Last night, 60 Minutes ran a feature story on foreclosure fraud and the looming housing crisis it presents. This isn't news to anyone who's been paying attention, or nearly one-quarter of American mortgage holders who are under water on their mortgages, but the enduring practice of banks playing fast and loose with mortgages—a practice they've been able to get away with for far too long—has doomed a major segment of the nation's economy.
It's bizarre but, it turns out, Wall Street cut corners when it created those mortgage-backed investments that triggered the financial collapse. Now that banks want to evict people, they're unwinding these exotic investments to find, that often, the legal documents behind the mortgages aren't there. Caught in a jam of their own making, some companies appear to be resorting to forgery and phony paperwork to throw people - down on their luck - out of their homes.
In the 1930s we had breadlines; venture out before dawn in America today and you'll find mortgage lines. This past January in Los Angeles, 37,000 homeowners facing foreclosure showed up to an event to beg their bank for lower payments on their mortgage. Some people even slept on the sidewalk to get in line.
The story investigated just one foreclosure mill, Docx in Alpharetta, Georgia, that became a "sweatshop" for foreclosure documents, with a former auto-parts store employee, Linda Green, becoming a "vice president" for multiple banks because she had a short, easy name that could be forged by anyone who could hold a pen. High-school kids worked part-time for Docx, forging Linda Green's name on foreclosure documents, thousands a day. Cue FDIC chair Sheila Bair:
Chairman Bair thinks rotten mortgage documents are so threatening to the economy that the government should force banks to pay into a massive fund.
"You think there needs to be a cleanup fund like for a natural disaster?" Pelley asked.
"I do. Yes, somewhat like that. Yes, this is yes this is one of human-making, but yes," Bair said....
Bair's proposed cleanup fund would pay homeowners to accept a bank's ownership claim without a lawsuit. She says this could be cheaper for banks than trying to recreate the missing documents legitimately - not through document mills.
"I think eventually the bank could prove who owned it. But it would take, it would take a lot of time and expense," Bair said.
It would be cheaper for banks, and certainly in the long run for mortgage holders, to not have to go to court, but it doesn't speak to the actual fraud issue that includes due process for the homeowner. On this, dday has a good take:
The point is that it’s not the captured political figures who will eventually give urgency to the banks to find a resolution – it’s the judicial process. And while that may take a while, it’s a potentially much more favorable scenario for borrowers than some settlement which threatens to strip away their due process rights. Bair’s Superfund idea only works if it is commensurate with the level of title problems, and only if it’s completely separate from punishment for fraud already committed in state courts.
The "superfund" for toxic foreclosures could be a quick and necessary fix for stabilizing the housing market now, but what we really need is binding legal precedent to crack down on the fraud. It's basically the only way to keep the banks honest in the future.