The problems associated with a clogged foreclosure system continue to mount. Foreclosures in 23 states have been halted by major banks after allegations surfaced of various illegal practices.
PBS has a video discussion of some of the issues in 'Robo-Signing' Paperwork Breakdown Leaves Many Houses in Foreclosure Limbo
Ohio Seeks $25,000 for Every Violation
WCPN News reports Ohio AG Sues GMAC Mortgage Over So-Called Robo-Signings
Just about two weeks ago, the country’s fourth largest lender, GMAC announced it was suspending foreclosure and eviction actions in 23 states, including Ohio. The reason? A document processor for the company admitted he had approved 10,000 foreclosure documents a month without even reading them. In the days that followed, Bank of America and JP Morgan Chase also halted foreclosures in states that require judicial approval. They, too, were concerned about the integrity of their foreclosure actions.
On Wednesday, Ohio’s Attorney General Richard Cordray filed a civil suit against GMAC, its parent company Ally Financial, and the processor who had admitted to signing all those documents.
Richard Cordray: We are talking about lenders and servicers treating foreclosure not as a legal proceeding that deserves the careful attention of the property owner, the servicer of the mortgage and the courts, but rather as a production line - making widgets - that accords foreclosures little deliberate accuracy that the law, or for that matter, basic courtesy and common sense mandates be given to such serious matters.
Cordray’s office is asking the court for civil penalties of up to $25,000 for every violation of the state Consumer Sales Practices Act and restitution for borrowers. The AG’s office also sent letters asking for meetings with four other major lenders to discuss their foreclosure practices: JP Morgan Chase, Bank of America, Wells Fargo and CitiMortgage. Ally Financial, GMAC’s parent company, has not yet responded to requests for comment.
Congress Passes Bill To "Streamline Foreclosure Process"
Adding fat to the burning fire of consumer anger, Congress ramrodded a measure that would "streamline the recognition of notarizations across state lines", arguably validating much of the robo-signings.
Obama Avoids Political Suicide With Pocket Veto
The New York Times reports Obama Plans to Veto Foreclosure Bill
White House officials said Thursday that President Obama would not sign a little-noted measure that suddenly gained attention amid questions about some big lenders’ slipshod bookkeeping on home foreclosures, Jackie Calmes of The New York Times reports from Washington.
The president’s pocket veto — rejecting a bill by withholding his signature while Congress is away — effectively kills the measure since lawmakers, who are out of town until after the Nov. 2 midterm elections, are not in position to override his decision with a two-thirds vote of the House and Senate.
The bill would have mandated that notarizations of mortgages and other financial documents done in one state, including those done electronically, be recognized in other states. By the time the bill arrived at Mr. Obama’s desk, however, it was caught in the controversy over major institutions’ acknowledgment of problems in processing documents for tens of thousands of foreclosures. Those included suspected forgeries and notaries’ failure to review the paperwork as required.
It would have been political suicide for the President to have signed that bill and he knows it, thus the "pocket veto". But how in the hell did such a bill pass Congress in the first place?
The answer is the chickens in both houses of Congress passed the "Interstate Recognition of Notarizations Act" by voice vote.
In a blatant act of galling chicken behavior here is the result.
- Apr 27, 2010: This bill passed in the House of Representatives by voice vote. A record of each representative’s position was not kept.
- Sep 27, 2010: This bill passed in the Senate by Unanimous Consent. A record of each senator’s position was not kept.
If ever there was a timely blowup, this was it. Had the Senate acted earlier in the year, the president would have signed this monstrosity. In retrospect it is rather amazing it did not pass earlier.
Time To Abolish Voice Votes
For still more on the pocket veto, please see Obama To Veto ‘Robo-Foreclosure’ Bill
Right before it recessed last week, the Senate passed a bill — the Interstate Recognition of Notarizations Act of 2010 — that could have made it more difficult for foreclosure victims to challenge banks that may have improperly approved their foreclosure. The legislation would have forced states to accept documents that were notarized in other states, under potentially different sets of notary standards, without verifying any of the documentation. The Senate passed the bill without debate and despite widespread reports of foreclosures across the country being approved by bank “robo-signers” (employees who weren’t verifying the necessary documentation to legally okay a foreclosure).
It is amazing, as well as amazingly telling that the Senate passed this bill AFTER the robo-signing scandal story broke wide open. Sadly, we do not know the idiots who voted for this measure.
This disgusting process certainly highlights ample reasons to abolish voice votes.
Who Should Pay?
The above articles and commentary discusses in detail what happened, but questions linger about who should pay, and how to determine the losses.
Economist economist Tom Lawler discusses the situation in “Foreclosure-Gate”: Who Will, and Who Should “Pay”?
It seems pretty clear that one of the outcomes of the recent “revelations” is that many foreclosures will be postponed; there will be more “refilings” of foreclosure petitions that will cost money; more borrowers facing foreclosures will hire lawyers, and servicers will have to reimburse more borrowers for legal fees; and some foreclosures could be delayed for quite a while. It is unclear at this point whether there will be any significant number of completed foreclosures that might be reversed, but if so that’s gonna cost! Net, there are going to be significant costs that someone is going to have to bear.
But who will bear those costs? Will it be mortgage servicers? Well, if they also own the mortgage, sure. But what about for loans they service for others (including private-label securities, Fannie, Freddie, FHA, VA, …)? Who’s a’ gonna’ pay?
From a “who should” perspective, any increase in losses associated with mistakes made by mortgage servicers, especially if those mistakes involved not following state foreclosure laws, which is a “violation” of most servicing contracts, the answer is crystal clear – the mortgage servicers. But how easy is it going to be to determine losses associated with mistakes by mortgage servicers? What are the “rules” on what a servicer can “recoup” in terms of costs associated with foreclosure when a servicer makes a mistake in private-label deals? With loans serviced for Fannie and Freddie, or FHA? What about delays in foreclosures clearly associated with servicer mistakes, which generally result in increased loss severities? Mortgage investors shouldn’t bear those costs, but how can they be sure they won’t?
What if there is a national “foreclosure moratorium” triggered by mortgage servicer mistakes that ultimately increase the severity of losses? Who “pays the price” in reality, as opposed to who “should?”
More Likely Than Not, Taxpayers Will Pay
Lawler says he does not have the answers to those questions, and right now I don't either. However, the attempt by the Senate to ramrod through that legislation shows the senate's intent to minimize the damage to the guilty parties.
Voters are extremely angry right now, and the next Congress is likely to be far more conservative than this one, but after the election the slate will be clear for another two years.
I hope I am wrong about this, but I smell another taxpayer sponsored bailout, possibly via some backdoor concocted scheme involving Fannie Mae. This trick will be to pass a bailout that does not look like one.
If that can be done, rest assured it will be done.
Problems Deeper Than Paperwork
The Washington Post reports In foreclosure controversy, problems run deeper than flawed paperwork
Millions of U.S. mortgages have been shuttled around the global financial system - sold and resold by firms - without the documents that traditionally prove who legally owns the loans.
Now, as many of these loans have fallen into default and banks have sought to seize homes, judges around the country have increasingly ruled that lenders had no right to foreclose, because they lacked clear title.
These fundamental concerns over ownership extend beyond those that surfaced over the past two weeks amid reports of fraudulent loan documents and corporate "robo-signers."
At the core of the fights over the legal standing of banks in foreclosure cases is Mortgage Electronic Registration Systems, based in Reston.
The company, known as MERS, was created more than a decade ago by the mortgage industry, including mortgage giants Fannie Mae and Freddie Mac, GMAC, and the Mortgage Bankers Association.
MERS allowed big financial firms to trade mortgages at lightning speed while largely bypassing local property laws throughout the country that required new forms and filing fees each time a loan changed hands, lawyers say.
"Assertions that somehow MERS creates a defect in the mortgage or deed of trust are not supported by the facts," a company spokeswoman said.
But that's precisely what lawyers are arguing with more frequency throughout the country. If such an argument gains traction in the wake of recent foreclosure moratoriums, the consequences for banks could be enormous.
Janet Tavakoli, founder and president of Tavakoli Structured Finance, a Chicago-based consulting firm, said that for much of the past decade, when banks were creating mortgage-backed securities as fast as possible, there was little time to check all the documents and make sure the paperwork was in order.
The result: "Banks are vulnerable to lawsuits from investors in the [securitization] trusts," Tavakoli said.
Referring to the federal government's $700 billion Troubled Assets Relief Program for banks, she added, "This problem could cost the banks significantly more money, which could mean TARP II."
Janet Tavakoli Blames the SEC as a "Failed Regulator"
The one thing we have not discussed about this mess is who to blame. I received an email from Janet Tavakoli on Thursday laying the blame smack on the SEC.
The SEC is a failed regulator.
Checking documents to make sure the paperwork is in order is not an optional step when securities are created and underwritten, and underwriters should be held accountable.
Unfortunately, flawed paperwork is far from the only problem with the securitization process.
The preponderance of evidence indicates a massive, widespread, interconnected Ponzi scheme with various types of concurrent fraud.
So far our regulators, court system, and Congress have all failed in their duties.
Free Market Failure? Hardly!
Someone is sure to blame this mess on the "free market". Nothing could possibly be further from the truth. The Fed's loose monetary policies were the great enabler in this scheme. The mere existence of the Fed, Fannie Mae, Freddie Mac, and the FHA run counter to free market philosophies.
Note too, that the big three rating agencies (Moodys, Fitch, S&P) were sponsored by the SEC. Please see Time To Break Up The Credit Rating Cartel for details.
Regulators in Bed with Industries They Are Supposed to Regulate
Finally, and as I have pointed out on many occasions, the one legitimate function of government is to protect civil rights and property rights, with everyone treated equally under the law. Regulation designed to prevent fraud, does just that.
However, and as is typically the case, regulators get into bed with those they are supposed to regulate.
How does this happen? Look no further than the appointment process itself. How many key players in the Bush and Obama administrations have ties to Goldman Sachs (NYSE:GS) and JPMorgan (NYSE:JPM)? How many have other ties to Wall Street and other large banks?
Playing Field Purposely Dishonest
Cries for more regulators will not do a damn thing when people like Elizabeth Warren Tossed a Bone and Appointed Geithner's Lapdog.
We do not have a level playing field for the simple reason Wall Street and the big banks do not want an honest playing field. Unfortunately, the corrupt way corporations buy politicians all but ensures the status quo, even as screams for more regulation reverberates from the mountain tops.