Everything I am reading these days on financial issues points to some serious reckoning soon to come, especially because of -- as the folks at Third Way are calling it -- foreclosure-gate. The Massachusetts Supreme Court ruling in the Ibanez case, along with a growing body of cases where the banks and/or their servicers have been ruled against in foreclosure cases, and even the banks' lawyers are being castigated in court by judges for bringing in made-up paperwork, is causing a growing sense of panic among the biggest banks that hold the most mortgages. Spokespeople for the banks are talking bravely, trying to dismiss the situation as some minor paperwork errors, but everyone who has been paying attention to the situation fears that there are really big consequences afoot.
The plain fact is that over the last decade, in their overwhelming rush to make bigger and bigger profits from trading in the bubble-driven real estate securities market, the banks ran roughshod over the home mortgage and title system that had served this country (and England and many others) quite well for hundreds of years -- and they made a serious mess of it. Because of the way these mortgages have been sliced and diced and sold into complicated securities, homeowners, judges, and the banks themselves are having quite a bit of trouble figuring out who actually owns the note in more cases than is easy to believe. The "paperwork" -- figuring out who owns the note - is not just a little messed up, it is a disaster area.
This wouldn't be as big a deal except that the combination of the housing bubble itself plus the worst recession since the Great Depression (caused in great part by that bubble) has created a foreclosure crisis of gargantuan proportions. Millions of homeowners are in foreclosure proceedings, millions more underwater because of the collapse of housing prices. And because the banks have cooked their books, not wanting all these toxic assets to wreak havoc with their official valuation and their stock prices, they have no interest in helping homeowners stay in their homes by writing down these mortgages to current market levels. So banks are moving to foreclose these millions of homes, but they can't prove to judges that they even own the notes that would allow them to foreclose. Thus you have robo-signers, falsified affidavits, and all kinds of strange things being presented to judges in courts. The judges who are not bought and paid for by the banks are raising big red flags about all this, and thus you have cases like Ibanez going against the banks.
This is a mess not just for the housing market but for the entire economy, as the numbers on all this are staggering, and the housing market really does have the potential to just completely freeze up, which would be an economic nightmare. Our economy has no chance of getting dramatically better until the housing market starts moving again. So the banks are now going to their political allies, just like they did in 2008, and telling them: unless you save us from the mess that we've created (oh, wait, they don't use those last four words, instead it's the unforeseeable "perfect storm", "black swan" thing), we will go under and take the entire economy down with us. The good news for the banks is they are not necessarily looking for a cash handout this time - although it may come to that - but just some legal "tweaking" of this "minor paperwork problem."
If you have the stomach for it and want to learn more about the gory details about the policy side of all this, there are a bunch of good writers you can turn to, including Yves Smith, David Dayen, and Marcy Wheeler, all of whom have put up great pieces worth looking at in the last couple of days. Numerian has a great post I have already linked to a couple times in past pieces this week on the truly scary implications of what is going down.
But my focus, as usual, is on the politics of all this, because the drumbeat is beginning in a big way to bail out the bankers from their own mess once again. Third Way's piece, which Yves, David, and Marcy do a good job deconstructing, is the opening shot in what will be a very focused legislative push to once again bail out the bankers from their own mess. The banks and their allies will try to do this as quickly and quietly as they can, portraying it as a simple legal fix for minor paperwork problems. However, the consequences of this kind of legal bailout are actually far greater in some ways than the TARP bailout, as costly as that was. The TARP bailout was just dollars though. This one, as Yves writes, undermines fundamental property law that our entire economic system is based on:
This proposal guts state control of their own real estate law when the Supreme Court has repeatedly found that "dirt law" is not a Federal matter. It strips homeowners of their right to their day in court to preserve their contractual rights, namely, that only the proven mortgagee, and not a gangster, or in this case, bankster, can take possession of their home.
This sort of protection is fundamental to the operation of capitalism, so it's astonishing to see neoliberals so willing to throw it under the bus to preserve the balance sheets of the TBTF banks. Readers may recall how we came to have this sort of legal protection in the first place. England learned the hard way in the 17th century what happens with low documentation requirements: abuse of court procedures, perjury and corruption become the norm. Parliament enacted the 1677 Statute of Frauds to establish higher standards for contracts, such as witnessing by a third party, to stop the widespread theft of property that was underway.The memo completely ignores the harm to investors from the bank mistakes and lacks any provisions for damage to investors to be remedied. Moreover, denying borrower rights removes their leverage to obtain deep principal mortgage modifications, which for viable borrowers produces lower losses than costly foreclosures and sales of distressed property. Thus this shredding of contractual protections in mortgages not only hurts borrowers but also harms investors.
So to save the banks from their own, colossal abuses of contracts that they devised, the Third Way document advocates Congressional intervention into well established, well functioning state law. This is a case where these matters can and should be left to the courts and ultimately state AGs to coordinate the template of a more broadbased solution.
To once again bail out the bankers, this time by changing real estate law in a way that hasn't been done since the 1670s, would be a far bigger deal than even the trillions in bailout dollars the TARP and Fed gave these banks in 2008/9. But the bankers and their allies like Third Way will try to present this as a simple fix to some minor paperwork problems. Look, if these paperwork problems were so minor, we wouldn't need the fix they are proposing: the banks would get nicked a little in a few cases where they screwed up a little bit of paperwork, and everyone would go on their way. But they have made a Texas-sized mess of the entire mortgage title system in their haste to make money, and it is time to pay the piper.
What's the solution? We should start with a foreclosure freeze while the government sorts through the mess and the state attorney generals finish their negotiations with the big banks. Clearly, a massive amount of mortgage write-downs to underwater homeowners to reflect current housing prices makes a ton of sense, and would dramatically cut the need for foreclosures, taking some of the pressure off the system. Once those two steps are taken, hopefully the AGs can cut a good deal for the American people to make things work better going forward.
The problem with sensible pro-middle class solutions like this is the incredible political power of these big banks. Here's the deal, though: politicians hate the idea of having to bail these guys out again. If progressives can make clear that any legal changes the bankers are trying to push through on mortgage and title law are just one more big bailout of the big banks, we can win this fight. Let's hope we do, because the stakes are pretty damn high.
Cross-posted at my home blog, OpenLeft.com
BR: Its gotta come form the top — time to stop coddling criminals whether they be muggers, bankers or laeyers.
Greg0658 Says:
January 11th, 2011 at 10:40 am
like the double-pyramid diamond of cash flow – it is also a representation of IQs
SCTTD Says:
January 11th, 2011 at 10:52 am
Failure to impose the law blindly to all parties equally will cause the total loss of faith in the system that we are spending trillions to “save”.
obsvr-1 Says:
January 11th, 2011 at 11:35 am
just a minor phonetic modification: change lawyer to liar and voila! all is well … I jest of course, when a lawyer commits perjury the punishment should be harsher then when a common citizen does as the lawyers are bound by their profession to up hold the law (or are they ?).
When the gatekeepers fail us, we are doomed to exist in the cesspool of the plutocracy, hopefully the disinfectant power from the light of disclosure and truth will cleanse the system.
About That Perjury, Judge . . . « Dylan Ratigan Says:
January 11th, 2011 at 12:34 pm
[...] PERMALINK [...]
MakingtheDrop Says:
January 11th, 2011 at 12:56 pm
Can’t play musical chairs when the dj is bought and paid for (or dead). The music just keeps playing…
Hang the blessed dj… http://www.youtube.com/watch?v=9AlH2oYedfk
EvilEsq Says:
January 11th, 2011 at 1:17 pm
Good article. Thanks for saying what the New York Times is afraid to.
Members of the US’s judicial system (attorneys and judges) have become our de facto aristocracy. The legal industry is the only self-regulated industry remaining in the US.
How many attorneys were prosecuted after the Enron scandal? Exactly ZERO yet attorneys were deeply involved in the Enron’s governance as well as structuring and documenting all of the transactions the firm entered into.
It’s not just judges that turn a blind eye to attorney misconduct, bar associations receive over 120,000 complaints regarding attorney misconduct annually. Fewer than 4.3% of attorneys who are complained about are disciplined. Most of the complaints that are prosecuted are for crimes that took place unrelated to the attorney’s legal practice or for an attorney’s misappropriation (read theft) of funds. Fewer than 1% of complaints by consumers of legal services are ever prosecuted.
Why? Lawyers and law firms are the largest source of funding for state and national political campaigns. In aggregate they give more to politicians than all corporations combined with the vast majority of the funding going to Democrats. Politicians are therefore loath to attempt to regulate the judicial system or the legal industry.
America’s judicial system is supposed to be our last line to defend our rights, property and liberties. It should be sacrosanct but has been totally corrupted to the advantage of judges, attorneys and their politician brethren… most of whom are attorneys.
dsawy Says:
January 11th, 2011 at 3:34 pm
I would think that in cases where a) the foreclosure is a judicial proceeding and b) where lawyers have submitted false affidavits, that they’re guilty of fraud upon the court, not merely perjury. Officers of the court are held to higher standards than non-officers, ie, they are responsible for the ability of the court to deliver justice. Where officers of the court commit fraud, the litigants are denied a fair hearing and due process of the law.
As I understand it, if fraud upon the court is proven, then any decision handed down as a result of that fraud can be vacated.
Mike in Nola Says:
January 11th, 2011 at 3:49 pm
I don’t know how it is in other states, even in TX, but I know in LA judges have a duty to report to the disciplinary committee lawyers who violate ethical or professional standards. Nothing like a letter from the Disciplinary Counsel to ruin your day.
FrancoisT Says:
January 11th, 2011 at 4:03 pm
I shall beat the drum on this as many times as needed: Our legal system has been perverted from providing a REASONABLE shake at equal justice to a machine honed to protect the interests of the powerful while shielding them from accountability and repressing very harshly, the “little people” that is, most of us who are not very well connected politically or by virtue of significant wealth.
Read “The New Jim Crow” and “With Liberty And Justice For Some” (to be published in March 2011)
So, seeing judges slapping lawyers on the wrist for offenses that would send us to the brig for a long time cannot possibly be surprising…and that is the real tragedy.
ELS Says:
January 12th, 2011 at 10:56 am
I guess. Remember, though, that any criminal charges require the DA to prove intent. So, you snag all the folks making slave wages (“Did you know that you were signing things w/o reading them?” “Yes.”) You might snag their managers who probably don’t make much more money (“Did you know your people were signing so many declarations that there was no way they could actually be reading the underlying files?” “Yes.”). Will you be able to convict anyone above that? Probably not. Everyone that was not in a position to literally see how things were set up has plausible deniability. As for the lawyers, it will also be very hard to obtain a conviction unless they actually saw the person signing off w/o looking at the file. When you need the dec, you send a letter or e-mail to the client along the lines of “I’ve drafted your declaration. Please review this closely. If it is not accurate, please call me or mark up the draft and send it back so I can correct it. If it is correct, please sign it and return it.” If the client signs w/o changing, where is the provable intent on the part of the lawyer?
Part of the reason many highly suspected cases of perjury don’t get convicted in all kinds of civil cases is because they are not easy to prove and obtain convictions on. The other part of the reason is simple resource allocation. Every perjury conviction is a purse snatcher that may not get prosecuted instead. It is your basic guns vs. butter question.
There are, however, things the Courts could do to prevent this in the first place: strictly apply the rules of evidence. Some lackey at the bank doesn’t have personal knowledge, but in his / her declaration says they read the file and the files says “XYZ.” If those notes from the file aren’t attached, that declaration is double hearsay – it’s inadmissible. In all honesty, many lawyers are lazy or don’t quite understand the rules and the Courts would come to a standstill if the rules of evidence were super-strictly applied outside of trial. There is a certain credibility component when one chooses to be lenient about the rules in order to get the cases moving. In my observation, the banks have lost that credibility and the judges I see have started applying the rules of evidence much more strictly when they are before the Courts.
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