When Banks Are the Robbers
October 20, 2010
by Amy Goodman
The big banks that caused
the collapse of the global finance market, and received tens of billions of
dollars in taxpayer-funded bailouts, have likely been engaging in wholesale
fraud against homeowners and the courts. But in a promising development this
week, attorneys general from all 50 states announced a bipartisan joint
investigation into foreclosure fraud. Bank of America, JPMorgan
Chase, GMAC and other big mortgage lenders recently suspended most foreclosure
proceedings, following revelations that thousands of their foreclosures were
being conducted like “foreclosure mills,” with tens of thousands of legal
documents signed by low-level staffers with little or no knowledge of what they
Then the Obama administration signaled that it was not supporting a foreclosure moratorium. Not long after, Bank of America announced it was restarting its foreclosure operations. GMAC followed suit, and others will likely join in. So much for the voluntary moratorium.
GMAC Mortgage engaged in mass document processing, dubbed “robo-signing.” In several cases, GMAC Mortgage filed documents with courts that were signed by Jeffrey Stephan. Stephan presided over a staff of 12 in suburban Philadelphia. Ohio Attorney General Richard Cordray filed a lawsuit against GMAC Mortgage, Stephan and the bank that owns GMAC, Ally Financial (itself a subsidiary of General Motors).
According to one report, Stephan received 10,000 mortgage foreclosure documents to process in one month. Based on an eight-hour workday, he would have had to read, verify and sign, in the presence of a notary, about one document per minute. He admitted to signing documents without reading them or checking the facts about homeowners said to be in default. And Stephan was just one of many “robo-signers.”
Recall that GM received $51 billion in taxpayer bailouts; its subsidiary, GMAC, received $16.3 billion; and Ally Financial subsidiary GMAC Mortgage received $1.5 billion as an “incentive payment for home loan modification.”
So you as a taxpayer may have bailed out a bank that is fraudulently foreclosing on you. What recourse do you have?
Back in February 2009, Ohio Rep. Marcy Kaptur advised homeowners to force lenders to “produce the note.” People facing foreclosure were being taken to court while the bank alleging default couldn’t even prove it owned the mortgage. The mortgage document often had been lost in the tangled web of financial wheeling and dealing. Kaptur told me: “Millions and millions of families are getting foreclosure notices. They don’t have proper legal representation ... possession is nine-tenths of the law; therefore, stay in your property.”
If you stay in your home, your mortgage lender may break in. Nancy Jacobini of Orange County, Fla., was inside her home when she heard an intruder. Thinking she was being burglarized, she called 911. Police determined the intruder was actually someone sent by JPMorgan Chase to change the locks. And Jacobini wasn’t even in foreclosure!
Most banks that suspended foreclosure efforts only did so in 23 states—because it is only in those 23 states that courts actually adjudicate over foreclosure proceedings. One judge who oversees foreclosures is New York State Supreme Court Justice Arthur Schack. He has made national headlines for rejecting dozens of foreclosure filings. He told “Democracy Now!” news hour, “My job is to do justice ... we run into numerous problems with assignments of mortgages, questionable affidavits of merit and just sloppy paperwork in general.”
Bruce Marks runs NACA, a national nonprofit that helps people avoid foreclosure. He told me: “When President Obama was running for president, he said one of the first things he’ll do is put a moratorium on foreclosures. He never did. He never backed bankruptcy reform so people could have the right to go in front of a bankruptcy judge.”
He went on: “And where is President Obama? When he says, ‘Well, you know, we don’t want to upset the market,’ what is good about a market when someone is foreclosed on and ... you’ve got a vacant building? We have to have a national moratorium to give ourselves a window of opportunity to restructure mortgages ... to look at homeowners as people, not as a commodity to make money.”
According to RealtyTrac, banks repossessed 102,134 properties in September, a home roughly every 30 seconds. Every 30 seconds, banks—many that received funds from the Bush administration’s TARP, and that may be using fraudulent practices—foreclose on an American family’s dream of home ownership. Meanwhile, GMAC Mortgage has reported increased profits for the first half of 2010.
American officials used to lecture other countries about their economic failings and tell them that they needed to emulate the U.S. model. The Asian financial crisis of the late 1990s, in particular, led to a lot of self-satisfied moralizing. Thus, in 2000, Lawrence Summers, then the U.S. Treasury secretary, declared that the keys to avoiding financial crisis were "well-capitalized and supervised banks, effective corporate governance and bankruptcy codes, and credible means of contract enforcement." By implication, these were things the Asians lacked but we had.
The accounting scandals at Enron and WorldCom dispelled the myth of effective corporate governance. These days, the idea that our banks were well capitalized and supervised sounds like a sick joke. And now the mortgage mess is making nonsense of claims that we have effective contract enforcement — in fact, the question is whether our economy is governed by any kind of rule of law.
The story so far: An epic housing bust and sustained high unemployment have led to an epidemic of default, with millions of homeowners falling behind on mortgage payments. So servicers — the companies that collect payments on behalf of mortgage owners — have been foreclosing on many mortgages, seizing many homes.
But do they actually have the right to seize these homes? Horror stories have been proliferating, like the case of the Florida man whose home was taken even though he had no mortgage. More significantly, certain players have been ignoring the law. Courts have been approving foreclosures without requiring that mortgage servicers produce appropriate documentation; instead, they have relied on affidavits asserting that the papers are in order. And these affidavits were often produced by "robo-signers," or low-level employees who had no idea whether their assertions were true.
Now an awful truth is becoming apparent: In many cases, the documentation doesn't exist. In the frenzy of the bubble, much home lending was undertaken by fly-by-night companies trying to generate as much volume as possible. These loans were sold off to mortgage "trusts," which, in turn, sliced and diced them into mortgage-backed securities. The trusts were legally required to hold the mortgage notes that specified the borrowers' obligations. But it's now apparent that such niceties were frequently neglected. And this means that many of the foreclosures now taking place are, in fact, illegal.
This is very, very bad. For one thing, it's a near certainty that significant numbers of borrowers are being defrauded — charged fees they don't actually owe, declared in default when, by the terms of their loan agreements, they aren't.
Beyond that, if trusts can't produce proof that they actually own the mortgages against which they have been selling claims, the sponsors of these trusts will face lawsuits from investors who bought these claims — claims that are now, in many cases, worth only a small fraction of their face value.
And who are these sponsors? Major financial institutions — the same institutions supposedly rescued by government programs last year. So the mortgage mess threatens to produce another financial crisis. What can be done?
True to form, the Obama administration's response has been to oppose any action that might upset the banks, like a temporary moratorium on foreclosures while some of the issues are resolved. Instead, it is asking the banks, very nicely, to behave better and clean up their act. That's worked so well in the past, right?
The response from the right is, however, even worse. Republicans in Congress are lying low, but conservative commentators like those at The Wall Street Journal's editorial page have come out dismissing the lack of proper documents as a triviality. In effect, they're saying that if a bank says it owns your house, we should just take its word. To me, this evokes the days when noblemen felt free to take whatever they wanted, knowing that peasants had no standing in the courts. But then, I suspect that some people regard those as the good old days.
What should be happening? The excesses of the bubble years have created a legal morass, in which property rights are ill defined because nobody has proper documentation. And where no clear property rights exist, it's the government's job to create them.
That won't be easy, but there are good ideas out there. For example, the Center for American Progress has proposed giving mortgage counselors and other public entities the power to modify troubled loans directly, with their judgment standing unless appealed by the mortgage servicer. This would do a lot to clarify matters and help extract us from the morass.
One thing is for sure: What we're doing now isn't working. And pretending that things are OK won't convince anyone.
Paul Krugman is a regular columnist for The New York Times.
Maybe the squatters were right. That was the
bizarre thought I had as banks sank into another mortgage morass last week,
with some shuttering…
Maybe the squatters were right.
That was the bizarre thought I had as banks sank into another mortgage morass last week, with some shutting down foreclosure activity and all 50 states launching investigations into the home-lending industry.
Remember the squatters? They took over an opulent Kirkland mansion last summer and lived it up for two weeks before the main instigator, a woman named Jill Lane, was hauled off in handcuffs for trespassing.
Her tale seemed too sensational to take seriously. She insisted she wasn't in it for money, but to make a political point: That the banks, in their frenzy to profit off the long-popped real-estate bubble, had lost track of who owns what.
"Banks do whatever they want, and nobody holds them accountable," she said at the time.
Lane had no more right to that mansion than she has to your house or mine. But her point was: OK, who does? If a bank forecloses on your mortgage, shouldn't the bank be able to prove it really owns the note and has a right to demand payment?
This question seemed like a sideshow. But it's become a major hangover from the real-estate party.
Some mortgages were so sliced, diced and repackaged as investment vehicles on Wall Street that the seemingly critical question of who owns the loans wasn't properly recorded.
Now we've learned that banks were processing loan documents as if they were fast-food orders. Some banks have since gone back and falsified documents in order to evict delinquent borrowers.
"The excesses of the bubble years have created a legal morass, in which property rights are ill-defined because nobody has proper documentation."
That quote easily could have come from a manifesto of sorts written last April by the Kirkland squatter, for a now-kaput local company called NW Note Elimination. It featured tips on how to challenge your mortgage.
But it was actually written last week, by Princeton economist and New York Times columnist Paul Krugman, to describe what is happening in this country.
"Many of the foreclosures now taking place are, in fact, illegal," Krugman wrote.
I called around to a couple of local foreclosure experts, to see whether anyone here is challenging the banks, a la the squatters, to "show me the note."
Scott Weitz, a Kirkland foreclosure attorney, said foreclosures in this state aren't usually handled in the courts. So to challenge the banks you'd have to sue them. That's so expensive that not many have tried.
Nova Shank, a Seattle real-estate agent who specializes in foreclosures, said he knows of one case in Issaquah in which the defaulting owners challenged errors in some of the bank's documents in a bankruptcy proceeding. The result was the bank allowed the home to be sold for more of a loss than it had wanted.
But people in foreclosure often are desperate, financially and emotionally. They're in no condition to mount sophisticated legal challenges, Shank said.
Weitz recently wrote a post on his law firm's Web site about all this, titled "Bank fraud abundant in mortgage documents." He predicted the problem is so huge that the system, both financial and political, will do what it does best when cornered: Look the other way.
"My guess is that we allow the foreclosures to continue, and cover up the 'fraud' or 'malpractice,' because fixing the problem would cause most of the banks to go under," he said.
That's almost exactly what the squatters suggested to me, during an interview shortly after Kirkland police retook control of that mansion last summer. Fraudulent mortgages and illegal foreclosures are a coming epidemic, they said. Only a silent one. Because the banks, too big to fail, have also become, in league with the government, too lordly to question.
I know, I know. Those squatters are nuts. Right?
Danny Westneat's column appears Wednesday and Sunday. Reach him at 206-464-2086 or firstname.lastname@example.org