Gavin R. Putland,  BE PhD

Monday, February 25, 2008 (Comment)

Can you stop paying the mortgage and keep the house?

As falling U.S. home prices leave mortgage borrowers owing more than their homes are worth, borrowers are encouraged to stop paying the mortgage, move out of the house, and send the keys to the bank ("jingle mail"). That much is well known. But, as this Bloomberg story explains, the practice of selling and reselling mortgage loans, packaging them into securities and selling them again, and so forth, is enabling some borrowers to stop paying their mortgages and keep their homes, because nobody can prove to whom the money is owed. (Jingle Bells?) Presumably, if the borrowers can stay in the homes long enough, they eventually acquire ownership through squatting laws. (Jingle all the way?)

Defaulting borrowers don't need to be dishonest when resisting foreclosure. They only need to say: "I know I owe money to someone. But if I no longer owe it to the lender from whom I borrowed it, and if the present claimant doesn't have the paperwork for it, then I have no way of knowing to whom I owe it, and neither does the court." And that's the truth. But the borrower needs to be assertive. If the purported creditor pretends to have lost the mortgage note or offers a mere copy of it, and if the borrower doesn't question the claim, the court will rubber-stamp it. The borrower also needs to keep paying the property taxes, lest the government start separate foreclosure proceedings.

Of course, thanks to the alchemy of fractional-reserve banking, the money that is not returned to banks by stay-put defaulting borrowers will have the usual 12-times multiplier for the reduction in the banks' capacity to make further loans. The credit squeeze just got tighter.

[Edited February 26, 2008. Reformatted June 26, 2012.]

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