Notorious R.O.B.

legal standing anyone?

From the dusty files of the excruciating minutiae of bankruptcy court proceedings (courtesy of the NY Times) comes this story:

But while banks may have booted a few robo-signers and tightened up some lax procedures, one question at the heart of the foreclosure mess refuses to go away: whether institutions trying to take back a property can prove they even have the right to foreclose at all.

Some in the industry believe that questions about this issue — known as “legal standing” — are trivial. They say it’s just a gambit by borrowers’ lawyers to throw sand in the foreclosure machine. Nine times out of 10, bankers say, the right institutions are foreclosing on the right borrowers.

Maybe so. But the United States Trustee Program, the unit of the Justice Department charged with overseeing the integrity of the nation’s bankruptcy courts, is taking a different view. The unit is stepping up its scrutiny of the veracity of banks’ claims against borrowers, and its approach is evident in two cases in federal bankruptcy court in Atlanta.

This, to put it mildly, could be a thermonuclear land mine. There’s no reason to panic yet, since no court has ruled on the standing issue, but the action by the U.S. Trustee hints at the possibility that this issue will become larger and larger, and likely require significant litigation to resolve. And looming in the background? MERS… which is not tech-speak for merde, but the entrance of the DOJ (the parent department of the U.S. Trustee) could result in a major merde-storm.

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From the invaluable Calculated Risks blog, Vallejo Close to Bankruptcy Filing:

Vallejo, a city of 135,000 outside of San Francisco, moved closer to bankruptcy after negotiations with its labor unions collapsed.

Bondholders will likely be asked to sacrifice some of their investment if the city seeks bankruptcy protection, an attorney for the municipality said last night. Vallejo faces ballooning labor costs and declining housing-related sales-tax revenue, leaving budget officials projecting that money will run out within weeks.

For people who have been hoping that the bottom may have been reached with real estate prices, I wonder what widespread municipal bankruptcy might mean.

Assuming that Vallejo’s municipal unions take the “devil take the hindmost” attitude that most unions do, the city will go bankrupt.  In bankruptcy, I assume the city’s finances will be administered by a magistrate or a bankruptcy judge.  (Although I have very limited experience with Chapter 9 bankruptcy, I did study bankruptcy law generally, so I’m assuming here.)

So.  Once bankrupt, will Vallejo (a) raise property taxes, or (b) lower property taxes?

If you guessed (b), bzzzt, go to the back of the line.

Maybe the court can set aside the union contract (as can be done in bankruptcy) and force the unions to negotiate all over with the now-bankrupt city, with court supervision.  But I don’t get the feeling that Vallejo is going to have a lot of services for the next few years, do you?  What would home prices in Vallejo look like a year from now, I wonder?

CR thinks that Vallejo is just the first in a long line of California municipalities that will be bellying up to the bankruptcy bar.

I think this is a development to watch.  Furthermore, it might not be a bad idea to take another look at your own town/city’s financials.  How’s their income — much of it tied to real estate via property taxes — compared to their pension liabilities and other generosities that cities flush with cash over the past few years have been showering on their public unions?

-rsh