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Am I paying for my house or the Brooklyn Bridge?

By Ethan Cohen-Cole

The foreclosure mess has raised new tough questions. We once again seem back to distributional issues. If a foreclosure is in question for a homeowner that has not been paying and a bank that has no good proof of its ownership, what should happen to the house?

1. The bank should get it because a homeowner that fails to pay should forfeit his/her collateral. Morally, why should this deadbeat get an asset for free? Particularly if the whole thing was stirred up by a lawyer. (See the WSJ article on this).

2. We should work through the mess in the courts to determine the validity of the individual case. No one should lose their home based on falsified documents. Careful determination ownership is important.

I have a new suggestion:

3. Any payments that the homeowner made to the bank, the one with no evidence of ownership, should be placed into a third party escrow account. 

The bank that has no legal proof of ownership to substantiate foreclosure probably has no legal claim on the mortgage payments that are collateralized by the house. This means the entire history of payment made to the bank.

This step may seem radical, as it would remove trillions in assets from bank balance sheets while ownership is determined. However, segregating these funds is important, can we even imagine the legal headache if a  bank goes into receivership and alternate claims to the mortgage payments emerge?

There are tens of millions of individuals that have been paying servicers of pooled mortgages (myself included), with revenues accruing to a bank that may or may not be the legal owner of the loan. Maybe I?ve been paying for the Brooklyn Bridge all along?

 

Full post as published by Credit Slips on November 15, 2010 (boomark / email).