8:20 AM, by Sonali Kohatcar and Candie Carawan on KPFK, 90.7 fm.
Foreclosure Moratorium Is Only Sane Response to Shocking Wall Street
Mortgage Scams
The highest rates of foreclosure are on the quick and dirty loans made at
the peak of the bubble.
By Dean Baker
AlterNet: October 18, 2010
As we all know there is a major philosophical divide in U.S. politics. One
the one hand there are those who think it is the role of government to help
ensure that the vast majority of the population can enjoy a decent standard
of living. On the other side are those who believe the role of government
is to transfer as much money as possible to the rich and powerful. The
latter group seems to be calling the shots these days.
This is seen clearly in the " liar lien" scandal: the flood of short order
foreclosures that ignore standard legal procedures. The banks have been
overwhelmed by the unprecedented volume of defaulting mortgages in the wake
of the housing crash. Even under normal circumstances foreclosure rates that
in some areas exceed ten times normal levels would create an administrative
nightmare.
But these were not ordinary loans. The highest rates of foreclosure are on
the quick and dirty loans made at the peak of the bubble. These loans were
issued to be sold. Almost immediately after the ink was dry, the issuers
would sell these loans off to Citigroup, Goldman Sachs, or other investment
banks to turn them into mortgage backed securities. The investment banks
themselves were running short order operations. More rapid securitization
meant more profits.
In this process, the paper work often came as an afterthought. As a result,
necessary documents weren' t signed, title transfers weren' t properly
registered, the notes tying loans to specific properties may not have been
properly filed and other paper work errors went uncorrected.
If the law were being followed, these issues would create serious problems
for servicers trying to foreclose on homes where the owner has defaulted.
Banks would have to spend the necessary time, paying high cost lawyers for
their work, to reconstruct the paper trail needed to establish clear title
to the house and the documentation that would allow them to foreclose on a
delinquent borrower.
In some cases this may not even be possible. Many of the issuers that
dominated the non-prime mortgage market at the peak of the bubble are no
longer in business. They probably did not make sure that all the
documentation went to the right place before they closed their doors.
If the Wall Street banks were like the rest of us, the policy response would
be simple: follow the frigging law. If banks want to foreclose then they
should have to present the court with the proper documents, end of story.
Anyone who has ever bought a house or refinanced a mortgage knows the
headaches involved. Everything must be in order, a process that can cost
thousands of dollars in fees, as a long sheaf of documents is signed in the
presence of a lawyer. This process can easily take two hours.
The banks don' t think that they should have to endure the same expensive
tedium as the rest of us. For them, these processes are simply formalities
that can be circumvented. Hence, the " robo-signers" who are paid to put
their names to documents that they know nothing about.
Some people have been wrongly foreclosed in this process, precisely the sort
of mistake that the bureaucratic formalities are intended to prevent. More
frequently, homeowners have probably been assessed fees and penalties that
they do not actually owe. To the banks this is just another unfortunate
error in the high-speed foreclosure process.
In this context the demand for a foreclosure moratorium makes perfect sense
to those who think that it is responsibility of government to protect the
majority of the population. After all, if someone has fallen behind in
paying their bills, they still have a right to expect that the law get
followed.
A foreclosure moratorium would allow regulators to ensure that the servicers
have systems in place that guarantee that the right procedures are followed.
A moratorium on foreclosures would serve the same purpose as the moratorium
on deep sea drilling following the BP disaster. The alternative - that we
should trust the banks - doesn' t pass the laugh test.
By contrast, those who believe that government exists to serve the rich and
powerful point out that these procedures will raise costs for banks. In some
cases, they may not even be able to carry through a foreclosure, since the
proper documentation does not exist.
The result could be billions of dollars in losses for the Wall Street banks.
That may not put them out of business, but it certainly could knock a few
million dollars off the bonuses of some the top executives.
So there you have it: the question of whether the Wall Street banks should
have to follow the same rules as the rest of us. It is one of the most
central philosophical questions underlying politics today.
Dean Baker is co-director of the Center for Economic and Policy Research and
author of the new book, False Profits: Recovering from the Bubble Economy
(PoliPointPress, 2010).
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