NY Times – How the Banks Put the Economy Underwater
Extremely well written, seamless narrative that reads like a script for a special Halloween episode of American Greed
This excellent editorial helps make the point that a national moratorium is the only just solution. Criminal investigations, indictments and imprisonment will go a long way towards helping our country recover. Allow the economy to recover enough to lift some of the terror and distrust. Allow breathing room and time for the start of job creation so those who are unemployed due to the engineered economic collapse don’t face the loss of their family’s home when they have no income or alternative housing options. Only then, implement the principal correction (need to change the language from write down to correction) plans and other solutions after an in depth, exhaustive search for information on exactly what happened and who has been unjustly rewarded.
There is so much we don’t yet know or are not prepared to address. For example: millions of homeowner paid HAMP dollars have been put into mortgage servicers’ “suspense accounts” without being applied and millions of dollars in predatory fees have been added millions of mortgage balances. The shysters have no incentive to disclose those figures instead they are highly motivated to do what they do best; consider funds belonging to others as free for the taking while they obfuscate the truth and the misrepresent facts. Solutions built on inadequate understanding of the scope of the problem will worsen this disaster. There are so many possible pitfalls. It would behoove us to not rush into any solutions until we’ve learned more and really brainstormed the implementation. Allow for a bit of healing time to occur. If we reward, legalize, or leave unpunished the massive financial and constitutional crimes committed, then we have instructed Americans in the harshest of ways that crime pays, laws can be ignored, alternative dispute resolution methods are to be sought since courts offer no hope of fairness or objectivity, fabrication of legal documents is accepted practice, notarizing documents is a do-it-yourself project, and fraud, deceit, misrepresentation, and forgery are basic skills of survival in America.
IN Congressional hearings last week, Obama administration officials acknowledged that uncertainty over foreclosures could delay the recovery of the housing market. The implications for the economy are serious. For instance, the International Monetary Fund found that the persistently high unemployment in the United States is largely the result of foreclosures and underwater mortgages, rather than widely cited causes like mismatches between job requirements and worker skills.
This chapter of the financial crisis is a self-inflicted wound. The major banks and their agents have for years taken shortcuts with their mortgage securitization documents — and not due to a momentary lack of attention, but as part of a systematic approach to save money and increase profits. The result can be seen in the stream of reports of colossal foreclosure mistakes: multiple banks foreclosing on the same borrower; banks trying to seize the homes of people who never had a mortgage or who had already entered into a refinancing program.
Banks are claiming that these are just accidents. But suppose that while absent-mindedly paying a bill, you wrote a check from a bank account that you had already closed. No one would have much sympathy with excuses that you were in a hurry and didn’t mean to do it, and it really was just a technicality.
The most visible symptoms of cutting corners have come up in the foreclosure process, but the roots lie much deeper. As has been widely documented in recent weeks, to speed up foreclosures, some banks hired low-level workers, including hair stylists and teenagers, to sign or simply stamp documents like affidavits — a job known as being a “robo-signer.”
Such documents were improper, since the person signing an affidavit is attesting that he has personal knowledge of the matters at issue, which was clearly impossible for people simply stamping hundreds of documents a day. As a result, several major financial firms froze foreclosures in many states, and attorneys general in all 50 states started an investigation.
However, the problems in the mortgage securitization market run much wider and deeper than robo-signing, and started much earlier than the foreclosure process.
When mortgage securitization took off in the 1980s, the contracts to govern these transactions were written carefully to satisfy not just well-settled, state-based real estate law, but other state and federal considerations. These included each state’s Uniform Commercial Code, which governed “secured” transactions that involve property with loans against them, and state trust law, since the packaged loans are put into a trust to protect investors. On the federal side, these deals needed to satisfy securities agencies and the Internal Revenue Service.
This process worked well enough until roughly 2004, when the volume of transactions exploded. Fee-hungry bankers broke the origination end of the machine. One problem is well known: many lenders ceased to be concerned about the quality of the loans they were creating, since if they turned bad, someone else (the investors in the securities) would suffer.
A second, potentially more significant, failure lay in how the rush to speed up the securitization process trampled traditional property rights protections for mortgages.
The procedures stipulated for these securitizations are labor-intensive. Each loan has to be signed over several times, first by the originator, then by typically at least two other parties, before it gets to the trust, “endorsed” the same way you might endorse a check to another party. In general, this process has to be completed within 90 days after a trust is closed.
Evidence is mounting that these requirements were widely ignored. Judges are noticing: more are finding that banks cannot prove that they have the standing to foreclose on the properties that were bundled into securities. If this were a mere procedural problem, the banks could foreclose once they marshaled their evidence. But banks who are challenged in many cases do not resume these foreclosures, indicating that their lapses go well beyond minor paperwork.
Increasingly, homeowners being foreclosed on are correctly demanding that servicers prove that the trust that is trying to foreclose actually has the right to do so. Problems with the mishandling of the loans have been compounded by the Mortgage Electronic Registration System, an electronic lien-registry service that was set up by the banks. While a standardized, centralized database was a good idea in theory, MERS has been widely accused of sloppy practices and is increasingly facing legal challenges.
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Yves Smith is the author of the blog Naked Capitalism and “Econned: How Unenlightened Self-Interest Undermined Democracy and Corrupted Capitalism.”