Some Notes on a Potential Foreclosure Fraud Settlement

There are rumors that a settlement over foreclosure fraud might be happening in Chicago today.  There are also rumors that such a settlement will be in the State of the Union.  Since the conversation will likely go complex quickly, here are a few things to keep in mind as you try and understand what is going on.

–  I’d recommend separating out the issues of (a) whether the banks caused the housing bubble and whether they’ve faced consequences for it, (b) the desirability of mortgage debt being reduced as either an issue of fairness, reclaiming ill-gotten bank profits and/or macroeconomic stimulus and (c) the idea of excessive number of foreclosures going through as a result of perverse incentives.

The core of this problem is one of record-keeping and legal process, and this utility-like function in our economy has broken down.  Even if there weren’t any foreclosures, even if there was no housing bubble or underwater mortgages and even if there weren’t record Wall Street bonuses, what is happening with the servicing model needs a serious investigation and airing.  (a)-(c) all add to the severity of the issue and are consequences of this broken model, but they are not necessary for the case to be made that there needs to be an investigation of what is going on in our mortgage markets.

–  Some links:  You may have heard about “robosigning” but the allegations go way beyond that.  I went over a lawsuit against LPS here that will introduce you to many of the claims.  I did a For Dummies series when the big scandals first broke.  And I argued that we shouldn’t think of servicers adding market information in the traditional Hayek sense as a result of the way these business models are setup.  The status quo is a disaster all around.

–  For those who claim it is an issue of the current wrecked housing market (or Dodd-Frank, or whatever), judges and advocacy groups have been flagging this for over a decade.  Let’s get some quotes from bankruptcy judges in here:

“Fairbanks, in a shocking display of corporate irresponsibility, repeatedly fabricated the amount of the Debtor’s obligation to it out of thin air.” 53 Maxwell v. Fairbanks Capital Corp. (In re Maxwell), 281 B.R. 101, 114 (Bankr. D. Mass. 2002).

“[t]he poor quality of papers filed by Fleet to support its claim is a sad commentary on the record keeping of a large financial institution. Unfortunately, it is typical of record-keeping products generated by lenders and loan servicers in court proceedings.” In re Wines, 239 B.R. 703, 709 (Bankr. D.N.J. 1999).

“Is it too much to ask a consumer mortgage lender to provide the debtor with a clear and unambiguous statement of the debtor’s default prior to foreclosing on the debtor’s house?” In re Thompson, 350 B.R. 842, 844–45 (Bankr. E.D. Wis. 2006).

(Source Paper.)  This paper by Katherine Porter concluded that “mortgage servicers frequently do not comply with bankruptcy law. A majority of mortgage claims are missing one or more of the required pieces of documentation for a bankruptcy claims. Fees and charges on claims often are poorly identified and do not appear to be reasonable. The bankruptcy data reinforce concerns about the overall reliability of the mortgage service industry to charge homeowners only the correct and legal amount of the debt and to comply with applicable consumer protection laws.”  And that was in 2008, before the market went sideways.

The problems that are being flagged are not a new problem with servicing, and by all accounts they have gotten a lot worse.  We need a serious investigation to get to the bottom of what is happening.  Alternatively, there needs to be some serious terms for enforcement during a settlement – and by all accounts they aren’t even close to something that meets those needs.

–  The consequence of Porter’s research is that this has real impacts on people holding debts.  A sophisticated conservative argument is that there is a problem here, but it is primarily a problem between banks and investors.  Or a problem between lots of rich people capable of hiring lawyers, and a problem that doesn’t involve consumers (or AGs) one way or the other.   The evidence is overwhelmingly against that – it could potentially impact the pocketbook of any homeowner if phantom claims end up targeting them.

– This is not specific to housing debt either.  David Dayen flags “We know that JPMorgan Chase recently suspended all their court filings over debt collection, presumably because of some truly awful misconduct in which their debt collectors were engaging.”  When JPMorgan resells your debt, there’s no checks to make sure the right amount and the right legal obligations are being followed, and individual consumers are a terrible check on these specifics.

If power plants were failing this way there’d be immediate investigations.  Why isn’t there one for this situation?

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5 Responses to Some Notes on a Potential Foreclosure Fraud Settlement

  1. “We need a serious investigation to get to the bottom of what is happening.”

    Yes! But why hasn’t there been any effort to do this? Why have authorities let these behaviors become common and accepted practice, instead of treating them like fraudulent business practices that require punishment to weed out?!

    That has been one of the biggest mysteries of the crash – this acceptance of fraud as a standard (unpunished) operating procedure….

  2. “If power plants were failing this way there’d be immediate investigations. Why isn’t there one for this situation?”

    I’m not sure how to avoid giving a snarky or sarcastic answer to this question. But let’s KISS (keep it simple, stupid or keep it short and simple). The people in control, making the decisions, are mostly not those who would benefit from the decisions.

  3. Jim Kemeny says:

    Can such a massive fraud ever be retroactively put right? What about all the people who felt no alternative was left except to abandon their homes? Many were or are poor and now destitute.

  4. Pingback: Current Mortgage Rates for Tuesday January 24 2012 | Mortgage Rates & Trends: Mortgage Blog

  5. dsquared says:

    We need a serious investigation to get to the bottom of what is happening.

    The root cause of the servicing and administration disaster is that the fragmented US land title system created such a massively complicated system that it was inevitable that shortcuts would be taken (and indeed, it was public policy to encourage their being taken, as the Federal authorities both wanted a sensible land title system and knew that vested local interests made one more or less impossible), and made it inevitable that mistakes would be made.

    It is because the original cause here is an utterly broken land title system, which remains broken because a small number of local-court law interests (and the title insurance industry) benefit from it, that I am very unwilling to take statements made by local judges and lawyers at face value when they refer to the perfidy and dishonesty of the banks in failing to adhere to every letter of the completely broken land title system. Ironically, in creating a system in which failures and errors are inevitable, and then profiting from those failures and errors, the land-title interest behave exactly like the banks themselves.

    There are plenty of individual cases of fraud to be going on with, and prosecuting those is a worthwhile use of anyone’s time. I disagree with this post – issues a) to c) are the important ones – the underlying systemic question is both obvious and insoluble.

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