Thursday, October 14, 2010

"ForeclosureGate": The really important questions 

News fiends know that the latest financial scandal turns on the shoddy practices of big banks in the foreclosure of delinquent mortgage loans. The failures in the wake of the collapse of the housing market are apparently massive, and raise the possibility of criminal liability and a new run on the financial system, neither of which would improve the economy.

Basically, the problem seems to be that during the boom big financial institutions and their agents took little or no care to document, secure, and assign securitized mortgage loans properly and that since the collapse loan "servicers" -- in many cases the same banks -- have been foreclosing on the houses securing those loans improperly.

There is a big blog-roundup at Memeorandum, but most of it goes to the economic and political consequences. Nobody seems to have asked the really interesting questions, to wit:

  • Where the heck was internal audit at these banks? These sorts of procedural defects are precisely the sort of thing that internal audit is supposed to identify and report to the audit committee of the board of the directors. No complex investigation in to financial risk models required, these were simple failures to complete documents and comply with procedures. If I sat on the board of any of these banks, I would want to know why the entire internal audit department ought not be purged -- after it has been tortured and executed -- for missing an issue this big.

  • Along the same lines, do we need any more evidence that the Sarbanes-Oxley law, which imposes massive costs on the U.S. economy in the name of internal controls, is a rank failure? It does not work and is probably counterproductive insofar as it elevates process above, well, actual thinking. Earlier rants on the economy-destroying features of Sarbox are here and here. (Officially, of course, in my day job I totally love Sarbanes-Oxley, lest I fail the all-important "tone from the top" requirement in the law, which makes it damn hard for public company executives to say what they really think on that subject.)

  • Goddamn these people were sloppy.


    By Anonymous Anonymous, at Fri Oct 15, 06:00:00 AM:


    You are correct in your assessments.

    However the foreclosure conundrum just exposed this fraud by Banks boards of directors whom must have had advance knowledge of this change of audit control process and their tacit approval of it in it's entirety.

    This issue is much more damaging to 95% of homes not in foreclosure and jeopardy of those property owners assets.

    It is easy to be sympathetic to people losing there homes to unscrupulous players but what about the remaining paid on time mortgages with permanently flawed titles?  

    By Anonymous feeblemind, at Fri Oct 15, 10:52:00 AM:

    I can understand one company being 'sloppy", as TH puts it, but how could an entire industry cut corners like this, and all in the same way?

    What were they thinking? That it was okay because everyone else was doing it?

    I don't understand it. It just doesn't add up.  

    By Anonymous Ignoramus, at Fri Oct 15, 01:11:00 PM:

    "Never waste a crisis"

    This could become the most significant issue we all face in 2011. There's a lot more at issue than sloppy paperwork. Read on, if you dare.

    We have ridiculously high percentages of "homes worth less than the mortgage" ... "mortgages in default" ... "mortgages going into foreclosure." There's a lot of geographical difference to this, so you may not be seeing it where you live -- but the dollar amounts are huge.

    Now we have ForeclosureGate. It's a bullshit legal technical problem layered on top of a very real economic problem. The economic problem has been lingering for years now. Recall that the original TARP proposal called for the USA to buy troubled mortgage paper before it morphed into the USA making direct investments in banks instead.

    Some of us have suspected that Obama & Co will use ForeclosureGate to push for write-downs of principal on underwater mortgages. This would explain why Obama pocket-vetoed the legislation that would have blessed robo-signings. If so, Axelrod's recently saying that Obama wasn't for the foreclosure moratorium was just a diversion.

    Now I see this ... Paul Krugman in today's NYT:

    "The excesses of the bubble years have created a legal morass, in which property rights are ill defined because nobody has proper documentation. And where no clear property rights exist, it’s the government’s job to create them. ... the Center for American Progress [CAP] has proposed giving mortgage counselors and other public entities the power to modify troubled loans directly, with their judgment standing unless appealed by the mortgage servicer. This would do a lot to clarify matters and help extract us from the morass."

    CAP is a leftie advocacy group founded by George Soros, with additional funding from Herb and Marion Sandler of all people. What CAP writes comes from Obama & Co, I suspect -- just because I'm paranoid doesn't mean I'm wrong.

    I read the CAP proposal. It goes even further to propose that the pass-through tax status of MBS trusts be revoked "for any residential home mortgage loan holding entity that forecloses on more than a specified percentage of all of its mortgages." Clever, that.

    Holy sanctity of contract, Batman !

    CAP is right that way too many mortgages are "upside down" and that modifications -- including reductions of principal -- can make economic sense. More on that below.

    The problem is who gets to decide. "Servicers" -- which are often the Big Banks or an affiliate -- don't own the MBS paper. These owners aren't all Evil Hedge Funds or Dumb German Banks We Don't Give a Shit About. Further, if you modify terms it will often have different effects on the different MBS tranches -- sometimes significantly so. I don't want to think about the potential effects on the values of CDOs that reference the MBS tranches. The twin trillion dollar gorillas (Fannie and Freddie) lurk in the background.

    Editorial hypothesis: Reducing principal alone won't work in scale unless the end result is enough "homeowners" actually having equity in their house. For too long, too many buyers had no money down -- they were in effect renters with an option to buy. If you just reduce principal, they're still renters with an option to buy at a lower price. The spiral will continue.

    The "Forgotten Men" here are renters who want to buy who are trying to save a real down-payment -- so Old School.

    The Root of all Evil here was thinking that homebuyers didn't need to have meaningful down payments. Barney Frank, are you listening now?  

    By Blogger Georgfelis, at Sat Oct 16, 12:40:00 AM:

    Forgive me for seeming the Cruel Heartless Republican, but what we really need here is a good solid bloodletting. And on both sides.

    The idiots who took out these loans that went so horribly bad need the Scarlet F (for Forclosure) stamped on their forehead with good bright red ink so the next time they go to the bank to get a loan, the conversation will go a little like this. "So, Mr. Smith, all we need to finish the loan is to run your credit record here and...Out! Get out of my bank!"

    Same thing for the people who approved these loans, sold them, sliced them, diced them, and passed the legislation enabling them, here is one giant red F, to be stamped liberally on foreheads until sense leaks in.

    In remarkably short time (after the explosive market crash and burn), surviving healthy banks with honest bankers on the boards will be able to make their money the old fashioned way. And all the people with the Scarlet F will be selling used cars. (in the rubble of our burnt and destroyed cities)

    Admittedly this approach does have a *few* disadvantages such as global fiscal disaster, economic collapse, hyper-inflation, and the invention of a word larger than "Trillion" to represent pocket change, but still...  

    By Anonymous Ignoramus, at Sun Oct 17, 08:39:00 AM:

    "The idiots who took out these loans that went so horribly bad need the Scarlet F (for Forclosure) stamped on their forehead"

    Minor quibble. I wouldn't demonize the borrowers as a class. There's a lot of variance among them. Many didn't know better. In many cases, the System offered them the opportunity to "own" a property for less than they were paying in rent. Shame on us.

    Also, you invite comparison to other Strategic Defaulters -- some of them Big Names. Even Donald Trump has been one -- a Serial Strategic Defaulter, actually.

    But neither are Mortgage Borrowers victims, as they're going to be made out to be. I can hear the violins tuning up already.


    I'm digging into the Foreclosure Mess for my day job. I still haven't gotten to bedrock as it's so deep. "MERS" alone could end civiilization as we know it.  

    By Anonymous Ignoramus, at Sun Oct 17, 11:23:00 AM:

    JournoList lives! Right on cue, here comes TH's Leftie Favorite Ezra Klein to echo and amplify the position of the Center for American Progress:

    Four ways the foreclosure mess could be used to help homeowners

    I've said it before: Ezra Klein is a child playing with matches.  

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