Posted on | January 16, 2011 | 35 Comments
In a major ruling Friday, a coalition of nonprofit defense lawyers and consumer protection advocates in Maryland successfully got over 10,000 foreclosure cases managed by GMAC Mortgage tossed out, because affidavits in the cases were signed by Jeffrey Stephan, the infamous GMAC “robo-signer” who attested to the authenticity of foreclosure documents without any knowledge about them, as well as signing other false statements.
The University of Maryland Consumer Protection Clinic and Civil Justice, Inc., a nonprofit, filed the class action lawsuit, arguing that any case using Jeffrey Stephan as a signer was illegitimate and must be dismissed. In court Friday, GMAC agreed to dismiss every case in Maryland relying on a Stephan affidavit. They can refile foreclosure actions on the close to 10,000 homes, but only at their own expense, and subject to new Maryland regulations which require mandatory mediation between borrower and lender before moving to foreclosure.
I’ll let the lawyers argue the law. I’m here to tell you the economic fact that this action could have a catastrophic impact on home values and mortgage lending. This class action suit has thrown 10,000 foreclosed home into legal limbo in a single state and, if replicated in other states, this could prevent lenders from recovering asset value through re-sale and thereby performing the market-clearing function that is absolutely essential to economic recovery.
Deadbeat borrowers have already imposed massive losses on the mortgage industry. American lenders have on their books hundreds of thousands of delinquent mortgages. Payments are months in arrears, and the only way to fix the problem is to foreclose the loans, evict the deadbeats, and re-sell the homes (likely at a substantial loss) to people who can afford the payments.
If that process of foreclosure and resale doesn’t occur — equivalent to hitting “reset” on the pricing system for housing — the real-estate market will collapse entirely in many communities, because nobody can know the actual value of a home.
Ask yourself this: Who is going to buy a home in a neighborhood in Prince George’s County, Maryland, where there a already a half-dozen vacant homes for sale and perhaps another half-dozen where the occupants are in default and subject to foreclosure? Within the next year, any of those homes is likely to sell for a far lower price than the price offered to today’s buyer. Because housing values are determined by comparison to similar homes in the same community, the guy who borrows $150,000 today to buy a $180,000 home is going to be automatically “underwater” on his loan if, in the coming months, similar homes nearby begin to sell for less than $150,000.
In such a disastrous market — which already exists in many communities, and which this Maryland class-action lawsuit can only help perpetuate — prospective buyers have a disincentive to close the deal, and lenders are discouraged from offering mortgages except to the most affluent and credit-worthy buyers.
And please spare me any moralistic lectures about sympathy for the poor. The only condition under which any lender would make a mortgage loan to a poor person is with the ironclad assurance that the home can be foreclosed and resold should the loan lapse into default (i.e., the borrower falls four months behind on his payments.) Government regulations to “help” the poor by interfering in that process, such as this blunderheaded new “mandatory mediation” law in Maryland, actually hurt the poor by providing disincentives for lenders to give them a mortgage in the first place.
Furthermore — and this is what really breaks my heart — by preventing the “reset” of the housing market after the collapse of the bubble, these anti-market measures prevent young people from scooping up the real-estate bargains that ought to be available now.
How many times have liberals lectured us about the need for “affordable housing”? And what else could make housing more affordable than the foreclosure and resale of hundreds of thousands homes currently occupied by deadbeats who took on mortgages they couldn’t afford during the bubble?
Like I said, I’ll let lawyers argue the legal aspects of these “robo-signer” cases. If lenders violated the law by trying to shortcut the foreclosure process, then they will be held legally accountable. But excuse me for thinking that this looks a lot like the kind of “social justice” litigation that has already had such harmful effects on our economy.
Prediction: The housing market will now enter another long, steady downhill slide. “Unexpectedly!”