Tuesday, November 16, 2010

America's banks are shafting customers and investors again.

The foreclosure crisis is getting heavier. America's banks are foreclosing on homes they cannot prove they own, but they are filing so many foreclosures that the judges (if honest) don't have time to look at them. If they did, almost 97% of the foreclosures are based on fraudulent paperwork.
I had a few things to say about this over the last month or two, but I think people had a hard time believing that fraud and perjury on this scale was actually possible; that people were being thrown out onto the street on the basis of affidavits that were forgeries and perjury through and through. Forged, back-dated documents purporting to be contemporaneous records of the transfer of mortgage notes from one party to another. Complete circumvention of the existing legal system for recording real estate ownership - and its associated taxes and fees - and its illegal replacement with an unreliable, understaffed private system. The employees of the corporation running that system passing themselves off as vice-presidents of dozens of banks and servicers so they could foreclose on mortgages. Banks even claiming both that they were and were not the actual owner of the mortage in the very same filings. Failures to convey the actual mortgages to the real estate trusts that backed the securities that were sold to investors. Attempts to convey mortages to those trusts only at the moment of foreclosure. Servicers with a vested interest in the mortages they service going into foreclosure so they can collect fees, and associated failures to collect payments. People given mortgage modifications by the bank, then foreclosed on for failing to pay the original amounts. People without mortgages being foreclosed on. Multiple banks claiming to own the same mortgage foreclosing on the same property.

And at the sharp end of all this, an automated process of perjury and fraud. Notarized affidavits claiming that the signer has personal knowledge of the facts of the case described that were signed by someone else with no knowledge of the facts and not notarized at all. And a court system overloaded with foreclosures unable to and uninterested in examining the facts of the cases in front of it. Families thrown out on the street in the tens or hundreds of thousands on the basis of minute-long hearings in courts where judges refused to consider questions of fraud.

It's hard to comprehend just how pervasive and serious this problem is. Trillions of dollars have already been lost in the bursting of the real estate bubble, but trillions of dollars more of the remaining mortgage-backed securities may be entirely worthless. Not to mention the massive destruction of households and neighborhoods wrought by a mindless, mechanical legal process.

If you don't have time to read the whole thing at RS, I'm excerpting the key parts after the fold. But I recommend taking the time to read it.[ from Rolling Stone.]

There is a great deal more to read all worth it. But if you want to know why the mega banks are working so hard to commit this massive fraud on the courts and on the homeowners, look that this final statement from the Obsidian Wings article. I have bold-faced the key paragraphs below:
It's undeniable that many of the people facing foreclosure bear some responsibility for the crisis. Some borrowed beyond their means. Some even borrowed knowing they would never be able to pay off their debt, either hoping to flip their houses right away or taking on mortgages with low initial teaser rates without bothering to think of the future. The culture of take-for-yourself-now, let-someone-else-pay-later wasn't completely restricted to Wall Street. It penetrated all the way down to the individual consumer, who in some cases was a knowing accomplice in the bubble mess.

But many of these homeowners are just ordinary Joes who had no idea what they were getting into. Some were pushed into dangerous loans when they qualified for safe ones. Others were told not to worry about future jumps in interest rates because they could just refinance down the road, or discovered that the value of their homes had been overinflated by brokers looking to pad their commissions. And that's not even accounting for the fact that most of this credit wouldn't have been available in the first place without the Ponzi-like bubble scheme cooked up by Wall Street, about which the average home­owner knew nothing — hell, even the average U.S. senator didn't know about it.

At worst, these ordinary homeowners were stupid or uninformed — while the banks that lent them the money are guilty of committing a baldfaced crime on a grand scale. These banks robbed investors and conned homeowners, blew themselves up chasing the fraud, then begged the taxpayers to bail them out. And bail them out we did: We ponied up billions to help Wells Fargo buy Wachovia, paid Bank of America to buy Merrill Lynch, and watched as the Fed opened up special facilities to buy up the assets in defective mortgage trusts at inflated prices. And after all that effort by the state to buy back these phony assets so the thieves could all stay in business and keep their bonuses, what did the banks do? They put their foot on the foreclosure gas pedal and stepped up the effort to kick people out of their homes as fast as possible, before the world caught on to how these loans were made in the first place.

Why don't the banks want us to see the paperwork on all these mortgages? Because the documents represent a death sentence for them. According to the rules of the mortgage trusts, a lender like Bank of America, which controls all the Countrywide loans, is required by law to buy back from investors every faulty loan the crooks at Countrywide ever issued. Think about what that would do to Bank of America's bottom line the next time you wonder why they're trying so hard to rush these loans into someone else's hands.

Addendum 6:22 PM CST
Here is another recent article on the mortgage disaster. It lays out some of the problems and the likely fall out.
Employees or contractors of several major banks have testified in court cases that they signed, and in some cases backdated, thousands of certifying documents for home seizures. Financial firms that service a total $6.4 trillion in mortgages are involved, according to the new report. Big banks including Bank of America Corp., JPMorgan Chase & Co. and Ally Financial Inc.'s GMAC Mortgage have suspended foreclosures at some point because of flawed documents.

Federal and state regulators, including the Federal Reserve and attorneys general in all 50 states, are investigating whether mortgage companies cut corners on their own procedures when they moved to foreclose on people's homes.

"Clear and uncontested property rights are the foundation of the housing market," the report says. "If these rights fall into question, that foundation could collapse."
Here are some ramifications:
  • Borrowers may not be able to ascertain if they're sending their mortgage payments to the right party.
  • Judges may block all foreclosures.
  • Prospective buyers and sellers could be in left in limbo.
  • For major banks, if they discovered that they still owned millions of bad mortgage loans they assumed had been sold, the losses could reach billions.
It's that last one that really frightens the banks.

In theory the banks sold those mortgages on to investors who should take the losses. But if there is no proof that the mortgages were transferred to the investors, then those mortgages still belong to the banks when they go into default. The banks will have to make restitution to the investors because they investors have no court standing to foreclose from the (alleged) defaulters. Only the legal owner can do that.

If you notice in the earlier article (above) that may apply to as many as 97% of the mortgages that are (allegedly) in default. This is not a simple problem that the homeowners failed to pay and should be foreclosed on. This is major. It is a question of who takes the loss when the mortgage goes bad. If the investors legally own the homes, they are out the loss. But if the bank never transferred ownership then it is the banks who are on the hook for the massive and now inevitable losses in those homes.

If you think that the banks took a big hit to their reserves two years ago when the economy went bad, this would very probably dwarf those losses. Think the feds will step in and bail them out a second time in two years??

This is exactly the scenario that Alan Greenspan thought that the self-interest and professionalism of the banks would prevent when he allowed to housing bubble to grow uncontrolled. Greenspan was responsible for regulating the bank's behavior and he did not do so, depending on the invisible hand of the market.

Greenspan is a libertarian. He had been informed that everyone from the original mortgage brokers through the original lending banks to the firms that bundled the mortgages into mortgage-backed securities and sold them on to investors was cutting corners and holding down administrative costs by not doing the due diligence and the required legal document transfers. But the market factors were supposed to handle that. Guess what? The market failed - again!

I'd hate to own stock in a major bank right now.

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