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Mortgage Lenders Committed Massive Fraud and Now Wall St. Wants to Escape the Law

Here they come looking for an out-clause and a way to keep their coffers full. We need to repeat a simple mantra: No more bailouts for Wall Street.

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Creating a privately operated registry of deeds in order to skirt local filing requirements was a remarkable act of hubris. “Fees are paid for a service performed, and if a document is eliminated because it is no longer necessary, no fee is due because there is nothing to record,’’ reads a statement on the MERS Web site. But that's nonsense; when a state charges a $50 filing fee, it doesn't represent the cost of the piece of paper. Those fees make up the revenues that finance state and local government and all the services they provide.

But the key point is that they're required to file those documents by law, a law the home loan industry believes doesn't apply to mortgage-lenders. Now they face not only investigations by all 50 state attorneys general, but potentially a wave of lawsuits from investors who may claim that the losses they took on these mortgage backed securities weren't just the product of the market's ups and downs, but a consequence of widespread misrepresentation on the part of Big Finance.

But the damage is, unfortunately, in no way being contained on Wall Street. According to data compiled by Housing Wire, the robo-signing boondoggle is largely responsible for a 50 percent drop in the number of foreclosures being completed over the past few months, shifting 250,000 from 2010 to 2011. It's good for those homeowners to stay in their places for another year, but potentially disastrous for the economy to have a large overhang of distressed properties weighing down the market. According to an analysis by Barclay's Capital, cited by Housing Wire, “If the worst happens... [if] widespread issues are found throughout the process and foreclosures are not allowed to be carried out, the damage could mean frozen home sales and new lending nationwide.”

In other words, the uncertainty around these chains of ownership may add to the “shadow inventory” of distressed properties that will come onto the market at some point down the road, a number estimated to be as high as seven million homes.

There are also untold numbers of homes that the banks are simply walking away from. Just as many homeowners have seen the value of “strategically defaulting” on their loans, these are properties so far under water that lenders have no financial incentive to take possession of and maintain them until they can be sold. A study conducted in Chicago by the Woodstock Institute, an advocacy group, found 1,896 “red flag” homes in the city that appeared to have been abandoned by loan servicers. The properties were disproportionally located in already distressed low-income communities.

Woodstock Institute VP Geoff Smith told AlterNet that the abandoned properties “add to the destabilization of these neighborhoods. They further effect surrounding property values.” He added that from the city's perspective, “a lot of times they have to step in and secure these properties because nobody else will. That's a cost to the city there. If there's criminal activity, the city has to respond, adding to the cost. They have to demolish these properties in many cases, again adding to the cost for the city. All of this is an extra layer of impact for communities that are already experiencing some distress.”

According to Smith, the issue “raises questions about servicer accountability. How are [they] accountable for the decisions they make and the impact those decisions have on communities? If it's not in their economic interests to take possession of the properties, then how does that effect the community” as a whole?”

The answer is that the consequences are disastrous, which may in turn provide the argument that the mortgage industry will use to seek judicial relief from the mess it created. It's a good bet that they will once again claim they are “too big to fail” – or too big to bear the brunt of widespread litigation on the part of struggling homeowners, investors and state governments.