Category: Housing

Striking a vital blow against accountability, Attorney General Peter Kilmartin endorsed the “50-state” settlement on foreclosure fraud yesterday, led by the Iowa Attorney General, Tom Miller. The settlement essentially allows banks to skip away from the crimes they committed in the course of foreclosing on a few million people’s houses.

To recap: this settlement has been over a year in the making, and is intended to clean things up in the real estate market, absolving banks of responsibility for their misdeeds in exchange for money that will go to principal reduction, and also doing some short sales and refinancing and payoffs to unjustly foreclosed borrowers.  These are good things, but there is a problem.

Nationally, we’re talking about $25 billion, which sounds like a lot, but last year JP Morgan’s bonus pool was around $10 billion. HUD Secretary Shaun Donovan says there is about $700 billion in negative equity in the country. Realistically, the program might help a million people, but there are 10.7 million mortgages underwater, and millions of people already foreclosed upon, also according to HUD.

Not only is the money not commensurate with the damage they caused, but it’s not going to be much help cleaning up, either. Kilmartin estimated Rhode Island would see “millions” from the settlement. The registrar of Essex County, Massachusetts, hardly the epicenter of the foreclosure epidemic, estimated last year that only 16% of the mortgages in his registry were valid, and of the rest, 27% were fraudulent. Over the past decade, the RI real estate market has been around $5 billion per year. Roughly similar numbers for the state of Rhode Island would have around a billion dollars in fraudulent mortgages per year, or around $8-10 billion total, give or take.  It will take a lot more than a few million to clear all those titles and restore the damage done.

Why is the settlement so low?  Maybe it’s because there hasn’t, until recently, been even a credible threat of prosecution for the crimes committed.  Just to review, we’re talking about actual crimes — fraud, forgery, perjury — acts for which you or I would spend time in jail.

What’s also astonishing here is where this $25 billion will come from. It turns out that almost all of it will come from the owners of the securitized mortgages, the pension funds and other investors who bought these terrible bonds from the banks.  Those owners will be dinged some of their interest payments, making their bonds even less valuable then they already are.  It appears that most of the money will not come from the banks that caused the problem and profited so much from it. So much for even the simulacrum of accountability.

For everyone who thinks, “Oh, well, the banks were just foreclosing on people who didn’t pay their mortgage, anyway,” there is a big problem ahead. The bank’s self-invented mortgage registry (MERS) was not maintained, and was probably inadequate to the job it was assigned: keeping track of ownership. (Not to mention that it was probably an illegal enterprise in the first place, but put that aside for a moment.)  This means that pretty much any property whose mortgage passed through MERS won’t be able to get a clear title. In turn this means a lot of claims on the title insurance companies, some of whom are likely to go under because of the mounting pile of claims. It also means time spent in court by people who can’t get a clear title to the property they own and money spent on lawyers to argue about them. Years from now, when you find yourself shelling out a few thousand dollars to clear the title to your house, you can comfort yourself in knowing that not only did none of the people who caused that problem have to pay any price at all, but most of them got rich doing it.  What a country!