Sunday, 17 October 2010

The US Mortgage Debacle

The fact that the Judge prejudged the case, so much so that she entered conformed copies of a Final Judgment before the hearing even began, requires disqualification.
Actually, I think life in jail would be more appropriate.

It's one thing to have sausage-machine "justice", verdict first, trial afterwards - but one should at least obey the forms.

From Naked Capitalism:
These new foreclosure-only courts are special creations of the Florida legislature, funded separately from the usual court system. They are manned by retired judges, which means in many cases they are not familiar with real estate law.

But perhaps most important, the explicit objective of these courts is to clear up the backlog. And that is coming to pass not by the Legislature having thrown enough resources at the problem (that is, having greatly enlarged court capacity to process more cases in parallel) but by pushing for faster resolution. The problem is that an accelerated process runs roughshod over due process and allows banks to foreclose when they may not be the right party, or worse, when the foreclosure is the result of servicing error.

Let’s look at one example of banana republic faux justice in the US, via a speech by foreclosure court Judge Roger Colton to his court on how the day was going to go. It’s simply breathtaking. He says that if the bank is foreclosing, he’s not going to consider any evidence that the foreclosure is in error (servicing errors, plaintiff can’t provide proof it owns the note, which means it might not be the right party and procedurally, means it lacks standing to take action). He says he has already heard everything, there is a lot of unemployment in the area; he is going to schedule a court date, but that is merely a deadline for negotiation. In other words, he makes it abundantly clear he has no interest in hearing evidence. When he gets to seeing a defendant after his speech to the court (p. 13), he rubber stamps what the bank wants without even considering the evidence. And apparently his entire day went like that. The summary from an attorney who was representing a client before him that day:
On 8/30, I had a Summary Judgment Foreclosure hearing on Palm Beach County’s “Rocket Docket”. The judge spoke for 14 minutes to the crowd, of mostly pro se defendants, about how they should just agree to the summary judgment and the plaintiffs, (whose attorneys (Shapiro & Fishman had a dedicated courtroom and to whom he referred to as “my attorneys”) would be gracious (Ha!) enough to allow them to stay in their homes for 120 days if needed (even though the statute says he only has to give them 30). When it came to hearing arguments which were fully briefed and provided to the court (pursuant to the instructions of the Divisions head judge) he only allowed 30-60 seconds for argument, failed to read any of the papers, failed to review the plaintiff’s foreclosure package,flatly ignored the Affidavit filed in Opposition, ignored my plea for a trial, signed the judgment and dismissed me. I never was permitted to even read the proposed judgment or to examine the “newly discovered” allonge which Shapiro’s counsel said I had no right to see.

Newly discovered allonges (separate documents with endorsements on them) are fakes; this is the new preferred method of document fabrication. Per the UCC (Uniform Commercial Code), an allonge is to be used ONLY when all the space that could be used for endorsement of a note has been used up. That means margins and the reverse side. And when an allonge is employed, it has to be so firmly attached to the original as to constitute a single document. Hence, no way can it travel separately and suddenly be discovered if it were legitimate.
The Laws, it appears, are for the little people. Documents are being blatantly fabricated, and the courts staffed by "retired Judges" who aren't actually superannuated. The usual reason for "retirement" in such cases is such blatant corruption or sheer incompetence that it can't be ignored, and the offender quietly eased out before too much more scandal is caused.

The whole mess that's caused the need for such sausage-factory systems is explained at Rortybomb in Foreclosure Fraud For Dummies.

In summary, Property Law in the US relies on title, proof of ownership, to be proved by physical pieces of paper, notes, with annotations and changes all witnessed. These legal requirements have been ignored. Mortgages have been bundled, securitised, commoditised, into more marketable packages suitable for large scale investments. Have a $200,000 mortgage, it's not particularly saleable. Have a package of 200 or more mortgages, worth in aggregate $50 million, and large-scale investors become interested. While default may happen on one or two, requiring expensive foreclosure and recovery costs, in aggregate the risk is lower. Unless the market collapses, and then they're up the creek.

But carrying around notes and pieces of paper, notarising all the changes of ownership as packages are aggregated, split, sold, re-sold etc was just too hard. It would require thousands of such notarisations per day, and to do it properly, checking title and making sure there was no mistake, that might take a good legal person several hours on each one. Far too expensive. So they didn't bother actually doing any of that, they just employed junior "robo-signers" to systematically perjure themselves and state under penalty of law that it had been done.

That's if they had the notes in the first place. Often they didn't. The firm they bought the mortgage from never received them from the previous owners - who are now out of business.

See Laws, little people, relation to.

Now the whole system would collapse if the courts didn't just cut corners, but make the circles rounder. This has been attempted... but there have been people evicted from their homes who never had a loan, and others who have paid it off but suddenly find half a dozen financial institutions each claiming sole ownership. Sometimes the banks have sold property they didn't own, and sometimes they've sold the same property multiple times to different buyers. This judicial attempt to take short-cuts and ignore mere laws to regularise an irregular situation has resulted in disaster, and some states now have moratoriums on all foreclosures until things are set to rights, and the mess sorted out.

From the Daily Caller:
Tomorrow, a bank—not your bank, but any bank—could evict you from your home. Even if you didn’t know the bank was foreclosing. Even if your mortgage is paid off. Even if you never had a mortgage to begin with. Even if the bank doesn’t hold a single piece of paper that you signed. And major banks not only know this fact, but have spent millions of dollars to defend it in court. Why? The answer starts with a Jacksonville homeowner named Patrick Jeffs.

In 2007, Deutsche Bank sued Jeffs for his home, which is a necessary step in the process of foreclosing on a homeowner in the state of Florida. Curiously, despite the fact that he immediately hired a law firm to defend his property when he found out about the foreclosure, neither Jeffs nor his attorneys were at the trial. That’s because it had already happened. Deutsche won by default because Jeffs wasn’t able to travel backwards in time to attend, even though the trial featured a signed affidavit indicating that he had been served his court summons.

The only problem with the summons Jeffs supposedly received was that it had been conjured out of thin air.

In June of this year, a Florida court ruled that the document was fraudulent, as the person who was supposed to make sure Jeffs was served had mysteriously received a copy of the summons before the lawsuit had even been filed, and Jeffs never even saw the copy. The text of that ruling was posted on various financial news websites in September. The lawyers that Jeffs hired to defend his case say that fraud such as this is not uncommon. It’s a widespread problem, and it has cost countless families their homes.

“I think it’s safe to say that 95% of the foreclosure cases in Florida involve some form of fraud on the part of the bank,” David Goldman of Apple Law Firm, PLLC told The Daily Caller in a phone interview. “It’s probably closer to 99%. And the court system is helping them get away with it.”

A 95% rate of fraud sounds preposterous, but the number was repeated by a paralegal familiar with the case, Lisa Beasley, as well as Michael Redman, who was prompted to create a website called after enduring personal experiences with the matter.
Earlier this year, Goldman worked with Jane Doe, an elderly woman whose real name couldn’t be disclosed for legal reasons. She had just spent several weeks outside of her home state of Florida visiting relatives, and she was current on her mortgage payments, which she had been paying for the past 15 years. She even called up her bank during her trip to ask about the best way to send in her latest payment. The bank told her that it wasn’t allowed to discuss the mortgage with her because her husband was the property owner, not her. But the bank couldn’t discuss the mortgage with her husband, either. Why? Because he was dead. And he had been for five years. Confirming this fact would have taken mere minutes.

Instead, when Jane returned home, the locks to her house had been changed and all of the property inside the house was gone. She still hasn’t recovered that property, and the bank hasn’t even told her where it is. According to Goldman, the wrongful repossession was first admitted, and then, inexplicably, the bank actually changed its mind and tried to make the outrageous claim that the homeowners’ association was actually the entity which had ultimately decided to change the locks and empty the house.
Earlier in the year, Bank of America “foreclosed” on Charlie and Maria Cardoso, removing all of their property and changing the locks even as a realtor employed by the bank itself told it that there was no mortgage on which the Cardosos could skip payments. Eventually, the papers used by Bank of America were shown to have the wrong address. Someone, somewhere guessed.
On September 23, the bank “foreclosed” on a Ft. Lauderdale house owned by Jason Grodensky. Phone calls and emails elicited no answers, and the problem was only resolved after Grodensky took the story to the media and received national attention. There should have been no way for Bank of America to take control of the property. Instead, Grodensky discovered that the title to that property had already been sold. The bank recovered the title at its own cost.
This week, Florida television station WFTV reported Nancy Jacobini’s story. JP Morgan’s lawyers had sent a contractor to change the locks on Jacobini’s house. She actually happened to be sitting on a couch inside that house at the time, which means that she could have simply opened the door for the contractor in response to a simple knock—and it also means, according to Jacobini’s lawyer, that changing the locks was illegal, because the house was still occupied. Instead of a knock, Jacobini heard someone breaking through her front door, grabbed her phone and hid in her bathroom, where she called 911. The breaking and entering was just an extra helping of crime. And here’s the kicker—not only was Jacobini occupying the house, but JP Morgan hadn’t even foreclosed. At every step along the way, the rule of law simply didn’t exist.
A man named Jeffrey Stephans testified on September 14th that he had signed off on affidavits which he didn’t actually examine. Those affidavits were used in thousands of Ally foreclosures, and the properties involved were subsequently bought and sold. The previous homeowners can now sue the banks that foreclosed, and the “they were underwater anyway” argument isn’t holding up in many states, where both civil and criminal penalties are being discussed. By admitting his actions
, Stephans instantly invalidated all of the repossessions and sales that were based on those actions. And Stephans said his practices are common in the industry. They’re so common, in fact, that a term was developed to describe them: “robo-signing.” This is being performed at law firms that process thousands of documents a day, which have become known as “foreclosure mills.”

Tammie Lou Kapusta, a former paralegal for one of those mills, testified on September 22nd that she was instructed by the attorneys at the firm to officially notarize hundreds of documents a day with a notary stamp that she wasn’t legally allowed to use. When complaints started rolling in about stamp dates that didn’t match other dates within the documents, she and all of the other paralegals doing the same thing at the firm were instructed to make the date of the stamp match the other dates, no matter what day it actually was. The documents would then be signed with the name “Cheryl Samons” by three different people, only one of whom was actually named Cheryl Samons. Kapusta said she drew the line when she was instructed to use random Social Security numbers assigned to people who might not even exist in order to falsify documents regarding each hypothetical person’s military status.

At least she drew it somewhere. She told the court that others didn’t.

The fact that there has been fraud and theft on a massive scale, sometimes by organisations long gone, that's been ... ignored. The Dishonesty has been so universal that we can't do anything else without rocking the boat till it capsizes.

Again, see Laws, and Little People.

What this means is that few titles that have changed hands in the last decade are unimpeachable. Even those who bought for cash may not be able to prove ownership, so cannot sell, not for any price. Unemployment is now close to 10%, and the traditional remedy for that, moving to where the jobs are, that's not always, or even usually, available now. People can't sell their homes, or if they can, may not be able to buy any of the millions of foreclosed homes now standing empty, because no-one can be sure who legally owns them.

And that, ladies and gentlemen, is why the Australian dollar is now worth more than the US dollar. Why those in the US real estate market are selling for any price they can get, and why gold is going up and up and up. Because it's not just the Real Estate market. It's the attitude that if a corporation is large enough, it is effectively beyond the law. Judges can be bought, and Congresscritters rented, quite cheaply. The system worked while the illusion was kept up, but now the rubes are starting to get wise.

The US economy has so much inherent strength that it will survive even this. But we may see the days of million dollar bills being insufficient to buy a cup of coffee first.

See Quantitative Easing.


Carolyn Ann said...

Quantitive easing has nothing to do with the current mortgage crisis. It's a fiscal tool that's available only to central banks. Florida doesn't have a central bank.

The Fed is going to employ it at some point, but probably very carefully. I read they were thinking of doing only $100B a month.

I'm not sure why you mention it?

I haven't seen the evidence that people who own their properties outright have been evicted. This was the subject of a "heated" debate on CNN, the other day. The person making the same claim couldn't provide evidence, either.

I'd also be careful quoting unsupported claims such as "The usual reason for "retirement" in such cases is such blatant corruption or sheer incompetence that it can't be ignored, and the offender quietly eased out before too much more scandal is caused." (Or did you make that claim? It's difficult to ascertain, sorry!)

You don't know that for certain.

Oh - your explanation of how property ownership is proven is a bit inaccurate. Each state is a little different, but for the most part, there is an official recording in a local government office of the ownership of a plot of land, and various records exist for any buildings on that land. (You should see the record room in Manhattan, for example! It's astonishing. The deeds to the property are a piece of paper, but that's all they are. The official record is held by the local government.

Other than that, the Florida "solution" was half-assed at best, and an absolute nightmare at worst. I'm not sure they could have picked a worse solution if they'd really tried.

(The Au$ is still valued lower than the US$, too. Although it is approaching parity! If I were a Forex trader, I wouldn't read too much into those tea leaves, though.)

Zoe Brain said...

"The official record is held by local government"

Except that that's being ignored, as it's completely inaccurate.

Seriously, "the paperwork" includes changing such things, and it wasn't always done. Or even usually done, when the mortgage was commoditised.

The law was ignored. The federal law that would have regularised the situation, and made legal the fraud that had been committed, was vetoed by Obama recently. Hence the panic.

Though "Fraud" isn't the right term. There's been almost none of that. Perjury and forgery, yes, those are applicable. Most foreclosures have been through genuine default on the loans, and someone would have had the right to foreclose, even if it wasn't the actual agent tasked with it.

Notes and paperwork becomes irregular all the time. Notes get lost, records don't get updated, and there are established procedures to deal with that. It takes some time and effort, but with diligence, a chain of ownership can be established.

But they didn't do that: they contracted it out to third parties to do that for them - throwing the whole thing into doubt, as the required checking and correcting of errors wasn't done.

To make an analogy - it's like a hard disc with bad bits, write errors that have not been corrected. It throws into doubt all the good data too.

Consequently, we have a few cases where foreclosure has been attempted on houses that never had a mortgage, and rather more where the mortgage payments were current.

1%? Less. Far less. But enough so the only thing saving the banks is the fact that most people are in default, and won't fight it. But that's temporary, since new buyers will want unimpeachable title, and that the banks can't provide.

Zoe Brain said...

See this video.

It's sensationalist and beat-up, so one-sided as to be almost useless, but the problem is real. They've played so fast and loose with the law that the normal checks and balances aren't working.

I've had a look at the claims made here. I've not found a shred of evidence to the contrary, and much in support.

Carolyn Ann said...

That was the guy arguing with Ali Belshi on CNN! :-)

I'm not disputing that this problem is going to become one of the all-time greatest screw-ups ever. Instead of figuring out what should have been done, these "Kings of the Universe" did what they always do: a shortcut.

A wise banker would have created a holding company with the express purpose of generating some fees by ensuring the records were changed to reflect reality. They didn't, and they now have a lot of angry Attorney Generals, more than a few judges who are about as annoyed and some home-owners who can sue them for lots of money.

More importantly: they have an investigation starting up that is all but impossible to lobby away, and has a strong chance of bringing about some of the changes they lobbied against in Congress.

There's also a *lot* of anger against Wall St. The bankers are oblivious to it. I suspect they won't like the medicine they'll be forced to take!

One quick question? I'm really hoping you don't believe a claim in that blog link you supplied. The blogger asserts that the collapse was part of the industry's business model - which shows a woeful lack of understanding of the business, or modern capitalism It's also ridiculously stupid. And it's a conspiracy theory worthy of any John Birch communist/UN cabal. If the blogger doesn't understand the basic principles of modern capitalism, how can any of their claims be taken seriously?

(This isn't a case of the paranoid eventually being right. It's the case of the conspiracy nut making grandiose, unsupportable, claims. Again.)

Carolyn Ann said...

I'm starting another thread to this conversation! :-)

Why do you think there will be Wehrmacht-style inflation because of this stupidity? Or even Argentinian-style inflation?

I don't see any evidence for such. The US economy has passed the point of deflation being an active concern; and this will depress the economy, not inflate it! The quantitive easing that's proposed won't be anything close to causing inflation; if the Fed's do a monthly issue of funds, they can always close the spigot if inflation gets beyond 4% or so. (If they do a single, grand, issuance, it will have the same affect as the last effort - not much of one!)

I don't think anyone is seriously proposing to inflate our way out of this crisis. After all, we're not in a recession anymore - it's more a period of stagnation. Besides, inflating the recession away would promote a currency war with China, and that's not a contest anyone can win!

A currency war is possible if China keeps focussing on exports. It would, ultimately, force China to do what it really doesn't want to do - open up its internal markets. That would cause political havoc - something China is, obviously, keen to avoid.

Australia would be affected, in a bad way, too. Commodities would be very difficult to price in a currency war.

Let's just hope no one provokes a currency war!

(Of course, avoiding such a thing would require intelligence all around. I don't about you, but I haven't seen much of that in the political speeches and Chinese obduracy.)

Carolyn Ann said...

A more balanced look at the problems this little perplexity will bring about... Megan McArdle in the Atlantic.

Zimbel said...

From what I've read, you're missing two things that may be significant:
1) Some of the mortgages themselves were fraudulent (and no, I have no idea of the percentage in question).
2) Virtually all of these pieced mortgages were brought under investment vehicles under New York State law, with nearly identical print. Apparently, only a very tiny percentage of the notes can be invalid under these investments; over that percentage (0.01%), and there's a large liability on the part of the seller (forced repurchase).

#1 might only be a tiny percentage of mortgages - in those cases, figuring out who owns what may be difficult (note that some of these "mortgage" sellers no longer exist). #2, however, may end up in a bunch of major lawsuits against the banks.

There are also more minor details, such as that the sellers of these mortgage-backed securities were fraudulently mis-representing what they were selling, but honestly, that's probably a (significant) side-note.

Anything that gets 49 Attorney Generals to investigate isn't likely to be small potatoes. I'm hopeful that I'm wrong, but I'm fully expecting another bailout or buyout of most of the major banks.

I agree with Carolyn Ann that deflation is more of a threat than inflation at the moment; our CPI-U, for example, was 0.1% last month. That's near the edge of deflation, not a symptom of hyper-inflation.

@Carolyn Ann- What would be the problems of a currency war with China? My very understanding is that they could either buy more dollars than they currently are or sell them off. The former would hurt our exchange rates further; the later would help our exchange rates.

Carolyn Ann said...

Well, Japan just spent ¥20B manipulating the price of its currency... :-) And Brazil just increased its tax on foreign investment to 4% (if memory serves).

Here's the problem: if one currency is kept at an artificially low level, it means that another one is, by reciprocation (and the fact that foreign exchange is a zero sum game), artificially worth more than it should be. That affects nation B's exports, because nation A is keeping its prices lower.

In the grand scheme of things, China spends about $1B (US) per day keeping its currency at a certain level: $0.1505 per Yuan. As China does a lot of trade in US$ - it buys quite a lot of Australia's raw materials in US$'s, for instance (that's by global agreement - that means they effectively get a discount. As it happens, it's quite a high discount.

If China allowed their currency to float, as it should it, it would probably decrease in value quite dramatically. That would make Chinese goods more expensive on the shelves of Walmart and Target. Which would lead to fewer sales. You would need more renminbi to buy $1, reducing the amount of renminbi's you have for other things, like paying wages. On the other hand, the US manufacturers could (in theory) respond with products that are competitively priced - building the national economy. But, as I mentioned, China's economy would contract a bit. Quite a bit, as it happens. Which would lead to large-scale unemployment, and (more than likely, considering some other conditions in China), a lot of social unrest. That unrest could lead to either reform - or, worse (if you're a Chinese government official), the overthrowing of the actual government.

Unfortunately, because America wouldn't be able to ramp up production quickly enough, inflation would result. (Supply never equals demand, and you never want it to, either.) This would send the US economy into a tailspin, and the rest of the world wouldn't catch the flu - they'd be on life support. Because there's so much invested in the US$! It's treated, and actually called, "cash". Interest rates on US debt would spiral out of control - Greece, but slightly different.

As things stand, the billion or so (dollars) a day that China spends keeping its currency stable is sort of accounted for in the price of the various currencies that can be traded for the renminbi. This wouldn't be a large correction for free-floating currencies (indeed, it would help Japan's yen, considering the amount of trade between the two nations), but it would be a disaster for the Chinese currency.

Carolyn Ann said...

The concept is quite new; I think it was a the Brazilian Finance Minister who actually coined the phrase. If America decides to use its currency, which it could because the US$ is the global reserve currency (there's nothing else to replace it, either. Not even the Euro. Actually, especially not the Euro!), it could force the markets to value the renminbi at something like its market value. I'm not an expert, so I don't know what the value could be.

If China let its currency float, it would have to more of its currency to buy things like oil, for instance. It could print money, but as any brief study of socialist, far left and populist governments will show - that's usually the quickest road to massive inflation you can find. (This is, oddly, a subtle point: injecting money into an economy isn't the same as simply printing money. In the former, you're careful to avoid devaluing the currency too much; in the latter, it's a free-for-all. )

The other thing to consider is that there's not a lot of distance between a currency war and a full-scale trade war. The WTO wouldn't be of much assistance; if anything, it would be reduced to uselessness. Global free trade would definitely suffer, and economic development in developing nations would take twenty seven steps back for each step they've recently taken.

But - there's always a but - if China doesn't allow its currency to appreciate against the dollar, at some point it will lose internal competitiveness. In other words, its own market won't improve. That's really bad and can lead to deflation and social unrest.

I think China is starting to come around to the fact that, as a global power and the world's second largest economy, it actually can't afford to subsidize its currency. But it's behaving like a two year old. (Mostly because, I think, its Politburo is full of conniving schemers who haven't paid much attention to anything except one-upping each other.) The only reason China can do what it does is because it's currency is valued lower than it should be. It's basically borrowing from itself, but keeps the interest it wants to pay to itself fairly low. At some point it will end up owing more in interest than it can pay in keeping its currency low. At that point - inflation, social unrest, etc.

That's why a currency war is undesirable. No one wins. It's pretty much the ultimate no-winner war.

Carolyn Ann said...

Hopefully that was a reasonably clear explanation!

Google insisted on a 4k character count, so I just sliced the entire thing in half.

Whichever way you look at it, if something involves "trade" and "war", it's usually a disaster for all concerned. A currency war can be thought of as a trade war conducted by other means. Basically! :-)

Disclaimer: The only thing I looked up was the exchange rate. The rest I relied on my memory, and of my knowledge of the markets and economics. So what I said is probably a load of useless rubbish. :-)

Zimbel said...

@Carolyn Ann- very interesting. The only thing I'll note is that some inflation (another 1-2% or so) would likely be good for the U.S. economy at the moment.

It sounds like what we want is a slow reduction of Chinese propping up of its currency.

Zimbel said...

A couple more articles on this mess:

This one speaks to my point #2 above:
Securities sold upon the basis of false representation, intentional or not, can be returned to the seller under the provisions of the Federal Securities and Exchange Act of 1934 and under “Blue Sky” laws of most states. These laws require a full refund of the original purchase price, regardless of whether the securities in question have gone up or down, in the interim...

Assuming a 30% rate, big bank securitizers have an exposure to about $2.19 trillion, with an unknown amount of additional costs and attorneys fees.

The banks don’t have that kind of money...

Zimbel said...

And an article that appears to have a clear left-of-center bias (or at least it's written for a left-of center audience). If the facts are accurate, though, it helps describe the extent of this problem:
Real estate law dating back hundreds of years requires that to foreclose on real property, the foreclosing party must produce signed documentation establishing a chain of title to the property; and that has not been done. Increasingly, judges are holding that if MERS owns nothing, it cannot foreclose, and it cannot convey title by assignment so that the trustee for the investors can foreclose. MERS breaks the chain of title so that no one has standing to foreclose.

...However, that ploy won’t work either, because it’s too late to assign properties to trusts that have already been set up without violating the tax code for REMICs, and the trusts themselves aren’t allowed to own anything under the tax code. If the trusts violate the tax laws, the banks setting them up will owe millions of dollars in back taxes. Whether the banks are out the real estate or the taxes, they could well be looking at insolvency...
Sixty-two million mortgages are now held in the name of MERS...

bolding is mine

Note that these are not mutually exclusive problems; these banks are being hit with both at once.

Carolyn Ann said...

Personally, I'd like to see inflation at about 4%. 2% is a reasonable goal for prosperous times; right now, we need a higher target simply to make lending more attractive.