Corporate Mortgage Scams Threaten to Crash an Already Shaky Housing Market
The Great Recession may have ended in June 2009, according to the National Bureau of Economic Research, but U.S. Treasury Secretary Timothy Geithner isn't buying it. Neither are recently revealed foreclosure and eviction scams at GMAC Mortgage, JP Morgan Chase, Bank of America, Wells Fargo and other too-big-to-fail financial firms swimming in both American taxpayer cash and the Federal Reserve Bank's divine intervention.
“I'm not an economist, and I'm not an academic," Geithner ducked when asked last week during a Financial Services Committee hearing to agree with NBER's suspicious assessment. "I would just say the following: This is still a very tough economy."
That's a colossal understatement; our creaking housing market is being capsized by a foreclosure pandemic riddled by corruption. Last week, predictable news emerged that Jeffrey Stephan, a GMAC Mortgage team leader for affidavit execution, signed off on nearly 10,000 foreclosures each month without even bothering to read them, although he is legally tasked with doing so. That's a rate of one a minute, if he works an eight-hour day, according to the Washington Post. Afraid it would look like it was blithely executing foreclosures on a callous conveyor belt -- which is precisely the case -- GMAC quickly put the brakes on any further evictions in 23 states until it could find a way to massage the problem.
"Do not proceed with evictions, cash for keys transactions, or lockouts,” GMAC's official memo explained. “All files should be placed on hold, regardless of occupant type. Do not proceed with REO sale closings.”
Real estate owned (REO) sales are sales of lender-owned properties that banks failed to unload at foreclosure auctions, and are busily trying to dump by any means necessary. That includes selling them to whatever deal-hunting home buyers still exist in this anemic economy.
But prospective home buyers could be inheriting damaged goods. Because of their dense securitization, each mortgage is divided between so many parties that banks are foreclosing and selling homes that may not even belong to them.
"Wells [Fargo] is sufficiently concerned about the risks of selling properties out of foreclosure that it is springing an addendum on buyers, shortly before closing, which effectively shifts all risk for any title deficiency onto the buyer," Yves Smith explained on Naked Capitalism. [But] if a bank like Wells does not have the right to foreclose, it cannot have clean title to the property. So the bank could conceivably be selling something it does not own."
Worse, titles to REO properties are being compromised and confused by these crafty banks and their lawyers. In one particularly ridiculous case, Bank of America foreclosed on a Countrywide-brokered Florida home and transferred its title to Fannie Mae, even though it had already been paid off in cash for it and no mortgage existed.
This securitized madness is exactly how owners were saddled with predatory adjustable-rate mortgages to begin with. The plan was never to keep them in their hastily constructed properties, built during a post-9/11 housing boom that more or less functioned as a casino for hedge funds and other deregulated power players. The plan was to saddle homeowners with artificially inflated loans that would exist long after their assets' true value was reached, in the best case. Or, in the worst case, long after they were kicked out of their homes, or could have their homes illegally repossessed thanks to obscure legalese and naked grift.
It is no accident that, according to CoreLogic (PDF), as of Q2 2010, nearly a quarter of all residential properties with mortgages are underwater. (Or experiencing negative equity, as bean counters looking for less scary terminology are wont to say.) Nor is it surprising that housing prices have not yet bottomed, even though they've fallen by nearly 30 percent since 2006.
Nor is it illogical to suggest the situation is only going to get worse, given the 12 million properties entering a market already swamped by underwater homeowners, as well as banks not only unwilling to take on any major housing risk but also shiftily masking title defects to those still interested in taking on the burden of their compromised REOs. It's enough to make you lose your mind in legalese. Which is also the plan.
GMAC's recent controversy is nothing new to anyone who has been paying attention to the issue. The one-time financial services arm of General Motors -- which now goes by the less offensive name Ally Financial, after a $17 billion TARP bailout brought a 56 percent government stake courtesy of American taxpayers -- was legally sanctioned in 2006 for the same scam. But they are no worse than their banking counterparts like JP Morgan Chase, which "committed fraud" according to Florida Circuit Court Judge Jean Johnson, who blocked the too-big-to-fail monster in August from foreclosing on a property that actually belonged to Fannie Mae. And of course, the preposterous Bank of America, whose financial shenanigans are simply too numerous to name here.
The insulting fiasco is another slap in the face to the Obama administration's Home Affordable Modification Program (HAMP), which was supposed to be a collaborative loan-modification effort between government and industry to lower homeowner payments and stave off foreclosures. But like government and industry's previously disastrous collaborations -- deregulation, bailouts, should I go on? -- the people foot the exorbitant bill and interminably suffer while industry players suck dry everything worth value, whether they own it or not. As of August, HAMP helped about 450,000 of a promised 3-4 million homeowners modify their loans, while foreclosures hit a monthly record of 95,000 homes, the highest monthly total ever recorded by housing industry analysts RealtyTrac. Those failures will only increase repossessions and evictions, which will spark off a persistent unemployment crisis featuring 15 million out-of-work Americans.
Meanwhile, more than half of the $400 billion government has recently spent to promote home ownership has benefited not the people-at-large but the wealthiest 5 percent of taxpayers, according to a new study funded by the nonprofit Annie E. Casey Foundation and the Corporation for Enterprise Development (CFED). Now we can add shocking -- shocking! -- revelations of corporate boilers courtesy of GMAC, the nation's fourth-largest lender, getting caught illegally mass-producing foreclosures using robo-signing slaves. Great.
The hard lesson, and truth, in this mayhem is that the so-called Great Recession is only over for corporations, whose profits have returned to pre-crisis levels and whose balance sheets haven't been this solvent since 1956, according to the Commerce Department. You're welcome.
For the rest of us, there are too few jobs or fair-minded loans on the horizon. Real unemployment is closer to 20 percent than it is to 10 percent. Like ourselves, our houses are increasingly underwater, submerged by disingenuous banks looking to callously capitalize on properties and securities they may not even own, all while willingly committing fraud on the nation.
But there are some shining lights willing to put it on the line for the American people.
"I'm pushing to establish an Office of the Homeowner Advocate at the Department of Treasury that would assist borrowers in the HAMP program who believe their mortgage servicer is breaking the rules," Senator Al Franken told the Huffington Post. "Right now, these families have nowhere to turn when wrongly denied from the assistance program or when they encounter difficulties in navigating an incredibly complicated system of avoiding foreclosure."
Let's hope Franken succeeds. Without that complexity, the banking and housing industry as we know it would disappear. Without the ability to splice mortgages into sci-fi nanostrands deliberately engineered to avoid simplicity (and liability), banks would suddenly have to increase their capital requirements, increase transparency and lend directly to homeowners without the benefit of a servicing industry whose very purpose is to distance risk as far away from lenders as possible. So far, it's working like a well-funded machine, even in spite of the GMAC controversy, which is years-old news, to say nothing of the overall recession. If banks can lock homeowners into dense legalese and massive interest payments, they can lock out those same homeowners and make hay in the foreclosure aftermarket.
Meanwhile, all the homes industry just couldn't wait to build in the housing bubble are rotting away, toxic footballs punted between players paranoid of getting stuck in money pits. Which, in turn, is creating multiple monsters, from increasing family homelessness, an unsustainable housing glut, depressed property values, rising public fury and worse. And it's time the American people withdrew from the war, like the United Auto Workers, who are so fed up with JP Morgan Chase's refusal to implement a two-year freeze on foreclosures they are planning mass bank withdrawals in the hundreds of millions. More taxpayer revolt against the banks, as well as a double-dip recession, are practically guaranteed unless the government gets serious about protecting its people, not just corporations, from systemic financial failure.
"Popular anger against taxpayer dollars going to the largest banks, especially when the economy continues to struggle, remains high," explained the Congressional Oversight Panel -- whose chairwoman Elizabeth Warren was named by the Obama administration to head a new consumer watchdog -- explained in its September report. "The program's unpopularity may mean that unless it can be convincingly demonstrated that the TARP was effective, the government will not authorize similar policy responses in the future. Thus, the greatest consequence of the TARP may be that the government has lost some of its ability to respond to financial crises in the future."
So NBER may think the Great Recession is over, but it's really just beginning for the majority of Americans, who are running out of hope, change and time. If economic history, which is littered with recessions and depressions, is any guide, Americans have years to wait before this Titanic turns around, if it ever does.
"If you allow a financial market to spin wildly until it breaks down, it really does seem that you run the risk of years of economic malaise," explained Yale economist Robert Shiller. "That is a historical pattern."