This video by Richard D. Wolff is a clear and accurate account of the financial crash and the current struggles of American working people. It dates from 2011, but it is still relevant. I recommend fast-forwarding through the first three and a half minutes minutes, which are about economic classes, and getting to the meat of the video, which is about the foreclosure and credit crisis.
I can remember when most goods and services were paid for through cash and check, without having to go through credit card companies, other lends and insurance companies. I don’t deny the benefit of credit or of insurance, or advocate going without either, but it is striking how much we Americans are at the mercy of lenders and insurers.
More than 1 million Americans lost their homes last year to mortgage foreclosures, the largest number on record. While the number of new foreclosures has fallen off in recent months, the foreclosure crisis is not over.
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A large fraction of these are due to financial misconduct by banks and other lenders. I believe this will turn out to be one of the greatest scandals in American history, much more serious than the Teapot Dome and Credit Mobilier scandals of the Harding and Grant administrations.
At first glance, the foreclosure crisis seems like merely a case of bad judgment all around – borrowers who shouldn’t have taken out loans, lenders who shouldn’t have granted them. There is a problem with paperwork showing who holds the mortgages, but at first glance this seems like a case of negligent record-keeping. And if banks sometimes foreclose on people who are current with their payments, or who don’t even hold mortgages, these cases are aberrations.
Not necessarily so! Some people who are current with their mortgage payments are being thrown into default without their knowledge. Here’s how it works. You send in your mortgage payment, but somehow it is put down as being late. Maybe it’s your fault, maybe it is bank’s fault, maybe it is the fault of slow mail delivery, in some cases it wasn’t late at all and the bank is charging a fraudulent fee – but you are charged a penalty.
However, you are not told about the penalty, and so you unknowingly are in default for that amount on your next mortgage payment. Next time you owe the amount you missed plus interest. This keeps mounting up. You may not find out until foreclosure proceedings begin, or until the amount is too much to pay. How would it benefit a bank to do this? Well, as with credit cards, the fees and penalties can be as lucrative as the debt repayment itself.
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Then there are people who have had a run of bad luck – big medical bills, or loss of a job – who may miss a payment or be late on a payment, but are good for the money in the long run. In an earlier era, such people would have a good chance of working something out with their local banks. But now, the right to the income from the mortgage has been sold to some investment trust, possibly in a foreign country. If you miss a payment, the bank is still liable to pay off the trust. Only by foreclosing can the bank get out of its obligation.
Then there is the matter of bad records. Each time a mortgage or a claim on mortgage payments is transferred, state laws require verification that the person selling the mortgage or claim actually owns it. In many cases, this has not been done. Sometimes this is a result of false economy – refusing to pay the money needed to do the job right. But in the case of the securitized subprime mortgages, obfuscation of the records has the benefit of preventing the buyers of the securities from being able to find out they have purchased a toxic asset.
The largest banks have outsourced foreclosure to service companies, who are paid based on the number of foreclosures they process. The service companies have no interest in checking whether the foreclosure is legally valid, and, for that reason, people who are paid-up on their mortgages, or who don’t even owe anything, have been had their properties put up for foreclosure auctions.
I cited some stories of wrongful foreclosures in an earlier post. Here’s another.
NO ONE TOLD Deanna Walters she was about to lose her home. Not when her mortgage servicing company foreclosed on it, nor when it landed on the county auction block and sold to the highest bidder. She realized what was happening only when a man taped a note to the front door of her well-kept house in a leafy corner of Stockton, California, last January. “My son went out and took it down,” recalls the 43-year-old single mother of two, “and that’s when he told me it was a ‘three-day or quit’ notice.”
Walters’ discovery that her home had been sold out from under her marked the low point of a four-year fiasco that began when Ocwen Loan Servicing became her mortgage servicer in late 2004. Through no fault of her own, Ocwen incorrectly processed or lost dozens of Walters’ payments and charged her more than $2,000 in late fees and thousands more in additional charges—all without notifying her. The Florida-based company tried to foreclose on her three times. After she paid more than $10,000, Walters figured things were settled. But Ocwen had other ideas.
The article goes on to describe how borrowers are at the mercy of mortgage service agencies, which are not subject to effective federal regulation. In Walters’ case, Ocwen went ahead and sold her house anyhow.
Testifying before the Senate banking committee last July, Diane Thompson, an attorney with the National Consumer Law Center, explained that servicers have an incentive to “push” homeowners into late payments: “If the loan pays late, the servicer is more likely to profit than if the loan is brought and maintained current.” After Ocwen auctioned off Deanna Walters’ house, it collected more than $3,500 from 36 different buyers’ fees, in a single day. …
Deanna Walters has sued Ocwen, and a judge has allowed her to stay in her home, even as the winner of the foreclosure auction is trying to charge her rent. … A self-described “spitfire,” she is left to do her own legwork—”every day, all day long”—to save her home. “If you could tell me who I need to speak to,” she says, “I would be in a van tonight headed to Washington to figure this out.”
“The first thing that needs to happen, I think, is to get these people out of their homes,” a man wearing a bespoke blue-striped shirt, a Hermés tie patterned with elephants and Ferragamo loafers said recently. “Correct! I’ll explain,” the veteran member of a bank restructuring and advisory team said. …
The article goes on to quote Wall Street bankers on the irresponsibility of homeowners who took out larger mortgages than they could afford to pay back. Ken Bentsen, executive vice president of the Securities Industry and Financial Markets Association, a lobbying group, said he hadn’t heard of any wrongful foreclosures and didn’t think it is a problem. A former member of the Goldman Sachs management committee said the real scandal is allowing people not current on their mortgage payments stay in their homes because of paperwork mistakes.
“The question to me is not do you foreclose or do you not foreclose. The question is when and with what philosophy you foreclose,” the man on the bank restructuring team said. “If you want to reduce the amount of leveraged homeowners you have, you need to ultimately kick them out of their homes.” A colleague walked up: His recommendation was to burn houses. It would lower the supply.
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