For months now, the banking industry has been dismissing the fact that they may have been pursuing tens of thousands of home foreclosures with deficient paper work as mere technical glitches.
Last week they got a wake-up call when Massachusetts highest court ruled 6-0 in favor of two Springfield homeowners who had been foreclosed on three years ago. The high court let stand a lower court decision that both foreclosures were invalid because the two banks trying to seize the homes did not actually have the legal standing to do so.
Gary Klein, a Boston based lawyer who wrote a friend of the court brief on behalf of the victorious homeowners, says he has a pending class action involving almost 10,000 families that he says were victims of improper foreclosures. “We need to sort out these faulty foreclosures,” says Klein because the underlying defective paper work will haunt the “future property owners years from now who will have a hard time getting a clear title” to the land they think they own. The Boston Globe quoted one of the banks tried to put the best spin on the ruling by suggesting it only created a "standard legal process" going forward for mortgage companies to follow.
It has been widely reported that big banks — in a rush to bundle and market tens of billions of dollars in mortgage-backed securities — fast-tracked the legal documentation for the underlying mortgages that were the "foundation" for the "innovative" products they were selling. Why stop at a local courthouse to record anything when you can robo-sign or otherwise finesse the required documents?
If one person did any of this it would be a potential criminal act, but when it’s done industry-wide, it’s a "systemic risk" needing special government attention.
Now all 50 state Attorneys General are investigating, along with the Department of Justice and the Federal Reserve -- all the folks that missed it in the first place are now on the case!
But this may be too big a genie to put back in the bottle. How much of the tens of billions of dollars in mortgage-backed securities that banks have sold are secured by nothing but legally deficient documentation?
New York City Comptroller John Liu has organized a coalition of public pension officers from several states that hold more than $5.7 billion dollars in stock in Bank of America, JP Morgan Chase, Wells Fargo and Citigroup. Liu wants the boards of directors of all four to undertake independent audits of their mortgage operations and publicly report just what their actual exposure could be.
Liu said according to one federal study, the collective liability for the banks could be as high as $50 billion dollars.
"We want to force the bank directors to stop taking hook, line and sinker what their managers are telling them -- that this is all a minor technical glitch," said Liu. He said banks that sold securities backed by mortgages they can't legally foreclose on now have to prepare for potential investor lawsuits and class actions suits brought by former homeowners looking for their home back. All that could spell trouble for the value of the bank stocks the public pensions now hold.
"This could precipitate another trauma like the financial collapse of 2008," Liu said. "Bank directors should not be just hoping their management has everything under control."
Liu says he first got suspicious earlier last year when he saw the banks failing to follow through in any substantial way on the Treasury Department's program to help distressed homeowners stave off foreclosure. He said he heard complaint after complaint from New Yorkers desperately trying to avail themselves of the mortgage modification programs hyped by the Obama Administration.
But what these first hand accounts revealed was that the so-called “second chance to avoid foreclosure” was most often a cruel time-wasting, and even money-wasting, hoax. While they were holding out for hope they could believe in, the mortgage servicers lost their paper work or the information the bank reps gave out was totally inaccurate. By July, Comptroller Liu, along with labor unions and concerned clergy wrote the big banks on behalf of the frustrated at risk households.
Others are also paying attention. Assistant Treasury Secretary Michael Barr had some really troubling news for the Congressionally Financial Stability Oversight Council last November. Barr told the new panel, created to spot systemic risks to the still fragile economy, that a review of the nation's major mortgage servicing companies found "widespread" and "inexcusable breakdowns in the basic controls of the foreclosure process."
By December 1, Federal Reserve Board member Daniel Turullo told the Senate Banking Committee that federal bank regulators had some alarming results from a preliminary survey of the mortgage banking sector. Their findings suggested the very same industry, that had brought us to the brink of fiscal meltdown was still rife with "significant weaknesses in risk management, quality control audits, and compliance practices."
Then, less than two weeks before Christmas, the Congressional Oversight Panel (COP), set up to oversee bank bailout funds, issued a report on the fate of the federal foreclosure prevention program. It validated nationally the homeowner complaints Comptroller Liu had written the big banks about locally months earlier.
The Congressional Oversight Panel castigated the Treasury Department saying its so-called Foreclosure Prevention Program "had failed to help the vast majority of homeowners facing foreclosure."
And if the banks blew off the at-risk homeowners, the COP report said the federal Treasury just looked the other way. "Treasury has also failed to hold loan servicers accountable when they have repeatedly lost borrowers paperwork or refused to perform loan modifications," wrote the COP report authors in their executive summary.
Bottom line, according to the Congressional Oversight Panel, is that the Home Affordable Modification Program has been a massive bust. It will ultimately only help 700,000 to 800,000 households avoid foreclosure, "far fewer than the 3 to 4 million foreclosures that Treasury initially aimed to stop.....vastly fewer than the 8 to 13 million expected by 2012."
So while mortgage servicers and banks ran down the clock on the loan modification requests, Treasury looked the other way.
What will the Obama Administration response be to this latest iteration of the mortgage mess?
No doubt the banks will be well represented in the Oval Office with the President's selection as his new Chief of Staff. William M. Daley, a former Commerce Secretary, was most recently with JP Morgan's Operating and Executive Committee.