Debunking the free house moral hazard

Katie Porter at Credit Slips has a good post debunking the spin from banks and many conservatives that if banks don’t continue to aggressively pursue foreclosure, regardless of their actual legal standing to do so, then a lot of undeserving people will get free houses. While Porter notes that this really isn’t happening that often to begin with, the notion that bad, non-existent, or fraudulent paperwork would prevent one bank from foreclosing on a homeowner means the person now has a free house is very, very false:

But this win is not the same as a free house. Just because a party lacked standing or statutory authority does not mean that there is not some party out there that does have the authority to foreclosure. Nor does a win on standing mean that there cannot be action taken to give the initial foreclosing party the authority that they need, which might occur by transferring possession of the note or by executing a series of assignments, to foreclose at a later date. Unless other problems exist, there is still a valid note that obligates the homeowner to pay money due and there is still a mortgage encumbering the house. The homeowner does not get a free house. Rather, the homeowner just doesn’t lose her house today to foreclosure. These are pretty different outcomes!

Porter goes on to note that there are still other meaningful consequences of foreclosure issues due to lack of standing or missing documentation. But the important thing is getting passed the hyperbolic moral hazard rhetoric coming from conservatives and banking industry shills:

A fruitful discussion of these issues needs to begin with a clear understanding of the consequences of the problem, as well as empirical evidence on how widespread these problems are. The free house is political handwringing, not legal reality.

The most successful arguments the banking industry and conservatives who support them have made are arguments that hinge on making one group of Americans jealous of another group of Americans. They want homeowners saying, “it’s not fair for my neighbor to get a free house while I work hard to stay current on my mortgage.” They want homeowners saying, “it’s my neighbor’s fault for getting more house than he can afford.” They want homeowners to turn against each other, to make sure that everyone is pulled down to the same level while not looking at the banks towering over them, raking in record profits off of first fraudulent lending and now fraudulent foreclosures. This is not dissimilar to how conservatives and big corporations have turned non-unionized working class people against their unionized neighbors and pushed them not to raise themselves up, but pull their unionized sisters and brothers down to their level of economic distress and exploitation. In short, the moral hazard argument boils down to one in which elites seek to turn members of the working and middle classes against each other, with the consequence that this distraction will prevent anyone from focusing their anger on the real perpetrators of the foreclosure crisis, the same people who are now telling Americans that they should look suspiciously and angrily at their neighbors.

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