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.
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