U.S. Housing Secretary Shaun Donovan is playing Julie the Cruise Director on the Titanic, telling everyone ‘Don’t worry, there’s no icebergs in these waters. Really, if you see any floating ice in front of us, it’s not the visible tenth of a catastrophe to come.’ Unfortunately ice is visible, it is an iceberg, and the leading edge of the submerged ice is already ripping into our democracy and our economy, leaving deep damage.
The happy talk to distract attention from the iceberg comes from two camps and has two synergistic messages.
Secretary Donovan is trying convince the American public that the what the Obama administration is doing is all that can be done to address our housing and foreclosure crisis. That’s farcically false. Other people are pushing the related message that fraud and forgery by foreclosing bankers isn’t important; the only thing that matters is whether homeowners are in default. Both groups want you to believe that the foreclosure fraud “settlement” is a good and just. Except the “settlement” isn’t. The “settlement” is just the latest in a long line of decisions not to enforce the law and further reinforces the idea that gold-collar criminals are above the law. (I put “settlement” in quotes because we’re now double digit days past the February 9 announcement, and still, there’s no deal submitted to a court for approval. And that means there’s no deal.)
So let’s take a good look at the foreclosure fraud iceberg.
The Visible Ice
Picture a ragged pyramid, with only the top tenth visible above the water. The most visible ice, the jagged peaks on top of the dry tenth, are individual foreclosure cases. Court cases generally involve public records and public processes, which makes the foreclosing bankers’ pervasive forgery and evidence manufacturing so sharply visible. Look and you’ll see endorsements suddenly, inexplicably, appear on the note that is the borrower’s promise to pay back the loan. Those magically appearing endorsements further two goals: facilitating foreclosure, and minimizing securities fraud liability. And by magically appearing, I’m being euphemistic: improperly adding an endorsement to a note to prove the right to foreclose is obstruction of justice.
A case involving precisely this issue is ongoing in Florida, in re Balderrama. In that case, the U.S. Bankruptcy Trustee is suing Deutsche Bank, demanding to know how and when the Balderrama’s note was endorsed to the securitization trust that allegedly owns it. See, in trying to prove it had the right to foreclose on the Balderramas, Deutsche Bank filed three versions of the Balderrama’s note, and two versions of allonges showing endorsements to the note.
Deutsche Bank filed this version of the allonge first, in 2010. That allonge shows the note going from 1st National Bank of Arizona to 1st National Bank of Nevada, and then 1st National Bank of Nevada to bearer, because it is endorsed in blank. In 2011, this version was filed (see page 163) which shows the blank filled in, to Residential Funding Corporation, and then Residential endorsing it to “Deutsche Bank Trust Company of the Americas, as Trustee.”
Deutsche Bank and Residential Funding both claim the version of the allonge specifically endorsing the note to Deutsche as Trusteee existed in 2007, but don’t really address why, then, in 2010 the wrong allonge was filed in court. The judge is quite suspicious, and will hold trial on how and when the three endorsement version (AZ to NV, NV to RFC, RFC to Deutsche) was created:
“The Court cannot avoid suspecting that the second allonge indeed was created solely to rebut the trustee’s assertions in this litigation and did not previously exist. If so, the Court suggests Deutsche and Ms. Faber [who did the last endorsement] individually consider the possible consequences of propounding potentially false evidence and perjured testimony to the Court.” [opinion at p. 8]
Note to people who think all that matters is that the homeowner is in default: our court system and rule of law cannot function if one side can make up evidence to ensure victory at trial. In bankruptcy cases such as Balderrama, a special person called the U.S. Trustee can act to defend the system as she has in that case. But in non-bankruptcy foreclosure proceedings, the only person who can defend the rule of law is the debtor. Imagine if people said no, Americans, you’re not guaranteed to know your Constitutional rights before ‘waiving’ them, because Ernesto Miranda was convicted of rape; no rapist has the right to talk about the rule of law. Luckily our U.S. Supreme Court didn’t see it that way, and gave us our Miranda warnings. If a rapist can defend the integrity of our legal system, why not a debtor in default?
Our Corroded Land Records
The foreclosing bankers’ evidence manufacture isn’t limited to note endorsements in foreclosure and bankruptcy cases. Our land records are rife with fraudulent documents of all types: assignments of mortgage, satisfactions of mortgage, substitutions of trustee, deeds. Just consider what John L. O’Brien, Register of Deeds for Salem, Massachusetts, did last month. O’Brien:
“sent some 31,897 of what he says are fraudulent documents that have been recorded in the Salem Registry to Massachusetts Attorney General Martha Coakley, U.S. Attorney General Eric Holder and U.S. Attorney Carmen Ortiz.”
Why? Well, O’Brien wants someone in law enforcement to impanel a Grand Jury to review his evidence and investigate further. O’Brien is “confident that these documents will show a pattern of fraud, uttering and forgery.” Guilford County, North Carolina Register of Deeds Jeff Thigpen is also outraged noting that he has “two primary responsibilities in land records: a sworn duty to protect the chain of title and a fiduciary responsibility to collect recording fees” and that the mortgage industry has interfered with both. After explaining that
“…Since the founding of America, counties in the United States have maintained public records of land, mortgages and deeds of trust, by maintaining indexes of grantors and grantees. Register of Deeds offices ensure transparency and an important check and balance in private property ownership. County recording practices have been in place for 300 years.”
Register Thigpen added:
“It is interesting that the first fundamental change in public land title recording systems was not initiated by publicly elected leaders, but a small group of mortgage industry insiders.”
A recent San Francisco study of its land records noted that the “settlement” would not block enforcement of
“California Penal Code §115, which states that any person who “knowingly procures or offers any false or forged instrument to be filed, registered, or recorded in any public office within this state, which instrument, if genuine, might be filed, registered, or recorded under any law of this state or of the United States, is guilty of a felony.””
And then the study detailed documents which certainly appear to violate that provision. A gimmie example are the double assignments–the ones where MERS assigns the mortgage to one company and then later MERS assigns the mortgage to a different company. If the first assignment is true, then the second assignment is false; if the second assignment is true, the first is false. Another gimmie example involves securitized loans. Federal filings show that Trust ABC owns a loan, but the documents foreclosing bankers filed in the land records say somebody else does. These examples plus others in the report appear to be criminal.
More Visible Ice: The Shadow inventory
Below the clearly defined ice peaks that are the individual foreclosure cases and our land records, are the foreclosure fraud iceberg’s foothills–the massive inventory of foreclosed properties for sale and soon-to-be-for-sale. These properties convey the scale of the fraud and forgery already committed in our legal system. They also are a big dead weight on the housing market, driving down prices. And don’t you believe people who tell you that it’s deadbeat borrowers fighting foreclosure that have lead to such a massive backlog of properties.
Michael Olenick has done the most defensible analysis of “shadow inventory” to date, and in addition to his scary inventory numbers and observation that most foreclosures are uncontested, he offers this detail: “in Palm Beach County there are 10,794 more final judgments of foreclosure that are at least a year old than there are certificates of title issued.” His post on the shadow inventory includes other anecdotes showing that foreclosing bankers, not self-defending homeowners, are slowing the foreclosure and resale process.
Ice at the Water Line: the Coming Pension and Tax Crisis
The ice beneath the shadow inventory, the partially concealed ice right at the water’s surface, is our coming pension and tax crisis. One glimpse of this crisis to come is public record information that takes some effort to find and skill to understand, like the reports bankers send investors allegedly detailing how a given mortgage-backed security is performing. Lisa Epstein, an anti-foreclosure fraud activist who runs the website Foreclosure Hamlet, has spent countless hours reviewing these reports. Epstein has found those reports inaccurate–they list houses as “in default” when in fact they’ve been foreclosed and sold off, for example. And the errors tend to make the securities look more valuable than they are, while helping the bankers charge investors unjustifiable fees. But even taking the information as accurate, Epstein finds that investors are getting hosed. Investors are losing as much as 100% of the loan balances.
Why? Mortgage servicer (banker) mismanagement, through fee-larding, failing to modify loans when it would make investors more money, and failing to sell foreclosed properties. Note, I say “failing to sell” deliberately–in many cases, the foreclosing bankers (plaintiff’s representative in this example) will outbid the third party buyers, $100 at a time. In other cases, foreclosure auctions fail because the minimum bid is above market price. How do these investor reports relate to a pension and tax crisis? Well, pension funds, 401ks and the U.S. taxpayer, via Fannie and Freddie, are the biggest investors eating these losses. Taxes will need to be raised, diverted from other worthy expenditures and/or pension benefits cut to compensate for these losses.
But there’s more data points showing the coming pension and tax crisis. Foreclosures wreck tax bases; consider this report by the Center on Policy Initiatives, which found that foreclosures have cost San Diego, CA $117 million in lost property tax and hundreds of millions more in increased costs like maintenance and policing. According to another story, foreclosures cost Minneapolis, MN $150 million in state funding for education. A New York fact sheet has each foreclosure costing nearly a quarter of a million dollars in direct and indirect costs. To understand the myriad dynamics set in motion by foreclosures, check out this 2010 report for the Connecticut Legislature.
These dynamics and the tax base destruction they involve are one of the forces wrecking state budgets. Check out Mandelman‘s list of austerity measures states have already taken, with worse to come, given the remaining state budget shortfalls. The state budget crisis, in part fed by mass foreclosures, is going to continue damaging our economy for years to come.
A more anecdotal but still common sense retirement impact of the foreclosure crisis is this: for many people, their home was their retirement plan, a big asset that could be sold when needed, supplemented by savings that they blew through trying to save their homes. With the savings gone and the house repossessed, these baby boomers are facing a financially insecure old age. Will we return to a time when our elderly eat cat food to get by?
The Submerged Ice: Wealth Destruction, Crony Capitalism and the Untouchables
Fraud, forgery and obstruction of justice in our courts; fraud and forgery in our land records; housing market destruction through mass oversupply of foreclosures (among other dynamics); the destruction of our tax base and retirement security–all these are plenty damaging to our economy and our democracy. But combined they do less damage than the parts of the foreclosure fraud iceberg people don’t focus on.
Foreclosures destroy wealth with guillotine swiftness. Not just the foreclosed homeowners’ wealth, but that of their neighbors too, through reduced property values and shrunken tax base. Back in 2008 the Center for Responsible Lending found that foreclosures of only subprime loans originated in 2005 and 2006 would destroy $202 billion of property values and tax base. Of course, these days many foreclosures were prime loans, were people who had substantial equity before the bottom fell out of prices, so the true numbers are far worse. Indeed, our financial meltdown and the housing and foreclosure crisis it spawned has destroyed trillions of dollars of middle class wealth. Nearly everyone is losing money.
But perhaps not the well-connected. For example, Phil Angelides, the ex-head of the Financial Crisis Inquiry Commission recently started and abandoned a venture to buy troubled loans and make 20% for investors by preventing foreclosures. Why is that crony capitalism? Well, Reuters reported:
“The company, Mortgage Resolution Partners, claims its strategy of using “legal and political leverage” to acquire the loans could generate a 20 percent annual return for investors. …In the letter, the mortgage company refers to its political connections as its “secret formula.” Angelides, a former California state treasurer, Democratic politician and land developer, was head of the Financial Crisis Inquiry Commission until last February.”
Reuters later reported that Angelides quit the company. Nonetheless, Congressman Patrick McHenry (R-NC) wrote to Housing Secretary Donovan asking about protections against crony capitalism affecting the use of “settlement” funds.
The crony capitalism at the heart of our Bailed-Out Banker Nation goes far beyond companies like Mortgage Resolution Parnters or its gross cousin, PennyMac. Consider the meeting where Treasury Secretary Hank Paulson apparently tipped off Wall Street buddies about Fannie Mae and Freddie Mac’s coming government takeover. But the privatize profits, socialize losses mentality, the hey, don’t worry bankers, the taxpayer will make your risky bet a sure thing approach to ‘public’ policy long predates the current iteration. David Stockman, who was President Reagan’s budget director, recently explained on Bill Moyers’s show on crony capitalism:
“DAVID STOCKMAN: I think it started with the bailout of the banks in 1994 during the Mexican Peso Crisis. [...] That was allegedly designed to help Mexico. It was $20 billion with no approval from Congress that was used, I think inappropriately out of a Treasury fund. And why were we doing this? It’s because the big banks were too exposed to some bad loans that they had written in Mexico and elsewhere.
BILL MOYERS: Wall Street banks. U.S. banks.
DAVID STOCKMAN: Wall Street banks. Wall Street banks. The banks of the day, Citibank, Bankers Trust, the others that existed at that time. And so the idea got started that Washington would be there with a prop, with a bailout, with a helping hand. And then the balls start rolling down the hill.”
The bold is mine, and it’s why this submerged ice is so big and deadly. The crony captialists, our Bailed-Out Bankers, have distorted the structure of our democracy to suit their needs. See, it’s not just the $20 billion from the peso days.
It’s also the trillions that the Fed gave the banks without Congressional permission, Congressional knowledge, or even the vaguest awareness of the American people. The Bloomberg News article deserves a close read, in particular for the policy influencing impacts of the secrecy. The article quotes members of Congress who believe that more serious banking reform–much more serious than Dodd-Frank–could have passed if the scale of the bailout loans had been known, real time. While such remarks are surely at least a little self-serving, the public’s reaction to the $700 billion TARP bailout suggests those Congressional commentators are right.
And it’s not just bailouts; Wall Street has the President’s ear. As Gawker explained, “Citigroup Replaces JPMorgan as White House Chief of Staff.” Not for nothing, Wall Street is among President Obama’s biggest funders.
But massive destruction of middle-class wealth and serial banker bailouts are only two thirds of the massive submerged ice mass that is tearing through our nation. The final third is the untouchable status of the Bailed-Out Bankers. A must read article by Professor Mary Ramirez, an ex-prosecutor, describes how the failure to prosecute the obvious crimes committed by the Bailed-Out Bankers pathologically institutionalizes their above-the-law status and inspires more criminality. Failure to prosecute, Ramirez argues, affirms the bankers’ crimes.
Yes, It’s Really a Foreclosure Fraud Iceberg
Some might complain that institutionalized criminality by bailed out bankers, public policy commitments to bailing them out again, secretly if needed, and the trillions in wealth destroyed by housing’s collapse are a bit attenuated from foreclosure fraud, and that I’ve misnamed my metaphorical iceberg. But they are all really of a piece: the fraudulent documentation machine that obstructs justice in most foreclosure cases across the country is institutionalized criminality by bailed out bankers. The “settlement” that absolves the bankers of so much of the liability of their crimes, rewards them with tax dollars for deigning to “pay” their “penalty”, while wrongly protecting the bankers’ second lien portfolio is yet another semi-secret bailout.
Foreclosure fraud is the very essence of everything going wrong right now. And that’s why it needs to be stopped, and bankers jailed for it. Too bad the “settlement” does neither. Too bad we’re still plowing full throttle into the iceberg.