We Need Pitchforks and Torches

• Loan volume accelerated, overloading key parts of the system.  Appraisals were often corrupted, as loan originators routed business to compliant appraisers.
• Massive securitization of mortgages ignored these constraints, and erected a pseudosystem on top of it that cheaply processed the high volume of both mortgage origination and securitization (e.g., the Mortgage Electronic Registration System – a faux version of security clearing corporations; see this explanation).  Securitization also broke the link between the originator and end owner, with many ill consequences.  Among other things, this put great pressures on the servicing firms to lower costs.
• During the RE boom years recoveries on foreclosed mortgages were zero or positive, which meant a low rate of foreclosures (homes could be sold by the owner rather than default on the mortgage).  So the institutional apparatus for foreclosures atrophied.

The the default bust hit.  Massive flow, overwhelming the system – which was never configured for such an event.  Remember, experts believed home prices never decline for more than a calendar year.  The worst scenario considered by the most experts was flat prices for 3 years.

The servicers (sometimes the bank originating the mortgage, often not) reacted by cutting corners (seethis Reuters story).  Finding the original loan documents was too expensive, so they used lost document procedures designed for extraordinary circumstances (e.g., fire, flood, or misfiling – see this at Calculated Risk and here at Reuters).  Some servicers hired law firms set up as foreclosure mills (e.g., FL), processing incredible numbers of foreclosures.  It’s not clear how, but clearly proper procedures were not followed.

As a result there have been many claims that foreclosure notices were never served (an easy way to make serving a high-margin profit center).  Employees have admitted under oath in depositions to fraudulently signing thousands of notarized affidavits.

This took place in the 23 states with judicial foreclosures only with the cooperation of Judges.  A few Judges protested when shown that their banks and their agents were committing perjury.  But the process ran smoothly for the past few years.  Now the wheels are coming off.  This might be difficult for the financial sector to conceal or mitigate, despite their de facto control over the government’s regulatory machinery.

A situation report about two headine issues – and a more serious problem

….Despite the oft-hysterical analysis, there is as yet insufficient public information about the scale of the problem.  Quite likely even key players (e.g., banks, their law firms, government regulators) lack the necessary information.  Deliberately, as all prefered to “see no evil.”  But now that the problem has erupted into the daylight, this leaves them ill-prepared to respond.  Especially as any adequate response will reveal their incompetence and malfeasance in creating the situation.  (Here are Wells Fargo’s procedures regarding creditors’ complaints; nothing available for their procedures to debtors’ complains).

Page 2 of 3 | Previous page | Next page