Elizabeth Duke Testimony on Foreclosure Crisis
Thursday November 18 Federal Reserve Governor Elizabeth A. Duke will predict that there will be four million addition foreclosure filings in 2011 and 2012, equally divided between the two years. This will be part of testimony before the House Financial Services Subcommittee on Housing and Community Services in Washington. The complete transcript of the testimony can be read here.
Duke will report that there were 2.25 million foreclosure filings in 2009 and a similar number are expected when the final count is in for 2010. The 2010 total will be achieved in spite of a slow down in foreclosure activity over the last four months of the year resulting from the scandal over sloppy and even fraudulent foreclosure proceedings. Duke will also testify in detail about the legal process problems and actions underway to sort out those difficulties. The numbers that Duke will present are at the upper end of the range I estimated at the beginning of the year for completed foreclosures. The numbers that Duke will present are less than the number of filings reported by other sources, but more than the number of foreclosures completed (home repossession or REO). If Duke intends to refer to the number of initial foreclosure filings only, then her numbers would be consistent with the other sources referenced.
Duke will mention that the crush of foreclosures resulting from the housing bubble started with 1 million foreclosure filings in 2006. This also differs from what industry sources have reported.
There may be some differences between the way foreclosure actions are being counted by Duke and by industry reports.
With regard to the foreclosure documentation and legal proceeding scandal, Duke will report:
The interagency examination and review focuses on foreclosure practices generally, but with an emphasis on the breakdowns that led to inaccurate affidavits and other questionable legal documents being used in the foreclosure process. The regulators expect the initial on-site portion of our work to be completed this year and currently plan to publish a summary overview of industry-wide practices in early 2011. At that time we will have more information about the extent and significance of these very troubling practices, as well as what must be done to prevent them from occurring in the future.
Duke will go on to give a complete review of the foreclosure process and the difficulties that need to be sorted out. She also will specifically address risks in the current situation to consumers, financial institutions, the financial system, mortgage markets and the housing market.
At one point Duke will say:
Cost associated with foreclosure documentation problems, including “robo-signing” (discussed in more detail later), are not the only potential liabilities facing financial institutions. Investors in mortgage-backed securities and purchasers of unsecuritized “whole loans” have begun to explore and in some cases assert contractual and securities law claims against the parties that originated the loans, sold the loans, underwrote securities offerings, or had other roles in the process. The essence of these claims is that the mortgages in the securitization pools or that had been sold as unsecuritized whole loans did not conform to the representations made about their quality—specifically, that the loan applications contained misrepresentations or the underwriting was not in conformance with stated underwriting guidelines.
She will discuss the financial exposure to financial institutions of put-backs that may occur when mortgage originators and mortgage securities underwriters have been found to have misrepresented the quality of their products. In other words, the polite governor uses delicate terms to describe the risks that lie before us as fraud is uncovered and restitution sought.
The Duke testimony is as direct, pointed and precisely factual (excepting my failure to determine exactly how she is counting foreclosures) as I have seen from a high ranking Fed official or a top government figure. Read the entire testimony and watch either the testimony live or on video after the fact. I can hardly wait to see if any of the committee members will be able to ask any intelligent questions. If that is accomplished, the discussion from Elizabeth Duke should be well worth hearing.