The Yale Law School Journal has published a new article, “In Defense of ‘Free Houses'” (hat tip Deontos), which makes an argument that I wish had gotten an airing when the foreclosure crisis was national news. From the opening section:
When addressing faulty foreclosures, courts are afraid to bar future attempts to foreclose—that is, afraid of giving borrowers “free houses.” While courts rarely explain the reasoning behind this aversion, it seems to arise from a reflexive belief that such an outcome would be unjust. Courts are therefore quick to sidestep well-established principles of res judicata in favor of ad hoc measures meant to protect banks against the specter of “free houses.”
This Comment argues that this approach is misguided; courts should issue final judgments in favor of homeowners in cases where banks fail to prove the elements required for foreclosure. Furthermore, these judgments should have res judicata effect—thus giving homeowners “free houses.” This approach has several benefits: it is consistent with longstanding res judicata principles in other forms of civil litigation, it provides a necessary market-correcting incentive to promote greater responsibility among foreclosure litigators, and it alleviates the tremendous costs of successive foreclosure proceedings…
So what should courts do when banks lose their foreclosure cases? As described above, one approach—that taken by the Florida and Maine Supreme Courts—is to bend the rules of res judicata to avoid a windfall for homeowners. This approach creates few benefits and significant economic problems…[We argue that further subsidizing banks’ poor litigation practices results
in deadweight loss by contributing to negative public-health outcomes and by disincentivizing banks from improving their servicing and litigation techniques. We also explain how granting winning homeowners “free houses” will not negatively affect the mortgage market.
Authors Megan Wachspress, Jessie Agatstein and Christian Mott argue that state courts have been systematically violating a basic premise of the law, res judicata, in foreclosures, by bending the rules to favor banks. When the parties to a case have had a “full and fair” opportunity to present their arguments and evidence fully, the judge should issue a verdict “with prejudice,” meaning barring the losing party from trying to file suit again. The Restatement (Second) of Judgments points out why it is important to shut down the opportunity to re-litigate when both sides have had their say:
Indefinite continuation of a dispute is a social burden. It consumes time and energy that may be put to other use, not only of the parties but of the community as a whole. It rewards the disputatious. It renders uncertain the working premises upon which the transactions of the day are to be conducted. The law of res judicata reduces these burdens even if it does not eliminate them, and is thus the quintessence of the law itself: A convention designed to compensate for man’s incomplete knowledge and strong tendency to quarrel.
The writers point out that the amount of evidence that a lender needs to provide in order to foreclose is not difficult to satisfy. Moreover, when a lender of servicer initiates a foreclosure, it accelerates the debt, meaning it comes due in full at present. But in fact, in many states, the acceleration of a debt is irrevocable, and before the crisis, courts respected that principle with foreclosures. If a bank lost, it was not allowed to pretend that it could wind the clock back and keep dunning the homeowner for monthly payments.
Some readers may take umbrage at the fact that the article fails to mention servicing fraud and abuses, and also underplays the failure to convey mortgages to securitization trusts and the use of fabricated documents to try to remedy that fact as mere “errors” and sloppiness. But rhetorically, the authors don’t need to make that argument, which many bystanders regard as controversial, to substantiate their position, which is that by not issuing judgments on failed foreclosures with prejudice, banks are getting an unjustified windifall, and that is subsidizing their substandard practices and producing unnecessary social harm.
I encourage you to read the article in full.