Saturday, October 16, 2010

Foreclosure-gate: a Historic Mess

With each passing day, we get new perspective on the size and magnitude of the mortgage/foreclosure scandal. We now know that this scandal goes beyond mere foreclosure fraud and is, in fact, a mortgage-transfer fraud of epic proportions.

The banks have been trying to cover up their massive mortgage fraud by circumventing foreclosure laws, thereby creating a entirely new level of fraud. And it's all finally coming to light.

On Wednesday, officials in all 50 states unveiled a joint investigation into mortgage companies’ conduct during foreclosure proceedings.

That was a timely decision. The very next day, RealtyTrac announced that U.S. foreclosure filings rose 3% in September from August levels, when 25% more homes were repossessed than the same month the previous year.

The foreclosure freeze and the concurrent investigations will have huge implications.

A drag on the foreclosure process “could delay any recovery in the housing market that might be on the horizon,” said analysts at FBR Capital Markets in a note that same day.

The markets know just how bad this could be for the banks; it has the potential to level them. That's why bank stocks tumbled this week.

The cost of default protection against U.S. bank debt also jumped this week on worries that financial institutions could be on the hook for losses as a result of the nationwide investigation. Bank of America’s spreads are now at their widest levels since July 2009.

This scandal involves more than just technical errors, or simply forgetting to cross the t's and dot the i's.

The examples of mortgage fraud are widespread and include wrong signatures, missing documents, falsifying documents, and false use of notary publics. The improprieties cast doubt on the entire foreclosure process. They reveal a systemic disregard not just for process and procedure, but for the law itself.

Yet, the banks are saying they simply didn't read the fine print — which they themselves wrote. And they're trying to foreclose on homes they don't even legally own. In many cases, they can't even provide proof of ownership.

There are cases of banks changing the locks on foreclosed homes while the inhabitants are still inside. However, it is illegal for a bank to enter a property unless they have retaken it at a foreclosure sale, which can be months or years after a foreclosure suit is filed. And the banks are certainly prohibited from entering a home when it is occupied.

What's worse, banks have been caught changing the locks on homes for which they don't even hold a mortgage.

The entire process is a mess. Basic property rights dictate that banks should not be attempting to repossess homes they don't even own. After all, the US is guided by the rule of law.

If lenders didn't foreclose properly, buyers could find themselves without clean title, opening a Pandora's box of risks. If title and ownership are in question, buyers could become reluctant to purchase foreclosed properties. Just the fear of such an outcome could be devastating to the already crippled real estate market.

Confidence has been lost. And in times of great uncertainty, confidence is the only thing that matters. If large numbers of homebuyers lose faith in the system of property ownership, title, and transfer, home sales will move from slow to stop. Prices follow sales volume, and if sales dry up significantly — especially in markets dominated by distressed sales — prices will collapse.

Unless the housing market is allowed to go through an uncomfortable, yet orderly, process of foreclosure and cleansing, all of the distressed properties cannot be cleared and a sustainable floor in prices cannot be found. Only through repossession, through the efficient reallocation of bank-owned properties back into the market, can housing truly heal.

Perhaps the biggest concern is the health of the Big Banks. If they are ultimately revealed as insolvent, it will wreak havoc on what's left of America and its economy. Yet, this might actually be a good thing in the long run because it would finally break the Big Banks and end their grip on our government.

It will be quite fascinating to watch the process unravel. The upcoming mid-term elections and the rise of the Tea Party are all about the bailouts, the hatred of the banks, and the fear of creeping socialism.

Another bank bailout would be political suicide for any politician that supported it. The public would never stand for it. Yet, so many Republicans have now backed themselves into a corner by opposing bailouts for political reasons.

However, in the fall of 2008, we were all warned that not bailing out the Big Banks would be economic and national suicide. We may still get to find out after all.

The fallout from this scandal could be historic and watching it all play out will be nothing short of intriguing.

We can only hope that all those politicians who carry water for the banks will be excoriated for not calling on them to follow and uphold the law. And if the banks won't, then the lawmakers are supposed to.

This is a great opportunity to see them all for what they are; liars, cheats, thieves, political partners and opportunistic bedfellows.

They are all in league with each other.

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