The mortgage crisis in a nutshell

I invite you to view a brand new 54-minute video (embedded below) titled “Mortgage Crisis in a Nutshell.” The presenter is John Campbell, a St. Louis attorney and educator. I work with John at the Simon Law Firm in St. Louis, Missouri. We gained much of our experience in this area of law by litigating numerous suits for mortgage fraud on behalf of homeowners, both individual suits and class actions. Also on behalf of homeowners, we've defended many unlawful detainer suits (attempts to evict homeowners). We've both become passionate about this work as a result of witnessing firsthand that many homeowners have been victimized by unscrupulous and unrepentant banks. In this 53-minute video John presents the main aspects of the mortgage crisis that has devastated the U.S. housing market and the economy. Our goal is empower all who seek to better understand what went wrong with the American mortgage system. As you will see when you click on the above link, this video can be watched in chapters: I. The Big Picture and its Many Parts (:55) II. Banks Flood the Market with Subprime Mortgages (3:54) III. Banks, Securitize their Mortgages (10:05) IV. Banks Cry for a Bailout (13:57) V. Wall Street Malfeasance (16:54) VI. Foreclosures, Robo-Signing, Trustees and Conflicts of Interest (18:20) VII. MERS ("Mortgage Electronic Registration System) (33:45) VIII. The Mortgage System Used to Work (43:42) IX. Credits and Further Readings (52:43) We created this video because we were frustrated by the fact that it is difficult to find websites and other materials describing the modern mortgage system in terms that are accessible to both lawyers and non-lawyers. As a result, many of our friends and acquaintances (those outside of the mortgage law community) don’t understand the inter-relationships among subprime loans, ratings of mortgage-backed securities, MERS, the bailout and robo-signing. The failure to understand these things is making it easy for the entities that caused this crisis to conduct business as usual. Because this system is so difficult to understand, too many people think the crisis was entirely caused by “irresponsible borrowers.” The result is that our national dialogue is obsessed with the alleged need for less regulation instead of discussing how to change the system to make sure this never again happens. We’ve used simple terms and basic drawings in order to make an opaque system understandable. Though it is undoubtedly slanted toward our perspective as attorneys who represent homeowners, we’ve worked hard to keep it factual and fair-minded. We ask only one thing in return for the link to this video. To the extent that you find it helpful to your understanding of the mortgage crisis, please consider forwarding this link to anyone else you know who would benefit from viewing it. Our aim is to spread this video widely through email, list serves, Facebook, Twitter, blogs, websites other social media. We certainly invite comments, both at DI and at YouTube. If this video works for you (or if it doesn't), please let us know. Thank you.

Continue ReadingThe mortgage crisis in a nutshell

FTT not enough; abolish credit default swaps

At Huffpo, Robert Kuttner makes the case for completely abolishing credit default swaps.  Many reformers are focusing on enacting a financial transaction tax, but Kuttner argues that this worthy reform falls far short of what is ultimately needed for meaningful financial reform.  Therefore, in addition to reenacting the Glass-Steagall Act, Kuttner seeks to abolish credit default swaps:

The financial transaction tax has become a useful symbol of the need to rein in the banks. Its enactment would mark an important turning point -- it would show that the power of the banks can be broken. And if the US government keeps opposing it, the EU should enact it unilaterally -- every global bank does business in Europe.

But such a tax would be only a small first step. Banks would still invent exotic instruments and trade them; they'd just have to pay a small tax.

It's time to simply abolish credit default swaps and similar exotic, impenetrable, essentially unregulated securities. They add nothing to economic efficiency, they line bankers' pockets, and they add massively to global financial risks. Swaps were only invented in the 1990s. The world got along beautifully -- much better in fact -- without them.

Kuttner is co-editor of The American Prospect and a senior fellow at Demos.

Continue ReadingFTT not enough; abolish credit default swaps

William Black: Stop the banks. Indict the banksters.

Wire fraud and mail fraud are extremely serious federal crimes. Thousands of people who have perpetrated fraud through the mail or through telecommunications of any sort have been sent to prison for up to 20 years.  The U.S. Department of Justice warns that prosecution of wire fraud is not always merited, however. Prosecutorial resources should not be expended where fraud is a small piddling crime. For example:

Prosecutions of fraud ordinarily should not be undertaken if the scheme employed consists of some isolated transactions between individuals, involving minor loss to the victims, in which case the parties should be left to settle their differences by civil or criminal litigation in the state courts. Serious consideration, however, should be given to the prosecution of any scheme which in its nature is directed to defrauding a class of persons, or the general public, with a substantial pattern of conduct.
What, then, should we make of the decision by the biggest banks in the United States to spew millions of lies through the mail in the zealous attempts to kick people out of their houses?  Everything about this bank fraud meets the test for serious fraud.  Not isolated.  Not between individuals.  Not involving minor losses to victims.  The victims, for the most part, cannot settle their differences by litigation because they have been put into desperate financial situations by the lenders, working hand-in-hand with the bank.  And yes, this scheme is directed to defrauding a large class of persons, and the general public is going to suffer the consequences of this "substantial pattern of conduct," namely, the large tracts of foreclosed homes in their neighborhoods. Note too, that the federal fraud statutes kick up the penalty to up to 30 years in prison "if the violation affects a financial institution."  Of course, the politicians and bank are going to argue that the increased penalty only applies if the institution is the victim. Then maybe it's time to pull out that wonderful quote by Anatole France:

The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread.

In steps bank regulator/investigator William Black, into the fray.  Black is one of the few nationally prominent voices I completely trust with it comes to the conduct of banks over the past few years (and yes, decade).  Here is the solution Black offers, one that politicians are going to choke on because the banks own Congress.

S&L regulators, criminologists, and economists recognize that the same recipe that produced guaranteed, record (fictional) accounting income (and executive compensation) until 2007 produced another guarantee: massive (real) losses, particularly if the frauds hyper-inflated a bubble. CEOs who loot "their" banks do so by perverting the bank into a wealth destroying monster -- a control fraud. What could be worse than deliberately growing massively by making loans likely to default, converting large amounts of bank assets to the personal benefit of the senior officers looting the bank and to those the CEO suborns to assist his looting (appraisers, auditors, attorneys, economists, rating agencies, and politicians), while simultaneously providing minimal capital (extreme leverage) and only grossly inadequate loss reserves, and causing bubbles to hyper-inflate?

This nation's most elite bankers originated and packaged fraudulent nonprime loans that destroyed wealth -- and working class families' savings -- at a prodigious rate never seen before in the history of white-collar crime. They created the worst bubble in financial history, echo epidemics of fraud among elite professionals, loan brokers, and loan servicers, and would (if left to their own devices) have caused the Second Great Depression.

Nothing short of removing all senior officers who directed, committed, or acquiesced in fraud can be effective against control fraud. We repeat: Foreclosure fraud is the necessary outcome of the epidemic of mortgage fraud that began early this decade. The banks that are foreclosing on fraudulently originated mortgages frequently cannot produce legitimate documents and have committed "fraud in the inducement." Now, only fraud will let them take the homes. Many of the required documents do not exist, and those that do exist would provide proof of the fraud that was involved in loan origination, securitization, and marketing. This in turn would allow investors to force the banks to buy-back the fraudulent securities. In other words, to keep the investors at bay the foreclosing banks must manufacture fake documents. If the original documents do not exist the securities might be ruled no good. If the original docs do exist they will demonstrate that proper underwriting was not done -- so the securities might be no good. Foreclosure fraud is the only thing standing between the banks and Armageddon.

I should add that there are many cases where foreclosure is perfectly appropriate.  On the other hand, there are hundreds of thousands of cases where disreputable loan originators such as Ameriquest and Countrywide systematically lied to borrowers, sticking them into loans that the borrowers had no hope of paying off when the hyper-charged "adjustable rate mortgage" came into effect two or three years later.  Add in the deceitful "yield spread premiums," hidden fees and the many lies about prepayment penalties, and you've got enough fraud to fill the courts of this land for many years to come, where banks who foreclosed based on these shameful scenarios should be punished and forced to make amends to the homeowners.   That is what should happen.

Continue ReadingWilliam Black: Stop the banks. Indict the banksters.

An outrageous prediction regarding millions of illegal foreclosures conducted by banks

We now know that many of the “foreclosure experts” who were signing many thousands (perhaps millions) of affidavits that allowed banks to kick delinquent homeowners out of their homes were utterly unqualified to understand the sorts of technical information they were spewing while under oath. In short, the banks were allowing and requiring incompetent employees to lie under oath in order to allow foreclosures to go forward:

In an effort to rush through thousands of home foreclosures since 2007, financial institutions and their mortgage servicing departments hired hair stylists, Walmart floor workers and people who had worked on assembly lines and installed them in "foreclosure expert" jobs with no formal training, a Florida lawyer says. In depositions released Tuesday, many of those workers testified that they barely knew what a mortgage was. Some couldn't define the word "affidavit." Others didn't know what a complaint was, or even what was meant by personal property. Most troubling, several said they knew they were lying when they signed the foreclosure affidavits and that they agreed with the defense lawyers' accusations about document fraud.

Even under the assumption that many or most of these homeowners were actually delinquent, this is incredibly disturbing. Richard H. Neiman, New York's top bank regulator and a member of the Congressional Oversight Panel, a federal bailout watchdog, has expressed concern:

"In recent days, it has become apparent that a number of mortgage loan servicers have submitted affidavits or other foreclosure documents that appear to have procedural defects," the Conference of State Bank Supervisors said in a statement. "In addition, many affidavits may have been signed without a notary public being present.

NPR has provided a more detailed description about the kind of people who served as “robo-signers”:

ARNOLD: [T]his GMAC employee told him that even though he was supposed to be certifying the accuracy of the documents in a homeowner's file... Mr. COX: He said he that doesn't look at them. He doesn't bother to go search them out in the computer to look at them. ARNOLD: And Cox said the sheer volume of foreclosures appeared to make doing a thorough job impossible. Stefan testified he's signing between eight and 10,000 documents a month. Mr. COX: That works out to be about one a minute. Some of those loan files contain a hundred or more documents. ARNOLD: Housing advocates call employees like this robo-signers. They say they barely have a chance to glance at all the documents that they're asked to sign.

These fraudulent foreclosure cases are hitting the courts all over. And they should, because many of these homeowners were lied to on the way in (about "yield spread premiums" and exploding ARM's and hidden penalties), and now they (and the courts) are being lied to on the way out. In fact, based on my personal experience as a consumer lawyer, the lies on the way in, and the shodding servicing, led to the foreclosure. Here’s a synopsis of a lawsuit filed Oct 1, 2010 by Center for Responsible Lending:

Five Maine residents filed a complaint today against GMAC Mortgage, LLC (GMAC) on behalf of themselves and a class of Maine homeowners, alleging that the company routinely and systematically files false certifications that it has a right to foreclose on Maine homeowners, and false affidavits when asking courts to enter foreclosure judgments.

The homeowners complain that GMAC files these false documents knowing that the courts in Maine will rely on them in deciding whether foreclosures can go forward and in allowing GMAC to sell their homes. Depositions of GMAC employees revealed that they do not verify the truth of information necessary to give GMAC the right to foreclose when they sign these court documents and that these improper practices have been in place since at least 2004.

This situation is horrendous. It justifies impolite synonyms for banks: house-jackers. Banksters. If you cringe at this language and consider it overbroad, ask yourself whether "innocent" bankers knew of this problem and whether they often discussed it at the country club with the evil bankers. And they didn't step up and report it. Consider also that the banks so often preach the importance of the “letter of the law” when slapping huge fees and penalties on home-owners, even when the homeowners are only a day late with their payments. Now here are those same banks, absolutely unable to establish a chain of title necessary for a foreclosure, but they utterly don’t give a rat's ass about the letter of the law, because this archaic rule (letter of the law) is now a burden to the banks. From the perspective of the banks, the solution to the problem that they can't figure out how to establish their case in the context of the convoluted system that they themselves created, is to systematically lie under oath. Over and over and over. And now that the banks have been caught by the national media, and because the media is paying attention, the politicians also need to pay attention to this problem, and everything has become awkward for the banks. Very Inconvenient. They might have to pay big money to send thousands of lobbyists to Congress to fix this problem. And then they will have to jack up their rates and penalties and other tricks and traps to pay for those lobbyists. [More . . . ]

Continue ReadingAn outrageous prediction regarding millions of illegal foreclosures conducted by banks

Simon Johnson finds tax-the-banks solution laughable

Barack Obama recently announced that the way to prevent future economic collapses is to put a new tax the big banks. For me, this was just one more in a long line of dreadful responses out of the White House. Who does he think is going to ultimately pay that tax? Further, how could a tax possibly keep big Wall Street banks from taking reckless gambles, and how is it that having a pool of tax money would mean that Washington DC wouldn't again jump in to "save the banks" with huge doses of tax dollars during the next cataclysmic crash? As long as there are banks that are "too big to fail," the federal government will jump in a most co-dependent of ways. I just read an FT.com article by economist Simon Johnson, who reassured me that my instincts were on target.

This week, the US Treasury pulled its latest rabbit out of the hat: a tax on the liabilities of large banks. The Obama administration argues that, by penalising large institutions with such taxes, we can limit their future risk-taking. This logic is deeply flawed. Why would higher funding costs mean you gamble less? If you know Tim Geithner is waiting to bail you out, you may gamble more heavily in order to pay the tax. The UK “reforms” look equally unpromising.
Johnson also spells out what IS needed:
First, we must sharply raise capital requirements at leveraged institutions, so shareholders rather than regulators play the leading role in making sure their money is used sensibly. This means tripling capital requirements so banks hold at least 20-25 per cent of assets in core capital. Second, we need to end the political need to bail out every institution that fails. This can be helped by putting strict limits on the size of institutions, and forcing our largest banks, including the likes of Goldman Sachs and Barclays, to become much smaller.
For reasons I truly don't understand, Obama is refusing to stand up and use his magnificent eloquence to make a case for meaningful financial reform. This has been a slow-motion train wreck for the past year, and he's about to allow the chance to create a CFPA slip away. He needs to join Elizabeth Warren in an almost constant assault on these highly monied amoral corporations (and their enablers in Congress) that it's time for real reform. As Warren (who IS out there fighting a good fight) says, "The problem is that a strong CFPA directly threatens the banks' ability to sell confusing, deceptive, fee-heavy financial products that generate huge profits, Warren said."

Continue ReadingSimon Johnson finds tax-the-banks solution laughable