Bankruptcy

Why a Foreclosure Compensation Fund Is a Bad Idea

By Ethan Cohen-Cole

The Washington Post yesterday wrote : 

"State attorneys general and the country's biggest lenders are negotiating to create a nationwide fund to compensate borrowers who can prove they lost their home in an improper foreclosure"

The fund is being compared to the BP oil spill and other general compensation funds.

A general compensation fund is reasonable if a large, non-specific damage has occurred. In such a case, one needs some intermediary to figure out who was damaged and by how much. In the foreclosure example, we don't have generalized damage; each bank in question had the ability (and the responsibility) to evaluate each document. 

A compensation fund would validate the idea that foreclosures are necessarily an error-ridden and imprecise process; that is, that robo-signers are the way of the world. 

Do we really want to put the burden of proof on borrowers? If the note holder can't figure out ownership, how could we expect a homeowner to do it? See huffpost on this.

Anything short of holding the banks fully responsible for current legal requirements is yet another subsidy.

Full post as published by Credit Slips on November 18, 2010 (boomark / email).