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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…)

Zach Carter

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

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…)

Zach Carter

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

Unbelievably, the U.S. Senate has approved legislation making it easier for banks to get away with foreclosure fraud. The bill would make it much harder for consumer advocates to show that banks are engaging in fraud, bailing out megabanks who cut corners in order to boost bonuses and slap borrowers with massive, illegal fees. The political fight between big banks and troubled homeowners is on, and President Barack Obama must take a side.

If President Obama signs this legislation into law, he’s sending a clear signal that his administration stands ready to bailout the banks again, whatever the consequences for American homeowners. The new legislation is a clear attempt to provide legal cover to GMAC’s robo-signing scandal, and should be firmly opposed by Obama.

Banks are running into big trouble in foreclosure courts right now because they have kept shoddy mortgage records for years in order to cut costs and boost bonuses. Those records are so bad that banks routinely cannot prove that they have the legal right to foreclose on the homes they attempt to foreclose on. That’s a major problem, because banks have repeatedly demonstrated that they cannot be trusted to figure out their own foreclosures for themselves. They’ve foreclosed on people who haven’t missed any mortgage payments, and even on borrowers who have fully paid off their loans.

So banks and their lawyers have been fabricating documents, forging signatures, and lying to judges in order to go through with foreclosures. All of this is fraud– especially when committed systematically, en masse by large corporations and their clients. It gets even worse when banks try to use fraudulent documents to slap borrowers with thousands of dollars in illegal fees. (more…)

James Parks

By James Parks
AFL-CIO Senior Writer

The rest of the banking industry should follow JPMorgan Chase’s example and declare a nationwide moratorium on home foreclosures, AFL-CIO Executive Vice President Arlene Holt Baker said this week. Chase has announced it is temporarily halting the processing of home foreclosures.

In rallies and town hall meetings across the country, union members have demanded that the banks pursue alternatives to foreclosure such as modifying homeowners’ mortgages to more affordable levels. In July, Holt Baker and Atlanta-North Georgia AFL-CIO President Charlie Flemming were part of a panel in Atlanta that listened to area residents about to lose their homes explain the Big Banks’ role in the foreclosure crisis. After the hearing. Holt Baker and others met with Wells Fargo Wachovia officials and urged them to declare a moratorium on foreclosures.

Last week, UAW President Bob King and several faith leaders announced their intention to withdraw hundreds of millions of dollars from JPMorgan Chase, among other reasons, over its refusal to declare a moratorium on foreclosures in Michigan. (more…)

Dean Baker

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

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…)

James Parks

By James Parks
AFL-CIO Senior Writer

In case you missed it, the recession is over. Really. In fact, it was over about 15 months ago, according to the National Bureau of Economic Research (NBER), a panel of academic economists based in Cambridge, Mass. They say the recession lasted 18 months, starting in December 2007 and ending in June 2009. That was the longest of any recession since World War II.

Ann Brenoff, writing at WalletPop, explains why you may be excused if you didn’t notice the end of the recession.

There are only a few pesky problems with that declaration: What to do with those 14.9 million or so people who still don’t have jobs (more if you count those who have given up looking out of futility)? Or the foreclosure plague that has wiped out entire communities? Or the fact that food banks are stressed to the breaking point with hungry families? Or that more than a few people can’t remember what the inside of a shopping mall looks like and panic when they misplace a grocery coupon?

Richard Eskow wirtes at the Campaign for America’s Future: (more…)

Zach Carter

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…)

David Sirota

 

Author of “The Uprising: An Unauthorized Tour of the Populists Revolt”

When they write their retrospectives about the era that ended with the 2008 election, economic historians will undoubtedly credit George W. Bush with almost single-handedly moving the country to embrace extremist conservatism. It’s a simple storyline: Cowboy president drives bewildered American herd over laissez-faire cliff. What such reductionism will ignore, though, is what we must remember now: namely, that Congress also played a decisive role in the stampede.

As former House Republican leader Tom DeLay said, he and his colleagues deliberately started “every policy initiative from as far to the political right” as possible, so as to shift “the center farther to the right.” The formula emulated Franklin D. Roosevelt’s fabled admonishment to allies: “I agree with you, I want to do it, now make me do it.”

Of course, that triumph was the country’s loss, as Republican policies thrust the political center off a conservative precipice and America into an economic freefall. And as we plummet, we are desperately groping for a lifeline.

If we are lucky and we end up snagging one that saves us – a huge if – it will be one that is strong enough to snap the center back from the conservative brink. This super-durable bungee cord must have the force of law, meaning it will be woven by Democratic legislators now exerting as much pressure on President Obama’s left as congressional Republicans focused on President Bush’s right.

When, for instance, Obama hedged on his promise to revoke $226 billion worth of Bush’s upper-income tax cuts, House Speaker Nancy Pelosi, D-San Francisco, pushed him to fulfill the pledge and put the money into programs that better guarantee job creation.

When Obama initially offered up a stimulus bill filled with discredited business tax breaks, Democratic senators forced him to back off. Reps. David Obey, D-Wis., and Jim Oberstar, D-Minn., then argued that the president’s proposed infrastructure investments were too small to boost the economy. That led House Democrats to increase Obama’s spending targets.

As stimulus negotiations continued, Rep. John Conyers, D-Mich., tried to add provisions letting courts renegotiate banks’ primary-residence mortgages so as to prevent more foreclosures. It’s a commonsense proposal: Judges already have the power to renegotiate vacation-home mortgages, and the New York Federal Reserve Bank says existing bankruptcy laws are exacerbating the foreclosure crisis. While Obama opposed the initiative out of fear that banking industry opposition might slow the underlying stimulus bill, Conyers’ effort ultimately made the president commit to supporting the reforms in future legislation.

Then there was the progressive reaction to Obama’s demand for more financial bailout money. Turning a routine committee hearing into a modern-day incarnation of the Great Depression’s Pecora Commission, Rep. Alan Grayson, D-Fla., upbraided a Federal Reserve official for refusing to disclose which banks are receiving taxpayer dollars. The spectacle was one of many that whipped the House into passing a bill attaching strings to the funds. Obama responded by committing to enact some of the restrictions by fiat.

At once complementary and adversarial, this intragovernmental squabbling probably makes the conflict-averse Obama uncomfortable. But the “make him do it” dynamic could finally bring the center of Washington’s political debate closer to the progressive center of American public opinion. Even more important, it is precisely what will help the new president avert an economic disaster.

David Sirota is the best-selling author of the books “Hostile Takeover” (2006) and “The Uprising” (2008).