“Where does the government have the right to tell the bank what’s in your best interest?” State Senator Joe Negron (R) defiantly asked the Florida Senate Banking and Insurance Committee meeting last week.
The Florida lawmaker and bank attorney has a good point. It’s a fair question to ask in a free market society—that is if you forgot that the past 30 months had occurred and thought the $3trillion financial industry bailout was a Twilight Zone episode.
Negron continues, “Doesn’t a bank have a right to foreclose on property if someone doesn’t pay the mortgage…Or is there some theory that I’m not aware of where the attorney general would have the right to tell a bank, No.”
Maybe he missed it in law school, but apparently there is not only a theory but according to the Florida State Attorney General there is also a law—it’s called “foreclosure fraud.”
Hundreds of thousands of mortgage documents were “robo-signed” by one “Linda Green” in an equal number of handwriting styles. The prolific Green appears to be a bank officer at dozens of firms across the nation leading to the breakdown of the foreclosure process and the scrutiny of all legal documents. (To date: Ms. Green has not returned calls for comment.)
Banks and their armies of crocodile-shoed lawyers shedding crocodile tears are mad as hell and not going to take it anymore. Well boys (thankfully not too many girls)… according to recent court rulings in New York, New Jersey, Massachusetts and Florida – the jig is up. Last week a New York judge dismissed a bank’s case and rebuked the plaintiff’s attorneys by stating, “Swearing to false statementsreflects poorly on the [legal] profession as a whole.”
In a perfect world, if a borrower defaults in a secured creditor relationship, the lender looks for ways to collect on the collateralized debt. The seemingly limitless fraud on the part of mortgage brokers, lenders, underwriters, “securitizers” and servicers over the past few years, reveals that Dorothy, er.. I mean, Senator Negron—we are definitely not in Kansas anymore.
Kansas was that pre-crisis banking utopia, where no one questioned the rights of a lender, securities firm, mortgage servicer or bond holder and their right to foreclose. No matter what they did—wrapping toxic loans inside 15,000 page CDOs, hedging them with lethal derivatives called CDS, fabricating legal documents, or falsifying incomes, names and assets—creditors collected the spoils.
As we travel down the road to OZ, nothing we knew to be true or fact is real. The bizarre is the new normal. Obama, who we believed to be the wonderful wizard ready to right the greatest economic wrongs of our lifetime, turns out to be just the guy behind the curtain.
At the height of the crisis Sheila Bair, head of the FDIC, offered a solution to the growing housing crisis: modify homeowners’ loans. Many bankers agreed with her.
The CEO of a mid-sized bank told me in early 2009, the government could buy every underwater house and defaulting loan in the country for less than the three trillion dollar bailout. “Stretch the loans out over 40 years and make your interest rate really low, maybe even zero for awhile, and the whole housing crisis would be fixed. But nobody thinks that way. That is half the problem.”
A former mortgage bond exec who worked at both Lehman Brothers and Goldman Sachs said one of the biggest challenges to fixing the foreclosure problem is automated servicers. As a distressed investor, he created a “human contact” servicer to negotiate directly with borrowers. The primary goal is to reduce the loan amount and interest rate by 20% to avoid foreclosure. If the borrower still can’t pay, the homeowner receives a cash payment to rent elsewhere and his/her credit report is left intact. The servicer saves 18 months of processing time and can sleep at night.
NO HOPE NOW
The administration earmarked $50bn for programs to help troubled homeowners modify loans. The HAMP Program and its consulting arm HOPE NOW have been colossal wastes of time and money as servicers simply refuse to participate honorably. Wicked Witch banks lure unsuspecting borrowers down the yellow brick road to foreclosure encouraging them to stop making payments only to swoop in for the kill.
On the way to the Emerald City, the Big 4, Bank of America (Countrywide), JPMorgan Chase (WaMu), Wells Fargo (Wachovia), and Citigroup decided to take a detour. They threw up smoke screens by “losing” record numbers of documents in an adolescent my-dog-ate-them fashion that works for the government but somehow not for 13 year olds.
Getting away with economic murder in the bailout bonanza has only added hubris to the already huge funeral pyre. The “robo-signer” debacle has put bank attorneys on the growing list of failed public servants.
In the first year of the crisis, the discussion revolved around the moral hazard created by banking bailouts. Weary of the topic, we rarely hear of this anymore. Yet the biggest banks have become accustomed, through government sanctions and taxpayer subsidies, to abscond on their debts while expecting consumers to pay theirs in full.
A recent settlement between Bank of America and Fannie Mae and Freddie Mac is being dubbed a “backdoor bailout” by allowing BOA to pay pennies on the dollar for selling toxic loans to these government agencies. Not only do they receive a “get out of jail free card” for committing mortgage fraud, they legally modify their debts in a way they refuse to do for borrowers. Again the Big Bank wins both ways – reducing their debt while collecting on yours.
It’s more than moral hazard—it’s moral hazard on roids.
The newest foreclosure fraud reveals that a contract is only “sacred” when it serves the party in charge—in this case the mortgage servicers and their legal reps perpetrating the acts. Bank attorneys have claimed that forging signatures on legal documents is a mere “clerical” issue.
The Supreme Court of Massachusetts is not buying it and ruled against illegal foreclosures last week. Two families were tossed out of their homes in 2007 by Wells Fargo & U.S. Bank respectively who did not own title to the deeds.
Rewriting the Rules
In answer to State Senator Negron’s original question – does a bank have the right to foreclose on a property? The answer from his own profession is no, not if they don’t own it.
As for banks who received bailout funds for profiting on toxic mortgage debt? They failed in their fiduciary, legal, ethical and moral responsibility to fellow citizens and broke the old rules.
Like Dorothy and her pals, the path beyond the yellow brick road requires brains, heart and courage. With true justice, the banking industry’s ability to renegotiate their loans should lead to borrowers’ rights to renegotiate theirs. Congress, which has been ineffectual on this major issue since the crisis began, has been prodded by a 50-State investigation and the ire of bondholders to pass legislation to hold mortgage servicers feet to the fire.
The move toward equitable treatment in the mortgage process signifies the potential restoration of honor in once respectable professions like law and banking. It could also rebalance the scales of justice to serve all parties equally.
Maybe 2011 will finally be the year we can sing, Ding dong the witch is dead.
©2011 All rights reserved.
Editor’s Note:Are you a homeowner, borrower, banker, investor, or servicer with a foreclosure story to tell? We want to hear it and welcome all sides of the issue to weigh in. email@example.com