Facing forclosure? Make them produce the note.

I love this story. And the fact that the idea is spreading.

We all know about people who refinanced their mortgages into ARMs that subsequently ballooned to unaffordable proportions. Now it appears that people are figuring out how to beat the lenders at their own game: "produce the note".

See, it turns out that, in order to forclose on your house, the bank that holds the note on your house must produce the original note in court. However, due to rampant securitization of mortgages, lenders and investors did a poor job of keeping up with the paperwork. Many owners of the note on your house cannot produce the original.

Yes, its a tactic and not a solution, but if it forces lenders to stop and find another solution to forclosure, all the better. I say, more power to the homeowners. When forclosure is the only tool lenders have in this economy, where forclosed homes sit vacant and lose more money for the lender and cost other homeowners more of their home value, those lenders need to be forced to devise a better tool.

(Full disclosure: As I've said before, my family experienced first-hand the predatory practices of lenders, brokers and banks who gave bad financial advice in order to get us into an untenable financial position. Thankfully, we're naturally skinflint-y Scots and trusted our guts.)

NPR covered the "produce the note" tactic today. They do make the point that, aside from the fun Robin Hood-aspect of the practice, "produce the note" tactics could stifle one investment channel in a potential housing recovery. Thankfully, the securities lawyer they interviewed for the story, Talbott Franklin, puts the emphasis in the right place:

"My big fear," Franklin says, "is that we'll get a series of decisions, based on not fully understood facts, which will prevent securitization from going forward in the future."

Franklin doesn't blame homeowners or their lawyers for bringing the challenges. He's more critical of lenders and their attorneys for not doing a better job understanding securitized mortgages and for not taking care of important legal matters before going to court to foreclose on a home.

Right on. More blame needs to be placed on a financial sector that didn't care how these investments worked as long as they were making money. Now that they're losing money, the sector need to deal with the troublesome consequences. Too bad for them.

UPDATE: If you haven't seen it, check out MSNBC's reporting on makeshift encampments ("tent cities") popping up all over the country. (TOH to Bosh56, who says "all the people who are calling the foreclosed people losers are hating and not seeing the human condition/these losers are real people".)

A sign of economic movement in home sales

According to this report from NPR this morning, home sales in southern California were up dramatically in September.  Southern California has had one of the highest forclosure rates in the nation, so what we're seeing here is bargain shoppers getting into the market at what could now be the nadir of the mortgage meltdown.

What does this mean?  These figures are from a period before the credit freeze that spurred Congressional action and a rollercoaster DOW, so we'll have to see how buyers fared in October when there was apparently no credit to be had.  Still, with 2 weeks left in the month, credit markets are thawing and it will be interesting to see if lenders think these So. Cal. purchases are a safe enough bet.

If we're lucky, the credit freeze will have been a blip, and people who have had some money but didn't jump 2 years ago will finally be able to take the home-ownership plunge.  That will begin working the bad mortgages through the system and get home values back on an upswing.  

There is still the question of what all this means to those who were forclosed upon, some who lied in order to get financing on homes they couldn't afford in the first place, but others who were handed or encouraged to take more than they could afford.

But for the grace of God...  The other day my husband and I were recalling our first tentative peerings into the world of home ownership, contacting a mortgage broker to find out if there was anything out there we could afford.  See, this is the thing: blame the buyer all you want for getting into a bad mortgage, but most of us do not understand the ins and outs of mortgage rates, terms, and conditions.  We rely on advice from the people who are experts: bankers and mortgage brokers.  Our broker told us we could afford up to 1/2 our monthly income on a mortgage - and would be approved for it.  With no down payment.

Fortunately husband and I are skittish creatures, prone to suspicion and fear.  We said thanks but no thanks to that huge offer and took something a little more modest.  (We're liberals to the core - always thinking "conserve".)  However, many people trusted their lenders and took the plunge.  Whose fault is it that they're now drowning?