Foreclosuregate Explained: Big Banks on the Brink

by Peter White
truthout Report

Truthout.org

October 28, 2010

http://www.truth-out.org/foreclosuregate-explained-big-banks-brink64621

Scandal is spreading across Wall St. like a very bad case of
poison ivy. A rash of fraudulent home foreclosures has
exposed some of the nation's biggest banks to an even worse
condition ... bankruptcy.

Until late 2007, the money boys on Wall St. made a bundle in
the housing market. After the bubble burst, they were just
itching to cash in on the down side, calling in all those
bad loans they made and selling off millions of repossessed
homes. According to RealtyTrac, Inc., which compiles such
data, lenders foreclosed on 3.2 million properties in the
last three years, 288,000 in the last quarter, the highest
number on record.

But evidence came to light, first in New York, then Florida,
Maine, Ohio, and other states that lenders were taking
shortcuts to speed up foreclosures. Law firms hired so-
called "robo-signers," some of whom have admitted in
depositions that they routinely signed off on thousands of
foreclosure papers they had never read and sometimes forged
signatures of notary publics who were not present.

"Why don't we have Mickey Mouse sign the thing, instead of
having a human being sign it? I mean it becomes
meaningless," New York Supreme Court Judge Arthur Schack
told PBS "Newshour."

Legally meaningless maybe, but not without consequence for
hundreds of thousands of Americans who have been evicted
from their homes, many of whom have no jobs, and who were
snookered into sub-prime mortgages in the first place.

In the wake of mounting public outrage, attorneys general of
50 states and the District of Columbia have launched a joint
investigation into what financial writers are calling
"Foreclosuregate." Industry spokespersons have downplayed
the controversy surrounding foreclosure mills and "robo-
signers." Bank of America and JP Morgan Chase are conducting
internal reviews of thousands of foreclosures, but say they
believe all the underlying facts in their foreclosures are
true and that any potential issues will be quickly
addressed.

However, Bank of America and GMAC stopped foreclosures in
all 50 states and Chase stopped them in the 23 states where
a judge must approve foreclosures. Other lenders like PNC
Financial and Litton Loan Savings followed suit in what
amounted to a national moratorium on foreclosures. But it
only lasted a couple of weeks. Bank of America and GMAC have
since started up foreclosure suits again despite the bad
press, pressure from bondholders and even the Federal
Reserve, which wants big lenders to start buying back the
bad mortgages on which they are trying to foreclose.

"The bottom line is not that those properties won't be
repossessed. They simply won't be repossessed as quickly,"
said Rick Sharge, vice president of RealtyTrac. But others
predict that if GMAC and Bank of America stick to their
guns, they just might go down in smoke.

"This is not simply a glitch in paperwork," wrote Iowa
Attorney General Tom Miller, who is heading up the states'
joint investigation into the mortgage paper fraud mess.

"This was an industry wide scheme designed to defraud
homeowners," Florida attorney Peter Ticktin told The
Associated Press.

Ohio Attorney General Richard Cordray filed a lawsuit
against lender GMAC in October that aims to stop sales of
all repossessed homes foreclosed with robo-signed documents
and to reverse judgments on those foreclosed homes that have
not yet been sold. In addition, the suit seeks damages for
homeowners and a $25,000 fine for every fraudulently filed
court document.

In Kentucky, Heather McKeever filed a class action lawsuit
against GMAC on behalf of homeowners there alleging the
giant lender, a recipient of $16 billion in federal bailout
money, violated the RICO Act. "This is organized crime by
people in suits but it is still organized crime," she said.

If other states file similar lawsuits like those in Ohio,
Kentucky and Mississippi, it could mean billions of dollars
in damages and fines, criminal perjury prosecutions of
"robo-signers" and disbarment for the lawyers who filed the
fraudulent papers. Some analysts say the potential liability
of major banks is so large, another financial crisis is a
real possibility.

The fraud allegations raise the question of who actually
owns the bad loans. If banks cannot show an unbroken chain
of title from the original borrower to themselves, they have
no legal right to foreclose. At least that's the argument
defense lawyers are making.

"When they tried to industrialize the loan securitization
market, which is really what they did, they tried to
automate everything they could. They started digitizing loan
documents and shredding originals.... and, of course what
that means is, we have no clue who owns what," foreclosure
expert Walter Hackett told PBS "Newshour."

Hackett turned into a consumer advocate after nearly three
decades on the inside. He knows exactly where to bite the
hand that used to feed him. And he was referring to a
private database lenders have relied on for years to track
loans that would be bundled into investment vehicles called
mortgage-backed securities (MBS), which are traded back and
forth between investors daily.

To collect fees from those trades, Wall Street relies on the
Mortgage Electronic Registry System (MERS), which had three
million loans listed in its database in early 2001. Today,
it has more than 62 million and virtually all of the home
loans made in the US since 2005. But since MERS is
essentially Excel spreadsheets shared between bankers and
brokers, it is really just a bunch of numbers. MERS was
designed to make money out of the mortgage market, not parse
exactly who owes what to whom.

One foreclosure expert estimates that just 6 to 7 percent of
the loans made in the last three years can produce properly
recorded title transfers from borrower to final lender.
Legally assigning, or recording title transfers was much too
slow and cumbersome for the fast-paced trade in MBS, so most
banks just ignored those requirements, according to
testimony, analysts and consumer advocates like Hackett. On
many mortgages, the loan owner's name was routinely left
blank, the titles never recorded and title transfer fees not
paid.

Banks invented an investment vehicle in 1987 called REMICs
(Real Estate Mortgage Investment Conduits) to allow them to
profit from MBS trading. A Real Estate Mortgage Investment
Conduit is what the name implies - an empty pipe that allows
banks to collect fees as trustees of MBS' without owning any
of the assets that back them. It also allows them to avoid
taxes and title transfer fees since they only pass through
titles to property held as collateral for the MBS' they
sell.

But this is clearly a convenient fiction for huge consumer
lenders like Bank of America and GMAC, which are trying to
have things both ways. REMICs were a real sweet deal for
banks until the bottom fell out of the housing market in
2007, triggering the worse recession in 75 years. Banks soon
found themselves going to court to repossess property they
had been claiming for years they never owned.

They hired foreclosure mills to retroactively produce
documents showing the chain of ownership ended with them. In
many cases, foreclosure mills provided affidavits of lost
mortgage notes attempting to prove banks' control of
mortgages in hopes of winning a favorable judgment.

Banks are in a big pickle. If they can prove they own the
title to properties they want to foreclose on, they are
liable to the IRS for unpaid taxes and penalties. If they
don't, the are liable to be sued by bond holders for lack of
due diligence in the bundled mortgages they sold to
investors.

This is good news for homeowners facing eviction, and there
has been an increase in the number of contested foreclosures
in Florida, ground zero of the foreclosure scandal.

Both Bank of America and GMAC got billions in federal
bailouts, so playing hardball with borrowers when the Obama
administration put up an additional $75 billion to persuade
banks to refinance troubled loans may jeopardize their "too
big to fail" status in Washington.

Housing Secretary Shaun Donovan told reporters in Washington
last Wednesday that the federal government would act soon to
force banks to offer loan modifications for mortgages backed
by the Federal Housing Administration. (How many?)

Meanwhile, investigations are underway not only by the
states' attorneys general, but also by federal banking
regulators, the US Justice Department and the Securities
Exchange Commission. A number of lawsuits have been filed in
Ohio, Kentucky, Mississippi, and other states, and all this
attention may force banks to renegotiate their loans with
more affordable terms for borrowers.

But banks are not heading down that path, instead, they are
redoing questionable foreclosure papers they hope will pass
muster in court.

"There has been an attempt by some of the major services to
indicate there are no problems," Iowa Assistant Attorney
General Patrick Madigan, told The New York Times.

"We're not at the end of this process. We're at the
beginning," he said.

Only time will tell how the foreclosure scandal plays out.
Federal regulators say their investigation won't be
completed before the end of the year. And several
foreclosure experts agree with Madigan that the fight over
foreclosures is just beginning.

Reporting assistance by Ellen Brown.

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