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Wednesday, January 09, 2008

Foreclosure Investigator

by Tanta on 1/09/2008 09:45:00 AM

Elizabeth Warren at Credit Slips has an interesting post up inviting reader comments. I thought our readers might have some ideas about this.

Because subprime lending was not evenly spread around the country (or even around a state or city), individual neighborhoods are bearing the brunt of the meltdown. When several homes in one community go into foreclosure, a neighborhood can rapidly shift from a safe, comfortable area with well-tended lawns to a place where no one wants to live. Mayors are on the front lines in dealing with the fallout.

Like most academics, we at Credit Slips tend to talk about what the federal government could do to deal with the subprime crisis. The feds have the power, if not the will, to make some big changes. But what about mayors? Can anything be done at the city level? This isn't an academic question, so put on your thinking caps and volunteer some ideas. Here's mine:

A mayor could appoint a Foreclosure Investigator. Announce that any person anywhere in the city who has received a notice of foreclosure or similar document should immediately call the city officer who will investigate all the paperwork to make certain that every aspect of the mortgage and the mortgage foreclosure comply with the law--at no expense to the homeowner.

This would be a powerful tool for three reasons: 1) Many of the worst mortgages have bad documentation, illegal provisions, etc. But if homeowners don't know that, and if they don't go to very good lawyers, the mortgage companies will foreclose and the homeowner's rights will be lost. 2) Even if the mortgage paperwork is in order, any push back from a homeowner makes is more likely that a deal can be negotiated to keep the homeowner in the house (if the homeowner really can afford it). A Foreclosure Investigator can inform the homeowner about a range of options. 3) If one city has the reputation as a lousy place to bring a foreclosure action, mortgage companies have lots to do right now, and they may put that city's foreclosures lower on their to-do lists. I realize the last point simply externalizes the problem, but for a mayor working hard to save neighborhoods in his or her city, that may be an issue for another day.

What are your ideas? What other tools are available? If a highly motivated mayor asked you what to do, what would you suggest?
I confess to wondering why homeowners would have to contact this Foreclosure Investigator in the first place. The first step of any foreclosure is to file a Notice of Default or Lis Pendens (or whatever the jurisdiction/foreclosure type requires) in the land records of the county (or city or town, depending). Homeowners can actually miss these things if they no longer occupy or for some other reason don't get served. The recorder's office doesn't miss them.

The legal issue, I assume, is giving the Foreclosure Investigator the right to demand documents or information from the lender/servicer/investor, either on behalf of the homeowner or in its own right. I have no idea how that would work technically.

I'm not sure I'd push for having a Foreclosure Investigator being charged with things like "informing the borrower about options." If these municipalities need legal aid services or homeowner counseling services, models for such things already exist and should be funded. It seems to me the point of the proposal is to have a party who represents the interests, first of all, of the city (or whatever jurisdiction this is), not the lender or the homeowner. In other words, it is precisely formalizing the "externalized" interest.

After all, while it's obvious to me (at least) that cities might have interests that don't exactly align with big national servicers and mortgage investors, it also seems obvious that they might have interests that don't always align with individual homeowners, either. At some level this proposal may well be a recognition of the socially crucial function of judicial foreclosures, which are rarer and rarer in many states as lenders elect "power of sale" or trustee sale foreclosures (because they're faster and cheaper to the lender). The judicial foreclosure is slow and expensive, but it gives the borrower "a day in court" and it tries, at least, to make sure that the state's interest in the process is protected.

Even in states where judicial foreclosures are still the only way to foreclose--like Ohio--we're seeing huge court backlogs. We've all heard about the uproar the Federal District judges have been creating with their attempts to make sure the lenders' paperwork is straight. Warren's proposal for a Foreclosure Investigator sounds a bit to me like a kind of officer of those foreclosure courts. In states where lenders can elect non-judicial foreclosure, it would insert the level of scrutiny of the loan paperwork back into the process.

I would guess that the loudest and first complaint will be about "spending taxpayer money" on cleaning up the mortgage mess. That's why I'd be inclined to think that any such Foreclosure Investigator needs to represent the city, not the individual or the lender, and that it needs to be quite explicit whose interests are being protected and why. It's probably easy enough for foreclosure-ridden cities to cost-justify the expense versus the gain to the taxpayers of preventing neighborhood foreclosure crises.

But it isn't going to be just subprime, and it isn't going to be just old core neighborhoods teetering on the brink for long. It's going to be fancy new half-built half-sold suburban developments full of "prime" mortgages and half-built schools and streets too far from core-city employment centers and the lovely politics of development. I envision the Foreclosure Investigator running up against not just "business environment" types who don't want Our Fair City to see "lender flight," but against those back-room deals with the developers and builders for tax abatements and permits and what have you, and suddenly the Foreclosure Investigator is drawn into the muck of whether some of these new neighborhoods are worth finishing, not "saving." That could be ugly.

Not that that's an argument against doing it, mind you. Ugly is going to arrive whether we fund an Investigator or not.