The foreclosure crisis is well known to Americans, and particularly to
Floridians. Mortgage fraud in writing home loans has been widely publicized,
and many people know about the shameful underwriting practices (or really,
nonexistent underwriting practices) of the big lenders.
The back end of the story – how foreclosures worked their way through
the court system – has received less attention in the press. However,
the frauds involved in that process were arguably even worse. A new book,
Chain of Title, by reporter David Dayen, may finally make people realize that.
The fraud Dayen describes arises from a simple idea: to foreclose on a
mortgage, a lender must actually hold that mortgage. Otherwise, the right
to receive payments belongs to someone else, and the lender has no right
to complain when a homeowner falls behind.
This basic truth got lost in the foreclosure crisis. Shortly before the
crash, mortgages were bought and sold in bundles at blinding speed. Buyers
and sellers simply ignored the law that requires purchases of mortgages
to be recorded in the public records. It was faster to trade them like
playing cards without ever recording the transactions. Even better, it
meant they could stiff clerks of court out of “doc stamp” fees.
This became a huge problem once foreclosures started happening. It became
impossible to follow the buying and selling to figure out which institution
really held the mortgage. However, that didn’t stop the banks –
they just started coming up with phony authentication documents to “prove”
ownership of the mortgages involved. The problem was that these bogus
documents were rushed out so fast that they were riddled with mistakes:
dates such as 9/9/9999, corporate officers being identified as working
for many different companies at the same time, and so on.
Surprisingly, regulators and judges were not the first ones to get to the
bottom of this massive robosigning machine. Instead, three ordinary people
outside of law enforcement – a nurse, an auto dealership employee,
and a lawyer who investigated fraud – began educating the public
about the epidemic of fraud in foreclosure cases. They worked harder,
and developed more sources of information, than the regulators who had
a legal duty to make sure the lenders were behaving.
Before it happened, it would have been inconceivable that three humble
people could help expose a huge and systemic bank fraud. But they did,
proving that consumers armed with information can still make a difference
in David & Goliath struggles with huge financial institutions.
Unfortunately, the overall story still had an unhappy ending. The problem
was not that the fraud was so small, but that it was so big. Again, there
were so many legally dubious transactions that lenders could never really
prove ownership the right way. That meant a real crackdown could have
brought down the entire nationwide foreclosure machine.
Faced with the enormous scale of the problem, regulators and law enforcement
just looked the other way. Judges concerned with clearing dockets rubber-stamped
foreclosures at rates of hundreds per day. People who didn’t have
the time or resources to fight fraudulent foreclosures still ended up
losing their homes. And perhaps worst of all, not one high-ranking Wall
Street executive went to jail.
Let’s hope judges heed the lesson of
Chain of Title
when new foreclosures appear on their dockets. This time around, our court
system should require real proof and due process before lenders are permitted
to boot people out of their homes. Otherwise, we could all get fooled again.