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Would a U.S. Foreclosure Ban Yield ‘Catastrophic’ Consequences?

The securities industry said Monday that a nationwide ban on home foreclosures would be "catastrophic" for the U.S. Jeffrey Brown asks the Ohio attorney general and a foreclosure expert for insight.

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    Talk of a nationwide moratorium on selling foreclosed homes ran into new opposition today, as the securities industry warned against serious damage to the housing market.

    The warning came from the Securities Industry and Financial Markets Association. It said imposing a moratorium would be — quote — "catastrophic."

    Last week Bank of America, the nation's largest, acted on its own to halt foreclosures in all 50 states. The bank is an underwriter of the "NewsHour." Three other banks, Ally Financial, J.P. Morgan Chase, and PNC Financial, have imposed partial freezes in 23 states where foreclosures must be approved by a judge.

    All of the banks acted after allegations of improprieties, including so-called robo-signing, in which processors signed documents they never read.

    On Friday, Senate Majority Leader Harry read called for a federally mandated moratorium. Congressman Debbie Wasserman Schultz of Florida joined the call on Sunday.


    I think we need a combination of a freeze potentially and also we need to sit down with the banking industry and talk to them about ways in which we can help them be able to work those mortgages out, because it's absolutely imperative that we keep people in their homes.


    Some Republicans, including House Minority Whip Eric Cantor, say a moratorium would do far more harm than good.


    What you're telling people and institutions that lend money is, they do not have the protection to take the risk they need to, to extend credit so people can get a mortgage. You're going to shut down the housing industry if that's the case. Government has got to pull back.

  • WOMAN:

    Eric, you are not from a state…


    We have got to stop intervening.


    Also this weekend, White House senior adviser David Axelrod voiced his own doubts.

    DAVID AXELROD, senior White House adviser: I'm not sure about a national moratorium because there are, in fact, valid foreclosures that that — probably should go forward, and where the documentation and paperwork is proper.


    In the meantime attorneys general in as many as 40 states are expected to announce a joint investigation of foreclosures this week.

    One of the attorneys general looking into this, Richard Cordray of Ohio, joins us now. Last week, his office filed suit against GMAC Mortgage and its parent, Ally Financial, accusing the companies of filing fraudulent documents in hundreds of foreclosures. Mr. Cordray is a Democrat. He's currently running for reelection.

    Also with us is Shari Olefson, a real estate lawyer in Florida and author of "Foreclosure Nation: Mortgaging the American Dream." She represents banks in commercial foreclosures.

    RICHARD CORDRAY, I will start with you.

    Before we talk about a possible moratorium, how serious is this? And — and what kind of direct impact are you seeing on people in Ohio?

    RICHARD CORDRAY, Ohio attorney general: It's a serious problem. And it needs to be taken seriously by the financial industry. You cannot have people's private property rights being taken in the courts of this country based on case after case in which fraudulent evidence is being presented to the court.

    I mean, nobody can defend that. That's not an appropriate practice. And we want to see that that is cleaned up. And we don't want to see foreclosures where it's based on phony evidence that can't stand up to court scrutiny.


    Do you know yet whether — I know it's early and you're still looking into this, but do you know whether and how many people might have been foreclosed on who perhaps shouldn't have been? Is that what we're talking about?


    We don't know at this point. I am not asking to reopen transactions that have already occurred.

    If people have already left those homes, and the property may have been sold to innocent third parties, I don't know that it's appropriate to unwind transactions. We want to be measured in our approach.

    And I also do not necessarily favor a blanket moratorium on foreclosures. What we do think is, if foreclosures are going forward based on fraudulent evidence, those shouldn't go forward. There should be a pause, and there should be a cleaning up of that process. But foreclosures that are proper can go forward and should go forward.


    Shari Olefson, what's your reading about the seriousness and causes of the problem at this point?

    SHARI OLEFSON, real estate attorney: Well, it could be very serious, Jeffrey, because, obviously, consumer confidence has been one of the biggest problems in our real estate market. We saw what happened at the beginning of this crisis, with all the interconnectedness of — in terms of the market and reaching to Wall Street and to Main Street.

    And we can only guess what some of the impacts of a more permanent foreclosure freeze might be for the country. In terms of the volume here, I mean, it's a huge bucket. We're also including, though, a lot of foreclosures that are being properly done. And we're just sort of double-checking to see that the procedure has been done right.


    Well, what do — staying with you, Ms. Olefson, what — you think a moratorium or a freeze is probably not a good idea at this point? What is the argument against it?


    Well, it's just too big of a bucket to be looking at the whole entire nation. There are a lot of other foreclosure companies, foreclosure attorneys, and a lot other banks that have been following the procedure.

    You know, the shame in this is that, unfortunately, for a lot of Americans, this is their only contact that they will ever have with our legal system. And — and it really is not sending a good message. Clearly to have attorneys who are officers of the court not following the rules of the court is reprehensible, especially when people are losing their homes.

    On the other hand, we can't hold up everyone. I mean when we had the problem with Toyota with their brake system, we didn't stop the manufacturing of all cars. We need to figure out a way to weed out these bad apples and correct the problems, punish the people who need to be punished, which is exactly what the attorney general is seeking to do, and move forward and get these foreclosures out of our system, so we can return to a more normal market.


    Well, Mr. Cordray, what — you spoke of a pause in the process now. What does that mean? How extensive would that be and how would it work?


    Actually, I very much agree with what Shari just said.

    I think, if foreclosures are based on proper evidence, then they should go forward. But if foreclosures are based on fraudulent affidavits, nobody can defend that. If that were done in any other kind of case, both the party and the attorney would expect severe sanctions.

    I think the courts are going to have to sort this out here. We're at the beginning of our inquiry, not at the middle or the end. And we're going to have to see where the evidence leads us.

    If this is a widespread practice, those foreclosures need to be paused and cleaned up before anything can go forward. You cannot have court judgments being given on fraudulent evidence. I think everybody can agree on that.


    But, in the meantime, how do we proceed right now with foreclosures that are sitting there to go forward or not to go forward?


    I would say two things.

    First of all, the more immediate cooperation and back-and-forth sharing of information we get from the lenders and mortgage servicers, the quicker we will be able to get to the bottom of this and get it sorted out.

    The other thing I would say is, if financial institutions know that they have filed foreclosure actions and they have submitted fraudulent evidence in those cases, it would be well worth their while to sit down and think about how they can work those cases out, reach a resolution, maybe a loan mitigation to keep people in their homes, rather than going forward and seeking a court order, where the court may well have to sanction them and they may be facing severe exposure.

    So, I think that it's up to the lending institutions, as Bank of America has done, to recognize they have issues in their process, to sit down, work with the law enforcement agencies across this country, and see if we can get this sorted out quickly, so that the courts can move forward.


    Well, Shari Olefson, one of the arguments for a pause or even for a moratorium is just, how can you continue with these — with a process like this if it seems so tainted right now, if there are really hundreds of thousands of cases out there where we don't really even know whether it was a legal process? How can you continue?


    We don't. We don't know. And cleaning up is what they're doing right now, which is why it's stopped.

    You know, there are other — there are other elements that are forcing these foreclosure firms that have been improperly handling these affidavits to clean up, namely the industry itself. The title insurance underwriters will not ensure these transactions anymore.

    So, with or without attorney general investigations or, you know, foreclosure freezes and mandatory moratoriums from Washington, the industry is frozen anyway, because the title insurance underwriters have said: No. On each of these transactions, before we will ensure title again, you need to re-foreclose or show to us that these affidavits were properly filed.

    In addition, new lenders won't loan on the properties now. So, in a way, it's sort of policing itself.


    But are you worried in the meantime that the market is frozen? I mean, you're in a state where there is a lot of foreclosed homes, right, on the market? So, in the meantime, does everything stop?


    It's horrendous, what's happening now. There are buyers who are waiting to buy homes who are being told that they can't close for at least another 90 days. Even these foreclosure factories — I mean, we have to remember, with this entire crisis, no matter how thin you slice a situation, there's always two sides.

    So, these foreclosure factories that were doing these wrong things, not everyone there was doing wrong things. There were some good, honest workers who were just trying to support their families. And they have been let go. I mean, hundreds of people are losing their jobs here now because of that. So, the repercussions are significant.

    On the flip side, an interesting silver lining which I always like to try to find in these crisis, is the fact that those people who have homes for sale that are not related to the foreclosure crisis may find it easier to sell their homes, because a lot of the supply that is out there, in terms of the distressed assets, is just no longer available to be purchased for now.


    And, Mr. Cordray, finally, how concerned are you going forward here about the impact of this on the housing market itself and home prices and sales that may or may not happen in your state and around the country?


    I'm concerned.

    And that's why we're going to have an investigation. And I don't want to jump the gun on that. We will see what the evidence shows. And the quicker we get information shared back and forth, the quicker we will get a sense of the total picture.

    What's disturbing is, there appear — appears to have been a business model followed by some, not necessarily all, in which fraud was a basis for seeking orders from a court. That cannot stand. That cannot be permitted. The A.G.s didn't create this issue. The title insurance companies didn't create it. Mortgage servicers who filed phony affidavits, fraudulent affidavits in case after case have created it.

    We now have to work together to see how quickly we can clean it up and make sure that the court orders that are given are based on appropriate, sound evidence, and not based on fraud.


    All right, Richard Cordray and Shari Olefson, thank you both very much.


    Thank you.


    You're welcome.