The Morality of Requesting a Note

Arnold Kling writes A Few More Thoughts on the Foreclosure Scandal and argues that borrowers have no moral claim to request to see the note:

The “foreclosure scandal,” as I understand it, is that with securitization, the actual noteholder has changed in ways that may not have been recorded properly at the county records office. However, the identity of the noteholder is well defined in the trading systems used by mortgage securities traders.

Morally (as opposed to legally), the borrower is not really a party to this controversy. That is, the borrower did not abide by the terms of the note. The borrower has no moral claim to anything at this point.

The potential dispute is over whether the party demanding foreclosure is the rightful noteholder or not. That dispute should morally (again, not necessarily legally) be resolved among the parties that might claim ownership of the note. In theory, those parties could be getting all worked up over the documents, signatures, and so on being used in the foreclosure process. In practice, those parties are not disputing one another. The process that the industry uses for identifying ownership interests in the mortgages seems to be working, as far as the relevant parties are concerned.

However, the %&*#^ lawyers for the borrower come in and claim standing to challenge the foreclosure on the grounds that the foreclosure notice was sent by someone who has not properly documented that he is the noteholder. Legally, they may have standing to do this. Morally, they do not.

The sensible policy would be for the government to step in and legislate that borrowers have no standing to sue unless they are claiming to have complied with the terms of the note.

I think this is wrong. Let’s use a quick example. Say I lend you $8, and you have to pay me back $10 tomorrow. When tomorrow comes, I say you owe me $12. Do you have a moral claim to dispute this? Of course you do. You especially have a moral claim to dispute this if I sold your mortgage to a different person who shows up wanting $12, and you really especially have a moral claim to dispute this if I say that you owe me $12 because of a special late collection fee that I’m claiming that you didn’t realize you signed up for.  The only proper way to dispute this is to consult the document we both signed that lays out the terms of the debt, which in a mortgage is called the “note”, and that’s the idea behind the campaign “Where’s the Note?”

The note is the IOU and it has the conditions for fees and the penalties of late payments. Like a lot of our new financial market mortgage system, it works fine when things are going well. Servicers have a scale business walking payments from one end of the office to the other end of the office. When things break down, which they do in delinquency, is when they have problems. And servicers have a huge incentive to juice fees and other extra payments, and there’s well-documented evidence that extra fees are tacked on to mortgages that have fallen behind, fees that aren’t following the terms of the note.  What’s a rational person to do because consult the actual terms of the debt?

Remember people who are being foreclosed on are dealing with a financial system that has spent the last 30 years ‘innovating’ “universal default”, the special ordering of overdraft debits to maximize fees, etc. A financial system that realized how profitable it is to squeeze fees and see if customers catch or contest them. Rather than just assuming what is in the system of the servicers is correct, homeowners have a responsibility to themselves to make sure that it goes with the terms of the note.

Why?  Because the difference between a few late fees could mean the difference between being above water or below water, between qualifying or not qualifying for a short sale.  Between an outcome that works better for them and an outcome that works better for people on the other side.  This makes a big difference for people going through financial distress and who will be trying to build their lives on the other side.   There’s nothing immoral about doing simple things to watch your own balance sheet.  I mean, I’m not even asking ordinary people to be 10% as ruthless and cutthroat as the financial industry has become towards ordinary people.

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29 Responses to The Morality of Requesting a Note

  1. Andrew says:


    If I understand Prof Kling’s argument, the delinquent borrower loses any moral right to contest the just actions taken against him or her by someone with a colorable claim to enforce consequences, by virtue of the (presumably uncontested) delinquency.

    Sort of “you did the crime, so you do the time.”

    It leaves out other approaches such as modifications, short sales, or other negotiated attempts to resolve a dispute between two parties. Because the borrower failed to make all required payments on time “The borrower has no moral claim to anything at this point.” (direct quote).

    I’ll leave aside cases where payments were short literally a few cents, or went to a different bank. In any contract, if one party thinks that another hasn’t lived up to the terms of the contract, that party has the right to seek remedies, but I don’t see that the aggrieved party can say that the other party has necessarily lost any or all moral claims on the outcome.

    This speaks to a point Kevin Drum raised: any genuine attempt to loss mitigate households on any scale significant enough to put a dent in the problem of people being underwater will see immense resistance from those who regard all delinquent homeowners as pure deadbeats.

    BTW, please keep up the good work – this blog has become essential reading on this topic (and several other finance topics).

    • Donald A. Coffin says:

      How do you know the actions are just–or even legal, if the person seeking to collect cannot demonstrate either legal ownership of the note or the amount sought? This is an argument from the point of view of society (not the debtor) in seeing only legal claims enforced.

  2. ThomasL says:

    I think the case Dr. Kling is talking about is closer to this:

    You lend me $10, and I am supposed to pay you back $1/day for 12 days.

    I pay you back for the first three days, and then stop paying.

    After a day or two, you call me up and demand I pay you back the remaining $9.

    I say “prove it” and go about my business.

    Basically, he is saying that in most cases the borrowers really are behind in payments, and they know they are behind in their payments. If they had reason to suspect that they were being wrongly charged (eg, you demand I pay $20 instead of $12) then they would have a right to complain. However, they don’t really have a right to complain because the lender demanded to be paid what both parties know the lender is owed. That is a breach of good faith by the borrower (meant in the philosophical sense, not the legal one). I’m hearing lots of reports of people being foreclosed that have not made a payment in over 18 months. The borrowers must know that is OK under even the most generous loan terms.

    The only place I disagree with him is that if the note has been sold in the interim, I don’t think it is unreasonable to demand proof of current ownership of the note. Not because I am morally free of the debt (or recourse), but because it is possible I owe it not to you, but to someone else.

    • winstongator says:

      I think you mean, “The borrowers must know that is [NOT] OK under even the most generous loan terms.”

      You have hit my point. I am sympathetic to some of the homeowners, but there are many who are > 12 months delinquent, with no attempt being made to get current. They are just living there as long as possible for free. Many have described them as squatters. These people are not on the cusp of over/underwater, nor are they looking for a short-sale.

      You really need to differentiate, and to acknowledge that many banks have been pretty slow in foreclosing some egregious cases.

      One show-me-the-noter in FL hasn’t made payments in > 8 yrs “Joe Lents hasn’t made a payment on his $1.5 million mortgage since 2002”

      Granted the paperwork problems that guy is exploiting have led to real problems with foreclosures, there is a lot of abuse by delinquent homeowners going on.

      Are we really debating whether morality should enter into transactions with too-big-to-fail banks?

    • Bruce Wilder says:

      I think Kling, like most conservative libertarians, is a closet authoritarian. He’s arguing that the bank, as a established and legitimate power in the society, has rights, and (relatively poor) loser-individuals forfeit all rights when they become losers. It is not, in principle, any different from arguing that an employer has an absolute right to fire any employee for any reason at any time, and the employee should not have right, whatsoever — not even to compensation for an arbitrary termination that has significant consequences for the erstwhile employee.

      Putting aside morality for a moment, to just look at the economics and efficiency of the situation, Kling’s vision of an authoritarian relationship is bad economics, because it results in arbitrary and suboptimal outcomes. It has been a well-recognized insight of economics for some time that all contracts are necessarily incomplete; as events occur that put the relationship beyond sustainability, the parties negotiate and/or appeal to the courts.

      The right to foreclose is certainly part of the actual contract terms, but it doesn’t represent the economically desirable path of resolution in most cases. Rather, it is a gambit, that sets up the negotiation and/or court-mediated arbitration, during which terms will be settled upon, which either renew the relationship, or resolve it.

      The central problem, as Mike has outlined, elsewhere, is that the servicers are not interested in negotiating. Their incentives are to create fees, and foreclose quickly, with little regard for the interests of the actual owners of the note (the security trust) and no regard at all for the debtor.

      Kling, true to his authoritarian outlook, is, essentially, arguing that the debtor has no rights any servicer is bound to respect. This is bad economics, because it overlooks the extent to which the debtor might be able to participate in a negotiated resolution, which reduced the net economic costs to every one with an interest in the transaction — was pareto-optimal, as they say. Such a Pareto-optimal outcome is only feasible, if the debtor has a right and power to force negotiations. Without such a right, the servicer is an arbitrary power, which will choose a pareto-suboptimal outcome, which is, nevertheless, good for the servicer. The debtor will lose, and, in all probability, so will the actual note-holder.

      Only by allowing the debtor the right to insist on, “Show Me the Note”, will negotiations occur, which might get closer to a Pareto-optimal outcome. Legally, it may be the only way to 1.) force servicers to devote adequate resources and attention to their responsibility; 2.) get the actual note-holder into the negotiations.

      This last may be critically important, because right now we just see the debtors being victimized, but the actual note-holders, the security trusts and their bond holders, are passive principals, whose agents — the servicers — are out of control. By demanding to see the note, the debtors are demanding that the actual, beneficial noteholder be identified, as an interested party, a party, which will not benefit from many foreclosures.

      The economics of the situation demand that only those foreclosures take place, which make sense economically. Letting the servicers make the choice arbitrarily and administratively, without any kind of “market process”, is as grossly inefficient as any Soviet 5-year Plan, and for the same basic reason.

      • DOM says:

        Absolutely right. It is almost comical to see the sudden concern of morality on the part of the financial industry. When times are good for them it’s all “caveat emptor,” when things go wrong they shed crocodile tears. Any one who has dealt with these issues over the last ten years knows that the only reason – the only reason – a financial entity does anything, whether it’s modify a loan, settle a lawsuit, or default on its own obligations, is driven solely by the bottom line, morality be dammed. If a homeowner believes a strategic default is in his or her best interest, it is actually to the benefit of society that the problem be dealt with as efficiently as possible, and at the least loss for ALL stakeholders. A rush to foreclose, hiding all the facts, does not accomplish this.

    • Donald A. Coffin says:

      The point is you didn’t call me up, you took legal action to collect the debt, without proving that I owed it, that I owed it to you, or how much the debt is. Society has an interest is seeing only legal and valid claims pressed. That’s what protects the rights of the debtor, and of the rest of us.

  3. standup says:

    what do “morals” have to do with it?

    no, seriously. Why does this argument even deserve a response? This isn’t a dispute about the application of some shibboleth of the courts of equity, where the doctrine of unclean hands might matter. It’s not a question about whether withholding a payment and squatting in the house until they kick you out will make baby Jesus cry.

    It’s ludicrous to suggest that the law requires persons to exhibit a subjective quality to their behavior before allowing them to exercise their legal rights.

    Look, it’s simple. For every one of these properties,either the banksters have a valid note, or they don’t. If they don’t, it’s their own goddamn fault and no one — NO ONE — should feel the least bit of guilt about screwing them to the fullest extent of the law.

    • Russ says:

      Kling is so fatuous, his argument reads like a parody of the double standard of how corporations allegedly have zero moral responsibilities but only financial ones while the housedebtore is supposed to adhere to all these standards of “morality”.

      But yes, it’s absurd on its face. On the contrary, it’s immoral not to be every bit as scorched-earth ruthless toward the FIRE sector as that criminal sector is toward the people.

      These criminals have no moral right to exist, let alone not be challenged on each and every point.

  4. F. Blair says:

    “The only proper way to dispute this is to consult the document we both signed that lays out the terms of the debt, which in a mortgage is called the “note”, and that’s the idea behind the campaign “Where’s the Note?””

    This is not the idea behind the “Where’s the Note?” campaign. The “Where’s the Note?” campaign is a PR campaign designed to put pressure on the banks by exposing their back-office problems, in the hope of forcing them into large-scale mortgage modifications. The people behind it are not primarily interested in protecting the small number of people who are current on their mortgages but are getting fucked over by servicer incompetence. They’re interested in helping those people who are delinquent on their mortgages but still think they should be allowed to stay in their homes.

  5. robk says:

    When did morality suddenly become a staple of the finance business?

    “Greed is good”

  6. lark says:

    It’s grimly hilarious that the same conservatives that would go to bat for property rights in other circumstance, and solemnly declare that they were fundamental to our way of life, can argue for disregarding such a basic principle of our system: property rights as expressed in the rule of law.

    Only a profoundly pro-rich ideology could explain such peculiar behavior.

  7. R. Blair says:

    The key to Kling’s assertion is the phrase “as I understand it”, which actually means “as I will now deliberately misconstrue it to make an irrelevant point”. The problem, of course, is that the identities of the noteholders are in no way “well defined in the trading systems used by mortgage securities traders”. (The idea that mortgage securities traders kept scrupulous records is beyond risible.) And the “scandal” arose from various revelations of invalid affidavits, forged documents, and mistaken attempts to wrest houses from legitimate owners. As “lark” notes, there was a time when conservatives regarded property rights and the laws that protected them as the bedrock of our capitalist system – but that time seems to have ended a few weeks ago.

  8. Arnold Kling says:

    If there is a dispute about whether the borrower is in compliance with the terms of the note, the borrower should be able to see the note. If you think that the borrower, even though clearly is in default, is entitled to see the note because “the law is the law,” that is fine, but then I think we should never have gone down the road of securitization in the first place.

    I am not out to help banks foreclose on innocent borrowers. I do not think that your hypothetical example is fair to what I was trying to say.

    • R. Blair says:

      I can’t respond to what you were trying to say, only to what you actually did say. You mischaracterized the “scandal” as a matter of county-level record-keeping and implied that the trail of ownership was somehow clearly visible in the “trading systems” used by mortgage bond traders. But that simply is not the case. And, yes, debtors have the right to see the note that validates their debt – otherwise, how can you be so sure that they are “clearly” in default? (See the FDCPA.)

      However, I may agree with you on one point – we should never have gone down the road of securitization, at least not with the pedal to the metal and no speed limit.

    • Donald A. Coffin says:

      How do you demonstrate that the borrower is “clearly in default” *without* presenting evidence that the debt is owed to you and evidence of the amount (and deliquency) of the debt? Isn’t it in society’s interest that *creditors* have some responsibility here?

    • Patrick E. says:

      Well, “the law is the law,” and the law is that if a court is going to enforce a contract (e.g., a Note), it has to know what the terms of that contract is. That’s what the note is.

      If you lose the note, you lose the ability to enforce that contract. I don’t think that’s such a hard concept to get behind.

  9. Donald A. Coffin says:

    What strikes me is that Kling seems to dismiss any moral obligation on the part of the person/entity trying to collect the debt/enforce the loan agreement. Near as I can understnad his position, X owes Y a sum of money. (Y may not, and in the case of a mortgage these days, generally is not, the original lender.) Y has reason to believe X has defaulted and demands payment. But does not Y have a moral obligation to act within the law? That is, does not Y have a moral, as well as a legal, obligation, in asserting Y’s right to payment, to present evidence that the amount claimed is in fact the amount owed? Else how do we have assurance, as a society, that only valid claims will be pressed? And, if Y cannot produce evidence of the amount owed, why should we accept Y’s claims?

  10. Donald A. Coffin says:

    Let me emphasize that my argument is not from the point of view of a borrower, in default or not. Its from the point of view of a society that has an interest is seeing only valid claims pressed or accepted.

  11. jwg says:

    Whether or not the borrower is behind on their payments is one, and only one issue that needs to be resolved before foreclosure, I’m not sure why some people think ownership of the mortgage is irrelevant.

    Imagine this scenario:
    I obtain $100K mortgage from Bank A. Become delinquent. Bank A begins foreclosure. I am able to sell home for $90K and pay off Bank A. Bank A then goes bankrupt.

    Turns out, Bank A sold Bank B the mortage before commencing foreclosure. I was not allowed to ask to see the note b/c of the law that Kling proposed. Guess what. I owe Bank B $90K and I have no house. Can’t get it back from Bank A, its bankrupt.

    How in the world is my purchaser supposed to get clean title?
    What bank would finance this house not knowing who owned the mortgage and therefore, whether it was paid off?

    In the rush to punish the “dead beats who bought too much real estate”, like, I suppose, the Mortgage Bankers Association, we’re supposed to disregard centuries of property law? And this is conservative? Nope, Bruce Wilder’s right. It’s authoritarian. Guy who already has all the power wins against guy who has no power, and we’ll propose radical changes in the law to make sure that happens because the little guy, you see, broke his promise and promise breaking is wrong.

    • Alicia says:

      “Imagine this scenario:
      I obtain $100K mortgage from Bank A. Become delinquent. Bank A begins foreclosure. I am able to sell home for $90K and pay off Bank A. Bank A then goes bankrupt.

      Turns out, Bank A sold Bank B the mortage before commencing foreclosure. I was not allowed to ask to see the note b/c of the law that Kling proposed. Guess what. I owe Bank B $90K and I have no house. Can’t get it back from Bank A, its bankrupt.

      How in the world is my purchaser supposed to get clean title?”

      Bank B is SOL. That’s what foreclosure does. It clears encumbrances. Bank B can go argue it with a judge but unless there was a procedural error in THE FORECLOSURE hearings they will be told to go pound sand and that their case is against Bank A and not the buyers of the foreclosed property. None of these problems have never been imagined before, that’s why foreclosure law exists.

      This article goes into it a little:

      • DOM says:

        “Bank B is SOL. That’s what foreclosure does.”

        Not always. What if Bank was acting fraudulently? Would I and/or Bank B have a claim that we still held equitable (not legal) title? Is the amount owed on the Note extinguished by foreclosure (in some states, maybe)? And imagine this scenario: my house is foreclosed on and sells at auction for $50k. Bank A gets a deficiency judgment of $50k. I cash in my 401(k) at a huge loss and pay it. Turns out Bank B had the note all along, shows up demanding its $100k. Me, Bank B and whoever bought the property are all harmed by Bank A’s actions. This why it’s foolish to argue the borrower has no “moral” right here – it’s not just his skin in the game, and even an “obviously in default” borrower has an interest in seeing that all claims on him are properly asserted and dealt with. And if “Show Me the Note” gets the foreclosure mills to stop and get their ducks in a row, than it’s actually good for everybody – except the foreclosure mills.

  12. jwg says:

    The notion that it is “immoral” to demand that a person who claims that you owe them money and wants to take your house prove that you actually promised them money and promised your home as surety is absolutely riduclous. Without such a demand you can’t be sure that the person you are paying or surrending the property too is entitled to it rather than someone else who is a bona fide purchaser of the mortgage.

  13. 4runner says:

    If it is legal– it is moral.

    We have these people called “representatives” who are elected by the people to write these things called “laws.” These “laws” represent the mores and values of society– they define what is “moral” in the society.

    These “laws” state that real estate transactions are so important that they have to be documented in certain ways. These “laws” state that court proceedings are so important that committing fraud before a court is a crime.

    It is not a crime to stop paying your mortgage or to request that the real estate transactions be properly documented.

    Someone here is indeed immoral– but it ain’t the borrowers.

    • DOM says:

      “If it is legal– it is moral.”

      This is, of course, what the Gordon Gekkos say. I disagree. However, there is nothing immoral if you find yourself in an unsustainable financial situation (for whatever reason) to doing whatever you need to do to resolve it, such as going into default, and nothing immoral in demanding that claims against you be proven and properly presented. Banks don’t pay without proof when someone makes a claim against them, even when the claim is “obviously” owed by someone; others have the same rights.

    • Anonymous Chef says:

      What’s funny is that I think almost everyone here – from Mike to Kling – agrees with each other. The fight is over which confounders you’re discussing.

      Kling’s point is that its immoral to make legal demands for the purpose of delaying your creditors. And he’s right – that’s basic civil procedure and debtor-creditor law. Mike’s point is that there are situations where there is a legitimate purpose to demand the note, most of which revolve around disputes over the amount of money owed.

      For what its worth, I’m a corporate bankruptcy attorney. I’m familiar with foreclosures but have never done a home foreclosure. I would never demand the note just to delay the other party. I think that a lot of attorneys aren’t that upright. But if I was defending a foreclosee I would still demand the note in most cases.

      As Mike said, one situation would be where there are suspicious fees, and the house looks either to be above water, or the bank is considering a deficiency judgment, or the debtor has to worry about forgiveness of debt income on his taxes.

      However, none of those get to Arnold’s point, which is why the attorney has standing to challenge the transfer between the originator and the purchaser of the loan.

      I’d certainly demand the note in every transfer case, unless the bank was willing to indemnify me against the following situation:

      Say I’m sued by a bank that says they bought my mortgage without proof, and I just give them the house. The originator later sues me on the same debt. Maybe the first bank forgot the loan was put back. Maybe the originator’s paperwork wasn’t complete, and they’ve got the untransferred note sitting in their files. Maybe one or the other is a fly by night fraudster.

      My capitulating in the foreclosure action conclusively established that I owed a debt to the first bank. However, that only applies against me, not against the originator. And so I have a very real possibility of owing the same money twice. If there was a surplus from the foreclosure sale, the originator can go after it. (While getting out of a judgment is possible, its reaaaaally hard).

      We call that “attorney malpractice.” And I’m not risking it to save the butt of someone who didn’t keep their files straight.

  14. practicality says:

    Good post Anonymous Chef.
    Maybe to summarise, and ask around – what would YOU do?

    1) Banks digitized the notes (often shredding the original, no county clerk stamps here)
    2) Banks packaged the notes into REMICS, slices and dices (the REMICS don’t have title since the rating agencies demand “bankruptcy remoteness”) and sells to investors, who in return re-sell and trade the securities (now called bonds, not “homes people live in”). Remember, the investor doesn’t actually buy the house, they buy a pool of obligations that have varying risk characteristics.
    3) MERS tries to keep track of which notes sits in which REMIC tranches and the ensuing buy and selling of the notes/bonds/homes. MERS thinks they have title, but this court here doesn’t seem to think so: The United States Bankruptcy Court for the Eastern District of California has issued a ruling dated May 20, 2010 in the matter of In Re: Walker, Case No. 10-21656-E-11 which found that MERS could not, as a matter of law, have transferred the note to Citibank from the original lender, Bayrock Mortgage Corp. The Court’s opinion is headlined stating that MERS and Citibank are not the real parties in interest.
    4) So MERS doesn’t have title, nor does the REMIC, and the originating bank doesn’t. The investor doesn’t. However, all the above believe they could, or might, or should. Sometimes, more than one party thinks they have title (see

    A mortgage is a business contract, not a morality question. As the borrower you don’t pay, you lose. As the lender, you don’t deliver, you lose. Therefore, it makes sense that as a borrower you need to know who is on the other side of the table. As a lender you need to make sure you have the direct line to the borrower.

    Given all the mortgage spaghetti going on on the LENDER side of the table, the borrower should pursue everything in their powers to make sure they are the protected party here. That the right people are paid, that if they can’t pay the mortgage they can negotiate with the right party.

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