Matthew Ferrara, Philosopher

The Real Reason Banks are Halting Foreclosures

Just when the housing market was starting to heal, steps in and makes a mess of things once again. It’s not robo-signers but robo-politicians that are are once again disrupting the marketplace. At consumers’ continued expense.

After a week’s worth of media repeating of robo-signers gone wild, here’s what I’ve not been able to find. An actual story of a robo-signed document that led to the unlawful foreclosure of a home of a consumer who was still paying their mortgage. Funny, don’t you think?

On one hand government is pushing banks to clear up the foreclosure backlog; on the other hand, it’s threatening to prosecute them for the possibility the paperwork might have some clerical errors. Fraud? Nobody will wonder when banks leave the housing sector altogether in the future, preferring risks in foreign lands far from attorneys general and politicians incredible.

The paperwork in question pertains to people who have stopped paying their mortgage. Who, by the way, have remained occupying (squatting) the house without paying compensation to the owners (banks). If you were an attorney general looking for new cases, maybe some theft cases might interest you? Alas, consumers can never be at fault these days. Only “big” companies.

That’s the real reason major banking institutions are recalling their foreclosures: Banks remember the Toyota “assumed guilty” run-away accelerator case.

Some 30 state attorney’s general are threatening to investigate – and file lawsuits – paperwork issues that haven’t resulted in provable harm to any actual consumers.  It’s the same guilty-before-the-facts danger that Toyota faced just a few months ago. Toyota’s stock tanked when Congress started its investigations. Billions of market capitalization, shareholder value and retirement fund assets vanished faded in the lights trained on indignant politicians with – as it turns out – not a shred of credible evidence. Just another show trial, America’s largest employers be damned.

Banks know the same stakes apply: Even if it turns out the paperwork errors were harmless, unintentional or not fraudulent in intent, they’re better off issuing a “recall” of foreclosures rather than risk the unlimited power of government. Banks are one of the few groups actually making profits in the jobless recovery; and profit is inherently bad, didn’t you know?

Ironically, none of the state attorneys general announced investigations into home “owners” who haven’t been paying their mortgages but remain occupying the homes. No investigation needed to see that’s theft, but why quibble over facts? In the cross-hairs, in the meantime, is the housing recovery. Just as investors were starting to come off the sidelines, the market has been slammed shut – under threat of a lawsuit. Maybe it’s just another unintended consequence of government action in the marketplace?

Banks can’t keep absorbing losses forever. Homeowners aren’t the only ones taking a hit by the housing market troubles. Forcing them to sustain losses longer – through a voluntary recall induced by an involuntary threat of lawsuits – isn’t a good plan to help them clear the inventory and reach the bottom. Nor will it make them more likelyto lend to future homeowners, when paperwork, not theft, is more likely to result in legal action.

Expect the housing recovery to be delayed.

Author’s footnote, 10/14: The Wall Street Journal reports today that, “Banks and other mortgage owners stand to lose $1,000 for each month that a foreclosure is delayed, according to estimates by Paul Miller, an analyst at FBR Capital Markets. If all foreclosures are delayed for three months, that could lead to $6 billion in losses across the industry, with around half of those falling on Fannie, Freddie and government agencies such as the Federal Housing Administration.” (Emphasis added.) What it failed to point out, of course, was the obvious: Those $6 billion dollars can only be paid for by taxpayers, many of whom are homeowners struggling themselves to pay their own mortgages during the recession and keep themselves out of foreclosure.

  • Funny how the lenders initially only concerned themselves with the 23 judicial foreclosure states though. Probably because in those states judges can actually dismiss cases or severely alter agreements & their actions of providing false testimonials IS actual fraud where they could face penalties for this. I agree lenders are attempting to get out in front of this but it is even if proceedural their fault, respondent superior (latin). Their attmpts to consolidate the work to “foreclosure factories” ended up not being the smartest move. At the end of the day only the attornies & government programs will get the majority of any settlement. Perhaps these lenders need to hire more staff along with their vendors along the way, after all there are quite a few people out of work lately.

  • Scott: I don’t disagree with a thing you’ve said; it’s true that paperwork errors could have been “fraud” and I”m sure there we can find lots of laws and technicalities to hang lenders on. But this witch hunt mentality of our political class has caused FAR more harm to the ENTIRE market than what any competent court clerk could likely have found with much less fanfare. To wit: The Wall Street Journal today indicated that Fannie and Freddie (and other mortgage servicers) could lose upwards of $1000 per loan per month that’s stalled in foreclosure for “review” – adding up to $6 billion in damages if this thing drags on for six months.

    The scope of the reaction is far beyond the scope of the problem.

  • Eric Martell

    I agree with you that the situation as currently portrayed might be construed as begging for government intrusion (and that’s not a good thing, IMO). On the other hand, Matthew, I don’t agree with you about the lack of seriousness of missing or forged documents and signatures. If one single mortgage was foreclosed upon by a bank which lacked standing due to loss of title, then the system is at fault and all mortgages must be suspect. Not only must the borrower live up to his obligations, but the banks must proceed according to the rule of law. We can’t have laws which we insist the borrowers abide by and let the banks and foreclosure mills forge documents with no reprecussions can we?

    In my understanding, if the chain of title is broken and the borrower does not know who actually has the title and the right to receive payment for the mortgage, then the debt can’t be construed as valid. Banks have got to demonstrate that they’ve got the standing to foreclose even if the homeowner isn’t making the payments. Otherwise, it seems as if we’d be agreeing to the idea that any bank can foreclose on any loan whether they have the title or not.

    I think the possible reprecussions of this situation are very serious. If title companies won’t insure titles which may be compromised, then what lender will make a purchase loan? This also applies to non-REO sales which may have had their prior mortgage title lost in the race to create MBS.

    Looks like we’ll be using all-cash and owner financing in the near future, unless this is straightened out quickly.

  • Paulchase
    Matthew, You’re assumption that all foreclosures happen to people who owe the bank money is flawed. Because of Robo-signers a couple had their property taken from them and suffered the loss of rent paying tenant and missed the homecomng of their son from duty in Iraq. Your commentary and logic are flawed. It took me 5 minutes to find the above story. Next time please do your homework.

  • Thanks for you comments, and I do see your points. The question I am left with is this: Don’t we have a court system to handle these mistakes? I’m sure these types of errors happened before the housing meltdown, and will happen after; and people have recourse – that’s part of why there is a judicial review process. So, again, does the potential problems warrant the response on the SCALE of disrupting the entire marketplace?

    I’m not defending the mistakes; I’m questioning the response. And the only reason foreclosures are being stopped en-masse is not because the banks aren’t willing to stop and review and take responsibility. Rather, it’s because 50 attorneys general are threatening to sue them out of existence – yet again……

  • Paul, thanks for you comments, but let’s take a step back: So you found a mistake, or two, or three, or 100 cases of mistakes. Do you honestly think that justifies suspending hundreds of thousands of forecslosures, disrupting the deals that were pending, people’s lives on hold, and a further market cycle downward. Let’s not make the exceptions the rule; Is your example correct – sure it is – but we have a process for this in the courts of law.

    I don’t think my logic is flawed; but I do think the premise that a few cases should disrupt the rule is a flawed approach. It’s a witch hunt, and I think we should recognize it as such.

  • Bobbysundrop

    This is America…we have court systems if a fraud situation has happen. For Government once again try to control the situation…another set up to hurt the Real Estate market and America….when folks use to mess up….they paid the consequence…now the Government takes control and does not let the natural consequence by the laws of our land, American, happen. Just more debt accumulating and the Governement being where they are not suppose to be…more freedoms disappearing and we are doing nothing about it!!!

  • Exactly! Why do we need an “investigation” every time? Fraud occurs every day – for example, homeowners who lie about their income on a mortgage application. Do we get the attorney involved every time..? Of course not. This is just another power play against “Wall Street” banks.

  • Chuck Licari

    Aren’t foreclosures a matter for the state courts… what standing do the feds have?

  • Chuck Licari

    Aren’t foreclosures a matter for the state courts… what standing do the feds have?

  • Nancy Riley

    Inequities do happen, but foreclosures are driving home prices down, causing more homeowners losses, bankcruptcies, and halting economic growth. It is a vicious circle. Banks have a big lobby representation and they can take on some of the burden.

  • Nancy Riley

    Inequities do happen, but foreclosures are driving home prices down, causing more homeowners losses, bankcruptcies, and halting economic growth. It is a vicious circle. Banks have a big lobby representation and they can take on some of the burden.