Foreclosure
Fraud: 6 Things You Need To Know About the Crisis That Could
Potentially Rip the U.S. Economy To Shreds By Economic Collapse
Blog
| October 16, 2010
The
foreclosure fraud crisis seems to escalate with each passing
now. It is being reported that all 50 U.S. states have launched
a joint investigation into alleged fraud in the mortgage industry.
This is a huge story that is not going to go away any time
soon. The truth is that it would be hard to understate the
amount of fraud that has gone on in the U.S. mortgage industry,
and we are watching events unfold that could potentially rip
the U.S. economy to shreds. Many are now referring to this
crisis as "Foreclosure-Gate," and already it is
shaping up to be the worst thing that has ever happened to
the U.S. mortgage industry. At this point, it seems inevitable
that some financial institutions will go under as a result
of this mess. In fact, by the end of this thing we might see
a whole bunch of lending institutions crash and burn. This
crisis is very hard to describe because it is just so darn
complicated, but it is worth it to try to dig into this thing
and understand what is going on because it has the potential
to absolutely decimate the entire U.S. mortgage industry.
The truth is that there was fraud going on
in every segment of the mortgage industry over the past decade.
Predatory lending institutions were aggressively signing consumers
up for mortgages that they knew they could never repay. Many
consumers were also committing fraud because a lot of them
also knew that they could never possibly repay the mortgages.
These bad mortgages were fraudulently bundled up and securitized,
and these securitized financial instruments were fraudulently
marketed as solid investments. Those who certified that these
junk securities were "AAA rated" also committed
fraud. Then these securities were traded at lightning speed
all over the globe and a ton of mortgage paperwork became
"lost" or "missing."
Then, when it came time to foreclose on these
bad mortgages, a whole bunch more fraud started being committed.
The reality is that the "robo-signing" scandal is
just the tip of the iceberg. The following are six things
that you should know about how deep this foreclosure fraud
crisis really goes....
#1 According to the Associated Press,
financial institutions were hiring just about whoever they
could find, including hair stylists and Wal-Mart employees,
as "foreclosure experts" to help them rush through
the massive backlog of foreclosures that were rapidly piling
up.
Apparently many of these "foreclosure
experts" barely even knew what a "mortgage"
was according to the AP....
In depositions released Tuesday, many of those
workers testified that they barely knew what a mortgage was.
Some couldn't define the word "affidavit." Others
didn't know what a complaint was, or even what was meant by
personal property. Most troubling, several said they knew
they were lying when they signed the foreclosure affidavits
and that they agreed with the defense lawyers' accusations
about document fraud.
#2 There is soon going to be a colossal
legal scramble to figure out who actually owns millions of
U.S. mortgages.
In his recent article entitled "Invasion
Of The Robot Home Snatchers," Robert Scheer described
the complete and total mess that the U.S. mortgage industry
has created....
How do you foreclose on a home when you can't
figure out who owns it because the original mortgage is part
of a derivatives package that has been sliced and diced so
many ways that its legal ownership is often unrecognizable?
You cannot get much help from those who signed off on the
process because they turn out to be robot signers acting on
automatic pilot. Fully 65 million homes in question are tied
to a computerized program, the national Mortgage Electronic
Registration Systems (MERS), that is often identified in foreclosure
proceedings as the owner of record.
Meanwhile, more organizations are stepping
forward to help homeowners fight foreclosures. National People's
Action, PICO National Network, Industrial Areas Foundation,
Alliance of Californians for Community Empowerment and the
Northwest Federation of Community Organizations have all partnered
with the SEIU to launch the "Where's The Note" campaign
which is going to encourage homeowners to demand to see the
note before submitting to a foreclosure. Campaigns such as
this are going to make foreclosures much more costly for banks.
#3 Legal battles over foreclosure
documents could soon spawn thousands upon thousands of lawsuits
across the United States.
Adam Levitin, a Georgetown University Law
professor who specializes in mortgage finance and financial
regulatory issues was recently quoted in an article on CNBC
as saying the following about the situation we are currently
in....
The mortgage is still owed, but there's going
to be a problem figuring out who actually holds the mortgage,
and they would be the ones bringing the foreclosure. You have
a trust that has been getting payments from borrowers for
years that it has no right to receive. So you might see borrowers
suing the trusts saying give me my money back, you're stealing
my money. You're going to then have trusts that don't have
any assets that have been issuing securities that say they're
backed by a whole bunch of assets, and you're going to have
investors suing the trustees for failing to inspect the collateral
files, which the trustees say they're going to do, and you're
going to have trustees suing the securitization sponsors for
violating their representations and warrantees about what
they were transferring.
#4 The problems with foreclosure paperwork
may be more widespread than anyone would have dared to imagine.
Attorney Richard Kessler recently conducted
a study in which he found "serious errors" in approximately
75 percent of the court filings related to home repossessions
that he examined. Now he says that the foreclosure crisis
could haunt the U.S. mortgage industry for the next ten years....
"Defective documentation has created
millions of blighted titles that will plague the nation for
the next decade."
#5 If some banks discover that they
are missing the paperwork for large numbers of mortgages (as
is currently being alleged), those banks could be forced to
significantly revalue those assets (as in "close to zero")
on their balance sheets.
John Carney of CNBC recently described it
this way....
The most damaging thing that could happen
to banks would be the discovery that they simply cannot prove
they hold a mortgage on a house. In that case, the loan would
probably have to be written down to near zero. Even for current
loans, the regulatory reserve requirements would double as
the loan would no longer be a functional mortgage but an ordinary
consumer loan. Depending on the size of the “no docs”
portion of the loan portfolio, this might be a minor blip
or require a bank to raise new capital to fill the hole in
the balance sheet.
#6 Renowned investor Jim Sinclair
is actually warning that the collapse of securitized mortgage
debt could be the "final shot" that will wipe out
many financial institutions across the United States.
The recent warning that Sinclair posted on
his blog is more than a little sobering....
I am asking for your attention again because
of the depth of the fraud and now the size of the securitized
mortgage debt OTC derivative pile of garbage that is in the
trillions. This entire mountain of weapons of mass financial
and social destruction is now in question. I have been telling
you this for more than 2 years since the manufacturers and
distributors of this crap were called by the NY Fed due to
the loss of control over the paperwork.
I had dinner with my former partner, then
lead director of and CEO of Bear Stearns. I could not contain
myself so I asked him why he did so much business in OTC derivatives
which were certain to bankrupt them. The answer I got was
it was more than 50% of their profit. The right answer should
have been it was more than 80% of their earnings.
Securitized mortgage debt is going to be the
final shot that kills all kinds of financial entities in the
Western world. The biggest holder of this putrid junk is pension
funds.
Meanwhile, the stock market continues to go
up, up, up as if everything is right in the world and as if
a juicy new bull market is now upon us.
Well, let's all join hands and sing happy
songs around the campfire.
Perhaps if we all close our eyes and wish
real hard all of this foreclosure fraud will just go away.