As more mortgage companies “fess-up” regarding their apparent fraudulent processing of foreclosure documents, the foreclosure scandal has become pandemic. And while the early response from many, including myself, was that this issue would soon be swept under the rug, with no benefit for struggling homeowners, and allowing banks to proceed with foreclosures, the problem has exploded in significance.
Attorneys and state courts around the country have begun to question the manner in which banks have processed thousands of foreclosures each month, and numerous errors have been discovered. Court documents have revealed the casual manner in which foreclosures were often allowed to proceed even while homeowners were allegedly being considered for loan modification and in a few cases when the owner was not in default on their mortgage. Ensuing investigations and testimony have revealed a foreclosure process that lacked proper verification and review by bank officials. The issue is not about “flawed paperwork,” “oversights,” or “errors,” but whether the nation’s largest banks considered themselves above the law.
The foreclosure scandal raises several questions:
What caused this problem to surface? Since most foreclosures aren’t contested, the lack of proper documentation has rarely been an issue. Now, however, with banks needing to process thousands of foreclosures each month, it appears that many ignored the legal requirements and became little more than “foreclosure mills.” Their failure to properly review documents compounded the errors, and the resulting number of homeowners contesting their foreclosures exploded. As attorneys and judges reviewed the practices of these “foreclosure mills,” the entire system has come into question. Ultimately, it appears that banks were treating the foreclosure process as carelessly as they did the original application for a mortgage.
● Why would banks knowingly commit fraud? In order to expedite the initial packaging and sale of the various mortgage instruments that helped create the housing crisis, the mortgage industry more than a decade ago created Mortgage Electronic Registration Systems (MERS), to speed up the transfer of mortgages between financial institutions. Considered by many to be the industry’s first step in ignoring the requirements for the proper transfer of mortgage documents, including the payment of local filing fees; when first established, the actions of MERS were rarely questioned, and the lack of accountability may have emboldened banks to more serious and more blatant violations.
● What are the ultimate ramifications for both the housing market and the overall economy? Regardless of reports to the contrary, many banks, their books still overflowing with “toxic assets,” teeter on the brink of insolvency. If foreclosures are delayed for a significant amount of time, the U.S. could face the very real possibility of another banking crisis, and the potential for another bailout. Additionally, lawsuits will continue for years, making stabilization of the housing market nearly impossible.
● What about the issue of title problems? Some title companies have already announced their refusal to insure title on foreclosed homes. And buyers, concerned about title issues, may simply avoid purchasing foreclosed properties until they are confident that such problems have been resolved. Additionally, those who have recently purchased foreclosed homes may find title to the property clouded by this crisis.
● Who will pay for this mess? While other issues surrounding this controversy are more complex, the answer to this question seems clear. The U.S. taxpayer will almost certainly bear a significant portion of the ultimate costs. With almost all mortgage loans backed by the U.S. government, taxpayers will, once more, be on the hook for government negligence and the banks’ avarice. Whether or not we agree is immaterial; it is far too late to change the rules in this game.
● Will extended delays in foreclosure further damage a fragile housing market? There are more than 2 million homes currently in or facing foreclosure; a moratorium will mean the owner can’t be evicted and the bank can’t sell the home. Then, once a solution is reached—and we can only speculate when that might be—the housing market could face a potential flood of additional inventory. Not only will the market suffer, but there will be millions spent in sorting through the confusion, while defaulting owners are allowed to remain in their homes rent-free. The potential costs are staggering.
● What are the political ramifications of this problem? Nothing of this magnitude comes without political consequences, and the potential in this case could impact both the economy and housing for decades. Politicians will attempt to capitalize on the issue as a means to promote their party’s agenda, and that could impact the ultimate overhaul of Fannie Mae and Freddie Mac and the future of government involvement in home financing.
● How can this problem be resolved? I suspect we’ll have a complete moratorium of foreclosures, whether voluntary or imposed, that will seek to find ways to move ahead with foreclosure, and congress may be pressured to legislate a solution to the problem. With several states having initiated lawsuits against lenders or demanding that foreclosures be temporarily suspended, a national moratorium seems inevitable. At some point, however, foreclosure must take place, and the U.S. taxpayer will pay for the majority of the losses. Rather than creating TARP II, bailing out the banks for a second time, or doing nothing and allowing taxpayers to pick up the bill through Fannie and Freddie, we could finally create a system of meaningful modifications. Doing so would lessen the burden on taxpayers and begin to stabilize the housing market and overall economy. Regardless of the solution chosen, there will be no “free lunch” for anyone; the ultimate choice is just whether we’ll have burgers or bread and water.
What I’m proposing is not a means for homeowners who fail to make mortgage payments to get a “pass,” allowing them to remain in their home without paying, but neither is it a way for banks to ignore the law and the consequences of their reckless lending practices. Banks and their attorneys created the mortgage instruments in question, and they forced borrowers to comply. Those same banks should be compelled to work with homeowners who demonstrate a desire to remain in their homes; and if a solution isn’t possible, they must follow both the spirit and letter of the law when proceeding with foreclosure. Allowing them to do otherwise is to ignore and harm the very legal system intended to offer protections to all of us.
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The Tribune article describes the “stewardship relationship” that exists between borrower and lender and how certain loan servicers are failing to live up to their responsibilities as “stewards” following default. (I find it interesting that lenders would ever be considered stewards, for in reviewing the behavior of many during the housing crisis, it appeared it was always about the money.) Good stewards take their responsibilities seriously, when it’s about the money, stewardship isn’t involved. 
I wish the economy were better, and I wish I could restore my home’s value.
During the past 3 years our country has fallen to its economic knees due to a crisis in our banking system brought about, in large part, by the collapse of the U.S. housing market. And while there are several complex precipitating factors to the current recession, some of which may never be fully revealed, the concept of home ownership has become to be viewed as a villain, for some a ghoulish nightmare, and for many, a less desirable goal for the future.
Regardless of whom we feel to be culpable, and whether or not we empathize with the actual victims of foreclosure, the result of having millions of additional vacant homes could create social and economic problems of immense proportions, the effects of which may be felt for decades. Each foreclosure has a direct impact on local home values, and each abandoned home creates an environment for crime and blight. Municipalities, their budgets already strained by the recession, will struggle to provide adequate fire and police protection. Funding for local schools will suffer, local businesses will fail, and the character of some neighborhoods will be forever changed.