(adapted graphic, original by Will Humes via Flickr)

Part of the scheme to minimize the importance of bank foreclosure fraud is the silly claim that some homeowners are getting a free ride. Here’s an example from CNBC Secular Pastor John Carney. He describes a homeowner who is trying to stay in her house by claiming foreclosure fraud:

This doesn’t change the fact that D’Amelio is attempting to stay in a house while reneging on her obligation to repay the loan she used to buy the home. ….

None of this excuses the actions of banks that falsified affidavits, did not properly transfer mortgage notes and lien documents, forged documents, and sold shoddily securitized mortgages to investors. But the wronged party in these situations is not the defaulting borrower—it’s the investors in the banks, the courts, the buyers of the securities, and the broader American public.

Thanks Secular Pastor John, but really, there are only two issues here, and neither one of them has anything to do with your fake morality.

1. The obligation to pay the note.

2. Disposition of collateral.

If you want to make someone pay, or take their property away from them, you have to act in accordance with the law, not your Ten Commandments of Money. So let’s see where we are in the real world instead of before the altar of corporate morality.

D’Amelio owes the money. That is not the issue. As soon as someone files a lawsuit based on the promissory note, a judgment will go down against her, and the noteholder will be able to use judicial process to collect from all of her assets (less statutory exemptions). I assume, of course, that the incompetents who run banks, trusts and servicing companies can find the note, or enough evidence of its existence to give them the right to enforce it.

What about the collateral? The general rule is that all creditors should have the same right to get at your assets. If you don’t pay, each creditor can sue you and get a judgment, and the sheriff will sell your non-exempt assets to pay the judgment. One exception to the rule is that if a creditor jumps through the right hoops, including paperwork and recording, that creditor gets first call on specific assets covered by the paperwork.

The hoops for real estate are simple. The creditor needs a mortgage document that complies with state law, That usually includes signatures, notaries and recording. If the person who is entitled to enforce the mortgage changes, usually because someone else acquires the note, the new creditor must record evidence of the transfer in the right office. Not that hard. But the point is that if you don’t do it right, you don’t get to step in ahead of other creditors. You don’t get first call on the assets.

Of course, as we know, the incompetents who manage this paperwork have failed repeatedly to get their paper in order, and have resorted to fraudulent tactics to hide their incompetence.

All that means is that the general rule goes into effect, and all unsecured creditors can reach the real estate. . . .

Suppose D’Amelio owes the hospital (if Carney can invent facts, so can I) $40,000 for surgical expenses not paid by WellPoint. In that case, the hospital can sue her, put a lien on her house, sell the house, and collect what is owed to it. If she files bankruptcy, the Trustee can sell the house and divide the money up among all the unsecured creditors.

What happens to the note? If some entity can prove it has the right to enforce the note, it can sue D’Amelio, get a judgment, and execute on her house. More likely, though, D’Amelio will just file bankruptcy. In that case, the money gets divided pro rata among all the creditors including the note holder, again assuming the incompetents can prove its existence to the bankruptcy court.

The only way I can think of for a homeowner to get a free ride is if the lender can’t find the note and can’t prove that it is entitled to enforce a copy under UCC § 3-309, which is a corporate mortal sin. Other homeowners might not be pushed out as fast as creditors would like, but that isn’t because of anything the homeowner did. It is solely the result of sins of the creditors.

Perhaps Secular Pastor John can administer the sacrament of confession to them. It cleanses the corporate personhood soul.