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The proposed $25 billion “settlement” of the mortgage servicing mess, scheduled to be made public any moment, must be a way station to much larger reductions of mortgage principal for underwater homeowners and much more serious consequences for the banks and their allies whose fraudulent actions created the mortgage meltdown. If the settlement turns out to be the final installment of relief for homeowners, it will be a colossal failure, both as economics and as justice.

However, while the settlement talks among state AGs, the Obama administration and bankers were in their final phase last week, New York Attorney General Eric Schneiderman filed a massive lawsuit against three of the largest players, Wells Fargo, Bank of America, and JPMorgan Chase. This bodes well for further enforcement actions, settlement or no settlement.

The lawsuit minces no words in alleging that the big banks fraudulently used the electronic system known as MERS to “evade county recording fees, avoid the need to publicly record mortgage transfers and facilitate the rapid sale and securitization of mortgages en masse.” According to Schneiderman, the illegal scheme saved banks $2 billion directly in recording fees, and the banks could be subject to much more money in fines. Schneiderman’s suit also seeks to block the ability of the banks to foreclose on some 70 million properties held in the name of MERS.

Much of this same fraudulent misconduct is also the subject of the proposed settlement talks. Schneiderman signed onto the talks, and to a newly activated federal task force on criminal wrongdoing in mortgage securitization. So how can he file this case without blowing up the talks? (more…)

Zach Carter
Economics Editor, AlterNet; Fellow, Campaign for America’s Future

Despite escalating outrage over rampant foreclosure fraud, the Federal Reserve now appears ready to eviscerate a key mortgage regulation in an effort to spare banks the losses from their own wrongdoing. Even as bank executives preposterously claim to have wronged nobody in the foreclosure process, they’re pushing hard to unwind the only serious federal rule that protects borrowers from predatory loans and improper foreclosures. As if the last decade of abuse wasn’t bad enough, banks are once again mobilizing to screw borrowers in the pursuit of epic bonuses. And once again, it appears that the Federal Reserve has become an accomplice to this nationwide mortgage scam.

This week, top mortgage officers from the nation’s largest banks are telling the Senate Banking Committee that they aren’t kicking the wrong people out of their homes. This is simply false. Problems at mortgage servicers have been going on for years, long before banks got into trouble for illegally robo-signing foreclosure documents. People are kicked out of their homes without cause in the United States every day. If the top executives at America’s largest banks don’t know this fact, they lack the competence needed to run their organizations.

Law firms that work with troubled borrowers are jam-packed with horror stories about foreclosures caused entirely by banks, not borrowers. Families who never miss a payment come home to an eviction notice, or a thug breaking down their door.

But it’s even more common for borrowers to find themselves in trouble because their bank engaged in blatantly predatory lending. There is only one serious federal remedy for predatory lending, and the Fed is now knowingly trying to gut that remedy in order to help banks avoid losses from their own fraud. The remedy is called rescission, and it works like this:

If a bank failed to make key consumer protection disclosures about a mortgage, the borrower can demand that all of the interest and closing costs on the loan be refunded. Equally important, the bank must also stop all foreclosure proceedings and give up its right to foreclose. Once the bank gives up its right to foreclose, the full amount of the mortgage, minus interest and closing costs, becomes due. This isn’t a free lunch for the borrower, especially when the value of her home has declined dramatically, but it’s better than nothing, and it does impose real costs on banks. (more…)

Zach Carter

Zach Carter
Economics Editor, AlterNet; Fellow, Campaign for America’s Future

Foreclosure fraud is ruffling a lot of feathers on Wall Street, and while the full scope of losses remains unclear, even major banks are now acknowledging that this is a multibillion-dollar disaster, not just a set of minor paperwork headaches.

So how bad will it get for Wall Street? There are several disaster scenarios in which the housing market simply shuts down, where the potential losses for Wall Street are simply incalculable. But even situations that do not directly rip apart the basic functioning of the mortgage system could be enough to shut down one or more big banks, creating serious trouble for the financial system, and a major test of the recent Wall Street reform bill.

JPMorgan Chase loves using its research department to push its political agenda, and the bank is currently characterizing the foreclosure fraud outbreak as a set of “process-oriented problems that can be fixed.” That puts them in the rosy optimist camp for this crisis, and they’re projecting a total of $55 billion to $120 billion in losses for the entire industry, spread out over a few years.

But take a look at the analysts’ methodology. The actual scope of losses gets drastically larger if you just change a few arbitrary assumptions.

JPMorgan’s analysts look at about $6 trillion in mortgages issued between 2005 and 2007 — this is the height of the bubble, but it excludes plenty of lousy loans issued in 2003, 2004 and 2008. They then estimate defaults of $2 trillion and losses of $1.1 trillion on those defaults. (more…)

By Zach Carter
Economics Editor, AlterNet; Fellow, Campaign for America’s Future

A lot of frequently credible publications have been pumping out drivel lately blaming borrowers for the ever-widening foreclosure fraud scandal. Fortune Magazine has the latest of these blame-the-borrower narratives. It would be nice to be able to dismiss this kind of nonsense as mere journalistic laziness, but at this point in the crisis, blaming the borrowers is an act of willful ignorance.

The Fortune scribe resorting to this grotesque journalistic vice is Fortune’s Duff McDonald. McDonald’s argument? Pretty lousy. He openly acknowledges that he hasn’t done his homework:

“I find it very hard to process the notion that the onslaught of foreclosures in this country does not have more to do with a failure of conservative financial planning than with some insidious criminality by lenders . . . . I’m amazed that the country has congealed into the belief that every single borrower who signed a mortgage document has an escape hatch that somehow puts blame on their lender when they can’t pay their debts . . . . I am at a loss to understand how so many individual homeowners signing loan documents for debt they could ultimately not afford were somehow the victims of a crime.”

Four years after the subprime meltdown began, Duff McDonald still hasn’t bothered to investigate fraud in the selling of mortgages. I’m getting pretty tired of writing this statement: In 2004, the FBI warned of an “epidemic” in mortgage fraud, 80 percent of which is committed by lenders. There was an entire Congressional hearing devoted to fraud at Washington Mutual. Loan officers and mortgage brokers are perfectly capable of falsifying a borrower’s loan application, and they’re perfectly capable of telling a borrower they’re getting a great 30-year fixed-rate mortgage while selling them a subprime mortgage with exploding payments, adding a zero to the value of the house, or anything else. That’s fraud, it’s illegal, it happened all the time, and it was perpetrated by handsomely paid financial professionals. (more…)

Zach Carter
Economics Editor, AlterNet; Fellow, Campaign for America’s Future

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. (more…)

By Dean Baker
Co-Director, Center for Economic and Policy Research

Virtually everyone has had the experience of being forced to pay a late fee or a bank penalty because of some fine print provision that we overlooked. Sometimes begging by good customers can win forbearance, but usually we are held to the written terms of the contract no matter how buried or convoluted the clause in question may be.

That is the way it works for the rest of us, but apparently this is not the way the banks do business, at least when those at the other end of the contract are ordinary homeowners. As a number of news reports have shown in recent weeks, banks have been carrying through foreclosures at a breakneck pace and freely ignoring the legal niceties required under the law, such as demonstrating clear ownership to the property being foreclosed.

The problem is that when mortgages got sliced and diced into various mortgage-backed securities it became difficult to follow who actually held the title to the home. Often the bank that was servicing the mortgage did not actually have the title and may not even know where the title is. As a result, if a homeowner stopped paying their mortgage, the servicer may not be able to prove that they actually have a claim to the property.

If the servicer followed the law on carrying through foreclosures then it would have to go through a costly and time-consuming process of getting its paperwork in order and ensuring that it actually did have possession of the title before going to a judge and getting a judgment that would allow them to take possession of the property. Instead banks got in the habit of skirting the proper procedures and filling in forms inaccurately and improperly in order to take possession of properties. (more…)

Zach Carter
Economics Editor, AlterNet

I’ll have plenty to say about the escalating foreclosure fraud scandal later this week. For now: This is a big, big deal. It isn’t a clerical error, it’s an aggressive attempt to slap borrowers with thousands of dollars in illegal fees for the luxury of being foreclosed on. And what’s more, this absurd, shady business was priced into the entire mortgage securitization scheme from the get-go. Banks have been fudging their documentation for years in order to cut costs and score higher profits from securitization—the business model has relied on this corner-cutting since day one of the housing boom.

The good news is that borrowers can use this epic fraud to defend themselves. If a bank can’t prove that it has the right to foreclose on a borrower by showing the proper documentation to a judge, then it doesn’t have the right to foreclose. This is a tremendous opportunity for neighborhood advocates. Make them pony up the docs, it might just save your home. The problem isn’t restricted to GMAC—foreclosure counselors and attorneys talk about the issue of forged or destroyed documentation all the time, and we already know that JPMorgan Chase and Countrywide (now Bank of America) have major documentation problems. Including GMAC, that’s three of the biggest players in every aspect of the mortgage market.

If courts actually follow the law here, we get the best of both worlds—big losses for Wall Street on their predatory loans, and borrowers who get to stay in their homes (mortgage-free, at that). The only question is whether these mortgage losses prove so severe that Wall Street banks come back begging to the government for another bailout. If so, it’s an opportunity to do what should have been done in 2008—break up these financial monsters into smaller creatures that don’t require bailouts when they fail. (more…)

Zach Carter
Economics Editor, AlterNet

Financial giants have figured out yet another way to profit from fraud. After devastating communities across the country with shady subprime loans, the mortgage industry has launched a new assault on America’s neighborhoods. Big banks are now outsourcing their foreclosure processing to shady law firms with a history of breaking the law for a quick buck. These foreclosure scammers forge documents, backdate signatures, slap families with thousands of dollars in illegal fees and even foreclosure on borrowers who haven’t missed a payment.

Andy Kroll lays out the insanity in a terrific piece for Mother Jones. “Foreclosure mills,” as they are known, have been around for years, but they’ve become a much bigger problem as the mortgage crisis has deepened. Fannie Mae and Freddie Mac spurred the creation of these social beasts decades ago to help them process large volumes of foreclosures quickly and cheaply. Pretty soon big banks wanted in on the action, and bailout barons at Wells Fargo, Citigroup and Bank of America starting sending foreclosures to these scummy law firms by the thousands.

Banks opt to outsource dirty work like this for a reason. It takes weeks to process the legal work necessary to kick somebody out of their home, since cops and judges don’t want to give borrowers the boot without proof. If you can cut down that processing time, you can save a lot of money on legal bills. Foreclosure mills cut costs for banks by cutting corners — when they can’t compile the documentation needed to push families out of their homes right now, they simply fabricate the documents. Still worse, these guys illegally withhold documentation from borrowers seeking to negotiate loan modifications with their banks — effectively forcing borrowers out of their homes instead of allowing them to cut a deal with the bank. When borrowers actually do straighten things out with foreclosure mills, the scumbags slap them with huge illegal fees. Kroll details a foreclosure mill that erroneously tried to evict a Florida couple who had been paying their mortgage on time. When it became clear that the couple could not be kicked out of their home, the foreclosure mill tried to charge them $18,500 in fees for mistakes committed by the foreclosure mill and the bank. The foreclosure mill even invented two new people who it said lived in the home in order to demand four sets of legal processing fees instead of two. (more…)