"60 Minutes" aired a segment last night on the foreclosure fraud that we in the blogosphere have been discussing for sometime. See "Videos: Depositions of Alleged Robo-Signers From Nationwide Title Clearing" from November, for example. It’s good to see this issue go mainstream. The video is embedded below, but let me make a few comments first.
Here’s the macro picture
The mortgage mess is much deeper than just the robosigners. The whole securitization process is broken. My guess is that this will be a legal morass for years to come. The financial crisis and the attendant foreclosure is first and foremost a human tragedy with people losing their jobs, homes, and savings. But let’s look at this from a macro perspective. President Obama just announced his candidacy for re-election this weekend. So, he is officially in campaign mode now.
What that means is that there will be no foreclosure moratoria, and certainly no ‘fat cats on Wall Street‘ rhetoric. The Obama Administration is looking to cultivate a pro-business profile. This is why erstwhile Obama-basher and GE CEO Jeff Immelt has been brought on side as well. That’s also why Obama has brought Bill Daley into the tent as Chief of Staff. Call it the Jamie Dimon comeback – that’s what I am calling it. Call it whatever you like. The fact is the old Obama Administration already set policy early in 2009 and the new Obama Administration now has to defend it if the President wants to be re-elected, which he clearly does.
So, of course they are going to push for a mortgage settlement. As with the Goldman case this past summer, the number is eye-poppingly large enough to throw a bone to the anti-Wall Street crowd but small enough that it doesn’t jeopardize the still fragile US financial system. Bankers can continue business as usual. And that is the goal, of course.
–What the Mortgage Deal In The Works Reveals About The Obama Administration
Now, either the President gets the state attorneys general onboard or the foreclosure crisis is going to have very negative effects for the U.S. economy. That’s the macro picture.
What about the perpetrators?
"It was a common practice in the last few years to flood the courts with these documents," Lynn Szymoniak told [60 Minutes’ Scott] Pelley.
A look at some of the junk the courts were flooded with shows that sometimes the document mill didn’t even bother to fill in the names of the supposed owners.
To them, it seemed like a joke.
"Instead of the name of the bank here that was acquiring the loan, this one says, ‘Bogus Assignee for intervening assignments.’ That’s who acquired the loan," Szymoniak pointed out.
"This was an actual document that was in litigation?" Pelley asked, looking at the document.
"Yes," she said. "And what corporation assigned this loan? A corporation identified as ‘A Bad Bene.’ Excuse me? When I saw that I was just absolutely amazed."…
"It’s astonishing to me that this had become as pervasive as a problem that it is," Sheila Bair, the chairman of the Federal Deposit Insurance Corporation (FDIC) told Pelley.
"It got sloppy," he remarked.
"It got very sloppy," she agreed.
As FDIC chairman, Bair is one of the government’s top banking regulators.
"You just described it as pervasive," Pelley pointed out.
"Yeah. It is pervasive. It absolutely is pervasive. It was just a matter of cutting corners, not spending enough money and not having quality controls," she said.
Can I tell you what’s happening in this conversation?
Sheila Bair is a part of the same Obama Administration that has moved into re-election mode. That means not only does Bair, a trained lawyer, have to parse her words out of a need for diplomatic aplomb that comes with being a high ranking government representative and from practiced lawyerly caution, she also needs to help create a narrative that supports the President’s political aims. That means the ‘F’-word is verboten.
I’m talking about fraud here. Pelley and Bair were discussing ‘pervasive’ use of phony documents to force people out of their homes during foreclosure. When I hear the words pervasive and phony together, personally the first word that comes to mind for me is fraud. But, Bair doesn’t use that term. The last paragraph tells you why – the Obama Administration is looking for a legal fix to this problem and that doesn’t necessarily involve banks admitting to perpetrating widescale fraud or having pervasive fraud committed on their behalf. I thought I should flag that because it stood out for me.
What about the human suffering?
No one is happy when a homeowner loses a house to foreclosure. On the other hand, I don’t like it when deadbeats try to use legal technicalities to weasel out of their debts.
When a judge is confronted by a homeowner who complains that a foreclosure is invalid because the servicer used a robosigner, I hope the judge’s first question is: "When is the last time you made a mortgage payment?" The rest is just details.
–The overblown menace of robosigners, Bankrate.com, October 2010
That’s one view of foreclosed homeowners that began to gain traction after Rick Santelli started the Tea Party movement with his famous video outburst on CNBC along those lines in the clip below 25 months ago.
My view is very different. I wrote a post in November asking: Is the foreclosure crisis overblown?
My take: For political reasons, the Obama Administration would like to deep six this issue because it could harm the technical recovery from becoming a real recovery by 2012, when the President is up for re-election. The only way this issue gets traction is via Republicans, the states or the courts.
But, as for the merits of the debate, clearly there was an epidemic of fraud perpetrated during the housing bubble. Many so-called homeowners – who are really renters with a mortgage because they have no equity – were complicit in this fraud at loan origination. Do we use the government’s resources to uncover these fraudsters and prosecute them? Probably not, as there are thousands of these cases for governments with limited resources to track down.
Instead, the government’s resources should be directed at uncovering fraud within banks. From a purely practical perspective, this makes sense because there are a much more limited number of targets. But from a societal perspective it does as well. Banking is a cartel established by government. The government extends banking licenses. Government regulates banking activities. And government sanctions those that engage in unsafe and unsound practices. This is not a free market, folks. It’s not like I could set up a bank tomorrow and start making loans. My operation would be shut down immediately and I would be thrown in jail.
What do we as society get out of this arrangement? Supposedly, it stops criminals and fraudsters from setting up shop and ripping people off and creating Ponzi schemes for their personal profit, leaving their customers and institutions bankrupt. As a result, government has required those fortunate few who get banking licenses to adhere to a strict set of rules. That’s what a bank’s fiduciary duty is all about: trust, faith, confidence – all of that.
Many people who aren’t ‘deadbeats’ have legitimate reason to try to stop foreclosures like fraudulent fees, changing the locks of houses that aren’t in foreclosure, foreclosing on the wrong house, foreclosing on properties that don’t have mortgages, etc., etc. Even short of foreclosure, there are legitimate legal gripes. For example, there is bank payment harassment, a problem that was brought to light by a soldier who was current on his mortgage but still being harassed. These are events that should never occur, not even once. That these kinds of incidents have occurred numerous times tells you that the foreclosure process is seriously broken. Perhaps only when we have a deep depression and more people are thrown out of their homes will we stop seeing articles like the Bankrate.com one. In the early 1930s, as many reputable farmers started to lose their property to banks, the tide of public sentiment turned.
Here’s 60 Minutes.