UPDATE: President Obama vetoed the foreclosure fraud bailout this afternoon, but plenty of other battles are already raging. Rep. Alan Grayson, D-Fla., is calling for Treasury Secretary Timothy Geithner and the newly-established Financial Stability Oversight Council to investigate the foreclosure fraud scandal as a systemic risk to the U.S. economy.
That's a major step. Thus far, Geithner has been hostile to efforts that would provide foreclosure relief to troubled borrowers. But given the fact that the current scandal involves straightforward fraud, the absolutely massive scope of this fraud, and the potential havoc it stands to wreak on banks' bottom lines, the government may finally step in to help homeowners. Obama made clear today that he will not support a stealth bailout for foreclosure fraud. With the right pressure, the administration may very well act to help borrowers, not bankers.
Meanwhile, state attorneys general are filing lawsuits against big banks left and right, and calling for a major moratorium on foreclosures.
Unbelievably, the U.S. Senate has approved legislation making it easier for banks to get away with foreclosure fraud. The bill would make it much harder for consumer advocates to show that banks are engaging in fraud, bailing out megabanks who cut corners in order to boost bonuses and slap borrowers with massive, illegal fees. The political fight between big banks and troubled homeowners is on, and President Barack Obama must take a side.
If President Obama signs this legislation into law, he's sending a clear signal that his administration stands ready to bailout the banks again, whatever the consequences for American homeowners. The new legislation is a clear attempt to provide legal cover to GMAC's robo-signing scandal, and should be firmly opposed by Obama.
Banks are running into big trouble in foreclosure courts right now because they have kept shoddy mortgage records for years in order to cut costs and boost bonuses. Those records are so bad that banks routinely cannot prove that they have the legal right to foreclose on the homes they attempt to foreclose on. That's a major problem, because banks have repeatedly demonstrated that they cannot be trusted to figure out their own foreclosures for themselves. They've foreclosed on people who haven't missed any mortgage payments, and even on borrowers who have fully paid off their loans.
So banks and their lawyers have been fabricating documents, forging signatures, and lying to judges in order to go through with foreclosures. All of this is fraud-- especially when committed systematically, en masse by large corporations and their clients. It gets even worse when banks try to use fraudulent documents to slap borrowers with thousands of dollars in illegal fees.
The legislation currently awaiting President Obama's signature tries to bailout banks on one aspect of this documentation problem. Banks push through a lot of bogus documents with the help of corrupt notaries. Notaries are people who witness some legal event, like the signing of a contract, and then testify in print that they saw the contract being signed. It's one way for courts and lawyers to show that documents have not been forged.
But the major foreclosure fraud scandal at bailout behemoth GMAC that ignited the current furor involved what appear to be totally bogus notaries. One GMAC employee, Jeffrey Stephan, signed thousands of affidavits and had them all notarized in Pennsylvania, even though they were being used in foreclosure cases in many different states. Since different states have different standards for notary approval, these documents should have been unacceptable in the vast majority of state courts.
That made the GMAC scandal illegal in most states. But the GMAC scandal got much worse once Stephan acknowledged that he had never actually examined the affidavits before approving them. All of Pennsylvania's notaries who signed off on the Stephans Documents were totally unreliable. They were approving fraudulent documents en masse.
So for the Stephens Documents, there are two levels of impropriety--the notaries who didn't do their homework, and Stephens, who illegally robo-signed hundreds of thousands of documents.
The bill approved by the Senate on September 30 addresses the notary side of things. It says that all states must accept a notary from any other state, and even allows notaries to sign-off on electronic documents. That means notaries don't have to be present at the signing of documents--somebody can forge a document, scan it into a computer, and ship it off to a notary for approval, replicating the GMAC scam online.
The good news is that the GMAC documents were still illegal even without the false notarizations. The fact that Stephans robo-signed these without examining them was itself an act of fraud (barring other extenuating circumstances). So even if this bill is signed by Obama, wronged homeowners have some hope for redress.
But the legislation would still create a major new hurdle for borrowers seeking relief. If a bogus notarization is deemed legal, it's much harder to prove that the document itself is just a big fat fraud. Most states only accept notarizations from their own state--this makes perfect sense for mortgages. Nobody from Pennsylvania needs to fly-in to witness my mortgage closing in Virginia--a Virginian notary will do just fine.
By requiring any state's notarizations to be acceptable nationwide, the bill establishes a new race-to-the-bottom in standards: Whichever state has the weakest notary rules gets all the business. It means all of the crap Pennsylvania notaries on the GMAC robo-signings would be deemed acceptable in any state. Borrowers could still challenge the GMAC robo-signings, but it would be much harder to win the challenge, since an official, authorized notary had stated that the fraudulent robo-signings were in fact legitimate.
The bill is an obvious attempt to bailout banks from the consequences of their own bonus-fueled shortcuts--shortcuts which are being used to slap individual American families with tens of thousands of dollars in illegal fees. President Obama has no business bailing out our biggest banks again--especially on the backs of troubled borrowers those banks are attempting to defraud.
And the future political ramifications are dire. If this bill proves insufficient to bailout GMAC, JPMorgan, Bank of America, and the other major banks implicated in the foreclosure fraud scandal, there will be future legislative efforts to help them. If this bill becomes law, then politicians will have created political cover for the next round of bailouts, which will be characterized as a mere "technical fix" to this attempt.
President Obama must veto this bill. American homeowners deserve to be protected from fraud. The American government shouldn't be bailing out fraud.