Foreclosuregate: a case of robber bankery

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.

Banks ‘foreclose’ on houses bought for cash

A man in Fort Lauderdale, Fla., bought a house for cash last December as an investment property.  In July, he was learned that the Bank of America had foreclosed on the house and sold it at auction.  He was astonished because he didn’t have any mortgage or any other relationship with the Bank of America.  But it was only after he contacted the South Florida Sun-Sentinel that he got anywhere in trying to get his house back.

His experience wasn’t unique.  A woman in central California bought a house for cash in 2001.  But the Bank of America in February sent her a notice of foreclosure, placed ads in the local newspaper and nailed a notice of foreclosure to her door.  She said she couldn’t get the bank to admit its mistake until KCRA of Sacramento took up her case.

There are other examples besides those two cases and other culprits besides the Bank of America, although it seems to be the worst offender.

And there are worse cases than this.  Banks foreclose on properties based on mistakes in the addresses.  Property-owners come home to find their furniture and personal property missing, their utilities cut off and their locks broken by “trash out” companies that have been sent to the wrong address.

Foreclosures on houses without mortgages are only the worst and most obvious of examples of a huge and increasing number of wrongful foreclosures.  It is the result of the bursting of the housing bubble, and banks trying to clear their books of bad debts.

I don’t suppose banks intentionally seize houses for which they have no legal claim.  It is just that mortgages are sold and resold so many times that the paperwork gets messed up, and the mortgage-holders can’t be bothered to hire enough people to check whether it’s right or not.

It’s in the nature of things that a large, bureaucratic organization such as a bank will make mistakes.  But in these cases, and many more, some of which are indicated in the links below, the banks show no interest in correcting mistakes – even in something so simple as foreclosing on the wrong property because of a clerical error in the address. Usually they only act when a reporter for a local newspaper or broadcaster investigates and threatens them with bad publicity, or when the property-owner successfully sues.

True, Bank of America recently announced that it will review foreclosure documents for correctness in cases pending in the 23 states where the courts must approve the documents.  GMAC Mortgage and JP Morgan Case have said they will amend paperwork where improperly done.  We’ll see whether this makes any difference in the affected states; homeowners in the other 27 states are out of luck.  Citi and Wells Fargo, the other two big mortgage processors, claim to have no problem with their process.