Foreclosure settlement a failure of law, a triumph for bank attorneys
Barry Ritholtz
Washington Post February 25 2012
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After many months of wrangling, a foreclosure settlement has been reached between 49 state attorneys general and a consortium of banks.
It is an epic failure of law and a triumph for bank attorneys.
It will accomplish little of value, as I’ll explain. First, let’s recall what the “robosigning” foreclosure scandal was all about.
Foreclosure is an extremely serious issue in American jurisprudence. As a nation of laws with strong respect for property rights, we have always treated this process appropriately. After all, having a sheriff forcibly evict a family that typically made a down payment, moved into a home, lived there for some years, made payments, etc., is disruptive — for the family, the lender and the neighborhood.
Foreclosure laws vary from state to state. However, all are specific and precise as to the legal steps that must be followed, from the homeowner’s initial delinquency onward. There are benefits to giving the homeowner a chance to “cure their default.” It is in everyone’s interest for the homeowner to catch up if possible.
We never want to see an innocent party “accidentally” evicted from a home. The legal system has evolved so this has become a “legal impossibility.” Imagine returning home from work or vacation to find the front door padlocked, the belongings strewn all over the block, a big orange sticker screaming “FORECLOSED” on the garage door, with an auction sign in the front lawn. Now imagine that this occurred even though you are not in default or even delinquent on payments. Thanks to the robosigning banks, this legal impossibility has happened repeatedly, even to homeowners who paid cash for their houses and had no mortgages. Imagine that — foreclosed with no mortgage.
Before any foreclosure can proceed, a lender must run through a checklist of specifics for the court to move forward. This review can take 45 to 120 minutes per file and addresses, for instance:
• When was the original loan made, and for how much?
• Who is the borrower? Who is the original lender?
• What is the address of the property?
• Which bank holds the mortgage note? Was the note transferred? When?
• When was the last payment made?
• How much is owed on the loan?
• Was the borrower notified of the delinquency? Default?
• Has the borrower been served notice? When, where and how?
Banks review these details to make sure there was not an administrative error. (Oops! We applied payments to wrong account!)
The banker who reviewed these files fills out and signs an affidavit, which is then notarized. It is the written equivalent of sworn testimony in court. Judges take affidavits extremely seriously. False affidavits bypass the entire fact-finding and legal process, and the result can be a miscarriage of justice. Anyone who lies on one commits perjury, a felony punishable by jail time.
At least, they used to get jail time.
Before the settlement, we learned that nearly every aspect of the robosigned documents was false. None of the details were ever reviewed. The signatures attesting to the review of the documents were fabricated — made by someone other than the person whose name was on the document. Neither person — the supposed signatory to the document nor the hired forger — ever validated the facts of each case. All of the safeguards put in place to make sure foreclosures were done correctly and legally were bypassed. Even the notary stamps were bogus — they were not real, and not signed by a notary to validate that the signer and the signature matched.
How did this happen? Instead of a careful review, people were hired to rubber-stamp hundreds of foreclosure documents an hour. Former burger flippers were paid $8 to $10 an hour to violate the law, file false affidavits and commit perjury. Some of the information was correct, but much of it was wrong — and none of it was verified for court purposes.
And now we have this grand settlement.
What will the impact be?
Economically, it will have no effect. The dollar amount is small relative to the U.S. economy. Indeed, the total impact of the settlement is less than one ten-thousandth of annual gross domestic product.
Then there’s the “math.” The number touted is $26 billion, but that’s wildly misleading. At most, it’s $6 billion, paid out by a consortium of banks. The other $20 billion is for capital write-downs for delinquent homeowners that were going to happen anyway. These were homes that the banks anticipated taking a $50 billion-to-$100 billion hit on. Only now, they get a tax benefit for it.
As far as the U.S. housing market goes, the impact will be minimal. About one out of five mortgages are underwater — meaning the house is worth less than is owed on it. Today, more than 11 million mortgages are underwater.
The settlement won’t affect the majority of these homes. Depending on which analysis you believe, the borrowers who receive a principle write-down will get $2,000 to $20,000 off their mortgage. This will not appreciably change the situation for most borrowers. They owe many tens of thousands more than the house is worth; some are hundreds of thousands of dollars behind in payments. Most will be as likely to default after this write-down as before. The impact on the overall underwater-mortgage issue is almost nonexistent.
The bigger issue is the economics of criminality. Most people who get caught committing crimes are punished. Commit a felony — if you run a bank — and your shareholders pay a monetary fine. Violating the law has merely become the banker’s cost of doing business.
Thus, the robosigning agreement has allowed the mass production of perjury. It has gone unrecognized and unpunished. It has made perjury a business expense, like travel or office furniture. The same reckless approach to giving loans to unqualified people was institutionalized, leading to another reckless approach to foreclosing homes.
We still don’t know who ordered these crimes, who is responsible for this, whether they still are in their jobs — or whether they are in a position of authority to do the same thing again.
Last, politically, the settlement reveals the corrupting influence of bank bailouts. Government is supposed to enforce laws equally and fairly. Instead, it is protecting its investments in rogue banks. They are committed to their original error and are loath to admit it. This is the reason that after a surgical accident, a new surgeon does the repair. He is objective and has nothing to hide. Conflicted governments, though, are focused on their reputation and reelection.
The robosigning agreement will serve as an exemplar to future generations of what not to do when confronted with failing banks.
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Originally published Washington Post February 25 2012
Ritholtz is chief executive of FusionIQ, a quantitative research firm. He is the author of “Bailout Nation” and runs a finance blog, the Big Picture. Twitter @Ritholtz
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