Banks: Law Can't Bother Us
With the mortgage crisis smeared across the headlines every morning, you would think that the mortgage holders would keep their heads down. You would be wrong. The national banks are floating a new idea: they shouldn't have to obey state law when they foreclose on someone's home.
Pre-emption has been a gravy train for the national banks, insulating their credit card business from state consumer protection laws. Some banks now want another ride on the pre-emption train, claiming that they shouldn't have to follow local foreclosure laws when they take people's homes.
Tomorrow Congressmen Brad Miller (D, NC) and Steve LaTourette (R, OH) will introduce HR 5380 to make it clear that the banks have to follow the state law foreclosure laws that they have always followed. Here is the scary part: this is expected to be a close vote.
HR 5380 is a small, but smart piece of legislation. It says that if the states want to pass laws to deal with the current foreclosure crisis, then they are free to do so. In other words, this bill says that Congress may not be ready to fix the crisis, but it will at least stay out of the way so that the states can do so.
If banks don't like the state laws, they are free to fight them in the state legislatures or the state courts. They can even make constitutional arguments about takings. But Congressmen Miller and LaTourette say they can't claim that Congress gave them a free pass.
Since the founding of this country, foreclosure laws have been the special province of the state. In the same way that they set up the basic rules of property law and property transfer, states decide the terms on which people could be thrown out of their homes or off their farms by the mortgage lender. There are no federal foreclosure laws. Any mortgage holder--including a national bank or thrift--must abide by the terms of the state's foreclosure laws.
But in the past few weeks, national banks have started making a new argument: state laws are pre-empted whenever a national bank holds the mortgage, so the states can't make them follow the local rules. Pre-emption has been used successfully by the credit card companies to fight off state regulation, so now the banks want to escape local restrictions on foreclosure as well.
The scope of this claim is stunning. Because there is no federal foreclosure law, would the banks be free to do whatever they wanted? Could they simply order families out of their homes? Would federally-charted banks start buying up troubled loans from other banks, then doing their own vigilante expulsions?
And if banks can get pre-emption here, where else can they get it? Do they become a law unto themselves?
Congress has not acted swiftly to help homeowners. The bankruptcy amendments that would provide real relief to the most troubled families is stalled. But here's a step Congress can take quickly: They can tell the banks that the federal pre-emption gravy train is not taking on any new passengers.
Could Blackwater Worldwide have a new business model?
"Some do it with a pen; we do it with a gun."
May 6, 2008 9:24 PM | Reply | Permalink
Thanks for posting this, Elizabeth.
Readers: I know this isn't as sexy as the primaries, but it's really important. This is the sort of thing the will define who we are as a country in the coming years. PLEASE recommend this post.
May 6, 2008 10:09 PM | Reply | Permalink
I'm not going to have any rep to vote for soon--the important issues keep wiping them out.
May 6, 2008 10:39 PM | Reply | Permalink
I think article X of the constitution provides a sufficient legal framework for a case against pre-emption. Where would the cases come from? Right now, the highest foreclosures by number are in California. You can rule out California and alot of the West, as the Ninth Circuit is very unlikely to let the banks cases ascend. The other states with high foreclosures that could test the waters are the Ohio, Michigan, and Illinois area and Florida.
So this is no doubt a concern - banks facing foreclosures are seeking ways to mitigate their losses (why wouldn't they) - and it should be dealt with swiftly, especially in light of the current court. Based on the current high court members, it would be best if these cases never got there.
While I agree the banks should not be able to pre-empt state foreclosure law, I am not a big fan of national intervention by congress to homeowners. Some states, such as North Carolina, and some markets, such as Houston and Dallas, are actually growing, albeit slowly (as it should be). Other areas, such as Wyoming, the Dakotas, and Mississipi and Alabama, were not places that speculators went, and did not experience the rapid rise in home prices. For this reason, the states, especially California and Florida, not the Federal government, should act first here. To borrow Obama's rhetoric, we need to be as careful with interference as both lenders and borrowers were careless buying and selling homes.
Large scale interference may hold real estate prices artificially high in places where it shouldn't be and hold prices down where they should rise. This is akin to letting dot-coms that should die stay around in 2000, and holding the stock price of companies that truly make something down.
A final argument against mass national legislation is the characteristics of borrowers in the foreclosure process itself - which can vary widely by state and market. A Michigan borrower facing foreclosure is much more likely to be a middle class and low-to moderate income borrower that was laid off than a California or Florida borrower, who is more likely to be a speculator. I would argue you should aid the LTM worker much more leniently and treat the speculator to a shorter foreclosure process.
May 6, 2008 11:55 PM | Reply | Permalink
This is a states issue, not a federal concern. In fact, a federal response could muddy juridictional waters. The banks will make the case that compliance with local law represents an onerous burden when foreclosing on a bad loan. They'll argue that it requires engaging local law firms and creates complexity in managing foreclosure proceedings. They'll make the case that application of local law was fine when mortgages were local transactions, but now that mortgages are bundled and sold in global markets the local laws are antiquated and ineffective. A federal response could support the argument that there is a legitimate jurisdictional issue.
Best to let this be tested in local and state courts.
May 7, 2008 9:58 AM | Reply | Permalink
So Repugs only believe in States rights when the states do not interfere with Corporate corrutpion or abusive practices.
These decisions should be made by the states. I read that Maryland had a 15 day period when foreclosure proceedings could begin. 15 Days????? You can't get anyone on the phone to speak with in 15 days!
Anyone who votes against this in Congress needs to be voted out of office!! Yeah, I know - there's still quite a few of them.
May 7, 2008 11:50 AM | Reply | Permalink
National banks have already successfully preempted state laws that tried to avert the sub-prime crisis by enacting legislation against predatory lending in the early 2000s. Georgia, New York, New Jersey and New Mexico had followed the basic guidelines of an AARP model state statute, the Home Loan Protection Act (HLPA), which reduced the amount of credit available for lending by imposing liabilities on downstream owners of predatory loans.
Then in 2004, the Office of the Comptroller of the Currency (OCC), stepped in and claimed that the National Bank Act preempted the new state laws on the grounds that they conflicted with federal law.
I wonder if the above is where the national banks are staking their claims on preemptive foreclosures? Just because there isn't a federal law on foreclosures doesn't mean they can't find a nicely worded regulation to help them out when they need one.
May 7, 2008 1:15 PM | Reply | Permalink
Lenders are here trying a tactic that failed in California. Many coastal communities here have rent control/just cause eviction protections, which either prohibit eviction of tenants whose landlords suffered foreclosure altogether, or require that the lender pay relocation compensation to displaced tenants. Lenders have, so far unsuccessfully, argued that state law preempts local legislation. In addition, many states have enacted legislation to protect tenants in foreclosure. Having not received what they wanted from state legislatures, they're going to Congress for help.
One would expect that our Congressional representatives would be shunning these people, failing to recognize them in the hall, deleting their contact information from their cell phones, and praying that no one noticed the campaign contributions the lenders had given them. But then one would remember the tax break they gave the National Association of Home Builders (NAHB) after that organization threatened to cut off contributions if Congress wouldn't help them out.
Are we a Banana Republic yet?
May 7, 2008 1:16 PM | Reply | Permalink
Such is the trouble we have because we let the commerce clause be read too broadly when it serves our interest. Now the chickens are coming home to roost in a very big way. Federal involvement in these things is strictly unconstitutional and always has been. There is NO enumerated power in the constitution giving Congress power over this kind of stuff, so the 9th and especially 10th amendments should prevail (The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people). Isn't it way too bad that the commerce clause has been so twisted as to eviscerate this amendment?
May 7, 2008 7:25 PM | Reply | Permalink
But - but - Elizabeth, you are supporting "state's rights." You must be a racist!
Racist! Racist! Racist!
May 8, 2008 12:28 AM | Reply | Permalink