Everything I am reading these days on financial issues points to some serious reckoning soon to come, especially because of -- as the folks at Third Way are calling it -- foreclosure-gate. The Massachusetts Supreme Court ruling in the Ibanez case, along with a growing body of cases where the banks and/or their servicers have been ruled against in foreclosure cases, and even the banks' lawyers are being castigated in court by judges for bringing in made-up paperwork, is causing a growing sense of panic among the biggest banks that hold the most mortgages. Spokespeople for the banks are talking bravely, trying to dismiss the situation as some minor paperwork errors, but everyone who has been paying attention to the situation fears that there are really big consequences afoot.
The plain fact is that over the last decade, in their overwhelming rush to make bigger and bigger profits from trading in the bubble-driven real estate securities market, the banks ran roughshod over the home mortgage and title system that had served this country (and England and many others) quite well for hundreds of years -- and they made a serious mess of it. Because of the way these mortgages have been sliced and diced and sold into complicated securities, homeowners, judges, and the banks themselves are having quite a bit of trouble figuring out who actually owns the note in more cases than is easy to believe. The "paperwork" -- figuring out who owns the note - is not just a little messed up, it is a disaster area.
This wouldn't be as big a deal except that the combination of the housing bubble itself plus the worst recession since the Great Depression (caused in great part by that bubble) has created a foreclosure crisis of gargantuan proportions. Millions of homeowners are in foreclosure proceedings, millions more underwater because of the collapse of housing prices. And because the banks have cooked their books, not wanting all these toxic assets to wreak havoc with their official valuation and their stock prices, they have no interest in helping homeowners stay in their homes by writing down these mortgages to current market levels. So banks are moving to foreclose these millions of homes, but they can't prove to judges that they even own the notes that would allow them to foreclose. Thus you have robo-signers, falsified affidavits, and all kinds of strange things being presented to judges in courts. The judges who are not bought and paid for by the banks are raising big red flags about all this, and thus you have cases like Ibanez going against the banks.
This is a mess not just for the housing market but for the entire economy, as the numbers on all this are staggering, and the housing market really does have the potential to just completely freeze up, which would be an economic nightmare. Our economy has no chance of getting dramatically better until the housing market starts moving again. So the banks are now going to their political allies, just like they did in 2008, and telling them: unless you save us from the mess that we've created (oh, wait, they don't use those last four words, instead it's the unforeseeable "perfect storm", "black swan" thing), we will go under and take the entire economy down with us. The good news for the banks is they are not necessarily looking for a cash handout this time - although it may come to that - but just some legal "tweaking" of this "minor paperwork problem."
If you have the stomach for it and want to learn more about the gory details about the policy side of all this, there are a bunch of good writers you can turn to, including Yves Smith, David Dayen, and Marcy Wheeler, all of whom have put up great pieces worth looking at in the last couple of days. Numerian has a great post I have already linked to a couple times in past pieces this week on the truly scary implications of what is going down.
But my focus, as usual, is on the politics of all this, because the drumbeat is beginning in a big way to bail out the bankers from their own mess once again. Third Way's piece, which Yves, David, and Marcy do a good job deconstructing, is the opening shot in what will be a very focused legislative push to once again bail out the bankers from their own mess. The banks and their allies will try to do this as quickly and quietly as they can, portraying it as a simple legal fix for minor paperwork problems. However, the consequences of this kind of legal bailout are actually far greater in some ways than the TARP bailout, as costly as that was. The TARP bailout was just dollars though. This one, as Yves writes, undermines fundamental property law that our entire economic system is based on:
This proposal guts state control of their own real estate law when the Supreme Court has repeatedly found that "dirt law" is not a Federal matter. It strips homeowners of their right to their day in court to preserve their contractual rights, namely, that only the proven mortgagee, and not a gangster, or in this case, bankster, can take possession of their home.
This sort of protection is fundamental to the operation of capitalism, so it's astonishing to see neoliberals so willing to throw it under the bus to preserve the balance sheets of the TBTF banks. Readers may recall how we came to have this sort of legal protection in the first place. England learned the hard way in the 17th century what happens with low documentation requirements: abuse of court procedures, perjury and corruption become the norm. Parliament enacted the 1677 Statute of Frauds to establish higher standards for contracts, such as witnessing by a third party, to stop the widespread theft of property that was underway.The memo completely ignores the harm to investors from the bank mistakes and lacks any provisions for damage to investors to be remedied. Moreover, denying borrower rights removes their leverage to obtain deep principal mortgage modifications, which for viable borrowers produces lower losses than costly foreclosures and sales of distressed property. Thus this shredding of contractual protections in mortgages not only hurts borrowers but also harms investors.
So to save the banks from their own, colossal abuses of contracts that they devised, the Third Way document advocates Congressional intervention into well established, well functioning state law. This is a case where these matters can and should be left to the courts and ultimately state AGs to coordinate the template of a more broadbased solution.
To once again bail out the bankers, this time by changing real estate law in a way that hasn't been done since the 1670s, would be a far bigger deal than even the trillions in bailout dollars the TARP and Fed gave these banks in 2008/9. But the bankers and their allies like Third Way will try to present this as a simple fix to some minor paperwork problems. Look, if these paperwork problems were so minor, we wouldn't need the fix they are proposing: the banks would get nicked a little in a few cases where they screwed up a little bit of paperwork, and everyone would go on their way. But they have made a Texas-sized mess of the entire mortgage title system in their haste to make money, and it is time to pay the piper.
What's the solution? We should start with a foreclosure freeze while the government sorts through the mess and the state attorney generals finish their negotiations with the big banks. Clearly, a massive amount of mortgage write-downs to underwater homeowners to reflect current housing prices makes a ton of sense, and would dramatically cut the need for foreclosures, taking some of the pressure off the system. Once those two steps are taken, hopefully the AGs can cut a good deal for the American people to make things work better going forward.
The problem with sensible pro-middle class solutions like this is the incredible political power of these big banks. Here's the deal, though: politicians hate the idea of having to bail these guys out again. If progressives can make clear that any legal changes the bankers are trying to push through on mortgage and title law are just one more big bailout of the big banks, we can win this fight. Let's hope we do, because the stakes are pretty damn high.
Cross-posted at my home blog, OpenLeft.com
Only the banksters could get away with this:
TRUCKEE, Calif. — When Mimi Ash arrived at her mountain chalet here for a weekend ski trip, she discovered that someone had broken into the home and changed the locks....
The culprit, Ms. Ash soon learned, was not a burglar but her bank. According to a federal lawsuit filed in October by Ms. Ash, Bank of America had wrongfully foreclosed on her house and thrown out her belongings, without alerting Ms. Ash beforehand.
Ash was in the process of loan modification with Bank of America at the time. And they didn't just break in, they completely emptied the home, even taking "a wooden box, its top inscribed with the words 'Together Forever,' that contained the ashes of her late husband, Robert."
In Florida, contractors working for Chase Bank used a screwdriver to enter Debra Fischer’s house in Punta Gorda and helped themselves to a laptop, an iPod, a cordless drill, six bottles of wine and a frosty beer, left half-empty on the counter, according to assertions in a lawsuit filed in August. Ms. Fisher was facing foreclosure, but Chase had not yet obtained a court order, her lawyer says.
The break-in was discovered when a Canadian couple renting the house returned from the beach.
Turns out these and countless other Americans have become victims again. They're victims of the deficit peacocks.
WASHINGTON -- Despite mounting evidence of big banks committing serious fraud in the foreclosure process, the U.S. Senate eliminated $35 million in legal aid to homeowners trying to keep their homes.
The fund was wiped out in order to meet government spending caps advocated by Sens. Jeff Sessions (R-Ala.) and Claire McCaskill (D-Mo.), but will likely end up costing taxpayers much more in the long run, as wrongful foreclosures burn through the balance sheets of Fannie Mae and Freddie Mac. The slashing of the foreclosure-assistance fund is just one casualty of Washington's increasing bipartisan push to cut spending across the board....
Recent reports suggest severe, nationwide problems with the mortgage system. A survey of 96 attorneys found that banks started foreclosure proceedings on 2,500 borrowers who were negotiating a loan modification. The survey was conducted by the National Association of Consumer Advocates and the National Consumer Law Center.
There's no relief in sight from the administration, either. Treasury has refused to use any of the funds for the Wall Street bailout for homeowner legal aid. Much worse, the Federal Reserve is actually blocking new foreclosure regulations that would homeowners.
WASHINGTON -- Top policymakers at the Federal Reserve are fighting efforts to rein in widely reported bank abuses, sparking an inter-agency feud with the FDIC and the Treasury Department. The Fed, along with the more bank-friendly Office of the Comptroller of the Currency, is resisting moves to craft rules cracking down on banks that charge illegal fees and carry out improper foreclosures. The FDIC supports such rules, according to an FDIC official involved in the dispute.
The new regulations would rein in debt collection, loan modification and foreclosure proceedings at bank divisions called "mortgage servicers." Servicers have committed widespread fraud in the foreclosure process. While the recent robo-signing of fraudulent documents has received the most attention, consumer advocates have complained about improper fees and servicer mistakes that lead to foreclosure for years.
It's the banksters' world, and we're apparently to be considered lucky if we get to live in one of their houses, which is what they and the government consider them. It's hard to arrive at any other conclusion than dday does when it comes to the Fed, "They don’t want to stop the banks from breaking into your house." And your representatives in the Senate are fine with that.
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