Tuesday, October 12, 2010

Foreclosure Gate: Mortgage Fraud Made Simple

In our weekly economic and market commentary, we mentioned Mike Konczal's piece on foreclosure fraud and how to easily understand it:  Foreclosure Fraud for Dummies, 1: The Chains and the Stakes.

His series on this is now up to four articles and they are important enough that if you did not run into them via the link in my weekly commentary, you should definitely read them all thoroughly.

His second piece, What is a Note, and Why is it so Important?, covers the deceptive counter PR campaign by the banks that a correctly filed and produced document is not important, when in fact it is a crucial legal document necessary in a just procedural court.  Beyond that the sellers of mortgaged backed securities are afraid that the trusts set up to hold these securities will force the sellers to repurchase the securities.

In the third piece, Why are Servicers so bad at their Job?, Konczal shows that the problem was in the creation of the securities and the removal of the actual mortgages from the books of banks, who historically had usually sought restructuring rather than foreclosure when the loans were still on their books.  Servicers do transaction processing and handle default situations.  As such they have economic incentives to not negotiate any modification to a good loan. Bankruptcy court records show a problem with documents from servicers beginning in the late 1990's.  Servicers are not subject to the Fair Debt Collections Act and many of the mortgages from the largest banks are second or third mortgages.

In the fourth piece, How could this explode into a Systemic Crisis?, Konczal is concerned that the mortgage insurers do not have the liquidity for a nation-wide halt in foreclosures and Congress might be pressed to act too quickly without proper debate of the issues to bailout the banks and mortgage insurers.  If trustees do not force the depositors and sponsors to purchase mortgages without notes, investors could sue them.  This could encourage tranche warfare between junior and senior tranche holders.  Much of this activity would focus around the four largest banks.  If the insurance market froze and the stock market panicked over the possibility of waves of lawsuits, this could again force Congress to act precipitously without proper consideration to bail them out and possibly abandon individual rights and equal protection under the law.

We have already seen the White House indicate it is ready to back the mortgage insurers and bankers over proper legal procedure and the protection of individual rights.  Konczal will be writing a fifth article how the debate should be formed and fixes found.  In my weekly commentary, I linked to Felix Salmon suggestions on this subject.  It will be interesting to see what Mike Konczal proposes.

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