Foreclosure Fraud For Dummies, 5: The Necessity of Government Action and Ways Out of The Crisis

(This is a series giving a basic explanation of the current foreclosure fraud crisis: Here is Part One, Part Two, Part Three, Part Four and this is Part Five.)

Here’s a guess:  In one month, the large banks will conclude that there are no problems with its foreclosure processes.  The massive fraud that was committed on the courts was the result of a few bad apples, but those are now gone and it’s back to business as normal.

At this point, either as a citizen or as a financial market participant, would there be any reason to believe them?   Is there any reason to believe that the servicer and foreclosure mill fraud is over?  That securitizations actually have the proper legal documentation necessary?   That borrowers and lenders are actually getting a chance to come to mutually beneficials situations?    Is there any reason to believe they aren’t lying?

Because servicers aren’t currently regulated.  They have a patchwork of state regulators and the OCC may regulate their parent company if it is a bank or thrift, but there’s no current government agent to provide any accountability here.   So without action, there’s going to be no one to confirm or deny that anything has actually changed in the housing market.

In some ways this narrative already reminds me of the BP oil spill in the gulf.  The Obama administration largely left it to BP to tell the government and the public what was wrong, hire the contractors and then also to tell everyone what the environmental damages were.  It will surprise no one that the information BP sent out was wrong (see, for example, Kate Sheppard,“Not an Incidental Public Relations Problem”), but for better or worse, the Obama administration is now linked to whatever course and information BP chooses to pursue.

Why not choose a different course for this one?   One that emphasizes social justice through powerful banks having to follow the rule of law, corporate responsibility to not commit fraud, provides a space where those who are weak and poor get a fair say instead of being bulldozed over by the rich and strong, and actually starts to dig out of the mortgage crisis that we are in. Check out Mike Lux’s Exploding foreclosure fraud issue: An opportunity for Democrats to turn the tide. Not only is it relevant, but it demonstrates that there’s a good chance this is going to get worse before it gets better. Why not get in front of it, and change course from the disastrous path we’ve been taking?

What Just Went Wrong in the Government Response?

Because what we’ve done to this point hasn’t worked.  Shahien Nasiripour and Arthur Delaney wrote the definitive account of the failure of the HAMP program, Extend AND Pretend: The Obama Administration’s Failed Foreclosure Program. Instead of continuing HAMP, it’s time for a fresh response.

Pat Garofalo of the Center for American Progress has The Fix Is Over: Mortgage Foreclosure Scandal Offers New Hope for Homeowners which has a lot on what a new foreclosure relief program could look like:

allowing housing counselors and other public entities to approve mortgage modifications directly, and if the borrower’s servicer doesn’t challenge the modification in 90 days, it automatically becomes permanent. Such a step would go a long way toward streamlining the program and getting borrowers who qualify through the maze of bureaucracy in a timely, clear fashion without leaving them in limbo for months on end.

Mortgage mediation programs—in which a bank must meet with a borrower, in the presence of a judge and housing counselors, before finalizing a foreclosure—should also be expanded..

Another new favorite policy option everyone should start considering:  “REMICs bestow enormous tax breaks to investors; these breaks should be revoked for any residential home mortgage loan holding entity that forecloses on more than a specified percentage of all of its mortgages.”

We have to remember what went wrong with HAMP: the servicers were in the driver’s seat. We need a process that is involuntary, government-run and is standardizable on both the modification and on the foreclosure end.  Between this and a clearing out of the current crisis to confirm change has actually happened we can start on a way out of this crisis.

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15 Responses to Foreclosure Fraud For Dummies, 5: The Necessity of Government Action and Ways Out of The Crisis

  1. Dennis M says:

    The US Gov has wasted hundreds of billions of our money on buyouts and phony incentives but how about this:

    My idea: Give taxpayers the same rate the banks got

    Tie interest rates to the federal unemployment rate.


    Capitalizing arrearages of past due payments, HELOC, late fees and other charges arising out of past delinquencies, are added to the loan balance.

    A new payment is then calculated.(mortgage calculator Bank )

    Granting zero principal forbearance.(Capitalizing the original loan amount)

    An example of a mortgage loan workout:

    Original Loan:$250,000

    Present Balance Owed:$300,000 (capitalized interest arrears, foreclosure costs)

    Interest Rate: 5.0%(30 year)

    Current Monthly Payment:$1362.42

    This is no “BAILOUT”; borrower would repay the original amount.

    Reduce the interest rate to 0.75% ARM*

    Extend the amortization terms to 50 years.


    Re-amortize to 50 years, with Arrears Capitalized:

    New loan amount:$300,000

    Interest Rate: 0.75% ARM*

    New Monthly Payment:$599.75

    (how is that for a stimulus?)

    Here, the homeowner has a reduced monthly payment of about $763.00 per month, and it’s this amount that can be used for car payments, food and utilities.

    The new loan would not be permitted any type of HELOC


    ARM* tied to the unemployment number.(6-month lag)

    10 % unemployment =. 75%

    9 % unemployment = 1.50%

    8% unemployment = 2.25%

    7% unemployment = 3.00%

    6% unemployment = 3.75%

    5% unemployment = 4.75%

    As you can see, a 5% unemployment rate brings all loans to market interest rates.

    At these rates most loans would be repaid 100% by the full faith and credit of the US Citizen.

    The Feds would benefit with less deductions at income tax time

    And the banks that caused it all….


  2. Great series! One thing I’ll add is that there is an additional reason that Notes may not have been delivered other than simply cutting corners or being “fly-by-night”. In a lot of cases towards the end of the bubble, the originators/sponsors may have been purposefully defrauding the trusts. One way was simply by promising to deliver a bundle of mortgages or pieces of mortgages of a certain quality and then delivering one that was of less quality – by not sending all the notes, it would be easier to hide this.

    A second way was simply by “delivering” bundles of mortgages that didn’t exist at all – selling something for which a note didn’t even exist. This would not cause a direct problem with foreclosures and from what I’ve read it is uncertain how much of this went on. But given how little due diligence ANYONE in the process was doing, it doesn’t seem unlikely that it happened. And it could definitely cause some pain to some of these entities.

    I suspect that at this point, the trusts, servicers, title insurers, and sponsors are trying to balance their desire not to have everything come crashing down – which will have unpredictable results – with their desire to protect themselves at everyone else’s expense. I don’t think anyone can predict whether the uneasy balance will be sustainable for long enough for things to shake out without major disruptions.

  3. Pingback: FT Alphaville » Further reading

  4. stuhlmann says:

    I agree. This has been a great series. But let’s not forget the law and order issues. Lots of people committed perjury by knowingly presenting fraudulent affidavits in court. These people, and the people who prepared the fraudulent documents need to be arrested, tried in court, and punished upon conviction. This will provide strong negative incentives for those who might consider doing similar things in the future. Of course the people who directed that these crimes be committed shouldn’t be let off scot free. I’m sure there are some sort of conspiracy or aiding and abetting charges that can be brought.

  5. Pingback: FT Alphaville » Sacrificing servicers on the altar of Hamp

  6. David Merkel says:

    REMICs are pass-through entities. Taxing them would accomplish nothing because they don’t earn any profits. Why suggest taxing them?

    • Nathanael says:

      As they don’t qualify legally as REMICs, all the money coming in is legally taxable at 100%. Which means the trustees are subject to repayment of evaded taxes.

      But because the trusts don’t legally exist due to never being legally funded under the PSA, the responsibility for the failure to pay taxes falls *entirely* on the sponsor bank….

  7. Fred Smith says:

    Nobody has brought up the distinct possibility that the loan servicers may well have bundled and sold each of these loans MORE THAN ONCE to differernt investors via the securitization process. THIS COULD BE THE REAL REASON THAT THERE IS NO DOCUMENTATION / PAPER TRAIL. The non-existent documentation and accounting is entirely consistent with this scenario. This means that the entire plan was a true Ponzi scheme in the worst sense. In other words, rather than selling the loan once to investors, as we have all naively been assuming, there is no reason to believe that they did not double-dip or quintuple-dip and sell the exact same loan to completely new buyers. THIS IS A LEVEL OF FRAUD THAT THE AMERICAN PUBLIC HAS NOT YET CONTEMPLATED.

    • Nathanael says:

      We already know it’s happened at least once. I would not be surprised if it had been done systematically.

    • EVMarc says:

      Catherine Austin Fitts was on to that 2 years ago
      some mortgages were sold 10 times or put in 10 different bundles
      like you have 100 mortages in a bundle
      one mortgage may be 10 of those 100
      the system isn’t fraudulent
      fraud is the system
      Cathrine’s site
      she is on every Wednesday community business
      she connects the dots

      • EVMarc says:

        the 10-13-10 Flahpoint show, current fraud ties it back all way to the saving and load guys
        same guys a temporary link is up now only available to download for a week

  8. Pingback: Foreclosure Fraud For Dummies, 2: What is a Note, and Why is it So Important? « Rortybomb

  9. David says:

    These loans were NEVER securitized. They were never properly recorded and reports are showing they were NEVER even Transferred to the Trusts.

    They left the Notes with the originators or sponsors to avoid the recordation fees & taxes. That is why there are so many assignment frauds – back dating – etc. The PSA requires these assignments must happen by closing date – it did not happen.

    This means these loans were not secured by the property. The lenders forfeit the right to foreclose and their only recourse is attempt a lien but the loan at that point becomes an Open-Ended loan no-different than a credit card debt.
    These foreclosure mills know they are illegal foreclosing and seizing these properties. They have no legal standing whatsoever and it is evidenced by comparing the Deed of Trust to the Note.

    Keep the Powder Dry

  10. Chris H says:

    The primary cause of this fiasco is unethical behavior.
    The people who perpetrated these evils did not act on moral absolutes.
    There are 2 laws that God decreed that solve all these problems, b/c obeying these 2 laws circumvents such problems:
    1. establishing and maintaining “just weights and measures” (i.e., no fractional-reserves banking, nor any monetizing of debt; but adherence to the “Coinage Act of 1792” which is stands in law today), and
    2. no charging your fellow countrymen interest (not ‘usury’, but INTEREST).
    If you think about the system/process-flow involved in loaning $, and in monetizing credit/debt, and relate that to obeying the 2 above laws, you will see that the impossibility of monetizing debt when no credit exists due to tanbible wealth exchanges in the market place; and the elimination of all the ‘bad people’ who rise up around charging interest and all such schemes.
    God offers the solution if people are willing to obey Him.
    Apparently mankind has failed at this so many times over the course of human history that one would think that we should have learned our lesson long ago. Apparently not. Once again, all owing to lack of moral character based on God’s laws: lazyness backed by greed and power-mongering.
    We create our own societal demise by not obeying the Creator’s dictates, and eventually “it’s hell to pay” … Chris H

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