Banking Crisis: Money-Spinning Scam for the Financial Giants

Pressure Intensifies on Mortgage Lenders

October 10, 2010

Reuters – More than two-thirds of U.S. state attorneys general plan this week to launch a joint probe into charges some banks used fraudulent paperwork to kick struggling borrowers out of their homes, a source familiar with the effort told Reuters on Sunday.

Bank of America, the nation's largest mortgage servicer, an industry term for a firm that collects mortgage payments, said on Friday it would temporarily halt foreclosures nationwide as it looks into reports of shoddy paperwork.

Bank of America is the first bank to halt foreclosures in all 50 states. Bank of America, JPMorgan Chase & Co and Ally Financial Inc's GMAC Mortgage had earlier announced plans to suspend foreclosures in 23 states pending a review of foreclosure procedures.

The mortgage unit of Ally Financial, which is 56.3 percent owned by the U.S. government after a $17 billion bailout, has said employees preparing foreclosures had submitted affidavits to judges containing information they did not personally verify.

Senate Majority Leader Harry Reid, who is facing a tough re-election November 2 in Nevada, where foreclosure rates are the highest in the nation, called for a national moratorium on foreclosures after Bank of America's announcement.

The source, who spoke on condition of anonymity, said the deadline for attorneys general to sign on to the investigation effort led by Iowa's Tom Miller was at the end of the day Monday, so a formal announcement could be made on Tuesday.

At least half a dozen attorneys general have already announced individual investigations into the foreclosure mess.

The total number of attorneys general calling for an investigation is not precisely known but it is expected to be at least three dozen and possibly more.

At this stage, the joint effort is not expected to include a call for a moratorium, the source said, though some attorneys general have already done so in their individual states.

Many, including Miller, are running for re-election or election to other offices.

U.S. Attorney General Eric Holder said last week the Justice Department is looking into the widespread reports of bogus paperwork. It is not clear if the matter is under the jurisdiction of the states or the federal government but federal officials are looking into it, the source said.

President Barack Obama, however, opposes a national foreclosure moratorium, though he wants a quick resolution to any foreclosures that might have questionable paperwork, top White House adviser David Axelrod signaled on Sunday.

"I'm not sure about a national moratorium," Axelrod told CBS television. "Our hope is that this moves rapidly and that this gets unwound very, very quickly."

Federal Housing Administration Commissioner David Stevens told Reuters the administration does not believe a nationwide moratorium is the right action at this time.

"Any kind of broad moratorium will simply stall home sales," he said.

Banks are expected to take over a record 1.2 million homes this year, up from about 1 million last year and just 100,000 as recently as 2005, real estate data company RealtyTrac Inc. said last month.

Harry Reid Calls for Foreclosure Moratorium as a Ploy to Win Reelection

October 7, 2010

Fire Dog Lake - A couple days ago, the highest-ranking Democrat in the House called for investigations on mortgage lenders who have been unscrupulously misleading borrowers and courts and engaging in systematic fraud. Now the highest-ranking Democrat in the Senate is following suit, and focusing on his home state of Nevada.

Harry Reid, the Senate Majority Leader, just sent a letter to the largest mortgage servicers in Nevada, asking them to suspend all foreclosure operations in the state. He also wants them to make use of the Treasury Department’s “Hardest Hit” program, a loan modification fund that provides $200 million in incentive payments for negotiations with unemployed borrowers to prevent foreclosures.

Reid had to do this. Nevada is off the charts when it comes to foreclosures and negative equity. Over 70% of homeowners in the state, an amazing number, are underwater or nearly underwater. Foreclosures are higher than any other state as well, and this contributes to both the skyrocketing unemployment rate and state budget deficit. Mike Konczal writes:

Nevada is interesting because it’s such a disaster, it’s relatively small, and there isn’t going to be enough demand to clear the abandoned properties — it would be a perfect place for a state-wide implementation of a right-to-rent program. If we were serious about “shocking” a solution to a structural unemployment problem forcing some financial firms and bondholders to actually eat losses in Nevada would be a place to start. But let’s also not confuse this story with the story of the country as a whole, where every state has had an increase in unemployment.

Reid could have taken this further — national civil rights groups are now calling for a national moratorium — but if you’re going to pick one state where the crisis must be stopped, it’s Nevada. In addition, Nevada is not a judicial foreclosure state, so lenders can foreclose on properties without going through any court. So they are in dire need of protection, as well as real remedies to get them out of their mess. I don’t know that the Hardest-Hit Fund is big enough, but isn’t it interesting that Reid referred to that, rather than HAMP?

And yes, to state the obvious, it’s not a little sidelight to this that Reid is in the fight of his life for re-election.

More of my coverage on foreclosure fraud can be found here.

Bank of America Halting Foreclosures in All 50 States

October 8, 2010

Fire Dog Lake - The foreclosure fraud mess continues. Bank of America, one of the top four lenders in the country, has expanded their freeze on foreclosure operations to all 50 states, beyond the 23 states which require a judicial sign-off.

I imagine they’ll be only the first, given their role as a market leader. We’re going to have a de facto moratorium on foreclosures, if not one put in by the government.

Why would BofA be concerned about foreclosure process in non-judicial states? This really comes back to title ownership. The Washington Post story on MERS today was really, really important to understand the fraud at the heart of this.

Mortgage Electronic Registration Systems, headquartered in a nondescript office building in Reston Town Center, has flourished quietly over the past decade, saving financial firms hundreds of millions of dollars by helping them avoid the time and expense of filing mortgage documents and paying fees each time a loan changes hands.

Its motto: “Process loans, not paperwork.”

But lawyers throughout the country increasingly are challenging that approach, questioning whether the company has the legal right to foreclose on homes, on the grounds that it doesn’t actually own mortgages. And the argument is gaining traction with some judges [...]

The company is an integral part of the system that emerged during the global housing boom, when mortgages were created and sold, sliced and diced, packaged and repackaged so quickly that financial firms had neither the time nor the patience to file paperwork in local courthouses as the loans were traded. By using MERS, lenders were able to reassign loans quickly and cheaply. But often the chain of ownership was not accompanied by an official paper trail.

The MERS registry tracks more than 65 million mortgages throughout the country and continues to facilitate rapid-fire transfers that keep the market for mortgage-backed securities humming.

But if courts increasingly begin to nullify the MERS model — different judges have issued differing rulings — this could call into question the legitimacy of millions of mortgages, wreak havoc on the real estate market, spur costly litigation against Wall Street banks and ultimately harm the broader financial system.

Basically every big lender in the country used MERS to trade mortgages. MERS facilitated this “financial innovation.” But they basically didn’t secure the kinds of records required by law. As a result, lenders looking to foreclose cannot actually come up with the paperwork showing a legal title on many homes. In fact, some lawyers are challenging MERS’ claim to reassign loans, calling into question a process that has been used since 1997.

That’s a huge mess. And as Brad Miller explains, the liabilities for the banks are enormous:

Brad Miller: There is massive potential liability for the securitizers, which are mostly the biggest banks. The contract was that if mortgages didn’t meet certain requirements, then the securitizer would buy them back. The mortgage servicers and trustees have exclusive control over the paperwork. Both the investors, the people who own the mortgage-backed securities, and the homeowners, really depend on them. There’s been lots of litigation where investors try to get securitizers to buy back the bad mortgages because they were flawed, but that litigation has been stymied by procedural objections. If the private investors can break through that defense and require the mortgages that don’t meet the requirements to be bought back, the liabilities for the biggest banks will be enormous.

EK: So this is, in other words, a problem for bank balance sheets. These banks bought the mortgages from individuals, packaged them into securities, and then sold them to investors. But because the mortgage contracts weren’t valid, the investor can potentially force the banks to take the mortgages back, thus blowing a new hole in their balance sheets?

BM: Right. They’ll have to buy them one mortgage at a time. Someone said there might be a second round of bank insolvencies because of this and there might need to be more TARP. There is no chance that Congress would pass more TARP.

This is why the banks are stopping the foreclosure processes. They need to understand the liabilities here.

Is this bad for the economy? First of all, that’s irrelevant to the rule of law. The banks created this mess, after all. And it was going to have to unwind sooner or later. But it really doesn’t have to cripple the economy (a lack of stimulus is doing that on its own, actually). The lenders can assess the risks, and make the conclusion that the best-case scenario for them is to modify loans on a massive scale. The effect on consumer spending and consumer confidence would be enormous. It’s only “bad” if you view the economy as what’s best for Bank of America.

Beyond that, as Miller darkly notes, “At the least, we now have resolution authority that we can take out for a spin.”