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"Conspiracy of Ignorance" Demands Attention

In California, the nation’s largest real estate market, the robo-signing scandal has produced many calls to halt foreclosures, but little real change so far.

For several years, lawyers who represent borrowers in foreclosure have been complaining about massive and gnarly problems in the foreclosure process.

Because of the way Wall Street sliced and diced mortgages into derivatives and sold them off, the ownership of the mortgage had often not been properly documented, these lawyers said.

Such documentation is a basic legal requirement of foreclosures.

But they couldn’t get many judges to go along with them, especially in California, where, by state law, judges don’t typically oversee foreclosures. They only get involved if a borrower files suit to block a foreclosure, and even then, the courts are reluctant to do anything that would benefit borrowers who haven’t been paying their mortgages.

But disclosures over the past week in the robo-signing scandal may change that, after bank officials disclosed that they signed thousands of foreclosure documents without reading them first. Among the problems were documents that appeared to be forged or inaccurate assessments of how much borrowers owed on their mortgages.

In states with court-supervised foreclosures, the big banks voluntarily called a halt to foreclosures. But not in non-judicial foreclosure states like California.

The banks’ position so far is that the robo-signing doesn’t represent any substantial problems in the documentation, just that they were overwhelmed and understaffed and couldn’t keep up with the paperwork.

Walter Hackett disagrees. He’s a former bank executive who now represents borrowers in foreclosure at Inland Empire Legal Services. Hackett also runs an online bulletin board for lawyers fighting foreclosure. “Sloppy paperwork is too nice a way to describe it,” Hackett told me. “It’s a conspiracy of ignorance.”

He recalled dealing with Wells Fargo on behalf of one client. They were promising his client a loan modification; however, by the time Hackett untangled the paperwork, it turned out the mortgage was actually owned by another bank. “Before a bank can foreclose on a property, they have to prove that they own the note,” Hackett said.

Meanwhile, Attorney General Jerry Brown has issued cease and desist orders against some of the big banks that have acknowledged problems in their paperwork. But Brown’s concern is not actually the robo-signing, a spokesman said, but whether the banks are complying with a California state law that requires the banks to attempt to work out a loan modification before they foreclose on a borrower.

Brown spokesman Jim Finefrock said, “We’re talking to them [the banks]. We’re hoping for a resolution of the matter.”

He acknowledged that Brown was focused on compliance with the California law, not the larger issues of whether documents had been improperly filed in foreclosure cases.

The implications of the foreclosure fiasco are potentially huge, what Reuters business blogger Felix Salmon describes as “the mother of all legal messes.” If the problems with the paperwork prove substantial, they could undermine previous foreclosures and home sales, leading to a waves of litigation involving borrowers, homeowners banks and investors. The bad news for the economy is that the robo-signing scandal will only prolong the foreclosure crisis, keeping those facing foreclosure, and the entire housing market, from attaining some kind of stability.

While politicians and organizations have been calling for investigations and moratoriums on foreclosures, those are only a start. We need real leadership to forge long-term solutions, instead of the weak half-measures we’ve gotten so far. Maybe the robo-signing mess will offer the opportunity for the administration, the banks and the investors to try again to solve the foreclosure debacle and to get it right this time.

Fumbling the Foreclosure Crisis

Remember when former President Bush landed on an aircraft carrier less than 2 months after the Iraq invasion while a banner unfurled to declare, “Mission Accomplished?”

President Obama hasn’t surrounded himself with the dramatic props, but he reminds me of his predecessor when he brags about how he and his administration have reformed the recklessness and lack of accountability of a seriously out of whack financial system.

Unfortunately for all of us, the bombs going off in the middle of what’s supposed to be a budding economic recovery keep reminding us that the system is as broken as ever.

We still have a system where the big banks play by one set of rules (that favor them) while the rest of us have to live by another set of rules.

The latest proof are the big banks' foreclosure follies, now unfolding across the country after it was revealed that bank officials were improperly submitting key documents in foreclosure cases without actually reading them in what has been labeled “robo-signing.”

Among the widespread irregularities: bank officials who claim to have verified how much borrowers owe when in fact they hadn’t determined the amount, documents related to the foreclosures with signatures that appeared to be forgeries and documents that were improperly notarized.

Lawyers who challenge foreclosures say this is not just a technical problem.

Because of the way mortgages were sliced and diced in the securitization process, these lawyers have uncovered a variety of problems in the foreclosure paperwork – most importantly. the inability to determine who exactly owns the mortgage at issue in a particular foreclosure. Banks, overwhelmed by the flood of foreclosures, have made serious mistakes – including illegally foreclosing on homes. In Florida, for example, a man paid cash for his house, but then Bank of America foreclosed on it anyway.

In the wake of the latest disclosures, a number of big banks have now halted some, but not all, foreclosures while they sort the mess out. There’s no help for those in some of the worst-hit states in the foreclosure crisis, such as California, which is known as a non-judicial foreclosure state.

Basically that means that under state law, lenders can foreclose on your property without going to court. So if you want to challenge your foreclosure you have to sue. But the laws are tough and lawyers in California have had little success in getting judges to block foreclosures. Judges have been reluctant to challenge the way big banks do their business on behalf of distressed borrowers behind on their mortgage payments.

The foreclosure fiasco points out the failure of the Obama administration to come up with a robust remedy, in part because banks have resisted government interference that would force them to acknowledge how much value their real estate holdings have lost. The administration’s foreclosure program, which offers meager incentives for banks to reduce payments for borrowers who are about to lose their homes, has been a dismal failure. President Obama failed to fight for his own proposal to give bankruptcy judges the power to adjust mortgage payments, which could have encouraged judges to modify more mortgages on their own. That proposal was defeated last year in the Senate in the face of bank opposition.

So we’re left with the spectacle of the banks that made their own rules in the real estate bubble continuing to make their own rules in how to deal with the collapse, still largely unaccountable to government officials or courts.

Now would be a good time for the president to get the message: asking nicely has not worked. Pretending to solve the problem hasn’t worked. It’s time to make the big banks play by the same rules everybody else has to play by.

If the president chooses not to get the message he won’t have the Republicans to blame. He’ll have nobody to blame but himself.