Banking Law

One of the perverse benefits (which a sane man would consider a curse) of writing this blog is that I get to interact with tin foil hat wearers of all stripes, from throughout this spinning globe I like to call "Planet Earth." They sing their sad songs of woe, and sometimes, right before they're swept away in a river of their own tears, they humbly beseech me to alert the world to some heinous injustice being perpetrated upon the proletariat by the evil capitalist oppressors who run the mortgage lending industry. Being, as I am, a blue collar, salt-of-the-earth kind of guy, I laugh in their faces before I grind my Virginia Slim out on their eyelid. Of course, I always make sure to blow on the ash before I grind it to make certain that its temperature approximates that of the surface of the sun. I then rub my hands together while cackling maniacally: "I'll get you, my pretty, and your little dog, too!"

One such story recently wafted my way. It concerns a forgotten class of victims of the "foreclosure crisis" that threatens to bring our economy to its knees faster than a White House intern in the Oval Office with Bill Clinton. That class consists of renters of houses whose landlords have neglected to make their mortgage payments. As we all know from Sheila Bair and other consumer advocates, when that happens, lenders rush to the courthouse to foreclose so they can own the house free and clear of the lease and kick a rent-paying tenant to the curb, after which the lender sucks all the great equity out of the home, then palms the leaking shack off on some Iraq War widow and her three Down Syndrome toddlers. Why? For the sheer fun of it, that's why!

As detailed by Communist Cable Network News, poor renters like Alice Mills find themselves taking a trip through the looking glass and right into the cold, cruel world of reality.

Alice Mills signed her lease in February, thinking she would have a nice place to stay for the next year, until she could make her way into a senior citizens' community.

The corner house she found in northeast Philadelphia was small, but it was enough for the 67-year-old great-great-grandmother who lives by herself.

Then in July, Mills got a rude surprise when she came home from a hospital stay to find a sheriff's notice on the door, saying the house had been foreclosed and she must call about being evicted.

Mills says her landlord told her not to worry because he would "take care of it," so she ignored other letters and notices that came to the apartment. Not until a sheriff's deputy showed up on November 13 did Mills take the eviction notices seriously. He told her she had to be out of the house the next day.

It's always advisable to ignore a raft of "letters and notices" that are mailed to you by government officials and that tell you the grim reaper is on the way, based solely on a verbal assurance that "I'll take care of it." That way, you can cry "I never saw this coming," and remain, technically, not a liar.

As CNN admits, there is nothing illegal about any of this. The lender's mortgage lien is prior to the lease, and the landlord takes title to the home free and clear of the lease when it forecloses. Nor is the lender obligated to notify the tenant of the foreclosure.

Of course, Congress is working on legislation to alter the balance of power.

A bill that passed the U.S. House of Representatives in November may help renters in this situation. It would give tenants who must leave the property because of a foreclosure, and who have leases, up to six months to vacate after being told of the foreclosure. However, that bill would not become law until sometime next year at the earliest, if it becomes law at all.

Lenders are opposed to a law that would force them to become landlords. The Mortgage Bankers Association, an industry group, says in a statement to CNN that "it really is unfortunate that a renter, who is essentially blameless in the whole process, faces eviction if their landlord is foreclosed upon. However, forcing new requirements on lenders would be extremely burdensome as most lenders have neither the knowledge nor ability to be effective long-term landlords."

Not only would this restriction increase the cost of mortgage loans secured by non-owner-occupied single-family homes, it's likely to increase the cost of all single family residential mortgage loans, since the lender would never be certain when an owner-occupant might move out and rent the home. As we've said previously with respect to subprime lending legislative remedies, if the proposed legislation in Congress sees the light of day, it will severely reduce the availability of mortgage credit to the people who need it most. It appears that Congress intends to make it equally painful for prime borrowers and lenders.

While Alice's case is certainly a human interest story that garners sympathy, you have to wonder how big a problem this is.

No one can say how many tenants are finding themselves in this situation, according to Judith Liben, an attorney with the Massachusetts Law Reform Institute. She has been studying this issue and says it's happening in both poor and middle-class neighborhoods.

"It's a significant problem all around the country, in cities, in suburbs and in fact in some rural areas," Liben says. Higher-end neighborhoods haven't been affected as much because they have not experienced foreclosure problems to the same extent as lower- and middle-class neighborhoods.

The same consumer advocate asserts that "[n]o one can can say" how many tenants are in the same situation as Alice Mills, yet this is a "significant problem." Am I the only person who sees that the first statement undermines the second? If you can't determine how many people are affected, how can you assert that the indeterminable number is "significant"?

By all means, let's alter lenders' rights in foreclosure to potentially increase their losses and, thereby, artificially inflate the cost of credit, to address a "problem" that no one can prove is or is not sufficiently "significant" to warrant intervention by the federal government. That makes sense.