While our collective anxiety is cynically ratcheted up by our leaders over the debt ceiling, millions of Americans remain mired in a foreclosure nightmare from which there is no waking. And though the banks were made whole years ago by the Toxic Asset Relief Program (TARP), the federal cash infusion designed to keep them stable, these underwater Americans have been left to financially bleed out.
According to Daren Blomquist, managing editor of the RealtyTrac foreclosure newsletter, there are now close to five million homes in the "distressed category" that are in, or close to, foreclosure. He says the real eye-popping number is just how many Americans find themselves "underwater" - the term used to describe owning a home that has become worth less than its mortgage.
"We are showing 29 percent of all loans are under water," says Blomquist. "And not just a little underwater, but where the loan amount is 20 percent more than the estimated value of the home."
In 2008, the country was in the early throes of the mortgage meltdown, brought on by the high-risk, and arguably illegal behavior of the big banks. The Bush Administration, along with then-Senator Barack Obama, urged quick action to buoy them. The thinking was basically: "We'll get the TARP to cover their rotting corpse and we will sort out the forensics of right from wrong later. Why the very foundations of civilization depend on it!"
Questions about the quality and transparency of the so-called mortgage-backed securities and credit default swaps were out early on. Yet subsequent disclosures revealed mortgage banks and their loan servicers were scamming on yet another level - they were engaged in a widespread practice called robo-signing, which relied on forgery to make it appear a mortgage had been properly assigned and recorded. And this no-fuss, no-muss strategy could be used to expedite foreclosure too!
At the same time all of this came to light, Federal regulators appeared poised to cut one of those deals with the banks that leaves them fined, but solvent without an admission of guilt.
No doubt in times of state house scarcity, the nation's attorneys general could rationalize a similar grand bargain with the banks, which would result in millions flowing into empty state coffers.
As Washington prepared to leave banks with a slap on the wrist, this month New York State Attorney General Eric Schneiderman made waves when he started asking questions about Bank of America's plan to settle outstanding claims with cheated investors (which had the misfortune of acquiring Countrywide and its now-notorious portfolio of troubled mortgage backed securities.)
Now Scheniderman - along with Delaware Attorney General Beau Biden - is launching a full-scale investigation into allegations that the banks short changed investors and simultaneously hoodwinked borrowers.
New York and Delaware were the home bases for all the bank trusts used as conduits for the billions in mortgage-backed securities before they were launched like ticking fiscal time bombs around the world.
"Attorney General Biden and I have been pursuing our own investigation," Schneiderman said in a recent interview with WNYC. "There are so many people who got bad deals and are stuck with those bad deals who are just seething with the sense that the bankers who put them in those bad deals are not stuck with the deal."
More than three years since the TARP was first rolled out, law enforcement appears to be taking a comprehensive look at one of the biggest potential heists in world history.
"We are investigating the whole picture," Schneiderman says. "I think we need to have something more like a comprehensive settlement that deals with the problems of the investors and the problems of the borrowers. I think the damage was really much greater than acknowledged up until now."
"I think there has been a reluctance to make those who are responsible for the mortgage-backed securities bubble and crash to take responsibility for their actions, and that is something I am determined to do." He said he thought that up until now relief for beleaguered mortgage holders or families in foreclosure sounded too much like ”charity” when they may actually have legitimate grounds for suing their bank or loan servicer.
He says the banks have pull in Washington and have been successful in slowing and watering down the reforms put in place after the mortgage meltdown.
"There are really two sets of issues to me that are inextricably intertwined," he said. "Everybody understands that when interests rates started to go up in 2004, the quality of loans degenerated. Everyone in the industry knew, or should have known, that there were more negative amortization loans, more interest-only loans, more no-documentation loans - the quality of loans was going down and everyone understood that the quality of securities that pooled these loans was getting more and more questionable. "
But Schneiderman says the ever-inventive industry found a way to cover their tracks.
"They switched over from regular mortgage-backed securities to collateralized debt obligations, which were these massive opaque instruments that were very hard for people to analyze," he said. "This was a pattern that continued through 2005, 2006, 2007. Then the bubble crashed."
Schneiderman says he can’t go into detail because his investigation is ongoing, and at the same time he is operating on a separate track pursuing negotiations along with the nation’s other state attorney generals with the banks for a universal settlement.
Former New York Governor Eliot Spitzer, who also served as Attorney General, has high praise for Schneiderman's half-year tenure as the state's top lawyer.
"First what you need to do is get your arms around what is pending within the office, and I think Eric has done a superb job not only finding out what is there but diving into those pre-eminent cases, for instance the mortgage investigation, which I think frankly had languished under his predecessor" referring to current Governor Andrew Cuomo. (Gov. Cuomo's press aid did not respond to Spitzer's critique.)
Spitzer, who made his own reputation using the platform of New York Attorney General to take on big game, had nothing but praise for Scheniderman's decision to take a stand on the mortgage mess that Washington stashed under the pricey TARP for so long.
"Once again it is a story of Washington by and large being unwilling to challenge a status quo that clearly has not understood its own failures or understood what has happened to our economy," Spitzer said. "As a result of Wall Street's failures, we have succeeded in transferring trillions of dollars to the banks to restore them to solvency without either reforming their practices or generating any sense of any accountability."
Citibank, JP Morgan, Wells Fargo and Bank of America either declined comment or did not return calls.
Realtytrac's Daren Blomquist says that everyday that passes without the grand reckoning that would come with a universal bank settlement, the prospect of recovery is put farther and farther into the future. The greed-induced crisis has undermined public confidence in the concept of "owning" real estate.
"It is prolonging the pain of this housing crisis because of all that uncertainty," he said. "So if we bring some clarity to it, come to some resolution, we could get to a place where buyers could have confidence in the market and know that the property they are buying is not going to fall of a cliff in terms of housing price appreciation."
The legacy of robo-signing for both foreclosures and mortgages can mean prospective property owners will always be looking over their shoulder. Forgery can really gum up a title search.
"They have to know the property they are buying, if they are buying a foreclosure, has a clear title and they are not going to have the previous owner come back and reclaim the property at some future time," Blomquist said.
Schneiderman says his mission is no smaller than restoring faith in the system, "so people really don't believe there is one set of rules for them and the bankers - that there is the ability to willfully violate the law and get away with it."
"Some of the changes that have been made in the last year or so are really evidence of the fact that the allies of some of the most powerful forces in our economy are trying to chip away at the reforms that were made in the wake of the crisis," Schneiderman warns.
Seeking redress for investors and wronged mortgage holders, and the illegally foreclosed is just part of Schneiderman's motivation. It is about getting the market reset that has eluded the Obama Administration even as homes slid in value and unemployment continued to unravel America.
"The key here really is if we want the market to get moving again," he said. "If we want people to have confidence that they can buy or sell a home, have confidence that there is one set of rules for everybody, that if you make a deal with a bank you understand what the deal is and they understand what the deal is and both sides will honor their commitments. That is something that is very fundamental."
Disclosure: Schneiderman’s father, Irwin Schneiderman, is a member of the WNYC Board of Trustees and has been a long-time donor to the station.