November 16, 2010
State Action and Mortgage Foreclosures
Posted by David Zaring

The Congressional Oversight Panel has a new report out over the robo-signed foreclosures, and it has the hallmarks of the panel's work: consumer-focused, aggresively critical, and not totally reliable on the law.  I actually am not sure that a short moratorium on housing foreclosures would be such a bad thing, and that's what the report recommends, at least in between the lines of urging Treasury to take a close look at the issue (the counterargument is that it would push banks back to insolvency, if they are getting no return on their underwriting, and that's not a bad argument either).  The report's here, and here's the press release.  Here's Ted Kaufman, the Delaware senator, introducing the report, on Marketplace this morning:

Frankly, we don't know yet, what the implication will be. What we're calling on Treasury to do, really takes a hard look at this. There's a number of different things that could be a major problem. One is due process. The second is the fact that thousands of documents are being signed by people. No one knew what was really in them.

I don't know this area of the law as well as him, but we are talking about state action today in class.  And I think there's a state action problem in Kaufman's due process analysis.  The government owes you due process, and your bank usually doesn't, unless it is acting on behalf of the state, or if there's some quirk of mortgage finance laws that I don't know about.  You get whatever protections you get against the bank in your contract first and foremost, and in your state's consumer protection laws subsequent to that.  But it doesn't owe you due process. 

The COP doubles down on the due process argument in the report itself:

failure to foreclose properly - whether because the foreclosing party did not actually hold the mortgage and the note, or because robo-signing affected the homeowner's due process rights - means that the prior jhomeowner may be able to assert claims against a subsequent owner of the property.

This analysis needs a lot more explaining.  And it doesn't come in the report, other than to note in a fiootnote, that "the issues involved are highly complex areas of law."  Banks don't have to perform due process on their contracts, something that is probably a relief to every overnight repo desk on Wall Street.  And to suggest otherwise, as the COP does, seems to me to be a basic error in the application of the state action doctrine, unless they're arguing that banks are now state actors, via TARP (no way), or that, because of Shelley v. Kraemer, foreclosure actions require state action, through the order of a court (unlikely, but there, you could at least research the question).

So I don't get the legal implications that the COP is throwing around in its latest report.

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