The Great Foreclosure Scandal

The other day The Wall Street Journal introduced me to a new word. From German, it is fremdschämen, meaning “a feeling of cringing embarrassment for the actions of others.” If only to discuss reality TV shows, English really needs NYS-Notary-Seal to adopt this one. We can spell it without the umlauts. It is pronounced something like FREM-shame-in.

I bring this up because there is a minor scandal brewing that has just inspired fremdschamen in me. The Consumerist has taken to calling it the Foreclosure Fracas. Wednesday’s update on it in The New York Times began:

The uproar over bad conduct by mortgage lenders intensified Tuesday, as lawmakers in Washington requested a federal investigation and the attorney general in Texas joined a chorus of state law enforcement figures calling for freezes on all foreclosures.

Representative Nancy Pelosi, the House speaker, and 30 other Democratic representatives from California told the Justice Department, the Federal Reserve and the comptroller of the currency that “it is time that banks are held accountable for their practices.”

In a request for an investigation into questionable foreclosure practices by lenders, the lawmakers said that “the excuses we have heard from financial institutions are simply not credible."

So what, you may ask, is the nature of the bad conduct that has inspired this intensifying uproar and calls for drastic action? The closest the Times gets to explaining that (and it is closer than many other media and blogs manage) is in the 8th and 11th paragraphs of the story.

Dubious notary practices used by banks to justify foreclosures have come under scrutiny in recent weeks as GMAC and other top lenders suspended homeowner evictions over possible improper procedures.


As banks’ foreclosure practices have come under the microscope, problems with notarizations on mortgage assignments have emerged. These documents transfer the ownership of the underlying note from one institution to another and are required for foreclosures to proceed.

Notarizations? Seriously? Some of the paperwork was not stamped properly? It is time banks were held accountable for this?

Well, yeah, basically that’s it. Bad paperwork.

To apply for a foreclosure judgment, a bank needs to submit an affidavit saying that it deserves to foreclose. Only natural persons can make an affidavit, so these are signed by a mid-level bank employee who, as a matter of form, states that he has personal knowledge of the case from reading the voluminous paperwork involved. Given that the same employee typically makes hundreds or even thousands of such affidavits a month, it ought to surprise nobody that he does not, in fact, have any personal knowledge of the case nor should it be surprising that the notarizations of those affidavits are not always done properly.

I am a great believer in the rule of law. So shame on the banks for cutting corners. But you can hardly blame them. This is a creaky Nineteenth Century system being applied to a massive Twenty First Century problem.

Moreover, it has not been alleged that there is anything substantively wrong with the foreclosure filings, only that the banks failed to say mother-may-I once or twice. Any reasonable person would assume that the ancient legal principle of “no harm, no foul” would apply here.

And, of course, this scandal has been going on for at least a few years without any furor. So why is it blowing up now? Why have California attorney general Jerry Brown and Connecticut attorney general Richard Blumenthal both called for a temporary halt to foreclosures in their states? Here is a hint: Brown is running for governor and Blumenthal hopes to become a senator.

Fremdschamen does not kick in for me just because a bunch of politicians cravenly seize on a fairly flimsy excuse to attack foreclosing banks in the weeks before an election. Fish gotta swim, etc. It starts to come over me when so many reports on this molehill-turned-mountain fail to even hint at its manufactured aspect. (Besides the Times, see, for example, Bloomberg BusinessWeek, The Wall Street Journal, and The Consumerist.)

And then cringing embarrassment fully arrived this morning. The Times piece from Wednesday had told us that

The Ohio secretary of state, Jennifer Brunner, suggested in a telephone interview on Tuesday that a bill passed by Congress last week about notarizations could facilitate foreclosure fraud.

The bill she referred to, obscure until that moment, had passed the house on a voice vote in April and the senate unanimously last Monday. It had been a pet project of Rep. Robert Aderholt (R-AL) for at least five years and would simply require that states accept the validity of out-of-state notarizations if they were valid in their home state.

Unlike the President, I have never been employed as a professor of constitutional law, but it seems to be that this ought to be the rule already. The phrase “full faith and credit clause” comes to mind. A state shouldn’t be able to decide that another state’s notarizations aren’t good enough, any more than it can decide another state’s drivers licenses or divorces are not valid.

This morning comes the news that the legal scholar at the helm of our great nation has vetoed the bill. It is his administration’s first veto.

And that is fremdschamen. Use it in a sentence today.

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