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.