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Generational Dynamics Web Log for 22-Oct-2010
22-Oct-10 News -- Foreclosure mess turns into a major crisis

Web Log - October, 2010

22-Oct-10 News -- Foreclosure mess turns into a major crisis

Citibank appears to be lying about foreclosure process

Foreclosure mess appears to be turning into a major crisis

When I first heard about the foreclosure paperwork problem a few weeks ago, my first reaction was that this was relatively unimportant, that the paperwork would be straightened out within a month or two, and then the whole problem would disappear.

I swear to you, Dear Reader, that I was not drunk or stoned when I reached that ridiculous conclusion. I can only offer the excuse that I must have been infected by a temporary case of the same kind of giddy mental illness that we see exhibited on CNBC and Bloomberg TV every day.

Remember what happened when the "toxic asset" scandal started in 2007? It was never going to be a major scandal. When the first bad quarter came by, the pundits called it a "kitchen sink" quarter, implying that financial institutions were writing down all their toxic assets in one quarter. Then there were a couple of "kitchen sink" quarters. Then the subprime crisis would be "contained." When there was bad news it was good news, because the worst was always over. Then when the news got worse and the stock market fell, the pundits would say, "Why did the stock market fall? We've known about this for months." And then, gradually, it came out that the financial institutions had repeatedly lied to the public and defrauded investors, but that they still felt that they deserved million dollar bonuses.

The foreclosure mess appears to be the next wave. The same signs are there. On the one hand you have banks saying that there's no problem except a few isolated cases, and on the other hand you have news stories showing that banks have been lying to the public and defrauding investors. There are only a few news stories so far, but it's obvious that no one knows what's going on, and the number of problems is going to accelerate.

Citibank, for example, is claiming that they have no problem, that they've reviewed their procedures, and that they haven't used "robo-signers," according to ABC News.

A robo-signer is an employee that signs thousands of foreclosure documents, in a rush to foreclose on homes. What we're seeing here is the mirror image of the original housing bubble. At that time employees were approving thousands of mortgage loan approvals without checking any of the documents, though of course nobody called them "robo-signers" at that time. In 2006, these banks were approving so many mortgages that they needed robo-signers to process them all, while today they need robo-signers to process the equivalent mass of foreclosures.

But Citibank claims that they're not using robo-signers. How many times did Citibank lie about its exposure with toxic assets in 2007 and 2008? Not only did they lie to the public repeatedly, and defraud investors in doing so, they also were ENCOURAGED to lie by regulators and prosecutors.

For an example of this, see my 2008 report, "Bond insurer 'bailout' appears near crisis point." In that report, I described how New York Insurance Superintendent Eric Dinallo repeatedly colluded with banks, including Citibank, and bond insurance firms, to lie to the public and defraud investors.

And I want to emphasize that I'm no big investigative reporter who discovers this fraud by assiduously digging deep into thousands of courthouse records somewhere and discovering a trail of deception by connecting the dots. I discovered this by reading the WSJ, the NY Times online, and by listening to CNBC and Bloomberg TV.

And then I have to read articles in those same media sources wondering why investors don't trust the banks any more. The actors in these events, in New York and Washington, are liars and crooks, and are operating openly.

So now Citibank claims that they're not using robo-signers, even though it's almost mathematically impossible to process all their foreclosures without using robo-signers. Should we believe them? Should we assume that regulators are watching out for us? (Insert your favorite sarcastic epithet here.)

And yet, a 2008 legal challenge to a foreclosure identified an individual named Cheryl Samons, working for one of Citibank's outside law firms, according to a Bloomberg analysis by Jonathan Weil.

Under questioning, Samons testified that she spent two hours a day executing affidavits and other records. She said she spent "very little" time examining documents before signing them. Asked if she signed more than 100 a day, Samons said yes. She declined to provide her own estimate. "Itís definitely not more than a million," she told the lawyer deposing her.

Well, that's a relief. Now that I know that Samons robo-signed less than a million foreclosure documents in her two-hour workdays, I can breathe more easily.

Further testimony indicated that Citibank may have made up for paperwork deficiencies by fraudulently creating and backdating documents. Whether these allegations are true should be revealed as the court actions continue.

There's going to be a flood of stories like this in the next few months. An analysis by the Wall Street Journal (Access) shows that robo-signers were being used for foreclosures as early as 2006. It's clear that this practice was not only widespread, it was also the norm. And a large number of these foreclosures are going to be open to legal challenge.

As I understand it so far, here's what happened in the 2005-2008 time frame.

Million of mortgages were approved by banks, but the banks did not maintain them as individual mortgages. Instead, the mortgages were put into a pool run by MERS Inc. According to the company web site,

"Process loans, not paperwork!

MERS is an innovative process that simplifies the way mortgage ownership and servicing rights are originated, sold and tracked. Created by the real estate finance industry, MERS eliminates the need to prepare and record assignments when trading residential and commercial mortgage loans."

The pool then maintains ownership of the mortgage notes, and processes the associated flow of funds. When a homeowner makes a payment, it's to the pool. When Citibank receives its share of those funds, the payment is completely unrelated to the specific mortgages that Citibank approved.

The MERS pool contained 62 million mortgages by 2008. It was funded by investors who purchased structured securities based on the expected returns from those 62 million mortgages.

You can see the "moral hazard" in this system. When a bank approves a mortgage, why worry if the homeowner is going to default? That individual default will be buried in the 62 million other mortgages in the pool.

This shows what a mess the foreclosure problem has become. Since there was little or no motivation to process the original mortgage loans properly, it's possible that millions or even tens of millions of mortgages are faulty. And if the allegations are true that Citibank fraudulently created and backdated documents in the Cheryl Samons case mentioned above, then it's possible that there have been millions of cases where documents were fraudulently created and backdated.

Some people are saying that this is a good thing, because it means that people will be able to stay in their homes.

In some cases, as I understand it, if the paperwork wasn't properly processed, then the entire mortgage debt is invalid, and the homeowner can stop making mortgage payments, with no legal consequences whatsoever. (Check with your lawyer if you're considering this.)

The problem is that the entire real estate industry depends on processing foreclosures. Some 25-30% of all real estate sales today are of foreclosed properties. Without the foreclosure business, the real estate industry would suffer another enormous shock. What person is going to buy a foreclosed property now, if it's possible that they won't even have legal title to the home?

This will mean more toxic assets for banks. If millions of mortgage debts are now erased, then the investors who purchased the structured securities, basing on the expected returns from those debts, are going to lose that money. And many of those investors are banks, hedge funds, and other financial institutions.

So we can assume that the volume of "toxic assets" is going to increase substantially in the next few months. And this may well be the next major leg in the collapse of the real estate bubble.

From the point of view of Generational Dynamics, the global financial crisis has only begun. One event that hasn't occurred yet, and must occur, is a day that will be remembered in history as the collapse of the financial system, similar to the day October 28, 1929. Stocks today are still overpriced by over 150%, as described in "Updating the 'real value' of the stock market." Thus, as bad as it's been, far worse is to come. It's impossible to predict what will trigger this crisis, but the foreclosure mess is one possibility.

(Comments: For reader comments, questions and discussion, see the 22-Oct-10 News -- Foreclosure mess turns into a major crisis thread of the Generational Dynamics forum. Comments may be posted anonymously.) (22-Oct-2010) Permanent Link
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