Not surprisingly, there's been some attempts to downplay the significance of the SF City Assessor-Recorder foreclosure audit. The attacks have come in three flavors: questions about the auditors' own background; questions about the accuracy of the report; and the "who cares, as these are just lousy deadbeats" argument. Even if we acknowledge that there is something to each of these attacks, they don't take away from the core finding of the report, which is that things are FUBAR in mortgage documentation, and that is going to inevitably result in some honest, but unfortunate homeowners being harmed.
The first attack is on the credentials and former activities of the auditors. Given the deeply compromised background of the OCC foreclosure review auditors, this is a chutzpadik attack. The sad truth is that there isn't a huge pool of people who can do this sort of audit. (Yes, takes it takes a thief and all that…)
The second attack on the audit is to point out that it doesn't get everything right. I address specific criticisms below, but it's kind of irrelevant. The issue isn't whether the audit gets things 100% correct. Instead, it's a gestalt point, namely that things are FUBAR in mortgage documentation, both on the front end (securitization) and the back end (foreclosure). Whatever quibbles one might have with the audit's methodology, it's pretty hard to deny that there aren't serious paper work problems.
If you want a "neutral" audit of the paperwork screw ups, take a look at MBS trustee exceptions reports (you can get them from servicer bankruptcies, when the trustee files a proof of claim). For the ones I've looked at, the number of exceptions (meaning paperwork problems found by the trustee) outpace the number of loans. This is on the front-end, before foreclosure, and while many of the problems are minor or don't implicate foreclosures, the trustees also weren't looking for a whole bunch of potential problems. (I would also not assume that most of the problems noted in exceptions reports were ever fixed–the expense would be prohibitive to the servicer. Query whether trustees then insisted on putbacks….)
In terms of specific problems with the SF audit Housing Wire, Paul Jackson, who has been a steadfast denier of servicing and securitization problems, argues that the audit's legal analysis is flawed because it claims that CA law requires recordaction of assignments. That's only half right. The most recent CA case on the issue, Calvo v HSBC, says that CA requires records to of mortgage assignments, but not deed of trust assignments.
There are questions about whether the CA appellate court got this right, given that California law has long held that differences in form between a mortgage and deed of trust are irrelevant. Let's assume, arguendo, that Calvo got it right. If so, Jackson's criticism is still misplaced as there's a whole separate question about whether those assignments actually happened and can be proven.
Recording has an evidentiary function; lack of recording means that banks will ahve to prove chain of title the hard way. That runs right into the PSA problem and the documentation required by UCC Article 9 (or Article 3 if the note is negotiable)–application of UCC Article 9 doesn't mean "bank wins". If anything, it just goes back to the question of whether an authenticated PSA can be produced that sufficiently identifies the loan in question. The banks couldn't do that for either loan in Ibanez. There's no reason to believe that was an exceptional case.(If it was, then why on earth the did the banks–or their lawyers–let it run up to the Massachusetts Supreme Judicial court?) The SF City Assessor-Record audit didn't look into the UCC issue, but it did show that there were transfers that didn't match the PSAs, which means that they cannot happen, so the foreclosure is being brought for a party that is not the deed of trust beneficiary. That's a real problem that is far more serious than recordation of assignments.
Jackson also criticizes the audit's findings about defects in the substitution of trustee process. He correctly points out that CA law treats a recorded substitution of trustee as conclusive evidence of the authority of the substitute trustee. I'm not sure that has any bearing when the recording was done by a party that lacked authority to do so, as the recording has to be done by the "beneficiaries under the trust deed, or their successors in interest". If record myself as substitute of trustee for Jackson's mortgage, could that possibly be valid? It's hard to imagine so.
So that brings us to attack number three–that this is just paperwork and the people who lost their homes were bums anyhow so who cares. Are we still barking up this no harm, no foul tree?
Yes, this is just paperwork. But so to is the mortgage loan itself. If signatures don't matter, then what about the borrower's signature? Finance is built on an edifice of paperwork. That paperwork creates and delineates legal rights, which in turn affect the pricing of transactions, both in mortgage originations and in mortgage sales. It amazes me that shallow statements like this still have currency:
Reckless lenders who sold loans to people who didn’t qualify for the terms are one reason that home values are back to where they were a decade ago. But reckless borrowers who took those loans, making a bad bet that home values would continue soaring, are certainly another.
Yes, there were reckless borrowers, just as there were reckless lenders. But we can't possibly assume that everyone who has lost their home in foreclosure was a reckless borrower. Unemployment has no obvious connection to reckless borrowing and is a major cause of foreclosure. And lots of people who didn't borrow recklessly (and those who didn't borrow at all) have seen their home prices drop.
We might compare this to the way the debate on the death penalty has evolved. We're realizing that our criminal law system isn't perfect, and that we execute both guilty and not guilty (including innocent) people. Even if most are guilty, how much of an error rate are we willing to tolerate with the death penalty? Now losing a home isn't at all the same as losing one's life, but it is a pretty severe harm for a family.
In the end, then, the question is what sort of error rate are we willing to tolerate with foreclosures?Is it ok if 25% of foreclosures are improper? How about 10%? 5%? 1%? That would still be 50,000 improper foreclosures since 2007!
I would say that the optimal level of error is probably greater than zero, as the marginal cost of eliminating all errors is greater than the marginal harm prevented, but the contracts prof in me balks at this (and oh what a tension it has with the bankruptcy prof and claims estimation). The law has long treated the home as different, be it in property and contract (specific performance as a remedy) or in criminal law (right of defense). There is so much non-monetary value baked into the home that I'm not sure we can assume that the marginal cost of eliminating all errors will surpass the marginal harm. Be this as it may, it strongly suggests to me that foreclosure needs to be a judicial process.