Foreclosures and the Rule of Law

Charles N. Steele
Issue CCLXXIII - January 9, 2011
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The state supreme court in Massachusetts has ruled that banks must hold the proper legal title to a mortgage in order to foreclose on it. The court has just overturned two foreclosures and returned the properties to the homeowners.

Two quotes from the NYT story are especially worth noting:  

"As lenders and Wall Street firms bundled thousands of mortgage loans into securities, banks often failed to record each link in the chain of documents demonstrating ownership of a note and a property."

“The broad implication is you’ve got to dot your i’s and cross your t’s,” said Kathleen G. Cully, an expert in bankruptcy and lender regulatory law in New York. “You need a proper chain of title, and in both of these cases there was a gap in the chain.”

In other words, in their haste to invent derivatives, derivatives on derivatives, and derivatives on derivatives on derivatives, the "Masters of the Universe" frequently didn't bother to actually follow the law.  The subsequent mortgage-backed securities are just a "bill of goods," as they used to say, despite having been rated AAA by -- let's not mince words -- liars who never bothered to look at the underlying paper.

If private property rights and the rule of law are to have any meaning, it will be necessary that in every case in which this happened that goes to court, the banks lose.  It will also be necessary that they not be bailed out. 

We'll likely learn soon whether America is still a republic governed by law, or has become a kleptocracy.

This article originally appeared on the blog, a new forum for the expression of economic ideas by professors Charles Steele and Gary Wolfram of Hillsdale College.

Dr. Charles N. Steele is the Herman and Suzanne Dettwiler Chair in Economics and assistant professor at Hillsdale College in Hillsdale, Michigan. His publications include papers on the Soviet economy and economics of transition, economic growth, and institutional change.  He received his Ph.D. in economics from New York University in 1997, and has subsequently taught economics at the graduate and undergraduate levels in the People’s Republic of China (China Agricultural University), the Russian Federation (Moscow State University), Ukraine (Economics Education and Research Consortium, National University Kyiv-Mohyla Academy), and the United States (Montana State University). He has also worked as a private consultant in design and review of USDA crop insurance programs with Watts and Associates, Inc.

In addition to economics, Steele's interests include trail running, mountaineering, snowshoeing, and similar outdoor pursuits. He's completed 26 ultramarathons, ten triathlons, and is a nine times finisher of The United States' oldest 50 mile race, the Le Grizz Ultramarathon.

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