Ally Financial (the parent company of GMAC Mortgage) expanded their review of their foreclosure processes to all 50 states, the second mortgage servicer to do so after Bank of America. It’s assumed but also a bit unclear whether this means they’re halting evictions or other foreclosure operations, though they provide this statement: “Foreclosure is a very serious matter and only implemented when all other home preservation options have been fully exhausted. We are taking these additional steps to restore confidence in the process, which is critical for the stability of the home and mortgage industry.”
They aren’t restoring confidence in the process for my benefit, or any other yahoo on the Internets. They are trying to solve an incredible problem that puts them at odds with other major institutional players. As I said in my Balloon Juice moonlighting last night, the servicers aren’t pausing their operations to be nice.
Ask yourself what JPM, GMAC and BofA are doing right now. They’ve already imposed said moratorium. The cover story is they’re fixing “technical paperwork errors.” In reality they have to be pretty panicked. BofA made a deal yesterday with a top title insurer to basically eat any losses they incur on houses without clear title. Others are probably trying to do the same. The investors are breathing down their necks to take back the securitized loans, too. The rating agencies are threatening downgrades. This is a cover-up to a bigger cover-up of shitty loan origination and securitization, and no amount of pretending it doesn’t exist will stop the bleeding. So acting like everything hinges on what Obama does about a moratorium is silly. It’s more like what he should do about the aftermath, because a moratorium is already in place for about 25% of the market and it’s a matter of time on the other 75%.
This wouldn’t be as catastrophic if the banks weren’t hoarding substantial amounts of the nation’s wealth to prepare for the fallout, strangling economic recovery. It wasn’t the sign of a healthy industry that the IMF called for more bank bailouts just a week ago. But I’d say the confusion over title ownership in practically every mortgage sold and repackaged over the last five years warrants some kind of a pause to sort things out.
Meanwhile, the talk of “damage” to the US economy is misplaced. That derives from the fraud at the heart of the mortgage process over the past decade, not a temporary pause in foreclosures. I’m so old I can remember the Treasury Department arguing that delaying foreclosures was a good thing because it prevented all the inventory from getting dumped on the market at once and lowering prices. That was in August. Besides, banks could simply dip into their shadow inventory they’ve been keeping off the market if they wanted to maintain current supply without foreclosed properties.
If you want to talk about damage to the economy, it comes from people like this:
In an effort to rush through thousands of home foreclosures since 2007, financial institutions and their mortgage servicing departments hired hair stylists, Walmart floor workers and people who had worked on assembly lines and installed them in “foreclosure expert” jobs with no formal training, a Florida lawyer says.
In depositions released Tuesday, many of those workers testified that they barely knew what a mortgage was. Some couldn’t define the word “affidavit.” Others didn’t know what a complaint was, or even what was meant by personal property. Most troubling, several said they knew they were lying when they signed the foreclosure affidavits and that they agreed with the defense lawyers’ accusations about document fraud.
“The mortgage servicers hired people who would never question authority,” said Peter Ticktin, a Deerfield Beach, Fla., lawyer who is defending 3,000 homeowners in foreclosure cases. As part of his work, Ticktin gathered 150 depositions from bank employees who say they signed foreclosure affidavits without reviewing the documents or ever laying eyes on them — earning them the name “robo-signers.”
You’re talking about a massive, industry-wide corruption of the legal integrity of the foreclosure process and the rule of law, and I don’t think some temporary relief (and to struggling borrowers, it will be relief) should be put on hold while the powers that be think of a way to sweep it under the rug.
The Obama Administration does support the 40-state investigation by Attorneys General into foreclosure fraud, and I certainly support their proposed solution:
A coalition of as many as 40 state attorneys general is expected Wednesday to announce an investigation into the mortgage-servicing industry, an effort some of them hope will pressure financial institutions to rewrite large numbers of troubled loans.
The move comes amid recent allegations that mortgage-servicers, which include units of major banks such as Bank of America Corp., submitted fraudulent documents in thousands of foreclosure proceedings nationwide [...]
The attorneys’ general immediate aim is to determine the scale of the document problems and correct them. But several of them have said that the investigation could force the lenders and servicers to agree to mass loan modifications or principal forgiveness schemes. Other possibilities include financial penalties or changes in mortgage servicing practices.
Lenders and servicers have largely resisted reducing principal on mortgages, instead focusing on interest-rate reductions or term extensions. Banks say they are worried about lawsuits from investors, some of whom could lose money in a principal write down.
Former New Jersey attorney general Peter Harvey, now a trial lawyer in New York, said that a settlement with state attorneys general would likely “to give the banks some cover” to make changes that might otherwise result in lawsuits by investors in mortgage-backed securities.
This is what we need to flush out the system, and it would represent a resolution to the benefit of homeowners, where the banks (and the investors) take the haircut. Maybe the deal can offer the banks part of the upside appreciation. But it has to provide something of value to reduce foreclosures, allow people to pay off their loans, and reset the housing market. This is a moment where they cannot be permitted to wiggle off the hook.