Foreclosure Fraud: 6 Things You Need To Know About the Crisis That
Could Potentially Rip the U.S. Economy To Shreds
fraud crisis seems to escalate with each passing now. It is being
reported that all 50 U.S. states have
launched a joint investigation into alleged fraud in the mortgage
industry. This is a huge story that is not going
to go away any time soon. The truth is that it would be hard to
understate the amount of fraud that has gone on in the U.S. mortgage
industry, and we are watching events unfold that could potentially
rip the U.S. economy to shreds. Many are now referring to this crisis
and already it is shaping up to be the worst thing that has ever
happened to the U.S. mortgage industry. At this point, it seems
inevitable that some financial institutions will go under as a result
of this mess. In fact, by the end of this thing we might see a whole
bunch of lending institutions crash and burn. This crisis is very
hard to describe because it is just so darn complicated, but it
is worth it to try to dig into this thing and understand what is
going on because it has the potential to absolutely decimate the
entire U.S. mortgage industry.
The truth is
that there was fraud going on in every segment of the mortgage industry
over the past decade. Predatory lending institutions were aggressively
signing consumers up for mortgages that they knew they could never
repay. Many consumers were also committing fraud because a lot of
them also knew that they could never possibly repay the mortgages.
These bad mortgages were fraudulently bundled up and securitized,
and these securitized financial instruments were fraudulently marketed
as solid investments. Those who certified that these junk securities
were "AAA rated" also committed fraud. Then these securities were
traded at lightning speed all over the globe and a ton of mortgage
paperwork became "lost" or "missing."
it came time to foreclose on these bad mortgages, a whole bunch
more fraud started being committed. The reality is that the "robo-signing"
scandal is just the tip of the iceberg. The following are six things
that you should know about how deep this foreclosure fraud crisis
According to the Associated Press, financial institutions were hiring
just about whoever they could find, including hair stylists and
Wal-Mart employees, as "foreclosure experts" to help them rush through
the massive backlog of foreclosures that were rapidly piling up.
many of these "foreclosure experts" barely
even knew what a "mortgage" was according to the AP....
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
There is soon going to be a colossal legal scramble to figure out
who actually owns millions of U.S. mortgages.
In his recent
article entitled "Invasion
Of The Robot Home Snatchers," Robert Scheer described the
complete and total mess that the U.S. mortgage industry has created....
you foreclose on a home when you can't figure out who owns it because
the original mortgage is part of a derivatives package that has
been sliced and diced so many ways that its legal ownership is often
unrecognizable? You cannot get much help from those who signed off
on the process because they turn out to be robot signers acting
on automatic pilot. Fully 65 million homes in question are tied
to a computerized program, the national Mortgage Electronic Registration
Systems (MERS), that is often identified in foreclosure proceedings
as the owner of record.
more organizations are stepping forward to help homeowners fight
foreclosures. National People's Action, PICO National Network, Industrial
Areas Foundation, Alliance of Californians for Community Empowerment
and the Northwest Federation of Community Organizations have all
partnered with the SEIU to launch the "Where's
The Note" campaign which is going to encourage homeowners to
demand to see the note before submitting to a foreclosure. Campaigns
such as this are going to make foreclosures much more costly for
Legal battles over foreclosure documents could soon spawn thousands
upon thousands of lawsuits across the United States.
a Georgetown University Law professor who specializes in mortgage
finance and financial regulatory issues was recently quoted in
an article on CNBC as saying the following about the situation
we are currently in....
is still owed, but there's going to be a problem figuring out who
actually holds the mortgage, and they would be the ones bringing
the foreclosure. You have a trust that has been getting payments
from borrowers for years that it has no right to receive. So you
might see borrowers suing the trusts saying give me my money back,
you're stealing my money. You're going to then have trusts that
don't have any assets that have been issuing securities that say
they're backed by a whole bunch of assets, and you're going to have
investors suing the trustees for failing to inspect the collateral
files, which the trustees say they're going to do, and you're going
to have trustees suing the securitization sponsors for violating
their representations and warrantees about what they were transferring.
The problems with foreclosure paperwork may be more widespread than
anyone would have dared to imagine.
Kessler recently conducted a study in which he found "serious errors"
in approximately 75 percent of the court filings related to home
repossessions that he examined. Now he says that the foreclosure
crisis could haunt the U.S. mortgage industry for
the next ten years....
documentation has created millions of blighted titles that will
plague the nation for the next decade."
If some banks discover that they are missing the paperwork for large
numbers of mortgages (as is currently being alleged), those banks
could be forced to significantly revalue those assets (as in "close
to zero") on their balance sheets.
of CNBC recently described
it this way....
damaging thing that could happen to banks would be the discovery
that they simply cannot prove they hold a mortgage on a house. In
that case, the loan would probably have to be written down to near
zero. Even for current loans, the regulatory reserve requirements
would double as the loan would no longer be a functional mortgage
but an ordinary consumer loan. Depending on the size of the “no
docs” portion of the loan portfolio, this might be a minor blip
or require a bank to raise new capital to fill the hole in the balance
Renowned investor Jim Sinclair is actually warning that the collapse
of securitized mortgage debt could be the "final shot" that will
wipe out many financial institutions across the United States.
recent warning that Sinclair posted on his blog is more than
a little sobering....
I am asking
for your attention again because of the depth of the fraud and now
the size of the securitized mortgage debt OTC derivative pile of
garbage that is in the trillions. This entire mountain of weapons
of mass financial and social destruction is now in question. I have
been telling you this for more than 2 years since the manufacturers
and distributors of this crap were called by the NY Fed due to the
loss of control over the paperwork.
I had dinner
with my former partner, then lead director of and CEO of Bear Stearns.
I could not contain myself so I asked him why he did so much business
in OTC derivatives which were certain to bankrupt them. The answer
I got was it was more than 50% of their profit. The right answer
should have been it was more than 80% of their earnings.
mortgage debt is going to be the final shot that kills all kinds
of financial entities in the Western world. The biggest holder of
this putrid junk is pension funds.
the stock market continues to go up, up, up as if everything is
right in the world and as if a juicy new bull market is now upon
all join hands and sing happy songs around the campfire.
we all close our eyes and wish real hard all of this foreclosure
fraud will just go away.
with permission from the Economic
© 2010 Economic