Mortgage Morass

According to Krugman, America is Thunderdome, where the rule of law is a distant memory.

"American officials used to lecture other countries about their economic failings and tell them that they needed to emulate the U.S. model. The Asian financial crisis of the late 1990s, in particular, led to a lot of self-satisfied moralizing. Thus, in 2000, Lawrence Summers, then the Treasury secretary, declared that the keys to avoiding financial crisis were “well-capitalized and supervised banks, effective corporate governance and bankruptcy codes, and credible means of contract enforcement.” By implication, these were things the Asians lacked but we had."

This little vignette is totally irrelevant to Krugman's argument, and its just a smug swipe at America. It is worth noting however that America is much, much wealthier than Asia, suggesting that, at least possibly, the Asians could learn something about economic management from America.


"The accounting scandals at Enron and WorldCom dispelled the myth of effective corporate governance."

Because America, with thousands of large corporations, has had two major corporate scandals in the past 10 years, obviously effective corporate governance is a "myth. But, such a low incidence of failure is an extraordinary success story. Following Krugman's logic, because two Congressmen, say Stevens and Rangel, to be bi-partisan, breached rules of ethics in the past 2 years, Congress is a lawless, totally ineffectively regulated body, and any semblance of control or legality is a "myth".

For the young lawyers out there, this is a classic example of a red herring. Raising the spectre of Enron -- which literally has nothing to do with mortgage foreclosures -- is a way of showing how corporations are fundamentally evil, banks (technically bank holding companies) are corporations, and therefore, banks are fundamentally evil.

"And now the mortgage mess is making nonsense of claims that we have effective contract enforcement — in fact, the question is whether our economy is governed by any kind of rule of law."

An amazingly hyperbolic statement. Read on, but Krugman cites possibly inaccurate affidavits as proof that our economy is now totally devoid of law. Its such a melodramatic overreaction that it makes me want to kill myself!

"So servicers — the companies that collect payments on behalf of mortgage owners — have been foreclosing on many mortgages, seizing many homes.

But do they actually have the right to seize these homes? Horror stories have been proliferating, like the case of the Florida man whose home was taken even though he had no mortgage."

Just last week, near Chicago, police falsely accused a man of murder.

http://www.nwitimes.com/news/local/illinois/article_4becd466-2934-52cd-9a24-aeb1b7523299.html

I certainly don't think that means we live under a lawless, tyrranical government that can drag me away in the middle of the night for no reason. The sensible, adult conclusion is that isolated mistakes are inevitable in a legal system with millions of cases pending at any given time, not that mistakes mean that America is lawless.

But, Krugman isn't interested in a reasoned discussion of the relevant issues -- its just one long screed. What is conspicuously absent is any quantification of the scope of the problem. Last year there were over a million foreclosures, in all 50 states. A handful of isolated mistakes were inevitable, which is true in every area of the law. I don't think that there is any doubt that there were any number of frivolous product liability, sexual harrasment, or racial discrimination lawsuits last year. But that certainly doesn't mean that we no longer have any rule of law, or that entire classes of lawsuits are now invalid. Based on a few anecdotes, Krugman now wants to deprive all banks of their day in court.

"Courts have been approving foreclosures without requiring that mortgage servicers produce appropriate documentation; instead, they have relied on affidavits asserting that the papers are in order. And these affidavits were often produced by “robo-signers,” or low-level employees who had no idea whether their assertions were true.

Now an awful truth is becoming apparent: In many cases, the documentation doesn’t exist."

This is where Krugman goes from being hysterical to dishonest. I have no doubt that in the vast majority of instances, there is no dispute as to the existence of the indebtedness, only as to the owner of the note evidencing the indebtedness. If borrower B executes a note and mortgage in favor of Lender C, and Lender L assigns it to Assignee A, there may be a dispute between L and A as to the ownership of the note, but there is no doubt that B owes the money, and mortgaged the property at issue. Under this scenario, B isn't harmed by paying L or A, because she is only paying what she owes. The dispute between L and A doesn't alter B's underlying indebtedness, and B shouldn't get a windfall relief from her debt.

Of course, B could get stuck paying L, and then have A come seeking the money. But, Krugman doesn't discuss this actually occuring, I have never heard of it happening, and, in the vast majority of foreclosures, the borrower has long since stopped paying the note anyways. But, to the extent that B is worried about double paying, and wants clarity as to who owns the note, she can always file an interpleader (or if she is sued and faces the prospect of paying twice, an impleader). The point is, the law already protects borrowers against paying the wrong party. Krugman, if he knew anything about the law, would be aware of this. But, Krugman, in a dishonest way, isn't interested in making sure the right borrower gets repaid, but rather making sure that the borrowers don't have to pay at all.

UPDATE: In the most recent issue of "The Economist", an article discussing this issue confirmed that "no evidence that anyone has been wrongly evicted has yet been found." There is, as I suspected, no evidence at all that any homeowner/borrower's substantive rights have been abridged, or that people have wrongly lost their homes, underscoring that Krugman's hysteria is totally baseless.

"This is very, very bad. For one thing, it’s a near certainty that significant numbers of borrowers are being defrauded — charged fees they don’t actually owe, declared in default when, by the terms of their loan agreements, they aren’t."

How can Krugman possibly know this? Where does the "certainty" come from? Its non-existent. He's not a lawyer, he's never collected a judgment or enforced a mortgage, but he's making bald assertions about what is occuring in American courts.

He also fundamentally misunderstands Anglo-American law. Its an adversarial process -- the borrowers/defendants have the chance to defend themselves. The borrowers all have copies of their notes and mortgages; if they didn't breach the loan documents, they are free to defend against the suit. Nobody is being "defauded" -- plaintiffs are filing suit to have their claims adjudicated, which is their right.

"True to form, the Obama administration’s response has been to oppose any action that might upset the banks, like a temporary moratorium on foreclosures while some of the issues are resolved."

Why would all mortgage enforcement actions be halted because of some bad lenders? The idea that say Wells Fargo shouldn't be able to enforce its legal rights because of say B of A's misdeeds is nuts, roughly the same as saying because your neighbor got a DUI, you're going to lose your license. Its also worth noting that Krugman's idea of collective guilt is totally asymmetrical -- surely he doesn't suggest that because say Illinois politicians are manifestly corrupt, the Utah state government should be reigned in. Tellingly, its only corporate misdeeds that draw his ire, and warrant wholesale condemnation not only of individual wrongdoer, but its entire class.

Also, the Obama administration probably rightly recognized the federal government just spent hundreds of billions of dollars to rescue financial institutions. It would be the height of folly to save them, and then less than two years later strip them of their collateral, leaving them totally unsecured creditors. It would literally destroy the financial system that the government so desparately tried to save.

Lastly, the Obama administration might have given some thought to the Consitutional infirmities of a federal law that would halt state courts from enforcing contracts involving real property, which the Supreme Court (admittedly not in the federalism context) has held is a quintesstially state and local issue. Federal cessation of state court judicial proceedings would be an unprecedented extension of federal power over states, and raise some heavy-duty federalism issues. Krugman of course has given zero thought to these issues.

"The response from the right is, however, even worse. Republicans in Congress are lying low, but conservative commentators like those at The Wall Street Journal’s editorial page have come out dismissing the lack of proper documents as a triviality. In effect, they’re saying that if a bank says it owns your house, we should just take its word. To me, this evokes the days when noblemen felt free to take whatever they wanted, knowing that peasants had no standing in the courts. But then, I suspect that some people regard those as the good old days."

For young lawayers, this is what's known as a straw-man. Nobody is suggesting that if a bank says that it owns your house, it can unilaterally seize it. This is just a lie, a willful mischaracterization.

On its own terms, its a truly bizarre argument. Republicans are, according to Krugman, neo-aristocrats seeking the imposition of some sort of new ancien regime. More than offensive, its just, really, really bizarre. Its a totally baseless accusation that, if Krugman had any intellectual honesty, would embarass him. Its a classic ad hominem attack that in no way deals with the substance of any argument.

For what its worth, Krugman identifies neo-aristocrats by their disregard for property rights. Its worth noting that the closest thing we have to noblemen of yore is the government, which, under Supreme Court precedent, can take your home to hand to a private developer of a mall. It goes without saying that conservatives dislike this practice, and liberals support it. So, in the defending property rights game, conservatives win.

"What should be happening? The excesses of the bubble years have created a legal morass, in which property rights are ill defined because nobody has proper documentation. And where no clear property rights exist, it’s the government’s job to create them."

Krugman again is succumbing to hysteria here -- foreclosures are so complex that normal judicial processes simply cannot handle them. In fact, foreclosures are straightforward legal proceedings. There is no crisis of property rights, simply, at most, contract and foreclosure disputes, which courts have been handling for literally hundreds of years. This is a simple problem, with simple remedies.

Also, this paragraph shows that Krugman has zero understanding of the law's purposes. He says that because property rights are ill-defined, courts can't resolve the disputes. This bizarre assertion means that, according to Krugman, courts aren't capable of making determinations of the legal effects of documents. But, courts exist for precisely this purpose -- to determine complex questions of property and contract rights. Krugman is pretending that courts can't do what they are designed to do -- determine and enforce property rights -- so that he can deprive courts of the jurisdiction to enforce documents he doesn't want enforced.

"For example, the Center for American Progress has proposed giving mortgage counselors and other public entities the power to modify troubled loans directly, with their judgment standing unless appealed by the mortgage servicer. This would do a lot to clarify matters and help extract us from the morass."

Krugman, advocating a solution to a problem that doesn't exist, is literally turning Anglo-American contract law and due process on its head. Under this scheme, a borrower can unilaterally seek ex parte relief from a tribunal, putting the onus on the other party to object. Aside from being constitutionally impermissible (due process) it violates all notions of fairness to allow a party to seek relief against a party with no notice to the other party. Krugman is literally denying certain classes of litigants an opportunity to appear in court based on their statue. This proposed procedure -- in which relief is available to a single class of parties (the borrowers) without notice to any other party -- would be totally unprecedented in Anglo-American law.

Its really important to note what Krugman is trying to do here -- he is advocating stripping courts of their authority. This must be because courts, when resolving contract disputes, have the goal of effectuating the parties' intent. However, in the context of home loans, enforcing the documents means that the borrowers have to pay or lose their home. So, Krugman proposes a parallel legal system is which "mortgage counselors" -- who have no legal training -- are given the authority to unilaterally abridge contracts. "Abridge" is a carefully chosen word here. Unlike courts, which are designed to simply enforce parties' agreements, these tribunals wouldn't honor agreements, but rather would deprive one party of the benefit of their bargain, and the rights that they relied on in extending credit. In other words, he wants to fundamentally alter the legal process so that the decisionmaker (e.g. the court) is not impartial, but would rather exist solely for the benefit of one party (the borrower). And, finally, if judges -- who are experienced lawyers and jurists -- can't correctly resolve the peoperty rights, how can "mortgage counselors", who have no legal training? They can't -- underscoring that the mortgage counselors' role wouldn't be to resolve property rights, but rather simply to ignore lenders' property rights for the benefit of deadbeat borrowers. In reality, courts are anathema to Krugman because they will force borrowers to live up to their obligations.

This article is Krugman at his worst. The problem isn't that Krugman is wrong, its that he's dishonest. What he really wants is a law providing that borrowers' loans are forgiven. He should at least openly advocate this position, instead of using a ficticious crisis to justify creating a parallel legal system totally inconsistent with Anglo-American law in order to let borrowers off the hook. If Krugman actually made the argument that borrowers shouldn't have to repay their home loans, he'd be wrong, but at least he wouldn't be a liar.