The bank lobby is spreading a host of silly myths about the foreclosure fraud outbreak in an effort to downplay the scandal and minimize concerns over potential bank losses that have emerged in the blogosphere. Housing Wire’s Paul Jackson spouts most of them in his post today. Jackson does acknowledge a host of major problems for banks that have been recently highlighted by the blogosphere, but he’s still spreading serious misinformation on foreclosure fraud and its potential effects. Banks routinely rip-off borrowers in the foreclosure process, and the blogosphere's uproar over foreclosure fraud is more than justified.
First, the agreement. Jackson agrees that there is enormous potential for investors to bring fraud cases against banks and win them. He calls them “real concerns, many hundreds of billions of dollars worth of concerns.” The blogosphere has done a terrific job highlighting this, with Felix Salmon shouldering most of the burden.
Jackson’s real critiques are pretty weak:
“‘Robo-signing’ is a procedural issue. Period . . . . Until someone can provide consistent and repeated evidence suggesting that the information contained within ‘robo-signed’ affidavits is factually incorrect — not just some of the time, but most of the time — the end result of this mess is nothing more than a very public, brand-damaging, headline-making procedural blip . . . . If false debt amounts were being pushed by banks onto the courts en masse, you can bet all the apple pie in America that every single one of us would have heard about it by now, too.”
First, we have heard about false debt amounts being pushed by banks onto the courts en masse. The best account is a 2008 paper by Harvard University Law Professor Katherine Porter (she was at Iowa then), examining mortgage servicing documentation in bankruptcy. Banks demand illegal fees from borrowers all the time, and resort to shoddy documentation to get away with it. How bad can this get? Ask Porter:
“In one egregious case, a mortgage company filed a proof of claim for more than $1 million when the principal balance on the note was $60,000.”
Take a look at some of Porter’s other findings: More than 18 percent of the time, servicers don’t even bother to file proofs of claim documenting the mortgage debt owed or the fees charged. Of the proofs-of-claim filed, 41 percent of the time, servicers don’t even supply the note, while 16 percent of the time, they don’t bother to itemize the fees they charge, much less justify the amount. Of the itemized fees, 43 percent were assigned to categories that didn’t fit the servicing industry’s own standards.
In many cases, these fees are so high that borrowers lose their homes thanks to the fees, not trouble meeting the monthly payment.
Let me emphasize that Porter’s study applies to foreclosure costs reviewed by a judge in bankruptcy—the most vigilant legal arena available for troubled borrowers. The robo-signing scandal is not playing out in bankruptcy court, it’s playing out in ordinary courts with much less rigorous standards. Banks simply try to prove that they have the necessary documentation to foreclose and are charge appropriate fees. They don’t have the actual document laying out this information, so banks are robo-signing fraudulent affidavits swearing that they really do have the right to foreclose and charge every fee they’re levying.
Given Porter’s findings in bankruptcy courts, this activity is very likely covering up widespread abuses in ordinary court. Note Jackson’s bizarre commitment to a majoritarian threshold for scandal. If 15 percent of foreclosures in the United States since the housing bubble burst have been unnecessary and fraudulent rip-offs, that is a scandal of monstrous proportions. We’ve already witnessed more than 6 million foreclosures this cycle—a 15 percent scam rate is nearly 1 million defrauded borrowers. That should be an outrage.
Jackson also claims that “Commentators have hopelessly conflated ‘robo-signing’ with other long-standing and/or played-out mortgage issues.”
Nope. Commenators have used the robo-signing outbreak to highlight other documentation problems that banks have created for themselves. Servicer misconduct has indeed been well-covered, as is the outbreak of fraud in the sale of mortgages to borrowers. Even the staggeringly dishonest due diligence operations that banks deployed to rip-off investors has been public for months. We know that banks have used robo-signers to cover their tracks in some arenas, there's a natural interest in investigating other areas of documentation trouble (especially Felix Salmon's mortgage bond fraud story).
Jackson does the best job of defusing these related scandals with his argument that the fate of the Mortgage Electronic Registration System (MERS) has already been decided in court. In effect, banks have been using the electronic MERS system to show their right to foreclose instead of paper documents, and several courts have upheld their right to do so (though others have not). But it's hard to understand Jackson's out-0f-hand dismissal of MERS trouble when the legal standing of MERS was raised on a Citigroup conference call with investors last week. This is not yet resolved.
But what I find most ridiculous is Jackson’s claim that commentary on the scandal has obscured other real problems:
“The real brewing issue in the markets right now currently is one of investor confidence, borne most lately of horrible remittance reporting from servicers. Investors have had it with inaccurate reports from servicers, and some are threatening to ditch MBS markets altogether.”
“Remittance reporting” means “profits that mortgage servicers detail and forward to investors.” Shoddy documentation in the foreclosure end have been the focus of much of the commentary thus far. In that element of the scandal, banks are trying to minimize potential losses from shoddy documentation. But Jackson makes a very good point: documentation problems are so bad that servicers aren’t forwarding the right profits either, or documenting them.
Why this is indicative of some blogosphere-wide over-reaction is beyond me. Jackson is effectively saying that the problem is much broader than the blogosphere has so far reported, and made an excellent point regarding the scope of potential problems.
Jackson also makes a good point about investor lawsuits. There are indeed significant technical hurdles that make it difficult for investors to sue banks over fraud in the mortgage-backed securities process, and this has been underreported. But that is far from the end of the story. When hundreds of billions of dollars are at stake, investors usually try to get their hands on it. And what’s more, it’s an appeal to a technicality on an issue where banks (and Jackson’s parroting of banks) are pretending to take the substantive high-road. Don’t worry, robo-signing is just a ‘procedural’ issue! Investor lawsuits are probably going to gut us on the merits, but technicalities will make it difficult for the cases to be heard!
