I didn’t make up that snappy new name; The Washington Post did, in calling it the largest one “in decades.” We here in California have a little different view of foreclosures than in some other states, particularly the further East you go. Here, we can pick from either what we lawyers fondly call a “Non-Judicial Foreclosure” or a “Judicial Foreclosure.” The former is something that happens via a Trustee and results in a sale, often on the steps of the County Recorder’s office or some courthouse; the latter is a lawsuit, usually seeking a deficiency judgment of dollars over and above taking back somebody’s house or other real property.
Some states, like Florida, only offer the Judicial Foreclosure route so every foreclosure has to be presided over by a Judge – Florida’s courts are so clogged with them right now that they are using a “Rocket Docket,” lawyers’ charming name for the opposite effect of ‘Justice Delayed is Justice Denied’ – it is, instead, justice at a blinding pace – hundreds of foreclosures heard by a Judge in a single court day, maybe a minute or so apiece, followed by orders resulting in formal eviction if the homeowner does not move out.
We usually only see Judicial Foreclosures on court dockets in California when times are really bad and real estate values have sunk lower than amounts financed, hence the need by some lenders to seek the additional Deficiency Judgment to make them whole and restore all the money they lent.
The new package introduced by the Obama Administration this week will be explained ad nauseum and it is very complex. A large part of it can be done by Presidential fiat, Executive Orders they call them, like the way JFK embargoed Cuba nearly 50 years ago, after first having Pierre Salinger scour cigar shops all over the Washington DC area to buy up all the Habanos that JFK truly loved, a thin Panatela, not in fashion today with 21st Century cigar aficionados who like Robustos and thick stogies to chomp on for an hour or two. True story; look it up on the Cigar Aficionado website.
The part which cannot be done by Executive Order is the tricky part which is to repeal, in essence, the federal legislation enacted a few years ago when credit card issuers’ remedies were also tightened up, which took away jurisdiction from Federal Bankruptcy Judges to modify residential, owner-occupied, home loans. Now, this package would involve legislation which Congress will have to pass in order to restore that power back to Federal Bankruptcy Judges. And, there’s where several important public policies come crashing together like those protons that are going to be raced around and collided with each other in the Large Hadron Collider in Europe, when they get the thing fixed and up and running again (as long as it does not create a Black Hole which swallows up Earth or any other small inconveniences).
When a lender makes a loan secured by real property, one of the great protections of our Constitutional system is the remedy by which the lender can take back the collateral, i.e., foreclose on the real property, if the borrower does not pay the loan back. Without this, no lender in his or her right mind would lend a dime; if you think credit markets are all frozen up now, imagine another Ice Age if this remedy did not exist and lenders could not easily exercise their rights to get paid back one way or another when their borrower defaults.
Paired against this is the impact of massive, widespread foreclosures on real estate values, neighborhoods, and society at large, particularly when our unemployed numbers are now approaching 5 million souls, and forecasts are for 8 to 8 ½% unemployment this year and maybe 9 something or even 10% next year. Maddeningly, if the current excess of foreclosures, and it really is an epidemic right now – 1 in 10 houses in Stockton is in foreclosure, for example – causes a severe drop in real estate values, as it has, then the lender’s very security for the loan is seriously jeopardized when real estate values fall, and fall hard, as they are doing – particularly when the home is what we call “Upside Down,” where the loan amount exceeds the fair market value (what a willing buyer will pay to a willing seller without coercion) of the home.
Restoring the power to Federal Bankruptcy Judges to (more jargon coming) “Cram Down” (literally, to cram down one’s throat) the lender who cannot work something out which is mutually acceptable and do-able with the Bankrupt (we call them “Debtors,” now) homeowner, would give back some needed flexibility for dealing with a real Catch-22 situation of strong public policies and interests in mortal conflict, as they are presently. The very lenders who pushed to take away the power, like Citigroup, several years ago when life was very different than now, are among those who have suggested that it be restored now, in a dazzling turnabout. That brings us to Pres. Obama’s distinction between “Those Who Played By The Rules” and “Those Who Didn’t,” a vague line in the sand, which, taken literally, would require awesome forensic work to see who really lied to get their Liars’ Loans and who didn’t, and who is a “speculator” and who isn’t. Not that being speculator is un-American or anything – our Founding Fathers, Geo. Washington prominent among them, speculated heavily in land in the late 18th Century and some became awesomely rich as a result.
And then there is the Republican opposition that can be expected in Congress. One hopes that more than a knee-jerk “no” will be involved in analyzing this most perplexing issue – it’s not easy; it’s not simple, and it doesn’t fit well into 6 o’clock news sound bites. This is really complicated stuff and we should give it all the thought and the full and fair hearing that it deserves because it is likely one of the next Congressional battles. If I had an easy answer, I would end this by offering it. I don’t.