Strategic Default: Elites Freak Out Over Imaginary Problem

Jan 12, 2011Mike Konczal

mike-konczal-2-100Even when economically irrational, most homeowners are still trying to do the right thing.

Remember this guy? David Walker of the Peterson Institute gets nostalgic about debtors prisons for strategic defaulters:

mike-konczal-2-100Even when economically irrational, most homeowners are still trying to do the right thing.

Remember this guy? David Walker of the Peterson Institute gets nostalgic about debtors prisons for strategic defaulters:

There is a norm asymmetry being ruthlessly exploited between how people and businesses view debt.  Strategic default is not a phenomenon that appears in any empirical data, but it is a boogeyman that needs to be ruthlessly pounded on before people realize that bankruptcy is something they pay for in their mortgages and is their ultimate safeguard against abusive practices. It's telling to watch financial elites freak out about the prospect of waves of strategic defaults, even as they fail to happen. It exposes what really worries them about the state of the economy and where they may not have control.

A Multi-Year Foreclosure Pipeline Slowdown Slows Down More

Cardiff Garcia has a post outlining the economic impact of the foreclosure slowdown. This dated graph shows that the foreclosure slowdown has been happening for a while now:

(Source.) The foreclosure slowdown is some mix of book valuation statistical junking (the banks don't want to mark down the property and take the loss, and perhaps of the neighboring properties), pipeline limitations, and a collapse of the new, 'thin' servicing model used by the largest banks. This slowdown will likely increase as the result of servicing fraud, and the record keeping errors and irresponsible practices for assembling mortgage-backed securities come to light in the courts.

Garcia points us to recent remarks by Joseph S. Tracy, Executive Vice President of the Federal Reserve Bank of New York, at the Connecticut Business and Industry Association/MetroHartford Alliance Economic Summit and Outlook. Tracy has a specific worry about the foreclosure slowdown (my bold):

The combination of declining house prices and increasing delays in the foreclosure process will put upward pressure on default rates as well as losses on defaulted mortgages. CoreLogic estimates that in the third quarter of 2010 there were 10.8 million borrowers in negative equity where the balance on the mortgage exceeds the current value of the property... This increases the risk that these borrowers will default on their mortgages either out of necessity -- say as the result of a job loss -- or out of choice, which is called strategic default as borrowers determine that there is little economic advantage to keep paying the mortgage. Longer delays in the foreclosure process further increase the incentive for a borrower to strategically default by extending the period of time that they can live “rent free” in the house. In addition, declining house prices increase the expected losses on those mortgages that do default.

We should be worried about slowdowns in the foreclosure process because it will encourage people to default on their mortgages when they could otherwise afford to pay. It isn't that it exposes the fact that the primary prestige industry in the United States over the past decade was a boiler room sham operation. But people may start to really look at their debt obligations like businessmen.

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Talk about a dog that didn't bark in 2010. The funny part about this rhetorical crackdown is that there's been no wave of strategic default people can point to. Homeowners really value their promises and are doing anything they can to try and do right by them, and the industry is using that leverage over them anyway they can.

There's Been No Wave of Strategic Defaults

You'll sometimes hear the figure that a third of defaults are strategic. That number comes a survey conducted by Luigi Guiso, Paola Sapienza and Luigi Zingales. They asked random people if they'd strategically default if their home was X% underwater, took their answers, and projected them onto the actual defaults and how underwater they were. There was no actual look at household budgets in creating this number. I'm a fan of Zingales' writing, but this is simply not useful in the debate. There's nothing here.

An Experian study from June 2010 found that strategic defaults peaked in the fourth quarter of 2008. What's a strategic default? "The research follows on an earlier report by Experian and Oliver Wyman that first aimed to quantify the share of mortgage defaults that are 'strategic,'" the study says. "Strategic defaulters are defined as those who miss six straight mortgage payments without missing multiple payments on auto loans and other consumer debts for the six months after they first fell behind on mortgage payments." I don’t see that as a good working definition of strategic default. From their model, a strategic defaulter is someone who misses six straight months of mortgage payments without missing multiple payments on auto loans and other consumer debts. It is fairly easy to keep consumer debt “current” by negatively amortizing it or making the bare minimum payments. What is a legitimate default here? One where the person can’t make any payments on any of their bills.

All this definition means is that someone has enough money to pay their car payment and the minimum on their credit card but not enough money to pay their mortgage payment. The mortgage payment is going to be bigger than each of the other two, and there is no benefit to paying part of the mortgage payment, as it doesn’t keep it current. The definition you want to use is whether or not someone has enough income to make all their payments, not how they allocate payments.

It's interesting that one of the few datapoints that find current (as opposed to 2008) strategic defaults, by CoreLogic, find them happening disproportionately among the rich, whose views on obligations probably mirror MBA and corporate logic more than community norms.

Borrowers Will Pay "A Substantial Premium"

Anyone actually looking at the data would conclude, in the words of the Federal Reserve Board: “The fact that many borrowers continue paying a substantial premium over market rents to keep their homes challenges traditional models of hyper-informed borrowers.” People take their obligations seriously, they (irrationally, in an economic sense) value their communities, neighbors and promises, and they work desperately to try and make good on them.

You can see this in the testimony of David Lowman, Chief Executive Officer, JPMorgan Chase Home Lending, at a House committee: "In fact, almost 64% of borrowers who are 30-59 days delinquent on a first lien serviced by Chase are current on their second lien. It is only at liquidation or property disposition that first lien investors have priority." So what you see is a lot of people, over half of them, who have stopped paying their first mortgage trying to make some sort of payment. If people were economically informed, financially literate and strategic they'd refuse to pay the second (especially if they can't pay the first). But they want to be paying something.

Consider it from a debt point of view. The (back-end) DTI ratio of someone applying for HAMP is 77.5% and 61.3% after modification. Think about that. Here's someone who spends 77.5% of their income servicing debt payments. To put that in perspective, this person will work until around October 10th before they see the first dollar that doesn't go to a creditor.

Instead of ditching this form of debt peonage, defaulting, going underground, etc., they are fighting to get into and through a program that will make it so they still spend the majority of their productive labor to pay off rentiers. Strategic default isn't a binary on-or-off switch. It is fine if people put the large majority of their productive labor towards debt payments.  And that's what we see from people in the HAMP program.

With that in mind, it's almost shocking to see how little strategic default is going on. Wouldn't it be great to have a system that met people trying to do the right thing halfway?

Mike Konczal is a Fellow at the Roosevelt Institute. You can follow him on Twitter at

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FDR's Second Bill of Rights: 'Necessitous Men are not Free Men'

Jan 11, 2011Harvey J. Kaye

fdrmain-150FDR envisioned a new definition of freedom and well-being -- one that we ought to remember.

fdrmain-150FDR envisioned a new definition of freedom and well-being -- one that we ought to remember.

On January 11, 1944 -- with American workers going "All Out!" on the home front and American soldiers, airmen, and seamen fighting European fascism and Japanese imperialism globally -- President Franklin Delano Roosevelt delivered his annual message to Congress on the State of the Union. In that speech, he reaffirmed his determination to pursue the Four Freedoms -- "Freedom of Speech, Freedom of worship, Freedom from want, Freedom from fear" -- both in the United States and abroad. He also articulated those freedoms anew, especially freedom from want and fear, in the form of an Economic Bill of Rights for all Americans.

Roosevelt knew full well that Congress, dominated by a conservative coalition of Republicans and Dixie Democrats, would never endorse it. And yet, based on polls commissioned by his administration, he had good reason to believe that most of his fellow citizens would support it. He also had reason to imagine that it would lead not only to victory in the upcoming November elections, but also to renewed efforts to extend and deepen freedom, equality, and democracy in a peacetime America.

Suffering from the flu and unable to go up to Capitol Hill to speak in person, the president sent the text of his message to Congress at midday and then presented it to the American people in a radio broadcast from the White House that evening. As ill as he was, he spoke vigorously and his remarks were reminiscent of a younger FDR.

He began by discussing his recent meetings with Churchill and Stalin at Tehran and the need to translate the wartime alliance into a permanent system of international security, and he then turned to the subject of the home front. To speed victory, but "maintain a fair and stable economy at home," FDR recommended five legislative measures to Congress, the first four clearly targeting corporate greed, the fifth evidently challenging labor. Specifically, he called on Congress to pass a "realistic" revenue act to increase taxes on profits; maintain the law allowing government to renegotiate war contracts to "prevent exorbitant profits and assure fair prices;" approve a law enabling government to more effectively control food prices; renew the Economic Stabilization Act; and enact "a national service law -- which, for the duration of the war, will prevent strikes, and... make available for war production or for any other essential services every able-bodied adult in this Nation."

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The president then looked ahead. Hoping to be heard on every front, he told Congress and the nation that, "It is our duty now to begin to lay the plans and determine the strategy for the winning of a lasting peace and the establishment of an American standard of living higher than ever before known." And in favor of that, he proposed the recognition and adoption of a Second Bill of Rights.

He said: "This Republic had its beginning, and grew to its present strength, under the protection of certain inalienable political rights... They were our rights to life and liberty. As our Nation has grown in size and stature, however -- as our industrial economy expanded -- these political rights proved inadequate to assure us equality in the pursuit of happiness." But, he continued: "We have come to a clear realization of the fact that true individual freedom cannot exist without economic security and independence. ‘Necessitous men are not free men.'" And evoking Jefferson and Lincoln, Roosevelt contended that, "In our day these economic truths have become accepted as self-evident," and, "We have accepted, so to speak, a second Bill of Rights under which a new basis of security and prosperity can be established for all regardless of station, race, or creed." This Second Bill of Rights included, he proffered:

The right to a useful and remunerative job in the industries or shops or farms or mines of the Nation;
The right to earn enough to provide adequate food and clothing and recreation;
The right of every farmer to raise and sell his products at a return which will give him and his family a decent living;
The right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad;
The right of every family to a decent home;
The right to adequate medical care and the opportunity to achieve and enjoy good health;
The right to adequate protection from the economic fears of old age, sickness, accident, and unemployment;
The right to a good education.

In sum, he stated, "All of these rights spell security. And after this war is won we must be prepared to move forward, in the implementation of these rights, to new goals of human happiness and well-being."

The vision and aspirations articulated by FDR and fought for by those whom we have come to call the Greatest Generation continue to resonate in American hearts and minds. It is up to liberals, progressives, and radicals to encourage their fellow Americans -- starting with Obama and the Democrats -- to pursue them.

Harvey J. Kaye is the Rosenberg Professor of Democracy and Justice Studies at the University of Wisconsin-Green Bay and the author of Thomas Paine and the Promise of America. He is currently writing The Four Freedoms and the Promise of America. Follow Harvey on Twitter:

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Something Rotten in the State of the US Economy

Jan 4, 2011

While the markets start out the new year optimistically and we cross our fingers for a good jobs report this week, will 2011 really bring recovery? The good news may be hiding some fundamental flaws that haven't been addressed. Roosevelt Institute Senior Fellow Jeff Madrick spoke with GRITtv before the end of the year about what we can expect, and got straight to the point: "This economy has a lot to overcome to get back to what it used to be and what it used to be wasn't good enough."

More GRITtv

While the markets start out the new year optimistically and we cross our fingers for a good jobs report this week, will 2011 really bring recovery? The good news may be hiding some fundamental flaws that haven't been addressed. Roosevelt Institute Senior Fellow Jeff Madrick spoke with GRITtv before the end of the year about what we can expect, and got straight to the point: "This economy has a lot to overcome to get back to what it used to be and what it used to be wasn't good enough."

More GRITtv

It's not just enough to go back to the way things were -- they weren't so great. "The foundations of the economy have not been good for 30 years," he says. "We've neglected education, we've neglected infrastructure, we've neglected energy investments... we've neglected early education. But wages have basically stagnated for 30 to 40 years." And a living standard that stays the same or decreases is "ahistorical" and "not the American experience," he points out. The American Dream is about the ability to increase wealth, but we lost that some time ago.

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But simply growing out way out of this problem isn't the solution either, he warns. "I do think growth is an important component of the way America dealt with its problems, but only in conjunction with social programs that made sure that wealth was shared," he says. We've neglected to develop those programs that make sure everyone has a fair chance. "We're not going to correct these problems... until we recognize we've got to allow government to get bigger, better managed, and raise tax revenue to support government," he concludes. And he's not the only one calling for a shift in our thinking about the economy. Check out Senior Fellows Rob Johnson and Tom Ferguson's new paper on the roots and cures for our raging deficit hysteria, as well as Joseph Stiglitz's alternative deficit reduction plan that will boost economic growth now.

Meanwhile, Roosevelt Institute Fellow Mike Konczal warned of another problem threatening the system before the holidays: foreclosure fraud. At a New America Foundation event, he explained that our current system of creating mortgages and mortgage-backed securities is relatively new and this is the first time it's really being put to the test. "And we find that it's failing," he concludes. The ways the system is set up "push toward foreclosure and push toward the speeding up of foreclosure," he says. But "foreclosures are lose-lose-lose events." An investor loses whatever money the homeowner could have put toward the house. The community sees its property values go down. And the homeowner loses his house, not to mention his social standing.

The problem, Mike adds, is that there doesn't seem to be a quick fix. "It's not clear that banks have a silver bullet to make this go away," he says. And legislators don't either. But the good news is that state attorneys general are finally being called into action to investigate, and that "does show a real promise for a real new opening and possibility for change in this crisis." Click here for the full video of his presentation.

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2011 Will Bring More De facto Decriminalization of Elite Financial Fraud

Dec 28, 2010Bill Black

What’s coming in 2011?  We asked thought leaders to share their perspectives on the biggest challenges for the year ahead, along with the changes they’d like to see and the hopes they cherish. Our very own Bill Black takes a hard look at the criminal justice system -- and how financial fraudsters are beating it.

What’s coming in 2011?  We asked thought leaders to share their perspectives on the biggest challenges for the year ahead, along with the changes they’d like to see and the hopes they cherish. Our very own Bill Black takes a hard look at the criminal justice system -- and how financial fraudsters are beating it.

The role of the criminal justice system with regard to financial fraud by elite bankers in 2011 is likely to reprise its role last decade -- de facto decriminalization. The Galleon investigation of insider trading at hedge funds will take much of the FBI's and the Department of Justice's (DOJ) focus.

The state attorneys general investigations of foreclosure fraud do focus on the major players such as the Bank of America (BoA), but they are unlikely to lead to criminal liability for any senior bank officials. It is most likely that they will lead to financial settlements that include new funding for loan modifications.

The FBI and the DOJ remain unlikely to prosecute the elite bank officers that ran the enormous "accounting control frauds" that drove the financial crisis. While over 1000 elites were convicted of felonies arising from the savings and loan (S&L) debacle, there are no convictions of controlling officers of the large nonprime lenders. The only indictment of controlling officers of a far smaller nonprime lender arose not from an investigation of the nonprime loans but rather from the lender's alleged efforts to defraud the federal government's TARP bailout program.

What has gone so catastrophically wrong with DOJ, and why has it continued so long? The fundamental flaw is that DOJ's senior leadership cannot conceive of elite bankers as criminals. On Huffington Post, David Heath writes:

Benjamin Wagner, a U.S. Attorney who is actively prosecuting mortgage fraud cases in Sacramento, Calif., points out that banks lose money when a loan turns out to be fraudulent. An investor in loans who documents fraud can force a bank to buy the loan back. But convincing a jury that executives intended to make fraudulent loans, and thus should be held criminally responsible, may be too difficult of a hurdle for prosecutors. 'It doesn't make any sense to me that they would be deliberately defrauding themselves,' Wagner said."

Mr. Wagner is confused by his own pronouns: "It doesn't make any sense to me that they would be deliberately defrauding themselves." This direct quotation needs to be read in conjunction with the author's description of his position: "banks lose money" when loans "turn out to be fraudulent." Wagner was responding to a question about control fraud -- frauds led by the person controlling the seemingly legitimate entity who uses it as a "weapon." The relevant "they" is the person looting the bank -- the CEO. The word "themselves" refers not to the CEO, but rather to the bank. The CEO is not looting the CEO; he is looting the bank's creditors and shareholders. Two titles capture this well known fraud dynamic. The Nobel laureate in economics, George Akerlof, and Paul Romer co-authored Looting: the Economic Underworld of Bankruptcy for Profit in 1993 and I wrote The Best Way to Rob a Bank is to Own One (2005). The CEO becomes wealthy by looting the bank. He uses accounting as his ammunition because, to quote Akerlof & Romer, it is "a sure thing." The firm fails (or in the modern era, is bailed out), but the CEO walks away wealthy.

Here is the four-part recipe for maximizing fraudulent accounting income in the short-term:

1. Grow extremely rapidly
2. By making bad loans at high yields
3. While employing extreme leverage, and
4. Providing only minimal loss reserves

A bank that follows this recipe is mathematically guaranteed to report record income in the near term. The first two ingredients in the recipe are linked. A bank in a reasonably competitive, mature market such as home mortgage lending cannot decide to grow extremely rapidly by making good loans. A bank can, however, guarantee its ability to grow rapidly -- and charge a premium yield -- if it lends to the tens of millions of people who cannot afford to own a home. Equally importantly, if many lenders follow the same recipe they will cause a financial bubble to hyper-inflate. Financial bubbles extend the lives of accounting control frauds by making it simple to refinance loans to those who cannot afford to purchase the asset. The longer that delinquencies and defaults can be delayed the more the CEO can loot the bank.

Note that the same recipe that maximizes short-term fictional income in the near term maximizes real losses in the longer term. Mr. Wagner is unable to understand that accounting control fraud represents the ultimate "agency" problem -- the unfaithful agent (the CEO) enriches himself at the expense of the principals he is supposed to serve and the firm's creditors. Agency problems are well known to white-collar criminologists, economists, lawyers that practice corporate, securities, or criminal law, and financial regulators. Yes, accounting control fraud causes the bank to suffer huge losses. The loans don't "turn out to be fraudulent" -- they are fraudulent when made. The recognition of the losses is delayed when an epidemic of accounting control fraud hyper-inflates a bubble, but the bubble will increase the ultimate losses. Sacramento, California is one of the epicenters of the mortgage fraud that drove the financial crisis, so Mr. Wagner's lack of understanding of fraud mechanisms is particularly harmful.

Financial regulators are essential to prevent this kind of error by senior prosecutors. The regulators have to serve as the Sherpas for the criminal justice system to succeed against epidemics of control fraud. The FBI cannot have hundreds of agents expert in many hundreds of industries. The regulators have to do the heavy investigative lifting. They have the expertise and greater staff resources. The regulators also have to serve as the guides. Their criminal referrals have to provide the roadmaps that allow the FBI to conduct successful investigations. The regulators played this role successfully at key times during the S&L debacle, filing thousands of criminal referrals that led to over 1000 priority felony convictions. During the current crisis the OCC and the OTS - combined - made zero criminal referrals. None of the federal regulatory agencies appear to have enforced the regulatory mandate that federally insured depositories file criminal referrals - and noncompliance with that requirement was and is the norm. There is no indication that the FBI has demanded that the regulators enforce their rules.

Absent guidance and support from the regulators, the FBI turned to the worst conceivable source of guidance and support - the trade association of the "perps" -- the Mortgage Bankers Association (MBA). The MBA, predictably, defined its members as the victims of mortgage fraud. The MBA invented a nonsensical definition of mortgage fraud which made accounting control fraud impossible. All fraud supposedly fell into one of two categories: "fraud for housing" or "fraud for profit." The MBA members are, in fact, victims of accounting control fraud. The mortgage banks, however, do not set MBA policy. The CEOs of the mortgage banks determine MBA policy and they are not about to tell the FBI that they are the primary source of the epidemic of mortgage fraud. Similarly, they are not about to make criminal referrals, which might cause the FBI to investigate why some lenders made loans that were overwhelmingly fraudulent. MBA members virtually never made criminal referrals even though they made millions of fraudulent loans. Why don't the victims make criminal referrals and help the FBI protect them from the frauds?

Why did an industry, home mortgage lending, which had traditionally been able to keep losses from all sources to roughly one percent suddenly begin to suffer 80-100 percent fraud incidence on "liar's" loans? Why would an honest mortgage lender make "liar's" loans knowing that doing so would produce intense "adverse selection" and a "negative expected value"? They would not do so. They were not mandated to do so by federal regulation or law. They were not encouraged to do so by federal regulation or law. They did so because their CEOs decided they would do so in order to maximize fictional income and real bonuses. The CEOs increased the number of liar's loans they made after they were warned by the FBI that there was an "epidemic" of mortgage fraud and the FBI predicted it would cause an "economic crisis" were it not contained. The CEOs increased their liar's loans after the MBA's own anti-fraud experts stated that they deserved the name "liar's" loans because they were pervasively fraudulent and after those experts said that "liar's" loans were "an open invitation to fraudsters." The industry's formal euphemisms for liar's loans were "alt-a" and "stated income" loans. None of this makes sense for honest CEOs.

The federal regulators have not made any public study of liar's loans. The FDIC and OTS' joint data system on mortgages is an anti-study -- it uses a categorization system that ignores whether the loans were underwritten. This makes the data base useless for studying loans made without full underwriting -- the loans that were overwhelmingly fraudulent and drove the crisis. Credit Suisse reported that mortgage loans without full underwriting constituted 49% of all new originations in 2006. If that percentage is even in the ballpark it indicates that that there were millions of fraudulent loans originated in 2005-2007. It is appalling that the regulators are not studying the facts necessary to understand the crisis and hold the perpetrator accountable.

Fortunately, the state attorneys general have studied these mechanisms and they have found that it was the lenders and their agents that overwhelmingly (1) prompted the false loan application data and (2) coerced appraisers to inflate market values. An honest lender would never engage in either practice or permit its agents to do so. The federal regulators, however, have spent their passion trying to preempt state efforts to protect borrowers. The federal regulators took no effective action in response to the State AGs' findings.

The combined effect of these private sector, regulatory, and criminal justice failures has created a set of intellectual blinders that have caused DOJ to mischaracterize the nature of mortgage fraud. Attorney General Mukasey famously dismissed the epidemic of mortgage fraud as "white-collar street crime." He did so in the context of refusing to establish a national task force against mortgage fraud. A national task force is essential in this crisis because of the national lending scope of many of the worst accounting control frauds. Attorney General Holder has maintained Mukasey's passive approach to the elite frauds that drove the crisis.

The U.S. needs to take three major steps to be effective against the epidemic of accounting control fraud. First, DOJ needs to realize that it is dealing with accounting control fraud. That task is not terribly difficult. The criminology, economics, and regulatory literature -- as well as the data on fraud and analytics are all readily available. The FBI must end its "partnership" with the MBA.

Second, the regulators need new leadership picked for a track record of success as vigorous regulators and a willingness to hold elites accountable regardless of their political allies. The regulators need to make assisting prosecutions, and bringing civil and enforcement actions, against the senior officers that led the control frauds their top priority. The regulators need to make detailed criminal referrals, enforce vigorously the regulatory mandate that insured depositories file criminal referrals, and prioritize banks that made large numbers of nonprime loans but few criminal referrals. The regulators need to work with DOJ to prioritize the cases. In the S&L debacle we used a formal process to create our "Top 100" priority cases. The regulators need to investigate rigorously every large nonprime lending specialist by creating a comprehensive national data base. We have unique opportunities given the massive holding of nonprime paper by the Fed and Fannie and Freddie to create a reliable data base and use it to conduct reliable studies and investigations.

Third, the regulators and the DOJ need to partner with the SEC and the state AGs to share data (where appropriate under Grand Jury rule 6e). The federal regulators need to end their unholy war against state regulatory efforts and the SEC needs to end its disdain for the state AGs. The SEC needs to clean up accounting and the Big Four audit firms. The bank control frauds' "weapon of choice" is accounting. The Big Four audit firms consistently gave clean opinions to even the most egregious frauds. Provisions for losses (ALLL) fell to farcical levels. Losses were not recognized. Clear evidence of endemic fraud was ignored.

What are the prospects for these three vital changes occurring in 2011? They are poor. There is no evidence that any of the three changes is in process. The new House committee chairs have championed even weaker regulation and have not championed the prosecution of Wall Street elites.

The media, however, has begun to pick up our warnings about the failure of the criminal justice response to the epidemic of fraud. Prominent economists, particularly Joseph Stiglitz and Alan Greenspan, have joined Akerlof, Romer, Galbraith,Wray, and Prasch in emphasizing the key role that elite fraud played in driving this crisis. Even Andrew Ross Sorkin, generally seen as an apologist for the Street's elites, has decried the lack of prosecutions.

Our best bet is to continue to win the scholarly disputes and to continue to push media representatives to take fraud seriously. If the media demands for prosecution of the elite banking frauds expand there is a chance to create a bipartisan coalition in Congress and the administration supporting prosecutions. In the S&L debacle, Representative Annunzio was one of the leading opponents of reregulation and leading supporters of Charles Keating. After we brought several hundred successful prosecutions he began wearing a huge button: "Jail the S&L Crooks!" Bringing many hundreds of enforcement actions, civil suits, and prosecutions causes huge changes in the way a crisis is perceived. It makes tens of thousands of documents detailing the frauds public. It generates thousands of national and local news stories discussing the nature of the frauds and how wealthy the senior officers became through the frauds. All of this increases the saliency of fraud and increases demands for serious reforms, adequate resources for the regulators and criminal justice bodies, and makes clear that elite fraud poses a severe danger. Collectively, this creates the political space for real reform, vigorous regulators, and real prosecutors.

Bill Black is a NewDeal2.0 braintruster, an associate professor of economics and law at the University of Missouri-Kansas City, a white-collar criminologist, a former senior financial regulator, and the author of The Best Way to Rob a Bank is to Own One.

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What Were They Smoking? The 10 Dumbest Stories of 2010

Dec 23, 2010Tim Price

idiotIt’s been an unpredictable year, and if our pundits and policymakers could do it all over again, there are some moments they’d probably love to take back. Unfortunately for them, the Internet never forgets, and the ND20 team has decided to look back over 2010 by counting down the dumbest headlines, decisions, and predictions.

idiotIt’s been an unpredictable year, and if our pundits and policymakers could do it all over again, there are some moments they’d probably love to take back. Unfortunately for them, the Internet never forgets, and the ND20 team has decided to look back over 2010 by counting down the dumbest headlines, decisions, and predictions. There was a lot of dumb to cover, so if you think we missed something, be sure to let us know.

10. One and done: To be a great president, Obama should not seek reelection in 2012 (WaPo)
What's the silliest part of this advice -- the idea that President Obama could achieve more by quitting his job, or the idea that two Fox News analysts have the president's best interests at heart?

9. Heritage Foundation and the "Luck" of the Irish (
Conservative economists had a lot riding on their belief that Ireland's austerity measures would save its economy, so it's not surprising that the Heritage Foundation was still touting the Celtic Tiger's strength two years into a deep recession.  That doesn't make it any less funny.

8. The Health Care Bill is Dead (Weekly Standard)
The day after Scott Brown's shocking victory in the special election to fill Ted Kennedy's Senate seat, Fred Barnes declared "The health care bill, ObamaCare, is dead with not the slightest prospect of resurrection. [...] Democrats have talked up clever strategies to pass the bill in the Senate despite Brown, but they won’t fly." To be fair, many progressives agreed with him.

7. Off-Message Watch: "I Don't Know That for Sure" (Economist's View)
Austan Goolsbee brought a lot of good will with him to the Council of Economic Advisers, but when he turned out to be agnostic about the benefits of a bigger stimulus package, it made us wonder if he was off-message or if the entire administration was.

6. Robert Rubin: 'Virtually Nobody' Saw Crisis Coming, Bush Deserves Much Of The Blame (HuffPo)
Like many of the architects of the financial system that collapsed in 2008, Rubin must not have been paying very close attention if he didn't spot any signs of trouble brewing.

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5. The war recovery? (WaPo)
We're always open to innovative economic ideas, but David Broder made us wonder if Martians had invaded his body with this column speculating that war with Iran would boost growth and help President Obama in 2012. But then again, Afghanistan and Iraq have done wonders for us.

4. Christine O’Donnell TV Ad: “I’m Not a Witch… I’m You” (CBS)
Even in the year of Aqua Buddhists and chicken barterers, Christine O'Donnell was an unusual Senate candidate. When Bill Maher revealed that she had once dabbled in witchcraft, she was forced to issue a denial that perfectly captured the absurdity of the midterms and earned a place in our political lexicon.

3. President Obama: Drill, Baby, Drill (ABC)
In one of his signature attempts at bipartisan pre-concession, President Obama decided at the end of March to endorse more offshore oil drilling. Three weeks later, the Deepwater Horizon oil rig exploded, creating one of the worst environmental disasters in U.S. history. Perfect timing.

2. The Politics of Foreclosure (WSJ)
When the foreclosure scandal broke, the Wall Street Journal argued that liberals were making too big a fuss about “the pain that results when the anonymous paper pusher who kicks you out of your home is not the anonymous paper pusher who is supposed to kick you out of your home.” The editorial stated that the good folks at the Journal were “not aware of a single case so far of a substantive error.” We can think of a few.

1. Welcome to the Recovery (NY Times)
Tim Geithner probably didn’t mean for the title of his now-infamous op-ed to sound sarcastic, but as Wall Street’s profits soared and the middle class continued to sink, it was hard for anyone to take it seriously. At least he didn’t mention green shoots.

Tim Price is a Junior Fellow at the Roosevelt Institute.

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Open Letter to Geithner & Co: Fix the Foreclosure Fiasco

Dec 21, 2010

You may have heard that America has a little problem with widespread fraud on the part of mortgage servicers. So what are our regulators doing to make sure this doesn't happen in the future?

You may have heard that America has a little problem with widespread fraud on the part of mortgage servicers. So what are our regulators doing to make sure this doesn't happen in the future? Not much.  So Christopher Whalen called upon a group of 52 economists, academics, and others, including Roosevelt Institute Senior Fellows Marshall Auerback, Tom Ferguson and Rob Johnson plus ND20 contributors Josh Rosner, James K. Galbraith, L. Randall Wray, and Dean Baker to sign on to a letter outlining how we can address this catastrophe. Addressed to Tim Geithner, Ben Bernanke, Sheila Bair, Mary Shapiro, Edward DeMarco and Joan Walsh, it calls on regulators to "develop national standards for originating, selling and servicing mortgage loans." But don't worry -- they don't have to start from scratch. The letter points out that financial reform already calls for regulation of mortgage securitization, what got us into this mess in the first place.

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Specifically, the signers call on regulators to install new standards for mortgage securitization, which "must promote a sustainable securitization market and, in particular, maintain additional 'skin in the game' for sellers of loans so the excesses and abuses of the past are not repeated." Part of this will require defining "what constitutes a qualified residential mortgage" that will be a new "gold standard" in the mortgage market. The letter has 11 specific proposals for national guidelines that banks should follow in order to ensure the process runs smoothly in the future.

And it may be holiday time, but this issue can't wait. Revelations about fraud in the foreclosure process expose some serious vulnerabilities in the system. "Problems of this magnitude are a threat not only to the economic recovery, but to the safety and soundness of all insured depository institutions," the letter states. We can't wait around for new legislation in the future to clean up the mess, the signers say. Dodd-Frank is sitting right there, ready to help us figure it out.

Read the full text of the letter here.

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A Foreclosure Lawyer Goes to Washington

Dec 8, 2010Thomas A. Cox

white-house-150Foreclosure lawyers may be better off working in the states than getting DC involved.

white-house-150Foreclosure lawyers may be better off working in the states than getting DC involved.

A couple of weeks ago, I was invited down to Washington to testify before the House Judiciary Committee hearing, "Foreclosed Justice: Causes and Effects of the Foreclosure Crisis." The panel that I was to be on included two other lawyers who represent homeowners, Professor Christopher Peterson (the University Of Utah law professor who has really got MERS's number), and representatives of three of the large loan servicers. Since one of those loan servicers representatives was to be from GMAC Mortgage, LLC, an outfit that has commanded quite a bit of my time and attention over the past six months, I hoped for the opportunity to make sparks fly with him in the hearing room.

I worked hard on my written testimony, giving GMAC Mortgage a lot of special attention. I headed down to DC on the day before the hearing just to be sure I made it on time. At 7pm, a call came in from the committee staffer telling me that the servicers were not going to be at the next day's hearing after all. Perhaps I am getting a swelled head, what with all of the recent media attention, but I wondered if the last-minute bailout meant that GMAC's representative did not want to sit before the committee with me as I much as I wanted to be with him.

Despite the absence of the servicers on our panel, I was still feeling energized the next morning. After all, after two recent hearings conducted by the Senate Banking Committee and one by the Subcommittee on Housing and Community Opportunity of the House Finance Committee, the House Judiciary Committee hearing was to be the first one where real, everyday foreclosure defense lawyers were appearing to explain the foreclosure crisis from a personal perspective. (No disrespect here to Diane Thompson of NCLC, who testified before the Senate Banking Committee -- she surely is a real lawyer, but she sits at the right foot of God as the country's preeminent expert on HAMP.)

The next day there were to be two panels before the 40-member committee, which meets in a big, impressive room. The first would include representatives from the OCC, Treasury and the Federal Housing Finance agency and a State Supreme Court (trial court) judge from New York. I was geared for action, but when the hearing started, there were only nine committee members in their seats. Later, the number shrank to three -- one of them distracted by an animated cell phone conversation.

Between a recess for a House vote and the glacial progress of the hearing, my fellow panel members and I were informed by a staffer mid-afternoon that, while they were thankful for our attendance, our panel would not getting an opportunity to testify that day.

Despite this unpleasant surprise, I came away with four observations:

1) I believe that an activist federal intervention into state property laws  to help solve the foreclosure scandal should be avoided. There are some areas where our federal government can handle issues better than the states, but this is not one of them. Example: The recent win that I scored in the Maine Supreme Court in August, where, construing more than 150 years of Maine foreclosure law development, our Court ruled that MERS cannot have standing to conduct foreclosures in Maine. This much-desired result came from local judges on a readily accessible state level court interpreting legal issues presented by local lawyers. We did not need, nor do we want, remote legislators in Washington telling us what the law will be for uniquely local matters.

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2) During the hearing, one of the Republican committee members argued that if the rule of law was enforced across the board, then perhaps the mortgage servicers would not be behaving as they do. He asked why there is not much more activity at the state level to sanction the lawyers who enable and present the servicers' dishonest claims. He wondered why the state courts are not being much more active in sanctioning misconduct, and why there is no criminal prosecution of misconduct, simple as submitting affidavits filled with perjury. I felt that these were legitimate questions. The dishonest affidavits issue is a simple one and I do not think that there is a good excuse for state boards of bar overseers failing to take action against the offending lawyers. And it puzzles me that no one state Supreme Court has taken any creative action, or undertaken a judicial inquiry to determine what, if any, remedy should exist for homeowners who lost their homes based upon dishonest affidavits. On the other hand, state judiciaries are tremendously overloaded and underfunded and have little to no spare capacity to take these issues on.

3) I wanted to ask this Republican if Congress should demand that Attorney General Eric Holder bring federal criminal charges against those who broke the law by submitting thousands of dishonest affidavits. I met with our newly appointed U.S. Attorney here in Maine about a month ago to urge him to consider using federal mail fraud and wire fraud statutes to pursue criminal charges against the servicers and perhaps their lawyers. The cryptic response seemed to be that the direction to do so would need to come from Washington. Apparently there is no such direction. Months ago, Holder said he was investigating. What is there to investigate? The crime is simple. We have served the evidence up on a silver platter of thousands of dishonest affidavits filed all over the country. Attorney General Holder should instruct U.S. attorneys in all fifty states to immediately start indicting those responsible for filing the dishonest affidavits, including the affiants and the notaries right on up to senior officers in the servicers who had to know what was going on. A wave of such indictments would surely change the culture in the servicing industry.

4) Another thing that stuck with me from the hearing is an apparent fundamental misunderstanding on the issue of principal reductions. Those who advocate against a foreclosure moratorium until there can be certainty that servicers will behave are also generally against forcing servicers to provide principal reductions as a part of the loan modification process. What the advocates of the "foreclosures are good" school seem to ignore is the fact that every foreclosure is, in fact, a principal reduction. Each foreclosure of an underwater mortgage reduces the principal recoverable on that loan. The rub is that foreclosures result in larger principal reductions than do loan modifications, which reduce the loan balance to market value, where homeowners can afford to pay. This is so because once a foreclosed property goes into REO inventory, it usually sells at a 20% discount to market value (and it also depresses the value of surrounding properties). Wouldn't it be better to avoid this deep discount and keep a homeowner in his home with a principal reduction to market value, rather than putting that homeowner on the street where his ability to become a consumer again will be delayed so much longer?

The House Judiciary Committee reconvened this hearing for December 8, 2010. I was about to leave Maine when I was advised at the last minute that the Republicans were now demanding another delay of one week. While I have agreed to return to Washington for this now twice delayed hearing, I wonder how much value I can really bring to that Committee's process. Relatively few committee members are even willing to show up, and the lame duck House of Representatives leaves me doubtful about really being heard and having a meaningful impact.

I came away feeling that I may be more useful in focusing on solutions up here in Maine in the hope that they may continue to ripple outwards. Because not much is happening in Washington.

Thomas Cox is a retired bank lawyer in Portland, Maine who serves as the Volunteer Program Coordinator for the Maine Attorney’s Saving Homes (MASH) program. He represents homeowners in foreclosure and assists and consults with other volunteer lawyers in providing pro bono legal services to these Maine homeowners.

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Blame Dishonest Banks, Not Ethical Lawyers Exposing Foreclosure Frauds

Nov 29, 2010Thomas A. Cox

foreclosure-gavel-150Thomas A. Cox, a volunteer lawyer from Maine who outed the first robo-signer, wrote a letter in response to attacks against those who are defending homeowners facing foreclosure.

foreclosure-gavel-150Thomas A. Cox, a volunteer lawyer from Maine who outed the first robo-signer, wrote a letter in response to attacks against those who are defending homeowners facing foreclosure. He demands that the blame be placed on the banks, where it belongs -- not on the lawyers working to expose fraud.

Dear Judge Sarokin:

I take issue with your Huffington Post article of November 22, 2010, in which you criticize lawyers defending homeowners in foreclosure cases. You assert, "To oppose the foreclosure, when both the borrower and lawyer know the mortgage is in substantial default, to my mind borders on the unethical." Not only is this assertion grossly unfair to these overworked, dedicated and ethical lawyers, it is based upon a fundamentally false premise as to the mechanics of the foreclosure summary judgment process. Inexplicably, you fail to offer the slightest criticism of the foreclosure industry and the ethics of its lawyers, who have presented thousands of false (and literally perjurious) affidavits in foreclosure summary judgment motions all across the county.

You have had a long career as judge in both the United States District Court (N.J.) and the Third Circuit Court of Appeals. I have had the privilege of practicing law for many years, in both the Maine State and Federal Courts as well as before the First Circuit Court of Appeals before my retirement. The arc of our respective careers encompassed the (quite different) bank crisis of the late 1980s and early 1990s in which there was also a great deal of foreclosure activity, although at nothing near the extraordinary levels of these times.

During that banking crisis, much of my legal work was devoted to representing banks and the FDIC in the same Federal Court system in which you worked, using the same Federal Rules of Procedure that you used. For the past two and a half years, I have been engaged as a full-time volunteer to represent homeowners in foreclosure cases in these same courts. The rules relating to the handling of summary judgment motions in foreclosure cases have not changed in any substantial way since you were on the bench, yet inexplicably you misstate their requirements. In doing so, you excuse loan servicers and their lawyers for presenting of false affidavits in thousands of cases. I cannot believe that you would ever have tolerated the presentation of false or perjured testimony in your courtroom, and I cannot understand why you are willing to excuse it now.

You excuse the perjurious affidavits by implying that attacks on those documents, based upon the lack of personal knowledge of the affiants, are unfounded. You state:

It would be virtually impossible in any bank (even in those in which the mortgage remained with the issuing bank) for one person to know how much was loaned and precisely when and how much was paid on account. In this day and age, all of that information comes via computer printouts -- not personal knowledge.

In making this statement, you display an apparent failure to recall what the Federal Rules of Civil Procedure say regarding summary judgment affidavits. Rule 56(e) explicitly requires that all such affidavits must be made upon personal knowledge. There is no exception in that rule for foreclosures or for mortgage loan servicers, yet you imply that they should not have to respect this requirement.

You fail to recognize that the required personal knowledge is not of the details of the loan and the balances due. Rather, what is required is knowledge of the requisite facts to authenticate and establish the accuracy of their employers' business records and computerized accounting systems. I filed many summary judgment motions on behalf of my FDIC and bank clients, and in not one instance did the affiant have knowledge of any of the details of the loan or of the balances due. In every instance, however, my witnesses did have direct personal knowledge of the facts relating to the keeping of the records for these loans and for the systems used to calculate loan balances. I never lost one of those motions for summary judgment, and I would have been greatly embarrassed if I had.

Today, I have yet to see a single affidavit from a loan servicer witness that adequately meets this personal knowledge requirement. As a consequence, I estimate that I, and the lawyers with whom I consult, win about 75% of the time by opposing these summary judgment motions based upon false affidavits. Yet the lawyers presenting these dishonest affidavits show no sense of shame when they lose, because in the 90% of the cases where they are unopposed, they win by default, collect their fees and go home happy. This failure to present honest and competent evidence arises not out of an inability to meet the requirements, but out of their stubborn refusal to devote the necessary resources to honestly comply with the rule.

You assert, "I am concerned with the stability of contracts, the rule of law, if they are abandoned at this fragile time in our economy." But you imply that it is foreclosure defense lawyers who are jeopardizing the prized concept of "the rule of law" when they attack these improper foreclosure filings. These lawyers are performing the highest calling of our profession as they expose the blatant dishonesty of the nation's largest financial institutions. None of our present knowledge about this outrageous and widespread phenomenon would have been revealed but for the efforts of the hardworking and ethical lawyers representing homeowners.

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So much do these institutions try to hide this dishonesty that GMAC Mortgage, LLC attacked me personally for exposing the abusive affidavit signing practices of its Limited Signing Officer, Jeffery Stephan. One of his many affidavits had been filed in a case in which I was representing a Maine homeowner, and the local judge accepted it as true. Thereafter, I deposed Stephan and revealed that he did not bother to read any of the affidavits that he signed, did not know whether they were true, and did not know they contained major errors. He even readily admitted that he did not appear before the notaries he supervised when they signed statements that he had personally appeared before them to be sworn. Stephan signed between 8,000 to 10,000 documents a month (not all were affidavits), and his affidavits were sent to courts all over the country. When I discovered this outrageous fraud, I shared the transcript of my deposition on a listserv with other lawyers from around the country who represent homeowners so that they could protect their clients from being victimized by his false affidavits.

GMAC Mortgage wanted to keep Stephan's testimony under wraps so badly that it tried to obtain a court order to stop me from sharing it with other foreclosure defense lawyers, and it asked the court to fine me personally for what it called my "malicious dissemination" of the transcript. I was outraged by these efforts to intimidate and gag me, having never experienced such offensive conduct in my forty years as a lawyer. I fear that many younger or less experienced lawyers might have been cowed into silence by any similar efforts. Our judge did not hesitate to deny the GMAC Mortgage motion to gag and fine me and in one case imposed lawyers' fees sanctions of over $27,000 against it for its bad faith filing of the affidavit from Stephan.

In the situation that I have just described, it is the "rule of law", for which you express concern, which worked exactly as it should in revealing misconduct by one of our major financial institutions. Our judge here in Maine had no problem with finding the conduct of GMAC Mortgage to have been carried out in "bad faith". When we showed the judge that GMAC had been caught in exactly the same conduct in Florida four years earlier, he stated, "despite the Florida Court's order, GMAC's flagrant disregard [of the law] apparently persists. It is well past time for such practices to end." What I find so troubling about your article is that you fail to condemn either the loan servicers or their lawyers for their clearly unethical conduct in presenting false evidence to the courts. In your failure to condemn such conduct, you also fail to use the stature of the office that you once held to inspire other judges to confront and root out misconduct.

You minimize the now indisputable fact that the nation's largest financial institutions have lied to courts in thousands of foreclosure cases. You raise no concern for the fact that our citizens' trust in the judicial system has been deeply shaken by the revelation that our financial institutions have foreclosed upon hundreds of thousands of homes by the presentation of false evidence in courts all over the country. In the plea at the end of your article, "let us not sacrifice the rule of law and the sanctity of contracts in the process," you imply that lawyers for homeowners are the ones at fault. But it so clearly is the banks, the trusts and their loan servicers who want to sacrifice the rule of law and who refuse to respect the sanctity of their contracts. They appear to have succeeded in far too many courts in obtaining special exceptions to our rule of law requirements. As a result, American citizens have been left to wonder whether they can receive fair treatment by our courts when confronted by large corporate adversaries.

Your expression of concern for our fragile economy suggests that you believe that the rule of law is a relative concept. You seem to suggest that it should be set aside when it comes to protecting homeowners in foreclosures in order to protect our recovery. One of the fundamental precepts of our Constitution is that the individual rights guaranteed by our laws must never be sacrificed. Due process of law is not a relative concept, it is an absolute. Our failure to preserve that concept is what led to the unconstitutional internment of thousands of Japanese Americans during World War II and must not be repeated here. There are no exceptions in the due process clause of the United States Constitution.

Finally, I must answer the implication in your article that there is a widespread practice among foreclosure defense lawyers of denying the existence of loan defaults when they are found. While you have been retired for many years, I have been working with many lawyers in actual foreclosure defense for almost three years. In addition, I am in constant communication with foreclosure defense lawyers all over the country. I have seen no evidence at all to support your assertion. While there will always be exceptions, I do not believe that there are widespread denials of defaults where they actually exist. What you seem to overlook is the fact that, even when defaults do exist, it is not only appropriate, but a matter of professional responsibility for a homeowner's lawyer to challenge the standing of any party asserting that default when that party clearly lacks standing to seek a foreclosure, when it is unable to prove that it owns the loan that it is trying to foreclose upon, or when it is unable to prove that it has provided the homeowner with the contractually created right to a proper notice of default and the right to cure it.

I greatly respect the office that you held as a judge in our Federal court system. But I can neither agree with the discredit that you lay upon the foreclosure defense bar, nor can I understand your unwillingness, as one having extensive judicial experience, to explicitly condemn the conduct of loan servicers and their lawyers. I sincerely urge you to reconsider your remarks, to retract them, and to make a public apology to all of the private bar and legal servicer lawyers who are struggling so hard, often for low pay, to preserve the integrity of our judicial system against the rampant dishonesty of the foreclosure industry and its exceedingly well-paid lawyers.

Respectfully submitted,
Thomas A. Cox
Portland, Maine
November 26, 2010

Thomas A. Cox is a retired bank lawyer in Portland, Maine who serves as the Volunteer Program Coordinator for the Maine Attorney's Saving Homes (MASH) program. He represents homeowners in foreclosure, and assists and consults with other volunteer lawyers in providing pro bono legal services to these Maine homeowners.

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Two Cords of Wood: An Intimate Look at Unnecessary Foreclosure

Nov 22, 2010Thomas A. Cox

home-foreclosure-documentRobo-signers. Moratoriums. Botched documents. In the midst of a complicated and crooked mess, New Deal 2.0 asked leading thinkers and activists to help navigate the maze of the foreclosure crisis.

home-foreclosure-documentRobo-signers. Moratoriums. Botched documents. In the midst of a complicated and crooked mess, New Deal 2.0 asked leading thinkers and activists to help navigate the maze of the foreclosure crisis. Our “Foreclosure 411” series focuses on the values inherent in explaining why we should care and what the crisis means to all of us. In the fifth part, volunteer lawyer Thomas Cox recounts some tough advice he had to give a client facing foreclosure.

Back in September, I was asked to give some unusual advice to a client. This woman, a resident of rural Northwestern Maine, wanted to know if she should buy the two cords of wood that she needed to heat her $48,000 home for the winter. I had previously told her that my bag of legal tricks was empty, and that I could not stop KeyBank from completing a foreclosure of its $28,000 second mortgage on her home. She was having trouble accepting the fact that it would really evict her, since she owed $50,000 on her first mortgage to a local bank, a loan on which she was current in her payments, which meant that KeyBank could recover nothing by foreclosing on its second mortgage. She told me again how, even though she had lost her job in the local paper mill, she had found other, but much lower, employment income and that she was able and willing to make reduced payments on the second mortgage. But KeyBank refused to accept reduced payments.

I had to tell my client that she should not buy the firewood, as I knew that it was planning an eviction within days. I had managed to penetrate the executive offices in Cleveland, Ohio, telling the "Executive Client Relations" person in the "Office of the President" how foolish it was to evict this woman, who had reduced income but a real willingness to devote as much of that as she could to continued second mortgage payments. The letter that I received in response told me how much KeyBank "valued" this woman as a client, how it "is committed to providing her with excellent service," and how it regrets "any inconvenience or frustration your client may have experienced." The letter closed by telling me, "[W]e appreciate the opportunity to respond to your concerns with quality and integrity." That letter also told me that it was not willing to do anything at all to restructure this woman's loan or to stop the eviction process.

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After spending over $4,000 on foreclosure costs and legal fees, it purchased my client's interest in the property at its foreclosure sale (there were no other bidders for this worthless second interest) and it did evict this woman from her home at the beginning of October. She is now living in the basement of her daughter's house. Since the interest in this home that it purchased was still subject to the outstanding first mortgage, it then paid $50,000 to the first mortgage holder so that it could own full title to the property as it made plans to re-sell it. Thus, at this point it had over $54,000 invested in gaining full title to this property. Last week, KeyBank listed this property for sale for $44,000. It will surely net no more than $40,000, if it can sell it at all. This will leave the bank with a real cash loss of over $14,000, a woman living in her daughter's basement who was willing to pay at least some level on her second mortgage, her community with an empty and devalued property in its midst, and a very sour taste for all of us who try to help these people.

Looking only at this loan and the personal situation of its borrower, KeyBank's actions make no sense at all. However, along with all of the other major lenders and loan servicers in this foreclosure crisis, it does not look at these loans from a personal perspective. Everything is driven by "the numbers." Those numbers tell financial institutions like KeyBank that it makes economic sense to avoid the costs of evaluating these loans on an individual basis. The numbers tell them not spend the money to pay employees to make individual decisions on whether a situation such as the one described here makes sense or whether ways can be found to work with the homeowner. KeyBank and the other large financial institutions and loan servicers do not care if they needlessly ruin the lives of some of their customers, as long as they can minimize the expense of dealing with their individual situations. The only "quality and integrity" that these institutions care about is the quality and integrity of their bottom lines.

I used to represent KeyBank back in my bank lawyer days. It grew out of purchases of two venerable old-line Maine banks with roots going back into the mid-1800s. Even as late as the 1990s, when I was representing KeyBank of Maine, it was still a "local bank." There were bank officers assigned to dealing with loans such as this one who would make real human decisions on appropriate courses of action. Since these banks have gone national, they no longer care about how they hurt their individual customers, and they no longer care about the communities where those customers live. They are entirely willing to sacrifice a certain (and substantial) percentage of those customers on the altar of corporate profits. They can get away with this because they can lend money more cheaply then our local banks can -- Federal monetary policies allow them to borrow money at a cheaper rate. Is this what we want from our Federal government?

Sadly, my advice to my client was correct. It was good that she did not waste her limited resources on the two cords of wood, as she no longer has a house to heat for the winter.

Thomas Cox is a retired bank lawyer in Portland, Maine who serves as the Volunteer Program Coordinator for the Maine Attorney's Saving Homes (MASH) program. He represents homeowners in foreclosure and assists and consults with other volunteer lawyers in providing pro bono legal services to these Maine homeowners.

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Breaking Foreclosure Info: Countrywide Never Sent Mortgages to Trust

Nov 22, 2010Mike Konczal

mike-konczal-2-100The picture of fraud becomes clearer while regulatory action has stalled.

mike-konczal-2-100The picture of fraud becomes clearer while regulatory action has stalled.

Wow. Stopforeclosurefraud finds testimony from a New Jersey bankruptcy court case indicating that Countrywide was not passing along notes as part of the securitization process:

The new allonge was signed by Sharon Mason, Vice President of Countrywide Home Loans, Inc., in the Bankruptcy Risk Litigation Management Department. Linda DeMartini, a supervisor and operational team leader for the Litigation Management Department for BAC Home Loans Servicing L.P. (“BAC Servicing”V testified that the new allonge was prepared in anticipation of this litigation, and that it was signed several weeks before the trial by Sharon Mason.

As to the location of the note, Ms. DeMartini testified that to her knowledge, the original note never left the possession of Countrywide, and that the original note appears to have been transferred to Countrywide’s foreclosure unit, as evidenced by internal FedEx tracking numbers. She also confirmed that the new allonge had not been attached or otherwise affixed to the note. She testified further that it was customary for Countrywide to maintain possession of the original note and related loan documents.

Both Yves Smith and David Dayen have write-ups of this news that you should read.

Why is this a big deal? It might be helpful to go back to the diagram we used for Part 1 of the Foreclosure Fraud for Dummies series that explained the chain of securitization.  Let's update it for the Countrywide situation. As you can see at each point, conveying and transferring the note plays a crucial part in creating these mortgage-backed securities (please click through for larger, easier to read, image):

(Thanks to Tom Adams for a discussion about this chart.)

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These are not technicalities -- these obligations come from secured credit and trust law, two fields where strict requirements are essential. We don't want confusion over conflicting claims to property, and we don't want tax-free trusts set up without the trusts doing their homework. The channels for the securitization are tax-free under a special type of law ("REMIC"), and in exchange for that the trusts have to be set up correctly from the get-go.

These laws are based on New York trust law, not congressional law. As Professor Adam Levitin noted in his testimony, between the New York trust law and the Pooling and Service Agreements there are very specific requirements for passing these notes down the chain. They are required to protect investors from malfeasance, avoid fraudulent transfer concerns, and create "bankruptcy remoteness" of that asset from the originator/sponsor.

And it appears that during the worst excesses of the mortgage bubble, the very basic rules of property transfer and record-keeping were ignored. The trust and its servicers have no standing to foreclose.

Key point: Tim Geithner and Treasury did not announce this breakthrough. The Federal Reserve did not announce this breakthrough. Even at this late stage, the actions of the trust, servicers and depositors are opaque to regulators and investors.

The only reason we know about this is from a New Jersey bankruptcy court. And it's only because of the people in the field deposing robosigners, piecing together the records, and fighting to get information about what is actually broken in the biggest piece of our stalled economy that we know any of this. Advances like this will disappear if Congress doesn't allocate the $35 million dollars it is supposed to for legal aid groups, and you can now understand why lawmakers are hoping this request dies quietly. And it also shows why Attorneys General will need to step up to the plate and take over this fight while the public needs to hold federal regulators accountable for their lack of effort.

Mike Konczal is a Fellow at the Roosevelt Institute.

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