Friday, January 7, 2011

The Law

Here at Financial Jenga we have hoped, even prayed for the law to be enforced for the last couple of years. Yet the fraud has raged unchecked and if anything grown worse. Banks have mass filed false affidavits to fraudulently seize houses through the foreclosure process and then said "oopps, we made a technical paperwork error" when caught. At first they got away with it. They HAVE seized houses through this procedure when there was no mortgage and no lien at all.

The Fed has gone and done things far beyond the scope of authority given to it by Congress - like using our money to prop up the investment banks and the stock fraud they are running. They are given the power to buy exactly two thing - bonds carrying the full guarantee of the US government and short-term loans for planting of crops. Buying junk bonds containing mortgages violates both the letter and the spirit of their charter. Buying stocks is so far beyond their legal powers that someone should be in prison and probably a lot of someones.

No one has shown much sign of really stopping the Fed yet but the Massachusetts Supreme Judicial Court landed a major blow for the law today by confirming a lower court ruling that nullified two foreclosures because they plaintiffs couldn't show they owned the property. In both cases, "robosigned" affidavits were introduced as proof of ownership and later shown to be without merit.

The state Supreme Judicial Court today upheld a judge’s decision saying two foreclosures were invalid because the banks didn’t prove they owned the mortgages, which he said were improperly transferred into two mortgage-backed trusts. As reported by

“We agree with the judge that the plaintiffs, who were not the original mortgagees, failed to make the required showing that they were the holders of the mortgages at the time of foreclosure,” Justice Ralph D. Gants wrote.

While there have been many similar rulings across the country, this is the first such decision by a state supreme court. And since property law is still properly the jurisdiction of the states, this decision is final as far as Massachusetts is concerned. Hopefully they will follow up with prosecutions for the mass of fraud represented by those false affidavits.

And this entire financial crisis is bound up with a struggle to centralize political power in Washington. One of the key enablers of the late-bubble madness was the effective nullification of state lending regulations. This was done in 2004 when the Office of Comptroller of the Currency used
federal preemption to overrule state laws against predatory lending. It was one of the worst moments of the Bush Administration:

The Office of the Comptroller of the Currency Feb. 21 published for comment a ruling that Georgia's predatory lending law, the Georgia Fair Lending Act (GFLA), is preempted for national banks.

At the same time, it issued two advisory letters to national banks to clarify its expectations for banks to avoid involvement with "predatory" lending practices.

So basically, the OCC's action wiped out state legal protections against predatory lending. And they substituted a finger wagging "don't do it" with a nudge and a wink to just go ahead. And of course the very worst mortgage paper was written over the next three years after the change. We have documented the results of those no-doc, alt-A and option ARM loans here from the very beginning. But those abusive mortgages would not have been possible without Washington stepping in to remove the legal shield that states provided their citizens.


barnaby33 said...

So far as I understand the judge ruled that the foreclosures weren't legal because the banks couldn't prove a clear chain of title. The judge in no way ruled that the banks couldn't remedy the situation; just that they had to go back and re-construct the chain of title. I could be wrong but it sounds like a cost/legal headache, not a game changer.

sandy said...

how does this technical delay not reward the people who lied on their housing applications and now get to live rent free in houses in legal dispute? a lot of those people lied on their applications and are now living rent free, while the rest of the society has to bear the burden of a housing market "on hold".

the longer the foreclosure process is delayed the longer it will take for the housing market to get back on track. the banks need to take the houses back now and liquidate them-even if it is at a loss.

as it stands now, the houses are not maintained by anyone, often being stripped by the angry "tenants", and destroying property values in neighborhoods for the people who have behaved responsibly.

am i missing something?

barnaby33 said...

@Sandy it does reward them kind of. Of course that is a by-product of the rescue of the banks and suspension of mark to market accounting.

However thats not really the important issue (at least not systemically.) The issue the OP posted on was really about the banks ability to foreclose which if completely invalidated IS a game changer.

The banks mostly sold the loans to other parties, mostly into a serviced pool from which investors were paid. If the banks truly cannot foreclose then neither can the investors who are now holding unsecured debt. Boy that will make collecting on the debt that much harder.

The Fed doesn't give a rats ass about the people who get to live rent free. This is about protecting large banks, period. I have a sneaking suspicion its also about protecting a few Russian oligarchs and Saudi princes who are major investors, but thats just a theory.

dataSlave said...

Hi sandy
And thanks for your comments. In response, this DOES reward the debtor to some extent but not as a debtor. It rewards them as a party to a contract with the bank when the bank cannot prove ownership.

The reason this is important is that we don't want banks (or anyone else) foreclosing on property they don't own. We certainly don't want to see foreclosure based on mass fraud in the legal filings.

This is as much about property rights, clear title and the integrity of the legal system as it is about banks.