THE GREAT DESTABILIZATION OF US PROPERTY RIGHTS AND THE "ELECTION" OF 2010

For purposes of this blog post let us assume that the election tomorrow is irrelevant. Let's assume that whether the Democrats win or the Republicans win, big money definitely wins--and they are perfectly hedged insofar as election outcomes are concerned. Let us further assume that the use of money to influence elections is only one channel by which big money wins in America. Let's assume that jobs, revolving doors and social affinity all play a role in cognitive capture as well as raw economic power.

Based upon the forgoing, I posit that shortly after the election the lame duck Congress will cobble together some bill (which President Obama will sign) that attempts to protect the bankers from MERS Madness, Robo-signed affidavits, mortgage bond putbacks and lost notes. I am not the first to so argue: John Carney of CNBC brazenly argues that "The politicians will not let the financial stability of the largest bank in the nation to be threatened by contractual rights." So now the working assumption is the megabanks are too big to enter into enforceable contracts? Too big to bother with proving their claims in a court of law? We should apparently just let banks file whatever paperwork they deem appropriate and then seize whatever property they want? Not even a completely runaway Congress can go that far.

What would such a bill look like? Almost certainly the bill will give huge windfall benefits to the megabanks and create huge costs down the road for the vast majority of the 99.9 percent of the population that does not occupy the executive suites of Wall Street. Yet, even that will not be enough to rescue the megabanks now. Here is why:

i) The bill would have to legalize, ex post, a huge number of illegal foreclosures. Obtaining an eviction based upon a fraudulent affidavit is illegal, and probably constitutes perjury, consumer fraud, mail fraud, wire fraud, and racketeering. Such misconduct constitutes sanctionable conduct in a court of law and may give rise to civil and criminal causes of action. Moreover, the victims of this misconduct may now have rights to reclaim their homes, pending the banks' ability to exercise lawful rights in a lawful manner. So how could Congress put this rather messy toothpaste back in the tube? They would have to give federal exemptions to fraud, perjury, mail fraud, wire fraud, racketeering and court levied sanctions. They would have to extinguish state recognized property claims of evicted homeowners and in order to make it more profitable going forward to foreclose, they would have to approve a Kafkaesque judicial process for foreclosures that would make a mockery of the rule of law. Would Congress and the President really have the audacity to undermine property and contract rights in a such an unprecedented and pervasive manner? Would even a lame duck Congress go to these extremes?

ii) Consider MERS. MERS has carved-out a legal status that is incoherent to all but (perhaps) itself. MERS does not hold the notes to underlying notes so it cannot foreclose. To fix this Congress would need to change basic property law to provide that a mere mortgage "nominee" can foreclose with no beneficial interest in the underlying note. Then there is the problem that MERS has no beneficial interest in the mortgage. As such it cannot transfer any rights. Thus, it appears that Congress would have to empower a non-beneficial "holder" of the mortgage to foreclose or transfer rights it does not have. This would require deep federal legislative disruption of long-standing state property rights and theory. Indeed, the idea that a mortgage that is assigned without the note is "nullity" is rooted in an 1872 US Supreme Court decision, Carpenter v. Longan. The idea is simply that the mortgage and note should be held by a unified plaintiff with the power to achieve just one recovery.

And if Congress wants to empower this legal ghost to play a central role in our system of tracking, prioritizing and recording property rights, it would need to answer difficult questions. For example, is the federal government willing to guarantee the perpetual existence of MERS? That is precisely what would be needed for a private mortgage registry to track and prioritize property claims on a permanent basis. Is the federal government going to mandate that MERS have the power and obligation to release mortgages when loans are repaid years down the road? Right now, if MERS is mortgagee it is unclear to say the least whether they can release mortgages if they are beneficially owned by others. What economic incentives does MERS have to release mortgages and record the release so that sales may proceed without the cloud preexisting mortgages. And, when this private actor neglects its duties to get tracking right, what recourse do victims have? Simply stated, it is unclear how Congress could legitimize MERS without throwing our entire system of property rights into chaos.

iii) Lost notes. Under the UCC mortgage notes are treated as negotiable instruments. That means like a check, you need the original to get paid. Is Congress really prepared to repeal the UCC insofar as the megabanks and lost notes are concerned? This would expose borrowers to the prospect that they could get sued by a megabank claiming the note is lost, and then get sued again when another holder in due course shows up with the note. Frankly, from a legal point of view, if Congress can change the law of negotiable instruments to save their precious megabanks, they can simply confiscate all retirement assets and hand them over to the banks. That is the essential meaning of lawlessness, folks, it is living in a society where everything is up for grabs at the behest of those holding the most power.

For Congress to jump in and fix these deep-seated legal issues would require it to "bulldoze" on a wholesale basis longstanding state law from contracts to property to negotiable instruments. It would also shred the last semblance of the rule of law in our economy, and thereby doom the US to a second or third world economy.

Certainly the wholesale preemption of state law and retroactive modification of contract and property rights would trigger a major constitutional challenge. It is hard to imagine that the Supreme Court would approve.

But, just in case: when you vote tomorrow, vote for the candidate most likely to hold the banks to account under law, and most likely to impose the Dodd-Frank Orderly Liquidation Authority. That may require thinking outside of the box.