If lots of banks do this, it will greatly impact the debt collection problems for everyone but bankers. The US debt collection process is a careful interweaving of the rights of creditors (the person owed money) and debtors (the person who owes the money). Creditors get court orders which they file as liens against the debtor's property.
If the bank does not honor those liens, the home owner can effectively continue to pile up debt, knowing that they will never have to pay the debt.
The Well Fargo Bank, NA, Short Form Open-End Deed of Trust, San Mateo County Recorder document no. 2009--047950 states, "Borrower covenants that Borrower is lawfully seised of the estate hereby conveyed and has the right to grant and convey the Property and that the Property is unencumbered, except for encumbrances of record as of the execution date of this Security Instrument."
There are at least two prior liens on this property, the first mortgage on the home, and a court order, San Mateo County document no. 2008-062012. It should be pointed out that California court orders generally carry an interest rate of 10% simple interest per year.
We messed with standard banking practices before, and it did not turn out well. It is my prediction that this new practice of not paying off prior liens will also not turn out well.
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