There are plenty of reasons why the foreclosure fraud crisis sweeping the nation's housing market is an economic disaster. Banks are charging borrowers illegal fees, kicking the wrong people out of their homes and even hiring thugs to illegally break into houses. But the fundamental scam is much worse than these shameful acts. Fraud in the foreclosure process conceals a second, more massive fraud: the astonishing levels of mortgage fraud perpetrated by subprime lenders during the housing bubble. These frauds don't just expose big banks to epic losses, they expose bigwig bankers to prison time.
Clearly, we're dealing with a lot of different frauds here. Tomorrow, I'll detail one of the smaller-bore problems with foreclosure fraud: providing cover for illegal fees that lenders charge to troubled borrowers. But today I'll discuss a much different and much bigger scandal. During the housing bubble, banks falsified documents on a massive scale in order to issue as many toxic subprime loans as possible. This was straightforward mortgage fraud, and the current wave of fraud in the foreclosure process is covering it up.
In 2004, the FBI sounded the alarm about an "epidemic" in mortgage fraud. This was right at the beginning of the real subprime explosion -- things got much worse as the housing bubble inflated. What's more, according to the FBI, 80 percent of mortgage fraud is committed by lenders.
Bankers and mortgage brokers didn't just make reckless loans to borrowers who couldn't afford them. They also illegally falsified documentation in order to push borrowers into loans they could not afford. This was not a con perpetrated by irrational poor people attempting to live beyond their means -- it was committed by perfectly rational lenders, who knew they could make a handsome profit by selling these garbage mortgages off to investors.
We know about how these frauds were incentivized at specific lenders thanks to anecdotes collected banks that actually went under during the crisis. When Washington Mutual collapsed in September 2008, it was one of the largest banks on the West Coast, with $350 billion in assets. It wasn't a small-time specialty shop operating off the grid -- it was a regulated bank, overseen by the Office of Thrift Supervision, subject to standard consumer protection regulations and federal anti-fraud statutes. Yet the bank engaged in systematic, knowing fraud which its executives allowed to continue unpunished. As Sen. Carl Levin, D-Mich., emphasized in a hearing this April, the company even rewarded some of its employees who committed fraud by promoting them.
Why all the dodgy dealing? Bigger bonuses. During the housing bubble, Washington Mutual CEO Kerry Killinger took home between $11 million and $20 million every year.
This type of mortgage fraud is not the scam that consumer advocates are currently sounding the alarm about. That's a much different fraud. When banks go to foreclose on borrowers, they do not have the documentation necessary to prove they actually own the mortgage. Banks can't document their right to foreclose, so they're fabricating documents, forging signatures and lying to judges to push them through. So how are the two frauds related?
Fraudulent mortgages are, by definition, illegal. Banks that issue them can be sued, and the bankers involved can be tried in court and sent to prison. Bankers very much want to avoid both of these scenarios.
But it's also illegal to package fraudulent loans into securities and sell them to investors -- especially if you don't tell investors that the security is full of fraudulent loans. It's securities fraud, and bankers also don't want to lose huge amounts of money on that line of business.
If you're a bank that packages mortgages into securities and sells them to investors, and you know your securities are full of fraudulent loans, you might not want to transfer all the necessary documents detailing the loans. Those documents, after all, would reveal that your securities were completely illegal -- and that you are responsible for any losses stemming from them.
For intermediaries like securitizers, fraudulent loans are the best kind of loans -- they're literally too good to be true. So long as nobody ever pins the legal liability on you, you can make a lot more money from fraudulent loans than you can make on loans that actually make financial sense. Fraud-packed securities fetched much higher prices than mortgage securities packed full of boring, legal mortgages, and led to much bigger bonuses.
In today's foreclosure fraud scandal, mortgage servicers -- the housing industry's debt collectors -- don't have the legal documents necessary to move on a foreclosure. They don't have the documents because the banks who created the securities never handed them over. And without those documents, it's far more difficult to prove that the securities and the underlying mortgages are illegal.
So this isn't about "paperwork" or technicalities. This is about preventing the basic fraud at the heart of the financial crisis and the Great Recession from being prosecuted.
That, ultimately, is the big danger for Wall Street, and for the policymakers who have provided economic cover for megabanks. Wall Street banks aren't worried that their mortgage servicing costs may increase while they "track down" paperwork -- they're worried that the entire $2.6 trillion mortgage-backed security market is about to land on their doorstep, with punitive damages and prison sentences to boot.
Apologists for CEOs spent much of the summer complaining about the "uncertainty" that new regulations and tax policies supposedly create for businesses and investors. If potential taxes were an economic problem, just wait to see how financial markets respond to a fresh $2.6 trillion hole in the banking system created by fraud.
Worst of all, U.S. taxpayers own a huge portion of these securities. Fannie Mae and Freddie Mac have enormous portfolios of subprime-mortgage-backed securities, and the Federal Reserve purchased large volumes of mortgage securities in order to sustain the housing market as it collapsed. The government has no choice but to deal with this mess, if only to cut its own losses. Whatever the policy the government pursues, Rick Santelli and his friends will be sure to complain about a bailout for "losers," but something has to be done. It's not a question of bleeding hearts, it's a question of basic justice for homeowners, investors and taxpayers.
Follow Zach Carter on Twitter: www.twitter.com/zachdcarter
Whatever's left of our American judicial system is based on proof. That used to equal original paperwork. Property titles filed with the nearest County governmernt.
For people under 50 years old the computer is the end all be all. Unfortunately, it'll be the end of American Domocracy. Ever since Reagan was elected, my own country has not only promoted greed, corruption, lawlessness, ignorance, slavery, etc., but has rewarded it with American taxes. What's left of our American institution? If you disagree, argue with examples not personal attacks.
And what of President Obama? He proudly announced from day one of his tenure that we were not to look backward. Let the dead debt stay dead. Let the living fraudsters forever live beyond civilized conduct and American justice. What should and will he do? Will he take the lead in dismantling these empty, fraudulent banking vassels? Or will he place restrictions on State initiatives? Will he and all the President's men continue a coverup that is coming undone? If so, indictments will be coming down the line for the criminals behind this coverup and high crime of undermining the American Republic.
Think this is bad? We seem to have learned NOTHING! .We're too d.... ignorant to try again with better planning and preparation? If at first you don't succeed, QUIT???? Using housing expansion to grow our economy was a brilliant idea which hasn't lost any of it's brilliance, but we certainly seem to have lost ours.
What are we expecting to grow our economy? Who are we expecting to grow our economy? Aren't economies created and sustained by citizens fairly equally serving each others needs? So why then are we allowing special interest groups to direct so much our our personal spending to emerging markets they're invested in? Have we noticed them living large today due to this, while many of our neighbors are suffering?
So what is the problem with our economy? Are we all still here? If we are and we begin serving each other more than folks we don't even know, will we very soon recognize the benefits?
You can't simply say generic things like "illegal fees" and "falsifying documentation". An intelligent reader can't make heads or tails out fo this and is simply expected to believe your conclusion? No thanks, do a better job documenting the argument and evidence before I'll believe anything you say.
I think it's fair to say, however, that if the banks themselves are bringing their activities to a halt in order to figure out and hopefully straighten out their legal situations, we can conclude the problems are of a large scale.
TARP was an urgent, hurried, and awkward attempt to "cover-up" the truth about behind this financial crisis.
Cover-Up ... this is all a cover-up.
$17 trillion dollars of middle class worth disappeared in the last two years. yup, that's with a "T" and not a single banker has even been questioned about it.
perhaps they were just trying to feed their families as well...for the next million years!