Yale Law Review: “In Defense of “Free Houses”

MEGAN WACHSPRESS, JESSIE AGATSTEIN & CHRISTIAN MOTT published an article that takes dead aim at the “free house” controversy. In the Yale Law Review they come to the conclusion that (1) the house isn’t free to any homeowner even if they escape the mortgage and (2) the projected social cost of  market values are wrong. But probably the most stinging criticism of the judicial system is that judges are abandoning the rule of law for ad hoc rulings whose only purpose is to avoid a result the judge doesn’t like.

Unfortunately, the article does not fully address the issue of why the banks are failing to prove what is ordinarily a slam dunk case. The authors seem to assume that the debt is legitimate and that it is mainly a paperwork problem. I would add my usual comment: if the banks simply had continued with the standard procedures they would not have had any paperwork problems no matter how many times the loan was sold. The greater evil that is not addressed in case decisions and law review articles is that this was all part of fraudulent scheme and THAT is why the banks had to resort to more fraud (in documentation).

We should remember that banks basically drafted the statutes and are the source of all paperwork on consumer loans, especially mortgage loans. For hundreds of years they knew how to do it, knew how to keep it and rarely misplaced anything. It strains belief to think that suddenly the banks  forgot what took hundreds of years to develop. The more insidious reason is what is feared to be the nuclear option — that the mortgages, notes and loan contracts were all an illusion, even if the money was real.

In the end, for reasons other than those expressed on these pages, the authors come to the same conclusion that I did — the “free house” is going to the banks every time a foreclosure is granted.

Here are some quotes from their article that I think are self-explanatory.

When addressing faulty foreclosures, courts are afraid to bar future attempts to foreclose—that is, afraid of giving borrowers “free houses.” While courts rarely explain the reasoning behind this aversion, it seems to arise from a reflexive belief that such an outcome would be unjust. Courts are therefore quick to sidestep well-established principles of res judicata in favor of ad hoc measures meant to protect banks against the specter of “free houses.” [e.s.]

This Comment argues that this approach is misguided; courts should issue final judgments in favor of homeowners in cases where banks fail to prove the elements required for foreclosure. Furthermore, these judgments should have res judicata effect—thus giving homeowners “free houses.” This approach has several benefits: it is consistent with longstanding res judicata principles in other forms of civil litigation, it provides a necessary market-correcting incentive to promote greater responsibility among foreclosure litigators, and it alleviates the tremendous costs of successive foreclosure proceedings.

In a foreclosure suit, the bank must generally prove the following: (1) the homeowner has signed both the note (the underlying loan) and the mortgage assigning the house as collateral for that note; (2) the bank owns the note and mortgage; (3) the homeowner still owes a debt to the bank; (4) the homeowner is behind on that debt; and (5) the bank has accelerated that remaining debt in accordance with the terms of the note itself. When a bank fails to prove these elements, a judge is legally required to rule in favor of the homeowner.

Recently, courts have been inundated with suits where homeowners question the bank’s ability to prove the second element. Litigation over “proof- of-ownership” issues in foreclosures is a growing nationwide problem; sampling suggests a ten-fold increase between the periods immediately preceding and following the 2007 collapse of the housing market.

To demonstrate ownership without expending more resources than pooling and servicing agreements allotted, bank employees signed hundreds of thousands of affidavits asserting that they had seen and could attest to the contents of original documents demonstrating ownership of the underlying mortgage. Although such affidavits were a legally acceptable means of demonstrating such ownership, a significant number of them were actually fraudulent.

…ethical transgressions have affected hundreds of thousands of foreclosures.

Judge Schack, a trial judge sitting in the New York Supreme Court for Kings County, has repeatedly sanctioned law firms for bringing improper foreclosure suits when he has independently discovered the inadequacy of the plaintiffs’ evidence as to defendants’ indebtedness or plaintiffs’ ownership of the note. See, e.g., Argent Mortg. Co. v. Maitland, 958 N.Y.S.2d 306 (Sup. Ct. 2010); Wells Fargo Bank v. Hunte, 910 N.Y.S.2d 409 (Sup. Ct. 2010); NetBank v. Vaughn, 841 N.Y.S.2d 827 (Sup. Ct. 2007).

By focusing on the immediate consequence of a ruling for homeowners, the courts ignore perverse incentives created by allowing banks to continue to externalize the costs of their mistakes.

…one approach—that taken by the Florida and Maine Supreme Courts—is to bend the rules of res judicata to avoid a windfall for homeowners. This approach creates few benefits and significant economic problems. In this Part, we argue that further subsidizing banks’ poor litigation practices results in deadweight loss by contributing to negative public-health outcomes and by disincentivizing banks from improving their servicing and litigation techniques. We also explain how granting winning homeowners “free houses” will not negatively affect the mortgage market.

…broader social subsidization of irresponsible [bank] behavior.

…prolonged foreclosure proceedings create negative social externalities, depressing surrounding homes’ resale value, reducing local governments’ tax revenues, and increasing criminal activity.44 Foreclosures also appear to have significant effects on community members’ physical and mental health, and correlate with increased rates of depression, anxiety, suicide, cardiovascular disease, and emergency-care treatment.

…although judges have expressed concern about homeowner windfalls, the alternative creates a windfall for banks that cut corners in managing and prosecuting foreclosures. The risk and costs of losing foreclosures should already be internalized in the price of current mortgages. Empirical studies suggest that greater protection for mortgagors historically corresponds to slightly higher mortgage rates among lenders. These studies indicate that lenders adjust the price of mortgages based on what they anticipate the cost, and not just the likelihood, of foreclosures will be.

 

32 Responses

  1. The defendants are held to a savvy set of improprieties and unethical procedures that included creating two wires from one loan as well as estate using the stripped title as a transfer and sale into trust and by substituting out the original agreements and note with purchaser seller
    ” Installment Sale Contract”.

  2. “Purported Mortgages” plural … Yes!
    Double Jepordy !!! Absolutely !!!-

  3. In doing the PPM securities issuers were allowed to construct a New York indenture holding fractional shares of the estate transferred and conveyed irrevocably into trust
    Therefore Plaintiff alleges facts establishing a basis for a claim for facts constituting ground for rescission of underlying transaction making the instrument voidable and for exemplary damages,
    Whereas the defendant claims are for a transferred asset, the Plaintiffs loan, sold on or about “date of closing” for value.
    The defendant knew at the time of making the the transfer that the “purported mortgages” was not enforceable.
    Defendant made the transfer with the intent to defraud Plaintiff.

  4. Aceshigh. … Probate perhaps,

  5. Defendant made the transfer with the intent to defraud the plaintiff,
    Defendant knew at the time of transfer the contract was not enforceable.

  6. Plaintiff as one half of the community property,

    Planning the trust while already married has the effect of dividing assets.

    *If done without the spouses consent … It is fraudulent transfer,*

    So do I enforce the contract or sue my spouse and a few legal incompitent eagles for Malpractice ?

    His Attorn ey ment
    Her Attorn ey

  7. Was that helpful?

  8. Enforce the Contract
    Where is the breech?

    Contract Law …. Attack the Contract !

  9. So even if the documents are signed (in anticipation of closing and receiving money from the lender) THE INSTRUCTIONS ARE NEVER COMPLETED.
    The D.O. T. IS NOT AUTHORIZED TO BE DELIVERED
    AND
    IS NEVER CONSTRUCTIVELY DELIVERED,

    ADMINISTRATIVE DUTIES. No SOL

    Contract Law 101

  10. Untested
    Issues with beneficiaries in State Trust Laws

  11. Can a remainderman get a HELOC in which the Grantors hold a Life Estate?

    YES

    The Problem with Life Estate Deeds …..
    A Lender who makes a loan to a remainderman can not foreclose for full market value until the …..
    END OF THE LIFE ESTATE.

    They pre approve KC for HELOC with 80/20 equity.
    That’s much moola …. Very Tempting Indeed!
    Let Me Think about it…….
    NOPE!

    Many Blessings to All

  12. After a Life Estate Deed is signed and recorded, the Life Tenant is No longer able to transfer, sell or mortgage the property without joinder of the remainderman.

  13. We have shown proof of our ability to payoff ….
    But … They wouldn’t give me one … nor would they show proof of claim.
    No proof…move for SJ. 😮

    The lenders of remaindermen can not foreclose full market value until the end of the Life Estate.

    Unless…HOA or Taxes are not paid giving rise to standing.
    Can you redeem /tender after 8 years?

    Administrative Procedure as Executor of Estate
    If you can’t beat them … Join them.

  14. All comments so far have missed the major point of the article…

    P.3 “…Courts are therefore quick to sidestep well-established principles of res judicata in favor of ad hoc measures meant to protect banks against the specter of “free houses.”

    Res Judicata / Double Jeopardy is a major principle of law that has stood in all other aspects of law, but, is failing/ignored in FC.

    Original link here…
    http://www.yalelawjournal.org/comment/in-defense-of-free-houses

  15. I didnt take that as picking either,and SC you have many good things to say and understand the issues well,but the fact of the matter is judges have been bought and paid for by guess who?Look at the pension fund holdings they are public record for all to see,then you will see not only MBS and Bank stocks but the companies who have “Above the law status like Time Warner,AT&T,Verizon to name a few.

    Do you think tese cunts will rule in anyones favor if it takes money out of their retirement funds?

  16. To answer honestly Dwight .. No.
    Do I know what I am talking about ? … Mostly.

    Do I have experience in law? … No,
    Do I give Legal advice ? … Heavens No! I don’t look good in stripes,

    Did I Pay to not Attorn (ey )?… Sure I Did!
    Is that offensive to you some how?

    Why do you insist on taking pokes at me?
    Or anyone else who tried to help you?
    You could just ignore us. Right?

    You insisted on dolng it your way, how is you not getting the result you wanted our fault?

    I don’t have all the answers but I ‘m an Ole’ Pro at asking Questions.

  17. I’m not a lawyer, but i MUST add a point no one is saying.
    These homeowners have typically PAID SEVERAL HUNDRED THOUSAND DOLLARS in REAL MONEY (real payments) the homeowners EARNED VIA YEARS OF THEIR EARNED INCOME FORM THEIR LABOR.
    Considering….
    the judge’s opinions resist “giving free” awards, as their only legitimate reason to rule WHICH IS A MORAL BASED DECISION…

    *IF THE JUDGES VALUED “WHERE” THE REAL DOLLARS “CORRECTLY” WENT — THE HOMEOWNER WOULDVE ALREADY WON. Therefore when the judges attempt to fallback on the morality of their options, the homeowners advocates need to FIGHT FOR THE RIGHTS OF YEARS OF LABOR & PAYING HUNDREDS OF THOUSANDS OF DOLLARS which was the HOMEOWNERS COST (interest) to “qualify” to even be able to be in position for this allegedly “free” house.

    The homeowners are there because they EARNED the right to be in that position. If “EARNING” is actually going to be the basis for the judges decision…then you MUST discuss which party REALLY earned & lost; and WHAT they lose.

    Even if that doesnt feel legally proper focus — ITS THE FOCUS THESE JUDGES ARE USING TO RULE.

    Please consider this perspective (the judges are.)

  18. I’m nit a lawyer, and probably not saying this correctly, but i MUST add a point no one is saying.
    These homeowners have typically PAID SEVERAL HUNDRED THOUSAND DOLLARS in REAL MONEY (real payments) the homeowners EARNED VIA YEARS OF THEIR EARNED INCOME FORM THEIR LABOR.
    Considering….
    the judge’s opinions resist “giving free” awards, as their only legitimate reason to rule WHICH IS A MORAL BASED DECISION…

    *IF THE JUDGES VALUED “WHERE” THE REAL DOLLARS “CORRECTLY” WENT — THE HOMEOWNER WOULDVE ALREADY WON. Therefore when the judges attempt to fallback on the morality of their options, the homeowners advocates need to FIGHT FOR THE RIGHTS OF YEARS OF LABOR & PAYING HUNDREDS OF THOUSANDS OF DOLLARS which was the HOMEOWNERS COST (interest) to “qualify” to even be able to be in position for this allegedly “free” house.

    The homeowners are there because they EARNED the right to be in that position.

    If “EARNING” is actually going to be the basis for the judges decision…then you MUST discuss which party REALLY earned & lost; and WHAT they lose.

    Even if that doesnt feel legally proper focus — ITS THE FOCUS THESE JUDGES ARE USING TO RULE.

    Please consider this perspective (the judges are.)

  19. Why in tarnations are the lawsuits filed for Abandonment ?
    State Your Claim in Public.

    Plaintiff
    KC as One Half the Estate, the Plaintiffs Note.

  20. Get of the blame game kick!
    If the Trusts weird revoked in 2012 as you state……
    What happens to the Trustors assets deposited into trust?
    Unclaimed property escheats.

  21. Wells sent my copies of the closing docs and on the HUD-1 it states that they paidChase 134k on my second and I paid it in full 2 months prior,have the canceled checks and statement showing a zero balance,so they are screwing everyone and courts dont care.

    The so called trust certificates were revoked in early 2012 yet some how thats the time that the judges pension funds magically and illegally got em.
    They also have page after page of fannie,freddie and ginne,salley.

    IMO its an entire corrupt undertaking starting at the top of our ,not really its theirs now government,its bigger than big and the private sector is the enemy.
    I will put a 1000. on the Obama fam being nothing more than actors,even the kids.

  22. Taxes, Insurance, (HOA if applicable) & Maintain.

  23. Wells is unsecured…….
    Remainderman debt is always unsecured, until the Estate is dissolved .
    Then and only then may the Remainderman debt can attach to the
    Settler/Trustor assets held in Irrevcoble Living Trust.

    Pay those Taxes!

  24. Trusts owner or owners are bk
    The Estate bk

    They paid how much extra at closing?
    Did the settlers/trustors agree to that?

    Is there a trust created in a mortgage?

  25. I have been through 3 foreclosures (all on the same house) and one quiet title over a period of seven years. My attorney for the quiet title and the third foreclosure didn’t know much and I lost. My husband is dead in part because the banks took all our money and when he got sick we had no money to get a doctor. Now the house is just sitting there empty, broken into by Black Knight or whoever and destroying the value of all the homes in the neighborhood. The banks certainly destroyed our lives. Total devastation. It is like we are living in a communist country with no rule of law. BUT I am a Christian and know that in the end, I win and they lose.

  26. Judges have historically been hesitant to outright cancel a mortgage encumbrance, awarding a delinquent homeowner with what they consider to be a “free house.” Judge Schack in Brooklyn is one of a handful of judges brave enough to actually grant this type of relief in appropriate circumstances. The New Jersey judiciary has been more conservative and bank friendly. There was recently a showdown on this topic in NJ Bankruptcy Court for the District of New Jersey focused on the Statute of Limitations having run in In Re Washington – http://www.fazziolaw.com/video/foreclosure-statute-of-limitations-how-will-judges-react-.cfm. The homeowner ultimately lost in the Appellate Courts, albeit, in what I believe to be a questionable decision that is likely to eventually be overruled.

    As Judge Schack and the Yale article point out, there are “externalities” that result from failing to disincentivize bank misdeeds. To use an appropriate analogy, failure to judicially enforce the rules of the road leads to speeding, careless driving, and ultimately catastrophic wrecks. In the foreclosure arena, these are wrecks that could have been avoided. Wrecks that kill or seriously injure innocent homeowners.

    Too frequently, it is the homeowners who have followed the rules of the road and who have fallen behind on their mortgages due to the bank created economic meltdown of 2008 and 2009. Having fallen behind, homeowners invariably try to modify or rehabilitate their loans once they get back on their feet. But, it is too often the case that banks fail to even adhere to the most basic lender and servicer guidelines imposed under Regulation X and Regulation Z of Dodd Frank, to the effect that Loan Servicers make a pretty penny giving homeowners the run-around for years. While Loan Servicers today do much better, it is adding insult to injury to take someone who perhaps had a predatory loan to start with, bought up by a string of lenders and pools who have little interest in loss mitigation, and then to defraud then and mislead them in the loss mitigation process to boot. Many times modifying the loan becomes much more challenging if a Loan Servicer doesn’t provide meaningful loss mitigation.

    The Yale article talks about the negative economic and psychological effects on homeowners and their families facing foreclosure. One can argue that forfeiture of the right for a bank to foreclose is sometimes justified (particularly a vulture lender sweeping in to buy-up a delinquent mortgage). One can argue from a public policy perspective that consumer protection laws should either be given teeth or should not be written into law. Either we are serious about hemming in bank overreaching, or we are not. But, creating rules for banks to follow, and then relaxing them every time the rules are ignored or broken, at the end of the day, is tantamount to lawlessness.

    Judicial attitudes to appear to be softening to a degree, and judges in New Jersey have become willing to cancel a mortgage encumbrance and grant a “Quiet Title” action in more limited circumstances, perhaps signaling a willingness to provide true “Quiet Title” action in an appropriate case on the right set of facts. http://www.fazziolaw.com/library/quite-ttitle-action-upheld-on-claim-of-defective-assignment.cfm

    You can read more about recent developments in New Jersey and New York foreclosure law at the document library at http://www.fazziolaw.com.

  27. Judges are getting huge dollars from banks acting as though they are the lender,my case dismissed twice before discovery and I have more than ample evidence.
    In writing Wells Fargo admits to not owning the loan,then sites the so called owner and trust,owner is BK and list WF as Unsecured Non Priority Creditor,they have since been liquidated and trusts pulled/Revoked from trading by the SEC.

    They will forge and create whatever documents they need so that blows #1 as well as #2,yet the judge has the revoked trust in her pension fund holdings.
    She goes on to stick me with 20k in the escrow companies lawyer fees,paid my first lawyer 23k to lie and move my case to this judge intentionally.
    On my 5th lawyer,in BK and wellls fargo just made my payment 6000.per month instead of the 3600,it was after the 10 years of interest only = almost 400k,and I never even met this women.
    This will only get worse,Obama or no Obama they see where the easiest place to get untold wealth is located and thats the masses of lazy,uninformed Americans that cant take an hour out of their day to organize.
    WF also says they paid an extra 134k at the closing and they did not and cant prove it but the judge says that is a dif issue,duh.

  28. There is a growing recognition among the judiciary that there are situations in which a mortgage may not be enforced. It is far more common for the Court to cancel a mortgage that has been settled than one in the midst of an active foreclosure. You can read more about one such case in New Jersey at http://www.fazziolaw.comhttp://www.fazziolaw.com/library/quite-ttitle-action-upheld-on-claim-of-defective-assignment.cfm

  29. UZA, re: answer to your question.
    We can only Pray.

  30. Reblogged this on UZA – people's courts, forums, & tribunals and commented:
    They are getting closer to the root of the problem; the question is, will it be soon enough? in peace

  31. It appears that judges and courts think it is ok for a bank or servicer to get a free house. None of the notes have proper endorsements to anything. Do paper trail.

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