Banks and Foreclosures

This is the first of what will undoubtedly be several posts on this topic.

If you’ve ever been to a closing for a home loan, you know that every single document is scrutinized, signed and verified to be accurate. As it should be. And if you’ve ever been to a closing where a document was out of order, you almost certainly didn’t consummate the loan.

The idea that a bank would take it on faith that the documents you supplied to them were ok is absurd. No bank would take your word on how much you make without a W-2 form, or agree that you would own the property free and clear without a title search. And they shouldn’t.

So the idea that any bank anywhere should be allowed to foreclose on a property without a complete and accurate set of documents is equally absurd. If the banks can’t process a particular foreclosure due to bad documents – or if the banking industry takes losses because of a systemic lack of proper documentation – that is too bad for the bank and/or the banking industry.

In her ridiculous article in the Atlantic (http://tinyurl.com/33gzjth), Megan McCardle says that since the end result would be the same, just let the banks ignore the requirements of proper documentation and run roughshod over homeowners. The industry won’t be able to sell all the homes that come out of foreclosure, she says. No one’s buying homes if you haven’t noticed. The title insurance industry will break down, she says. This is a multi-billion dollar segment of the insurance industry that runs single digit loss ratios year after year. It won’t go away, trust me.

Here’s an even more preposterous quote from the NYTimes:

Joseph R. Mason, a finance professor who holds the Louisiana Bankers Association chair at Louisiana State University, said that concerns about proper foreclosure documentation were overblown. At the end of the day, he said, even if the banks botched the paperwork, homeowners who didn’t make their mortgage payments still needed to be held accountable.

“You borrowed money,” he said. “You are obligated to repay it.”

So why not be obligated to repay it in full immediately? Where do you draw the line on this kind of thinking? I’ll tell you. Right at the closing table. No documents, no foreclosure. Period.