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Washington Mutual (WAMU), who received a windfall by foreclosing upon a Maryland family after WAMU lost paperwork showing it had been paid, is now paying for losing paperwork in another mortgage.

Since 2002, Joe Lents had not made a payment on his $1.5 million home in Boca Raton. WAMU tried to foreclose, but could not prove that it held the mortgage note because it had lost the paperwork. Is Joe Lents a deadbeat? Well, it sure sounds like it, because he agreed to pay back the money he borrowed. But in the case of WAMU, I say what’s sauce for the goose is sauce for the gander!

Across the country homeowners are using this failure on the part of the mortgagors as a defense to prevent foreclosure and it looks as if federal judges are not unsympathetic. I feel the same; if these corporations want to lend out and then constantly resell these subprime mortgages, they should be required to keep the paperwork in order to at least prove who owes what to whom. Otherwise, we see situations like the two above where both sides can get hurt.

There’s an interesting post over at The Frontal Cortex on the Psychology of Sub-prime Mortgages. It discusses scientific studies showing that people tend to choose sub-prime mortgages, even at awful rates, because the emotional reward center in the brain overvalues the short term benefits:

The best evidence for this idea comes from the lab of Jonathan Cohen. Cohen’s clever experiment went like this: he stuck people in an fMRI machine and made them decide between a small Amazon gift certificate that they could have right away, or a larger gift certificate that they’d receive in 2 to 4 weeks. Contrary to rational models of decision-making, the two options activated very different neural systems. When subjects contemplated gift certificates in the distant future, brain areas associated with rational planning (the Promethean circuits of the prefrontal cortex) were more active. These cortical regions urge us to be patient, to wait a few extra weeks for the bigger gift certificate.

On the other hand, when subjects started thinking about getting a gift certificate right away, brain areas associated with emotion - like the midbrain dopamine system and NAcc - were turned on. These are the cells that tell us to take out a mortgage we can’t afford, or run up credit card debt when we should be saving for retirement. They are our impulsive pleasure seekers, the hedonists inside our head.

The implications are far reaching, because similar behavior is seen in the difficulty people have in saving money. This seems to be an explanation for something the frugal community has always known, that it is tempting to spend money because the intellectually sensible choice offers a different sense of reward. More importantly, I think it stresses the importance of psychological and behavioral approaches to saving and debt elimination, such as Dave Ramsey’s debt snowball over a purely number-crunching view, such as paying down the debt with the highest rate first.

Maybe this will get me moving to do that debt snowball post I’ve been putting off.

Homeowners who obtained rubber-stamp mortgage approvals are falling behind in payments and facing either refinance or the need to sell. Because real estate values are dropping, those same people are all too often being forced into foreclosure because their home is now worth less than they can borrow on it or less than they need to sell it for.

That is unfortunate, but not unexpected. What is unexpected, or even outrageous, is that a family can buy a property, later refinance, then continue to make all of their payments and still get their property foreclosed!

This was a series of articles that appeared in the Baltimore Sun in June, but the Sun only goes back two weeks so it is unavailable online. The relevant details are as follows:

Atta Poku is a Ghanaian immigrant and naturalized American citizen who built a small taxicab business in Columbia and bought a townhouse there in 2000. He refinanced the next year, but the original loan was never recorded as paid by Washington Mutual Inc., the refinancing firm.

Four years later, although he made every mortgage payment, Washington Mutual foreclosed and sold Atta Poku’s house before he could mount an effective legal defense. He was charged four years of interest plus legal fees, although he insisted the loan was paid.

Atta Poku and his family were evicted in August last year, and last month the Maryland Court of Special Appeals dismissed his last attempt at redress. Maryland law allows foreclosure with just 15 days’ notice and without proof that the homeowner was told of the legal action.

No one blamed Atta Poku for the foreclosure, but he was unable to prove in court that the loan was paid off because of mistakes by financial institutions and missing records.

The lawsuit claims that Chicago-based Washington Mutual, Houston-based Stewart Title Guaranty Co. and the now-defunct Advance Settlement Agency Inc. all collected fees for the refinancing and acted in “a negligent, careless manner.”

Dwayne E. Pope, owner of Advance, is serving time in a federal prison for stealing more than $1.6 million in settlement funds in 2002 and 2003 - after Atta Poku’s refinancing. He has not been charged with or accused of any wrongdoing in the Atta Poku case.

Maybe this will be a cautionary tale. At least it would be nice to think that some good came out of this sad story. The obvious lesson is don’t drag your feet if you receive notice that your mortgage company thinks you haven’t paid them. In fact, don’t ignore or procrastinate with any legal issues, because that usually just makes things worse. Use reputable title and mortgage companies and document everything, in particular, make sure you copy the backs of checks in addition to the front.