Black is Back: When all Else Fails, Find the Foreclosure Facts

19 Oct

As anyone who has been reading us any length of time knows, we are big fans of Bill Black. (well you notice, don’t you that his video series is STILL the centerpiece of our homepage, right? There IS a reason for that!)

He’s been bringing us the real story and the underlying facts to that story for years now and we’ve posted a LOT of his materials here – and we sure HOPE at some point someone at the DOJ is going to call him up and ask him to come on down and lend a hand as they have a LOT of clean up to do…  This piece was published at the German site

This is very in-depth and we’ve only put up the first section, the link at the bottom of the segment will take you to the rest of the article, which, of course, we really think you should do!

Dienstag, 19. Oktober 2010 10:23

von Bill Black

Former banking regulator William K. Black reminds us that the financial crisis and the Great Recession in the U.S. began with the “f” word and continues with the “f” word: FRAUD. The newest up-date of the “f“ word saga is “Foreclosure Gate.“

The following article appeared first on Benzinga, a financial website in the U.S.A., where Bill Black publishes a column covering regulation. Black is the author of The Best Way to Rob a Bank Is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. His academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network Page and at New Economic Perspectives. With the personal permission given by Bill Black we publish this analysis.

Sheila Bair, who has chaired the Federal Deposit Insurance Corporation (FDIC) since her appointment by President Bush on June 26, 2006, has been the only top federal banking regulator willing to upset the industry she regulates. Reuters reports on her less than vigorous reaction to the disclosure of endemic foreclosure fraud.

“We have been told that this is a process issue – that all of the information is in the file, the problem is the person who needed to sign the affidavit had not been looking at the file before they’d done so. So we need to independently verify that,” Bair said.

“Foreclosure is a very serious thing and it should only being undertaken after loan modification efforts are not feasible. And that the files are fully documented.”

In addition, Bair urged banks to do “rigorous internal analysis” about the range of possible risk exposures.

“We need to get a full handle on all of these issues,” she said. “If it turns out this is just a process issue then I don’t anticipate the exposures to be significant.

“If it turns out to be something more fundamental then we’ll have to deal with that. But I think we need to get all the information before we jump to any conclusions.”…

It does not appear that Ms. Bair, or any senior official in the Obama administration, has focused on the fact that it has been standard operating procedure, for several years, for lenders, CDO holders, and courts to “jump to any conclusion” necessary to foreclose on homes regardless of whether the loan was fraudulently induced by the lender and regardless of whether the entity foreclosing on the mortgage engaged in foreclosure fraud.

She also frames the problem euphemistically as limited to – “process” – instead of the known facts, which constitute fraud by the entities that are foreclosing. “We have been told this is a process issue.” Ms. Bair’s statement can only be truthful if the FDIC has only been talking to liars. Ms. Bair cannot have been talking to those representing the debtors. The banking regulators have failed to shake off the corrosive effects of the “reinventing government” movement, which instructed them to refer to the banks and S&Ls as their “customers.”

But the even more important question is what she has been doing as a regulator for over four years. Admittedly, her predecessors emasculated the FDIC and she had to start form a deep hole. The FDIC lost over three-quarters of its staff (using “early outs” that often robbed it of its most productive employees). Worse, it tried to compensate for its grossly inadequate staff resources by adopting “lite” examinations in 2002. The FDIC called this travesty “MERIT” (Maximum Efficiency, Risk-Focused, Institution Targeted Examinations). In a MERIT examination the examiners went to greatly reduced review if the bank reported that it did not have large numbers of bad loans. The result was that the FDIC’s examiners heard no evil from the banks and saw far too little of the evil that came to dominate banks’ nonprime residential loans and commercial real estate (CRE) loans. (Bair inherited MERIT. She finally killed it in early 2008.) As late as she was in killing MERIT, the community bankers were worse. Their trade association continued to push for the MERIT program after anyone sentient could tell it had proven disastrous.

Recall that we know empirically that the nonprime crisis was driven by millions of fraudulent and predatory home loans – making them the FDIC’s highest priority – and Ms. Bair has had years to “get all the information” about such loans and prevent the frauds and predation. Throughout the developing nonprime mortgage crisis, the FDIC failed catastrophically to deal with this top priority (and as I explained in an earlier column, its secondary priority – commercial real estate). The banking regulatory agencies and the Federal Housing Finance Agency (FHFA) (which is supposed to regulate Fannie, Freddie, and the Federal Home Loan Banks) have no excuse for not having “the information” about the state of nonprime residential loans. If, in late 2010, they do not have even the most basic information about the incidence of nonprime mortgage fraud by lenders and the state of underwriting and record keeping of key documents of such loans then the case for removing the head of each agency and changing the top agency supervisors is conclusive.

Here is the principle that President Obama promised Congress would govern our response to the financial crisis. He promised first that we would find the causes of the crisis and address them:

“[I]t is only by understanding how we arrived at this moment that we’ll be able to lift ourselves out of this predicament.”

We would address the problems promptly:

“Regulations — regulations were gutted for the sake of a quick profit at the expense of a healthy market. People bought homes they knew they couldn’t afford from banks and lenders who pushed those bad loans anyway. And all the while, critical debates and difficult decisions were put off for some other time on some other day.

Well, that day of reckoning has arrived, and the time to take charge of our future is here.”

Unfortunately, after this clarity the President’s logic and policies started to become incoherent.

“But credit has stopped flowing the way it should. Too many bad loans from the housing crisis have made their way onto the books of too many banks. And with so much debt and so little confidence, these banks are now fearful of lending out any more money to households, to businesses, or even to each other.”

Yes, large numbers of banks are insolvent because they hold so much fraudulent nonprime mortgage paper and CRE. The problem with “these banks” is bad assets, not that the insolvent banks lack “confidence” in the economy.

This incoherence promptly infected his discussion of foreclosure:

“[W]e have launched a housing plan that will help responsible families facing the threat of foreclosure lower their monthly payments and refinance their mortgages.

It’s a plan that won’t help speculators or that neighbor down the street who bought a house he could never hope to afford.”

The problem is that the “neighbor down the street” is the problem. Liar’s loans became the norm (Credit Suisse reported that they represented 49% of mortgage originations in 2006). Liar’s loans were typically fraudulent. A borrower typically used the proceeds of a liar’s loans to buy “a house he could never hope to afford.” The lenders and their agents typically made or directed the false statements about income and occupation. (The lenders and the loan brokers knew the term sheets and the ratios to hit.) While the lenders and the agents typically took the lead in providing the lies that made liar’s loans worthy of that name, this does not means that the borrowers were blameless. Many borrowers knew that the loan application contained false information and that they could not afford to purchase the home. We are talking about millions of homeowners, most with families.

Read the rest of the piece here


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