The Rest of the Story

Nowotny Interference- A chess dilemma in which two black pieces obstruct one another’s ability to protect vital squares

Most of us really don’t understand the causes, effects, or fixes of the mortgage and real estate confusion arising out of the Silly Years. Here are some things that I do understand:

The urge many people felt to buy real estate was not morally or intellectually wrong, and in fact, until a couple of years ago the smartest people we know all measured business and financial success by how much real estate one could own, even if not paid for.

The availability of money, coupled with appraisals that ignored common sense, made real estate sell for far more than it was actually worth. Money was easy because Wall Street and Washington colluded, one propelled by greed and the other by ideology, to disregard all prior rules in the industry.

Good people bought investment property and remortgaged their existing investments (and their homes) during the Silly Years for more than the property would likely be worth in a very long time, on the then-plausible belief that “values” would continue to go up.

Good people fully intend to pay the debt they create. In fact that very intent, and the long history of honest Americans doing their best to buy and maintain their homes, made mortgages an internationally irresistible investment. We know now that any investment that attractive invites world-class greed, and while Wall Street didn’t invent greed, it certainly invented new ways to make it happen, probably on the grandest scale the world has ever known.

No one could afford the cost of the assumption that all mortgages are fraudulent and therefore shouldn’t be repaid. Our whole system would crumble if there were no presumption of repayment of debt. That being so, those companies that created bad mortgages will continue right on collecting mortgages. Collection will be by means of foreclosure of mortgages, without distinction between those created by fraud or over-reaching, and those which were not.

Now we will pump trillions of dollars into mortgage markets in order to keep the very same companies and money brokers who made millions creating risky (probably also fraudulent) investments from taking down the whole world’s economy. Unfortunately if the goal is to help good people caught in the Wall Street trap, Congress can’t accomplish that just by pumping money into these same companies.

This creates the dilemma. Congress has not yet clearly expressed whether it intends to bail out just the mortgage companies that created toxic mortgages, or whether it intends also to bail out toxic mortgages. But just what is a toxic mortgage, and who will decide what one looks like? How could a court decide which mortgage is to be treated as “toxic”, arising out of corporate greed and now recompensed by the national bail-out penance, and which is a mortgage that should be paid in full, or if not, foreclosed? By what right or jurisdiction does any local court even decide that?

Part of the answer is the economic reality of the bigger dog. That is to say, in the economic world, big dogs eat little dogs unless the little dogs somehow don’t let them. Mortgage companies will foreclose, and unless owners answer lawsuits, they will be defaulted. Once defaulted, the mortgage companies will attempt to collect by selling the property, then coming to the mortgagor for the unpaid balance. I believe another cottage industry will soon arise when the mortgage companies begin to assign the unpaid mortgage balances to law firms or collection agencies that will then make additional attempts to collect from those whose property was foreclosed. The law creates a presumption that mortgage companies have those rights, as you might expect.

Every citizen has a legal right to resist a foreclosure, and in my opinion, over-leveraged loans made by National lenders, that were bailed out with Federal dollars, should be resisted and modified. Get a lawyer; any lawyer. Have your lawyer answer the foreclosure. Don’t expect to own property for nothing, don’t expect him or her to work for nothing, and don’t ask him to let you walk away from all your debt. But ask him to try to work out a deed in lieu of foreclosure, or a short sale, or any other deal that modifies the loan. Only by that process will the owner have a chance to join the list of those benefited by federal bail-out money.

If federal money doesn’t get to street level, then the only ones benefited are the ones who created the mess. To go back to my canine analogy, we can’t get federal money to ground level without each dog looking out for himself. The courts, acting on a case-by-case analysis, may be the only setting in which that can happen.

My Nowotny reference is not perfect. But courts are understandably relied upon to protect society, including its commercial expectations, in this case by assuring the predictable repayment of mortgages. They also protect the rights of citizens. That’s a balancing act that the mortgage companies have no motive to perform, and courts have no jurisdiction to perform unless owners being foreclosed answer these lawsuits and look out for themselves.