One of the great benefits of teaching college is what you learn from your students. Sometimes the lessons are new, sometimes they appear as new ways of understanding information you already have.
Recently, I served on the doctoral committee of a student who was writing her dissertation on the “Lived Experience of Foreclosure.” Her research connected a number of insights, and highlighted a number of policy issues, in a way that illuminated the interdependence of economic stability and self-worth in American culture in a way I hadn’t previously appreciated.
There weren’t many people who were willing to share their experiences with her, and the reasons for that reluctance could be inferred from the painful insights of those who did respond. In America, after all, homeownership is a cultural marker, tangible evidence of solid and responsible citizenship. Home is more than a roof over ones head or a place to live; it’s a time-honored symbol of the American Dream—and its cultural symbolism makes foreclosure an American nightmare.
Research on the effects of the mortgage default epidemic that accompanied the Great Recession has confirmed foreclosure’s more “macro level” consequences: foreclosures are a threat to neighborhood stability and community well-being; they affect predominantly the low-income and minority populations most likely to be hard-hit by economic downturns; they create an environment conducive to criminal activity and lead to disinvestment.
Those consequences are bad enough, but it is the experience of real people caught up in an economic downturn not of their making—and the lessons that can be drawn from those experiences—that can help us shape policies to minimize a repeat of the recent epidemic.
Foreclosure, it turns out, is not just a legal process triggered by an inability to pay. It is equally the consequence of a profound disconnect between the borrower and lender. That disconnect is a function of dramatic changes in banking since the days when mortgage loans were the product of face to face agreements between an officer of the bank on the corner and a long-term, well-known customer.
The purchase of local banks by ever-bigger, national ones was driven by the bankers’ belief that bigger would be better, that consolidation would permit efficiencies that would ultimately benefit both their bottom lines and their consumers. Divorcing banks from their customers was an unanticipated consequence.
That initial disconnect was exacerbated by the practice of “flipping” mortgage loans. In some cases, the borrower was barely out the door when a letter arrived informing him that his loan had been sold and would henceforth be serviced by Bank B, with whom the borrower usually had no previous relationship.
It is no longer uncommon for a mortgage to be sold several times during its term. Among the consequences of flipping is the obvious one; when the bank extending the loan doesn’t intend to keep it, there is less incentive to ensure that the borrower can repay. The growth and prevalence of inadequate and unethical underwriting standards—a scandal widely discussed in the wake of the Great Recession—is largely attributable to flipping.
This distance between the borrower and the eventual owner of the mortgage emerged over and over in the conversations with the foreclosed homeowners. In one case, the delinquent homeowner found a buyer, but couldn’t reach anyone who had the authority to approve the short sale.
Consequential as it has been, the foreclosure epidemic illustrates a problem that is far larger and more pervasive than current banking practices: America’s growing power imbalance.
Free markets require willing buyers and willing sellers, each in possession of the relevant information, and each able to walk away from a transaction if they deem it too one-sided. People who enter into such agreements are expected to live up to their terms—an expectation that most of us agree is just. Increasingly, however, the transactions to which we are party are not the result of negotiation and unforced decision-making. Instead, they are “take it or leave it” arrangements in which one party has all the power and possesses most or all of the relevant information.
In an economic world characterized by such imbalances of power, it may be time to rethink policies that operate to penalize the powerless and reward the predatory.
As usual, I have a personal connection regarding foreclosure through my daughter’s experience during the 1980’s – this is not a new problem. She had proudly purchased a nice home on the east side for herself and three daughters; she had a secure job, paid all bills on time and had a good credit rating. About 1 year later, suddenly a Marion County Sheriff appeared at her door with an eviction notice due to foreclosure. At that time, title companies were being bought out by title companies who were bought out by title companies being bought out, et al. I was helping her by researching mortagage companies while she tried tracking all of the title companies. I finally learned the original owners, from whom she bought the house, had their loan/mortgage through the VA. I managed to work my way through VA bureaucrcy to the correct department and was told that the man who had the original loan died, his wife as owner upon his death got a 2nd mortgage for $7,000 to pay funeral bills. When I asked the VA clerk why this didn’t appear during the title search she told me she was familiar with the situation. She said the she knew the title researcher missed the $7,000 2nd mortgage on the home; when I asked why the VA didn’t bring it to their attention she informed me “that isn’t our job”. So my daughter and three granddaughters were evicted from their home; her attorney found several other instances and added her loss to a class action suit involving several home owners. That was back in the 1980’s; the entire case is still lost somewhere in the world of the VA, banks, loan companies, mortgage companies, title researchers, and on down the line of buck passing. This was a deep emotional loss for my daughter as well as a financial loss as she never got one cent returned due to the laziness of one VA employee and the convoluted money-chasing home mortgage institution. Hard to accept the fact that it is even worse today but it seems at this time to be primarily – follow the money.
I believe the undermining or honesty and trust between the citizens and Government, Corporations, Banking, Medicine and Religion has been the greates lost to the American culture in the past 30 years.
It seem to track with the rise of talk radio rants and the decline of factual news media content that has impacted political decisions driving it the the extreme fringe for answers that don’t exist at the edge of anything.
JoAnn,
I used to be counsel to a title insurance company. The situation you describe with respect to your daughter is precisely the type of situation that would be covered by title insurance assuming she obtained that insurance when she did the closing, which if she mortgaged the property, certainly would be the case. (The abstractors also carry Errors and Omission insurance in case they miss something during their searches. ) If there was a problem with the timing, your daughter could have paid the $7,000 lien and then made a title insurance claim for reimbursement. (The title insurance company could then pursue the previous homeowner for the $7,000 as it was their debt that was paid.)
Searching court records for liens is not as easy as it sounds as every county in Indiana has a different system for keeping its records and many records haven’t been computerized. Even the most diligent researcher misses something every now and then. That’s why you get title insurance though to protect the buyer.
In your daughter’s case, if she mortgaged the property, she would have had title insurance, but the new lender would also have had title insurance protecting the new lien, ensuring that it was placed in the first lien position which, in the situation you describe, wouldn’t have been the case.
My daughter had paid for any and all requirements to purchase her home legally with realtor representation. The title company maze was being sued via a class action suit due to numerous illegal actions. You are very cavalier in your suggestion that a working single Mom pay the $7,000 owed to the VA by someone else for the funeral of a man my daughter did not know. She not only did not have that $7,000 but would never have been so stupid as to pay for a stranger’s 2nd mortgage and hope the title company at fault would have the scruples to repay her for their own incompetence. The numerous title companies involved obviously covered their asses well as this class action suit got lost; the VA, being a part of the federal government couldn’t be fought by a young woman struggling to raise her children and provide them with a decent home. The title companies finger-pointed and buck-passed which is why her attorney chose to include her suit in the class action rather than attempt to fight these people alone. Where is your common sense, having worked for a title company you must be aware that a home cannot be sold legally without this title insurance – it was the lack of information reported by the title researcher and the laziness of a VA employee at fault. The mass confusion regarding the title company fiasco at that time was reported frequently in the media once it was uncovered. Many, many people suffered due to these questionable, illegal – and probably deliberate – tactics.
FHA loans seem to be the ones that get sold often. When we transferred here, we bought a home but our prior home was in escrow and not closed, so we only had 3% to put down making it a FHA loan. We got two notices before we paid the first installment on the mortgage that our note had been sold to other banks. We eventually ended up with Wells Fargo and even though I wasn’t happy about that, I knew there was nothing we could do. This is the third time this has happened buying properties since I bought my first home in 1996. I admit, 3% down is low but once we closed our old property, we put the proceeds toward this mortgage in order to get of out paying PMI, Property Mortgage Insurance (on top of home owners insurance). When your mortgage is at 80% loan to value, the banks don’t seem to sell your note. Just my experience.
Now that corporations are people, we should understand them to be completely self serving vicious people without conscience. Their only goal being to pay those in their employ, who create wealth, as little as possible, sell the created wealth to customers for as much as possible, and reward disconnected share holders and executives with the difference, all of the while changing the resources that we own in common into waste to be dumped into our commonly inherited land, water, and atmosphere.
Nice neighbors? Not on your life.
We’ve taken what is probably the most effective institution in allowing cooperative skill integration of workers to serve customers for everyone’s benefit and devolved it to an economic zombie consuming us.
Having spent my career mostly working for a large company who saw itself as a force of good for customers, workers, and communities I know that the capitalism is not the culprit here. Extremism is. All of our institutions have been affected by it and have turned it from we, the people, to tools of power over us.
Is this the long prophesied collapse of capitalism?
I’d like to think not. I’d like to think of these times as a warning to responsible citizens that all of our institutions can achieve good or evil and constant diligence on the part of informed responsible people is what keeps them in our service. Apathy can be extremely costly.
Democracy and capitalism can save us. But, we can fail them too. If we do, our goose will be cooked for a long, long time.
Vote, buy, invest for the long term. Be part of a solution. Extremism wilts in the face of collective responsibility.
It *is* capitalism, Pete. Economic concentration is inevitable because of returns to scale, but with private ownership, it inevitably produces gross power imbalances.
Expropriate the banks! Set up one national bank, democratically controlled by the people. Democracy is great, but there will be no democracy under capitalism.
Maybe Steve. All economic systems have risks. To me, well regulated capitalism may be the least problematic. Like voting in a democracy, consuming and investing in a capitalist economy gives we, the people influence when we’re smart enough to use it.
Perhaps that’s the current problem.
Steve, the argument for regulated capitalism:
Nick Hanauer: Beware, fellow plutocrats, the pitchforks are coming
Sorry.
http://www.ted.com/talks/nick_hanauer_beware_fellow_plutocrats_the_pitchforks_are_coming