Tuesday, the President said we don’t need a moratorium on foreclosures. Indeed, the statement said the administration was concerned about unintended consequences. Wednesday, the states rendered his opinion irrelevant. Forty states — no, 49! — no, all 50!* — state Attorneys General have opened investigations into mortgage fraud. It should surprise nobody if one of the first things those investigations do is halt pending foreclosures. Ally has joined Bank of America in voluntarily halting all foreclosures. California already has a class action suit against Countrywide’s new parent company, Bank of America, and the actual filing is a fascinating read. Anything said in court will be in the public record for all the other states to apply. Florida is being forced to change some policies. It is officially out of the Fed’s hands for the time being.
I would like to make sure that everybody understands something very serious about this mess: the problem isn’t that some people signed some documents without reading them; the problem is fraud. While it is true that in the overwhelming majority of foreclosures, the “homeowner” has not been making payments, the problem is that the corporation foreclosing doesn’t have the clear right to do so and they know it. Furthermore, this is a problem that experts have known about for years.
There’s a really great explanation of the issues starting here (it’s 5 parts long but worth the read), but in a nutshell, mortgage companies made mortgages that they knew or should have known were going to go bad. They then bundled these mortgages up into various financial instruments and sold them to investors, who were told that these mortgages met underwriting standards and had no problems. However, the mortgage itself was not properly transferred in violation of every state’s laws, and in some cases the original documents were destroyed. Then the crash began and some people stopped paying the mortgage. In order to foreclose, the servicer — the bank taking their monthly check — had to forge the destroyed documents and sign legal documents saying things they could not know were true.
This also had a side effect of holding up most short sales and mortgage modifications. The servicer would need to talk to the owners of the mortgage backed security to make it work, and these owners were reluctant to sign on. After all they were sold these things as a sure deal.
A second side effect that is a serious risk to the economy: the owners of all those securities based on bad mortgages are entities like life insurance companies and pension funds. An investor lawsuit against B of A has been dismissed. On one hand, it’s hard for me to feel sorry for these professional investors who should have known better. On the other hand, in the end it’s everyday people like retirees who will be most effected by this mess. In a nutshell, that’s why the FDIC had to put in an emergency rule allowing for “better treatment for some creditors” should a too-big-to-fail bank collapse. When all is said and done, some will fail.
And one more side effect is that title insurance policies might be written to specifically avoid the issue of whether a bank can legally sell a property. This makes the policy itself worthless! No wonder banks love all cash offers on foreclosed homes; they might have a problem if your new mortgage company found the property lost due to fraudulent title, but as just a person you have little recourse.
But the question we should focus on is “what now?” Sure, foreclosure fraud must be stopped and stopped now, but how do we fix the problem when it’s hard to tell which documents are real, and even which ones still exist?
Cross-posted to BridgetMagnus.com.
* Way to be late to the party, Alabama!