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Economy

House 'Under Water'? Do Like the Banks Do and Just Walk Away

Banks aren't taking possession of houses after foreclosure, creating a "shadow inventory" that may derail the recovery.

"There's class warfare, all right, but it's my class, the rich class, that's making war, and we're winning." -- Warren Buffett

Here's a terrible new twist to a housing meltdown tortured by too many of them. Banks are refusing to take possession of houses after the foreclosure process because of the prohibitive cost, from legal to maintenance fees, of being stuck with the same worthless mortgages with which they've saddled American homeowners.

It's a problem of their own making: Foreclosures shot up 7 percent in July, and the rate is nearly a third higher than this time last year. There is no end in sight. That's led to increased homeowner abandonment of their properties, which in turn has led to escalating blight that has depressed property values and tax revenues even further.

By 2011, around half of the mortgages in the shell-shocked United States could be underwater, which is a softball euphemism for utterly worthless. The financial industry is well known for such empty metaphors -- including "class warfare," ably dissected above by Berkshire Hathaway billionaire Warren Buffet. That's because they are easier to stomach than the purposefully labyrinthine, fearsomely destabilizing details.

Take "jingle mail," for instance, industry-speak for homeowners who mail back their keys and purposefully walk away from lenders who have left them to drown underwater; that is, with homes whose market value is significantly below their mortgage debt.

It's a cute euphemism for such a fucked-up state of affairs engineered by the financial industry, and its colluders in the government and media. Greased by a thoroughly unregulated over-the-counter derivatives market that is fast approaching $600 trillion (that is not a typo) and now under investigation for antitrust trading, Bank of America, J.P. Morgan Chase, Citigroup, Goldman Sachs and other titans of Wall Street seized the opportunity to lock homeowners into unfair mortgages that could ruin their balance sheets, and the American economy, for good.

Sure, they should have known what they were getting into, but when is the last time you read your pages-long disclosure contracts on your home or credit card? Derivatives thrive on such mind-numbing complexity, which is why the financial press and industry continually lionizes bankers like Merrill Lynch's John Thain, whose firm lost billions and had to be acquired by Bank of America to stave off a systemic economic collapse, "as the smartest guy[s] in the room."

And even they don't know, or are just fine with not knowing, all the details of their dense financial contracts: When Federal Reserve Chairman Ben Bernanke was asked by Rep. Alan Grayson, D-Fla., where $500 billion of American taxpayer money exported by the Federal Open Market Committee to foreign central banks went, his response was probably the same as most homeowners asked about the details of their mortgage contracts: "I don't know."

This is why Buffet called derivatives "financial weapons of mass destruction," a more apt euphemism for an industry in love with depersonalized terminology.

So the argument that homeowners should intimately know the twists and turns of their mortgage contracts, most of which are designed to lock them into debt for a very long time, is disingenuous, at the least.

Especially when it is the banks who locked them into those contracts, rather than the supposedly cold, calculating jingle-mailers that are walking away from houses the banks marketed, sold and then foreclosed, only to leave them with stunned homeowners who find they're liable for tens or hundreds of thousands of dollars in city fees.

"It is just bone stupid," the Center for Responsible Lending's Kathleen Day told AlterNet by phone. "Banks foreclose on families, kick them out of their houses, which puts even more people underwater. And then they walk away from those same houses. It's almost like a sitcom, but it's a situation tragedy."

The tragedy has gone viral. Small and large banks across the country have punted these compromised mortgages, often located in cities sundered by the housing bubble like Buffalo, N.Y., Cleveland and others.

The banks' reason is simple enough: They're not worth anything to them either. A sobering analysis from the Cleveland Plain Dealer calls those mortgages "toxic titles," but the problem is beyond terminology now.

In an enlightening piece, the Milwaukee-Wisconsin Journal Sentinel locally "found more than $400,000 in back taxes, fees and demolition costs owed on nearly three dozen properties that lenders foreclosed on in the past two years but didn't complete the process," with many more to come.

In other words, banks aren't just walking away from homeowners, after leading them through Kafkaesque foreclosure suits and pocketing fees for it. They're also walking away from their practically bankrupted cities, which are slowly swelling with abandoned, vandalized and otherwise-ruined properties, further depressing their already-broken local economies. But even though the disturbing and nearly impossible-to-trace practice has gone viral, it has nevertheless been ignored.

"We really are not up on any of this," American Bankers Association spokesman Jim Eberle said by phone to AlterNet. "We really don't know about that happening in the banking industry. I don't think we really want to be in your story, because we really don't know enough about what's happening and which lenders and servicers are possibly doing this sort of thing. We really don't have a handle on it, if it is going on."

For those keeping score, that's three "We don't know" qualifiers in three straight sentences, but Eberle's financial services organization is evidently not alone in its ignorance. Representatives I spoke with by phone and e-mail from the National Association of Mortgage Brokers and Mortgage Bankers Association refused to go on record with AlterNet about the trend. To be fair, even Day's Center for Responsible Lending hasn't looked at the problem in depth.

These deafening silences, compounded by inscrutable mortgage legalese, compels underwater homeowners, bogged down by maddening fine print on worthless mortgages parceled out in bad faith, to do something that many of them would probably rather not do, which is run.

Run like hell.

Of course, if homeowners could, like corporations, declare bankruptcy and allow judges to modify their contracts -- a process called cramdown (another hilarious econo-term) -- then they would arguably be able to pay off their debts, stay in their homes and make their lenders happy. But it is those very lenders who not only successfully lobbied against allowing bankruptcy judges to take over mortgage terms, but also have steadfastly refused to do so themselves.

The Obama administration, which publicly and lamely passed on the opportunity to take a stand on a cramdown amendment floating through the Senate in May, has supposedly tried to pull its head of the sand on this issue. It has promised to publicly disclose which mortgage servicers and lenders, who are receiving $50 billion in subsidies, are failing to live up to their agreements with the White House to stem the foreclosure bloodbath.

"Right now," Day explained, "bankruptcy judges can modify any contract but mortgages. They can modify everything but the roof over your head. When Obama first proposed his plan, there were lots of carrots but one stick: Bankruptcy modification."

But that agreement, named the Homeowners Affordability and Stability Plan, has so far given less than 10 percent of delinquent borrowers a break, with few banks modifying at all and some modifying even less.

According to the Washington Post, J.P. Morgan Chase has modified 20 percent of its borrowers, Morgan Stanley's Saxon Mortgage Services has modified 25 percent, Citigroup has modified 15 percent, Wells Fargo has modified 6 percent and Bank of America, probably the worst of all economic offenders (next to the unrepentantly greedy Goldman Sachs, that is) has modified a paltry 4 percent.

That's pretty ridiculous for a financial services organization that, as the Washington Post article explained, told at least one denied homeowner that it wasn't participating in Obama's plan, although it was. This is the same cutthroat bank that bought mortgage-fraud poster boy Countrywide and the failing Wall Street powerhouse Merrill Lynch, perhaps to help both avoid bankruptcy due to balance sheets filled with toxic titles.

In fact, Bank of America's buyout of Thain's Merrill Lynch was such a secretive process that it reportedly compelled Henry Paulson -- former Treasury secretary, Goldman Sachs CEO and mentor to Thain -- to shred what ethics guidelines the Bush administration had left in its shock-doctrine portfolio.

The same Bank of America that, according to investors and federal prosecutors, abetted Ponzi schemer Nicholas Cosmo, who sucked over $400 million dollars out of their pockets. The same bank that can't even persuade a judge to allow a supposedly simple $33 million settlement with the Securities and Exchange Commission, because of lies tied to bonuses handed over during the Merrill Lynch takeover. The same bank ... well, do I really need to go on?

Because of lying entities like these, cramdown died a painful death, even though it could have saved everyone's sorry asses, from homeowners who can't read their mortgage contracts to corrupt lenders who, pardon the pun, bank on it.

And that's left us with this ugly game of toxic potato, where banks and homeowners pass around the plutonium-enriched house until it detonates in the city's lap as one more vandalized money pit that needs to be bulldozed. Throw in the fact that each state has its own circuitous way of executing such extreme displays of financial chess, and you have a scenario ripe for disorder.

"There's not any true uniformity," Eberle explained of the state of American foreclosures and disclosures. "I'm guessing that each state has a different method and timetable involved. There are some states that allow the lender to go back to the homeowner to make up the difference on what's owed on the mortgage and what's been received on the foreclosure auction. If you don't get bidders, the mortgage lender or the bank would typically bid as much as the property is worth.

"But whether it is the banks or the lenders, once they foreclose on a property, they own it. And they're obligated to take care of the property, in many cases, by city, county and state laws."

Of course, that's the conventional legalese that has been turned on its head by increasing bank walkaways, whose math has been found challenging, to say the least.

In July, New York State Attorney General Andrew Cuomo reported that J.P. Morgan, Merrill Lynch, Goldman Sucks -- does a day go by without a reason to hate them? -- and more banks receiving bailout billions from taxpayers via Paulson and George W. Bush's ludicrous Troubled Asset Relief Program handed out more in bonuses last year than they received in earnings.

It doesn't take a mathematician to realize that a bank like J.P. Morgan Chase, which made $5.6 billion but paid out $8.69 billion in bonuses is grifting the American people of at least some of the $25 billion it took from their pockets. These are banks, after all, that will possibly collect $38 billion in overdraft fees alone this year.

Given those numbers, it also doesn't take a political scientist, or a Federal Reserve chairman, to divine that an underwater homeowner wouldn't be well within his or her rights to tell those banks to, in the words of that great American poet Dick Cheney, go fuck themselves.

Which is what they should do, right? No, says Day and the CRL, advice that every bank in the nation -- ones not currently being seized, that is -- probably agrees with.

"The bottom line is, if you walk away, it really hurts your credit rating," she argued. "The credit card companies will use any excuse to raise your interest rates. You're walking away from any money you put into the house. If you can't afford the payments, and the lenders are negotiating in bad faith, there's no pretty picture. But walking away wouldn't be our first choice.

"If homeowners can do it another way, that's always better. What if they can get a modification? if they can stay in their house, then they can rebuild their equity. People are getting jerked around in all kinds of ways, but if they can stick through it, they should."

Scott Thill runs the online mag Morphizm.com. His writing has appeared on Salon, XLR8R, All Music Guide, Wired and others.
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