's get started and rip off the band-aid now.

After viewing the consent order between the Fed, the FDIC, the OCC, the OTS and Lender Processing Services, and after the coverage of the Obama Administration's efforts to persuade NY Attorney General Schneiderman to play ball, it is clear to me that we are well past the time for settlement in the mortgage foreclosure crisis.

What we need now is to see some people from Wall Street doing the perp walk.

Every settlement, consent order, etc. seems to include several elements that just don't sit well with me.

No admission of wrongdoing. Yes, every settlement under the sun tries to avoid an admission of fault. However, it's pretty darn clear that there were bad actors involved in this mess. Either the higher-ups on Wall Street knew what they were doing, and sanctioned it, or they displayed a seriously reckless disregard for the letter of the law.

Self-regulation as a solution. You've just caught the major players in the mortgage lending industry playing fast and loose with the law. Obviously, the best solution is to scold the industry and ask it to kindly regulate itself. However, time and again, we see language to that effect in the various settlement proposals and consent orders. Our regulatory agencies don't necessarily have the budgets to be physically present at every lender and servicer each day. Some self-regulation is going to be necessary. However, leaving some of the main players in the game makes no sense.

Slap on the wrist fines. It feels odd to call $20 billion a small amount of money. But when you look at the actual numbers involved in the mortgage crisis, it's a small amount of money. Although Bank of America's numbers currently don't look too good, let's not forget that after the bubble burst, the major lenders were posting record profits. Instead of kicking the can down the road, we should be solving the problems presented by the housing fallout now. If a settlement with the state attorneys general is to be had, it needs to include principal write downs for underwater borrowers. Yes, it will hurt bottom lines in the short-term. However, it may also stabilize property values and create opportunities for longer-term growth.

Broad releases of liability. A settlement surrounding the robo-signing scandal should only release liability related to robo-signing. The almost global release of liability in the leaked versions of the settlement agreement would undermine ongoing investigations at the state level. It would also fail to hold anyone accountable for wrongdoing beyond the robo-signing scandal. Those are not the results that the American people deserve, in particular when their tax dollars ultimately backstopped the "too big to fail" banks on their inexorable march towards record-breaking profits.

We need to see some real enforcement out there. If it can be proven that people were breaking the law, those people need to be held accountable. After all, white collar crime is still crime.

The Chicago Tribune and the Huffington Post are reporting that the U.S. Attorney's office has filed a complaint against the City of Joliet, alleging racial discrimination in a housing battle that has been ongoing for years.

At the center of the issue is Evergreen Terrace, a Section 8 housing project located just west of downtown Joliet. The City has long sought to re-develop the land where Evergreen Terrace is located. In October 2005, the City of Joliet brought a lawsuit to condemn Evergreen Terrace and take the property via eminent domain.

The U.S. alleges that there is a specific discriminatory intent and a discriminatory impact to the City's attempts to condemn Evergreen Terrace. 95% of the project's residents are African-American. In contrast, the 2010 census indicates that 68% of Joliet's overall population self-identifies as white, compared to 16% that self-identify as African-American. The government's complaint also alleges that Joliet's mayor and a specific city council member made on-record statements to both HUD and to the city council. Those statements are pretty damning, in particular the ones where they refer to the residents of Evergreen Terrace as "rats" and the project itself as a "tumor" on the city.

Let's just say that the complaint doesn't mince words. If the allegations are true, Joliet doesn't appear to have a leg on which to stand.

The Fair Housing Act prohibits discrimination based on race. That discrimination can be based upon a specific intent, "Let's get those [insert race here] out of our town!" or it can be the result of another action, taken under the guise of a non-discriminatory motive. It would seem that the U.S. has Joliet on both issues here.

The city has been trying to condemn Evergreen Terrace to promote public safety and the better use of land in the city. It has argued that the area is blighted and should be condemned to make way for bigger and better things. However, according to the complaint, there have been significant capital improvements made in the past few years. Among those improvements are renovations to facilities within each apartment unit and improved physical security for the project itself.

Even if the city's motive was taken on face value, displacing 750+ residents without providing new options for Section 8 housing has a significantly discriminatory impact on Evergreen Terrace's population, which is overwhelmingly African-American. If Joliet is allowed to condemn and demolish Evergreen Terrace, the displaced residents will likely have to look outside Joliet for a new place to live. This has the impact of further segregating an already largely segregated city.

The city may argue that any discriminatory impact is minimal, as the African-American population of Joliet is roughly 23,589 residents. Let's assume that the city would be correct in that assertion. Even then, the statements of city council members and the mayor of Joliet are on record -- in city council meeting minutes and in statements made to HUD -- saying some pretty damning things.

It will be interesting to see how this plays out. The City of Joliet seems ready to take this all the way to trial, and I hope it goes that far. It would be nice to get some fresh case law on this issue.

Those who have read the blog before are likely aware that I think MERS represents one of the worst ideas for the streamlining of our real property system since we quit requiring that any land transfer involve putting a chunk of the land's dirt into the new owner's hands.

I'm serious. We used to make people swap pieces of dirt. Granted, this was moreso a feature of the English system of property conveyance, but it was pretty darn cool. We could absolutely revive this requirement in our modern system. It would just involve a coffee can.

But I digress.

Back to good old MERS. MERS has apparently decided that it shouldn't be the named plaintiff in foreclosure lawsuits anymore. It has also decided that at least one assignment should be recorded prior to filing the lawsuit. Basically, MERS has decided that compliance with the law is a decent idea.

Here's the big problem with this newfangled "follow the law" approach. Many of the banks that issued loans no longer exist. What happens when MERS is "nominee" for a defunct institution? I guess we will find out. My guess is that the solution will be to come up with some bogus documents that substantiate a previous assignment. That previous assignment will, of course, be missing. Vital documents seem to have a pesky habit of disappearing. It's amazing how that happens.

Perhaps I am a pessimist.

Or perhaps it's because reality has a well-known anti-lender bias. ProPublica is reporting that internal documents reveal that GMAC/Ally is still fabricating documents, including assignments that "commemorate" past assignments that are now missing. These "commemorative" assignments are a big problem. Most of them do not list the date on which the alleged original assignment was made. Those original assignments were almost 100% unrecorded, which means that there is no proof they took place.

The only proof of these so-called assignments' legitimacy is the word of the bank. I think we've learned that those statements are of dubious veracity, at best.

We are dealing with a massive problem. How can we resolve issues of "who owns the loan" when many of the original lenders no longer exist? I am not proposing that we just give people homes free and clear of their mortgages. What I am proposing is that maybe we need to use a legal fiction to fix the damage done by another legal fiction.

Thanks to MERS, we have loans that were transferred without any reliable documentation. If Bank A no longer exists now, we cannot have Bank A execute a remedial assignment to Bank B. If Bank B wants to assert its ownership, it will have to create forged documents to demonstrate that status. Obviously, that's not a solution -- that's the status quo.

Somewhere in this mess, there should be (for the most part) original notes and mortgages. These documents are probably stored in a warehouse somewhere. Let's say that Washington Mutual was the original lender. WaMu sold the loan, but retained servicing rights. When the FDIC took over WaMu and sold it to JP Morgan Chase, it sold those servicing rights to Chase. Chase, on the other hand, has asserted that it owns the loan because WaMu never gave the original documents to the unfortunate debt buyer.

So how does Chase perfect ownership? Chase could just create some bogus indorsements on the note and make it "look good." This would be exposed as fraud soon enough, further undermining confidence in the housing market. My solution to the problem? Chase becomes the "owner" of the loan. In exchange for this sudden ownership, Chase promises to protect the borrower against any other person or entity seeking to enforce the note against him. Chase further promises to modify the loan to an affordable payment and/or write down the principal to fix any underwater mortgages.

From that point on, any change in possession of the underlying loan MUST be recorded with the county recorder of deeds within 30 days of the transfer taking place.

Somewhere in the midst of this mess, we will need to use some legal fictions to fix the chain of title problems created by MERS. We may as well make it a legal fiction that helps people stay in their homes.

At least, that's what Bloomberg reported last week. I haven't seen much news regarding this since Bloomberg's article was published. Odds are this is because the NFL lockout's end and the continuing drama of the debt ceiling morass have dominated the 24-hour news cycle.

The plan itself is interesting -- promote the writing down of principal balances on securitized mortgages. However, there is some language in the story that bothers me. There are multiple references to the covenants governing mortgage securities that prohibit principal writedowns and limit the number of loans that can be modified. However, this has not been my experience when reviewing Pooling and Servicing Agreements (PSAs) and the other documents that make up a mortgage-backed securitized trust.

Many of the PSAs and other documents that I have reviewed encourage the modification of loans, some may even allow principal writedowns. Why? Because for a mortgage-backed security (MBS) to perform, it must have performing mortgages in the trust pool. Allowing borrowers to default and enter foreclosure harms the performance of the securities, which is something that investors do not want.

Even a principal reduction would harm investors less than a mortgage in the pool being foreclosed upon. While the payments made by the borrower would be lower (because there is less principal to pay off and less interest to compute against that principal), they would still be made. This is a vast improvement over the current state of many MBSes, which have been the subject of many investor lawsuits.

What is most interesting about this plan is that it would not require any government funding. If Treasury would consider the plan's activities as "qualified loss-mitigation activity," it would protect the lenders from lawsuits. It would also seek to sell non-performing loans out of the trust pool to investors who buy distressed debt.

On its face, this seems like a good idea. It remains to be seen whether the plan will come to fruition, but at very least the government and the mortgage industry are exploring options.

On the other hand, I have serious doubts that most of the MBS trusts actually own the loans they purport to own. Is breaking these iron-clad piggy banks open a way to gloss over some of the habitually bad practices of the mortgage lending and servicing industry? I guess we will have to wait and see.

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.

If you live in Chicago and have a mortgage, there is a 47% chance that your home is worth less than the mortgage balance. The most recent projections indicate that the housing market won't begin to recover until 2014 at the outside earliest. Some economists are noting that we may be headed for a double-dip recession. Although some home owners may be able to weather the storm, many are going to be stuck with negative equity for much longer than the next three years.

When a home is underwater, mortgage payments can seem futile -- payments towards principal are merely nudging the property towards a break-even point; they are not building equity. If you believe the media, so-called "strategic default" is a big thing these days. Let's ignore the fact that nobody can properly define the term, and focus on concrete options available to Illinois home owners who are underwater on their mortgages.

1. Keep Paying

If your home is only marginally underwater, and you're in an area that is seeing fewer foreclosures, it may make good business sense to stay put. Home owners best served by staying put likely purchased their homes before the real estate bubble took off and did not refinance their homes during the bubble. This type of home owner will likely have stable income as well.

Obviously, this would be the best option as it avoids any negative impact on the home owner's credit. It also keeps the home owner out of bankruptcy and out of foreclosure.

2. Walk Away

Simply walking away from the property is the diametric opposite of option number 1. When the media discusses strategic default, it seems to be discussing this option. However, it sometimes lumps the other options in with this one.

The walk away is simple. Stop paying the mortgage. Move out of the property. Some people mail the keys to the bank. At some point, the bank will foreclose on the property. The way this option is described, the worst-case scenario is almost always a negative impact on the home owner's credit score.

That is not the case. Simply walking away from a mortgage can have other penalties associated with it. When a property is underwater, it is almost guaranteed that a foreclosure auction will not recover the value of the mortgage. In general, properties sell for less than their market value at a sheriff's sale. If a property's market value is significantly less than the value of the loan, a sheriff's sale will not even come close to recovering the loan's value.

So why should the person who walked away care? Isn't it the bank's problem? Yes, if you live in what is known as a "non-recourse" state, the bank is out of luck.

Illinois is a "recourse" state. This means that the bank can pursue a foreclosed home owner for what is known as a deficiency judgment. This deficiency is the difference between the amount owed on the loan and the amount obtained at the sheriff's sale. Once a bank obtains a deficiency judgment, it can put a lien on other property that you may own. It can proceed to garnish your wages. It can freeze your assets while it determines just how much of your money it can obtain to satisfy its judgment.

Suffice it to say that walking away in Illinois is not as hassle-free as it may seem.

3. Deed In Lieu of Foreclosure

The deed in lieu of foreclosure is a remedy available to Illinois home owners. The deed in lieu is created by the Illinois Mortgage Foreclosure Law. You can find the statutory language at 735 ILCS 5/15-1401. Some federal programs like HAFA also provide a deed in lieu option. Some lenders may also make this option available to home owners in states without a statutory version of the remedy.

A deed in lieu of foreclosure avoids the filing of a foreclosure lawsuit. Although the borrower may be in default, or close to defaulting, it is nothing like simply walking away from the property. The deed in lieu of foreclosure protects the home owner from the negative credit reporting associated with a foreclosure lawsuit. It also protects the owner from a potential deficiency action on the underlying loan. The deed in lieu wipes out the entire debt obligation.

The deed in lieu may not be a great option for underwater home owners. While some underwater homes may only have one mortgage, many have multiple mortgages. The presence of a second or third mortgage makes a deed in lieu of foreclosure all but unattainable.

If there is only one mortgage on the property, most lenders require that the property be listed for sale for 90 days before granting a deed in lieu. The lender will also want to see financial disclosures that demonstrate a financial hardship. If you are able to make your mortgage payments, but simply do not see the sense in paying off negative equity, you may not be eligible for a deed in lieu of foreclosure.

4. Consent Foreclosure

In a consent foreclosure, the home owner has been sued by the lender. However, instead of proceeding forward with the foreclosure lawsuit, the lender and home owner agree to settle the matter. The home owner files a stipulation of consent to foreclosure. In return, the lender takes back the property and agrees to waive the right to later pursue the home owner for a deficiency judgment.

This remedy is very similar to a deed in lieu of foreclosure. It is also created by the Illinois Mortgage Foreclosure Law. You can find the entirety of the statute section at 735 ILCS 5/15-1402. There are some key differences.

The first major difference is that a consent foreclosure causes a judgment to be entered against the home owner. This will have a more adverse credit impact than a deed in lieu. However, it is entirely possible to obtain a consent foreclosure, even with other mortgages on the property.

The second and third position lenders can object to the consent foreclosure, but if the property is significantly underwater, their position won't be much different than if the property went to sale normally. This is because there will not be any funds remaining to pay the second and third mortgages. It is important to note that the consent foreclosure only protects the home owner from liability as to the first mortgage. Any second or third mortgage may still pursue the home owner for the balance due on those loans.

If you anticipate opting for a consent foreclosure, it is best to request on as soon as you are served with a summons. If you are represented by counsel, make sure your attorney send the request as soon as possible. This way, you avoid being denied a consent foreclosure because the lender has too much money invested in the foreclosure process.

5. Bankruptcy

The U.S. Bankruptcy Code affords home owners the opportunity to surrender a property as part of a bankruptcy. Under Chapter 7 or Chapter 13, the home owner may elect to surrender the property. One also gets the benefit of discharging other consumer debts.

Chapter 13 may afford underwater home owners the opportunity to strip second and third liens off the property, paying them back as if they were repaying a credit card debt. This tactic may restore equity to an underwater property.

Before considering a Chapter 13 bankruptcy as a means of lien stripping, it is important to consult with a bankruptcy attorney in your area. Different courts allow different things, and lien stripping may not be available to you.

Conclusion

No matter how you proceed, there are many options that could be defined as "strategic default." Aside from lien stripping, the end result is always the same -- the bank ends up in possession of the property. Ignore the people that claim mortgages are a moral obligation. At the end of the day, the only true difference is that most reasonable options involve a minimization of home owner liability, while a true strategic default can result in judgments against the home owner. Those judgments have a rather lengthy shelf-life and can be collected upon in several ways.

It is likely a good idea to consult with a licensed attorney before seriously pursuing any of the above options. Know your options and the possible impact before you act.