NYT: ‘Chain of Title,’ by David Dayen

Book Review | Nonfiction

‘Chain of Title,’ by David Dayen

By FRANK PARTNOY - MAY 13, 2016

 

http://www.nytimes.com/2016/05/15/books/review/chain-of-title-by-david-dayen.html

CHAIN OF TITLE
How Three Ordinary Americans Uncovered Wall Street’s Great Foreclosure Fraud
By David Dayen
385 pp. The New Press. $27.95.

On Sept. 26, 2008, 11 days after the Lehman Brothers bankruptcy, I proposed in the opinion pages of The New York Times a straightforward alternative to Treasury Secretary Henry Paulson’s plan to bail out the banks. Instead of spending $700 billion to prop up complex side bets on subprime mortgage loans, the federal government could have simply bought the loans themselves. If the loans became more valuable, so would derivatives based on the loans. We could have helped both Main Street and Wall Street.

Government officials considered this idea but rejected it, and the journalist David Dayen’s gripping story of foreclosure fraud shows us why. The government couldn’t buy the loans for one simple, yet appalling, reason: No one could figure out who legally held them.

As Dayen explains in “Chain of Title,” buying a house with borrowed money has always required two main contracts. The first is the loan itself, the borrower’s promise to repay the lender. The second is the mortgage, which gives the lender a lien on a house if the borrower defaults. In the old days, the lender would keep both. But in modern markets, the lender typically passes off both the loan and the mortgage, like two hot potatoes, to another bank, and then that bank might pass them on to another, and so on. This is the process of “securitization” depicted so memorably in the movies “Inside Job” and “The Big Short.”

Both loans and mortgages require paper and ink. A loan requires an endorsement; a mortgage, an assignment. Without a wet-ink signature from a human being, neither can legally be transferred.

This signature requirement might seem outdated today, like being forced to use a card catalog to find books. In fact, in the aftermath of the financial crisis, many bankers were dismissive of the requirement, foreclosing on millions of borrowers without regard for process. But in Dayen’s view, the technicalities matter. If there isn’t clear proof of each transfer, it becomes impossible to tell who holds the hot potato, and therefore impossible to tell who has the legal right to foreclose.

Dayen follows three Florida homeowners as they discover that banks have been lying about signatures. Lisa Epstein, a nurse, learns that the bank foreclosing on her, the one at the end of the securitization daisy chain, could not prove that it had legally obtained her loan. When she challenges the bank in court, its lawyers present a document dated three months after she was served with foreclosure papers — a “poorly drafted cover-up,” Dayen writes. She meets Michael Redman, a car salesman who had a similar experience, and persuades him to publish an online guide to uncovering mortgage fraud. The two of them connect with Lynn Szymoniak, a lawyer, who investigates the signatures in her own foreclosure action and finds one with a date when the signer was actually in state prison.

Exposing those lies becomes a moral crusade. The homeowners’ stories are emotional roller coasters, which Dayen meticulously reports. He and his characters find the banks’ behavior not just indefensible but criminal. Prepare to be surprised, and angry.

Dayen skillfully narrates a slow reveal and sprinkles in some lively metaphors. Alan Greenspan “viewed regulations the way an exterminator viewed termites.” A bank pursuing foreclosure without legal signatures was “flailing away like a boxer in the dark.”

But this book is noteworthy for a more fundamental reason. A free-market system works best when people can prove they own what they think they own. Otherwise, our confidence is undermined and policy options in a crisis are limited — not to mention unfair. Banks took advantage of the fact that nobody knew who owned what. And their eagerness to cut corners precluded an idea that could have saved millions of Americans from foreclosure.

Frank Partnoy is a law and finance professor at the University of San Diego and the author, most recently, of “Wait: The Art and Science of Delay.”

A version of this review appears in print on May 15, 2016, on page BR26 of the Sunday Book Review with the headline: Bad Deeds.