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Another Bank Crisis: Will Obama Save Homeowners From Wall Street’s Latest Fraud Scheme?

Another Bank Crisis: Will Obama Save Homeowners From Wall Street’s Latest Fraud Scheme?

A massive foreclosure fraud scandal is rocking the U.S. mortgage market. Wall Street banks and their lawyers are fabricating documents, forging signatures and lying to judges—all to exploit troubled borrowers with enormous, illegal fees, and in some cases, improperly foreclose on borrowers who haven’t missed any payments.

The fraud is so widespread that it could put some big banks out of business and even spark another financial collapse. Fortunately, things haven’t fallen apart just yet. With strong leadership from President Barack Obama and Congress, the government can help keep troubled borrowers in their homes and prevent another meltdown.

One fraud begets another

As Danny Schecter emphasizes in an interview with GRITtv’s Laura Flanders, this mess is just one element of a broader, criminal fraud at the heart of the foreclosure fiasco and resulting financial crisis. Banks pushed fraudulent loans onto borrowers during the housing bubble because the loans could be packaged into mortgage-backed securitizations and pawned off on hedge funds and other banks. Banks made a lot of money from this process, until the mortgages went bad and the fraud-packed securities plummeted in value.

Document drama

At the heart of any mortgage is a document called “The Note”, which lays out the terms of the mortgage and the kinds of fees that banks can levy against borrowers if they fall behind on their payments. Owning the note also gives banks the right to foreclose when a borrower stops paying.

The trouble is, in an effort to cut costs and boost bonuses, banks haven’t kept actually kept track of the note—in fact, they’ve actively destroyed the document so they don’t have to deal with filing it. Now that mortgages are going bad, banks are taking advantage of the documentation vacuum they created to levy massive, illegal fees on borrowers both before and during the foreclosure process. They do this by manufacturing fake documents, forging signatures, and getting bogus signatures from notaries to approve sham documents.

This is all terribly unfair to borrowers. In some cases, illegal fees push borrowers over the edge into foreclosure, while in others, borrowers get saddled with tens of thousands of dollars in illegal fees after getting kicked out of their home. The situation is a national disgrace.

Failure to produce

But the situation also creates legal liabilities that can push banks into failure. If banks can’t pony up the note, they don’t have the right to foreclose—not without some serious, expensive legal maneuvering. And what’s more, if the banks who created these shoddy securities can’t supply notes, investors who bought the securities can force losses back on the banks that created them. Given that there are $2.6 trillion in mortgage-backed securities out there, banks are very worried that losses and lawsuits stemming from shoddy documentation could spark another round of major financial turmoil.

The sheer lack of documentation makes it very difficult for investors to decipher which banks are exposed to loads of red ink, and which banks are not. That’s a recipe for financial panic.

Silencing employees

The banks know they’re in serious trouble. That’s why, as Andy Kroll notes for Mother Jones, mortgage servicers like GMAC are trying to silence employees who can testify about the extent of these frauds. GMAC employee Jeffrey Stephan confessed to robo-signing 10,000 foreclosure documents every month without actually examining them. His acknowledgment sparked the current public scrutiny of foreclosure fraud, which has expanded to banks including JPMorgan Chase and Bank of America.

Kroll was one of the first to report on these fraudulent foreclosure mills and their illegal fees, and his coverage of the issue is essential reading for anybody following the unfolding crisis. Kroll also highlights the wave of new investigations and inquiries being launched by attorneys general in eight states, a phenomenon that is likely to expand as the crisis widens.

As Annie Lowrey details for The Washington Independent, one of those states is Ohio, where Attorney General Richard Cordray is suing GMAC, seeking $25,000 in damages for every fraudulent document the company has filed. In Ohio alone, there have been 190,000 foreclosures over the past two years.  Cordray hasn’t won his suit, and not every foreclosure will include fraud, but that’s a potential loss of over $7 billion to GMAC from foreclosures in Ohio alone over the past two years. And that doesn’t include what would be much higher losses to banks who packaged the mortgage securities, who are forced to repurchase them by burned investors.

Banks are doing their best to minimize the appearance of scandal, but the scope of potential losses from outright fraud is quite clearly a threat to the viability of the financial system. It’s easy to imagine a disaster scenario in which the government has no choice but to take major action to prevent the economy from imploding (yes, it can actually get worse).

Obama needs to pick up the slack

So far, President Obama is sending mixed signals about his intentions. As Steve Benen notes for The Washington Monthly, Obama vetoed a bill that would have made it harder for borrowers to show that banks were engaging in fraud during the foreclosure process. That was on Friday—but by Sunday, top Obama adviser David Axelrod was telling the press that the administration was not ready to support a foreclosure moratorium, dismissing the fraud crisis as a set of “mistakes” with lender “paperwork.”

As I note for AlterNet, Axelrod’s comments are a complete mischaracterization of what’s going on in the foreclosure process, and of what can be done. The housing market is a mess because banks have been systematically committing fraud. We cannot rely on such fraudsters to fix the mess– some kind of government action is going to be necessary. Whatever the solution, the administration cannot stand with big Wall Street banks against the borrowers and investors that are being defrauded. Any solution must take the interest of troubled borrowers as paramount. We’ve already tried saving the banks without saving homeowners, and as the unfolding foreclosure fraud crisis illustrates, it didn’t work.

Check out video here.

This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint.  This is a project of The Media Consortium, a network of leading independent media outlets.

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by Mike Licht, NotionsCapital.com
by Zack Carter, Media Consortium blogger

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81 comments

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1:13AM PDT on Oct 30, 2010

Everyone who wanted progress MUST go out and vote against the G NO P! The Republicans are accepting $75 million from unknown sources who refuse to reveal themselves. Call it legalized(by the 5 conservative members of the Supreme Court) bribery. But it is clear that the Republican agenda is simply to gain power at the expense of the middle class. It was Bush and deregulation of the Banks, mortgage companies, and Wall Street that caused this economic mess. Not even Iron Man could repair it with a snap of the fingers. The Party of NO has sabotaged efforts to improve it just to keep things bad so they could manipulate anger into power. You MUST defeat this cynical, money accepting party from giving back to their corporate sponsors their soul for $$$$ (75 million worth). DO NOT SIT THIS ONE OUT. If you do, EVIL and GREED and EXTREMISTS will prevail! VOTE! Damn it, YOU MUST VOTE!
(COPY AND SPREAD THIS IF YOU AGREE…WHEREVER YOU FEEL IT WILL BE READ AND RECEIVED.)

6:31AM PDT on Oct 26, 2010

In fact, a whole slew of federal indictments of major Wall Street figures and top executives of financial institutions at the end of September could have turned this election into a DEMOCRATIC rout instead of a Republican one. Obama could be a rare incumbent President to GAIN seats in Congress in the mid-term elections, if he'd had the guts to take the side of the VOTERS against the folks who are fleecing them so badly.

He'd still have had a lot of other bad issues to contend with (e.g., the new health care bill forced the deductible on my company-sponsored retirement prescription drug plan up from $1000 this year to $2,750 next year, AND they announced that the medical plan is exempt from virtually all of the provisions of the new law, so I'm ready to skin Democrats who voted for it, and I know a lot of other retirees in the same boat), but he'd sure do a LOT better than he's going to do come November 2.

6:19AM PDT on Oct 26, 2010

The truth is that a LOT of the anger that is fueling things like the Tea Party movement is based on the fact that while the Wall Street companies and bankers who precipitated this whole financial crisis have gotten a free ride out of financial trouble at taxpayers' expense, and not only have gotten to KEEP thjeir personal millions but are BACK to voting themselves millions a year in bonuses, ordinary folks are STILL without jobs and are STILL having their mortgages foreclosed.

People blame the Obama administration because there have been NO major indictments for the significant wrongdoing that is going on in the financial markets, and no major indictments for the major fraud in the massive fraud in home foreclosures. Obama can in NO WAY blame that on Bush. That is HIS doing and his alone. He's had plenty of time to mount an investigation and bring people to justice. HE AND HOLDER JUST DON'T CARE!

And he just casually takes the side of banks against ordinary people and says that there is no need for a halt to foreclosures while this mess gets investigated. That's probably because he's NEVER GOING TO DO THE INVESTIGATING!!!

If the American people saw a realistic way to throw the Democrats out WITHOUT putting the Republicans IN, they'd jump all over it. But in fact, there just isn't such a way. So out they go. And two years from now, things had BETTER get better, or MORE incumbents will fall!

7:30PM PDT on Oct 25, 2010

If we already know the answer why bother asking the question.
Of course the consumer will bear the brunt of any and all bank actions. As for protection-- the old stand by-- Banks,CEOs, and rich folk first!

11:50AM PDT on Oct 17, 2010

IF YOU READ THE BANKS ARE CREATING THE LOST DOCUMENTS AND SIGNATURES ARE FAKES.

If you can not produce the original note the one with the best fake wins.

9:22PM PDT on Oct 16, 2010

I HAVE READ THIS ARTICLE, AND I HAVE A QUESTION. HOW CAN THESE BANKS WHO ARE CONVENIENTLY LOSING MORTGAGE NOTES FORCLOSE ON ANYONE WHEN, UPON CLOSING, THE BUYER ALSO GETS A COPY OF THE TERMS AND THE NOTE? I KNOW I DID WHEN I BOUGHT MY HOUSE. ALSO, THE BUYER IS SUPPOSED TO HAVE AN ATTORNEY OVERLOOKING THEIR PURCHASE. IT SEEMS TO ME THAT THE HOMEOWNER WOULD BE ABLE TO PREVENT A CHANGE ON TERMS BY PRODUCING A COPY OF THEIR NOTE TO THE COURTS.

AS FAR AS THE MORTGAGE, BOTH PARTIES ENTERED INTO AN AGREEMENT, AND NEITHER SHOULD BE ABLE TO CHANGE THE TERMS AFTER THE FACT. ALSO, NO ONE CAN FORCE A MORTGAGE ON ANYONE. MANY PEOPLE WHO GOT CAUGHT UP IN THIS BUSINESS PROB ABLY DID NOT HAVE THE MEANS TO BE BUYING A HOME AT THAT TIME ANYWAY, OR POSSIBLY DID NOT USE AN ATTORNEY TO MAKE SURE THESE MORTGAGES WERE ON THE UP AND UP.. BUT, THEY CAN NOT BLAME EVERYONE ELSE FOR THEIR OWN IGNORANCE. AND, BELIEVE ME, I HAVE NO LOVE FOR THE BANKS, AND FOR SURE THEY ARE NOT HONEST. BUT WE ALL HAVE THE MEANS TO RESEARCH A MORTGAGE BEFORE WE AGREE TO IT. IT IS KIND OF LIKE THE COUPLE WHO KEEPS HAVING KIDS, AND THEN COMPLAINS THAT THEY CAN NOT KEEP UP WITH THE BILLS TO SUPPORT THEM.
WHEN YOU PLAN FOR LONG TERM FINANCIAL LIABILITIES, YOU HAVE TO CONSIDER MANY FACTORS.
AND, THEN YOU HAVE TO ALLOCATE A PERCENTAGE OF YOUR INCOME TO SATISFY THEM. WHAT THIS MEANS IS THAT WHEN YOU BUY A HOME, OR HAVE KIDS, YOU HAVE TO CONSIDER THAT THINGS MIGHT CHANGE IN THE FUTURE.

2:11PM PDT on Oct 15, 2010

Just like the game of musical chairs..... I bought a home in 2006 and shortly thereafter my mortgage changed hands numerous times. Now that the music has stopped and everyone is trying to find their chair these mortgage companies are trying to change the rules of the game. I am not sorry for those mortgage companies who feel now they are stuck with a debt that they so readily wanted when the feeding frenzy was putting money in their pockets.
Property values dropped drastically so now the homeowner is stuck with a debt that is half the value. Mortgage companies are saying these are bad debts because nobody wants to continue paying and are willing to walk. NOW .... THINK ABOUT THE PROBLEM FROM BOTH SIDES HERE. WHO IS IN THE WRONG ???? BOTH THE HOMEOWNER AND THE MORTGAGE COMPANY BOUGHT AN INVESTMENT THAT WENT SOUR. WHO IS GOING TO BE LEFT STANDING AND OUT OF THIS GAME???

I OFFERED TO CONTINUE TO PAY ON A $300,000.00 DEBT THAT IS ONLY WORTH $150,000.00 BUT ONLY IF THEY DROP MY INTEREST TO HALF OF THE TOTAL INTEREST THAT I AM CURRENTLY PAYING. I DO NOT HAVE THEIR COOPERATION THEY STILL WANT HIGH INTEREST SO THEY WILL END UP WITH MY HOME AT HALF ITS VALUE. WE BOTH LOSE.

PS. THE WAGE VALUE OF THE WORKER ALSO DROPPED FOR MANY OF US ... THIS WAS NOT SOMETHING I FORSAW. SO, IT IS TIME FOR ALL TO DECIDE HOW THIS WILL END. I WILL START OVER BUT I DO NOT FEEL THE MORTGAGE COMPANIES PAIN SINCE IT IS THEIR DECISION TO WANT WHAT THEY CAN NOT HAVE. SORRY I AM TAPPED OU

2:03PM PDT on Oct 15, 2010

This is more terrifying to the Administration then you or most writers are even thinking about.

As the housing bubble was the chief factor in the not recession we are currently in, this relates directly to a lessening chance of recovery. The housing market bubble is slowly being reinflated as Fannie Mae/Mac take on more debt, suck up more taxpayer subsidies, and encourage more people to become home "owners" who normally wouldn't. Add now the stupidity of some banks in not looking over their foreclosures carefully and you have the probability of a housing market freeze.

The only thing that might unstick the housing market is for a)the government to stop their continual subsidies to people who will never be able to pay for their homes and b) get the huge amount of housing stock tied up in foreclosures back on the market.

Personally I doubt the Administration has the guts to do the first and the second is likely now out of its hands as the banks begin to panic over their mishandling of the foreclosures. So what that leaves is the likelihood that the housing market is going to get kicked in the teeth again before it had even managed to get its head out of the dirt.

In other words, the implications for both the economy and the Administration, never mind the possibly wronged homeowners is not going to make anyone happy. Maybe that's yet another reason why gold is jumping....

8:57AM PDT on Oct 15, 2010

interesting

7:30AM PDT on Oct 15, 2010

In all this massive corruption it is interesting to note the only bank in the US that didn't get caught up in this incompetent, greedy corruption was the Bank of North Dakota and that is a bank that is owned by the people, not the Robber Barons and War Profiteers that own just about everything else in the US now. Something to think about.

No matter how bad this is, how corrupt the banks and the corporatocracy and politicians are, these criminals will all be getting billions in bonuses for their illegal, immoral, unethical, criminal incompetence at the end of the year. Just watch. And we are all paying for it. Nationalize all of them. They can't be trusted to police themselves and they are too dangerous to let go without being nationalized or very closely regulated. The banks in the UK (arguably the EU country most like the US in economic Thatcherism=Reaganonomics with "New Labour" like "New Democrats" - all just "Old Conservatives") have announced already they will be paying 7 billion Pounds in bonuses to their Wall St. cousins in crime. Voting in the Corporatocracy's best friends (the Conservatives) won't make this any better - they will stop any kind of regulation of these thieves. Remember, it was conservative Deregulated Free Market Capitalism that has brought the world to its economic knees while the rich & the Robber Barons of banking & industry have been making record profits, poverty grows & the middle class loses its homes. Vote Nader!

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