The object of this diary is twofold:  a) to show that Dylan Ratigan at MSNBC does in fact cover the issues of the banking and fraudclosure travesty; and b) to simplify some of this for financial neophytes like myself.  It’s increasingly important that more of us learn what’s going on, and what’s at stake as these issues are either papered over or systemically made right for people, not for banks.  I’m sure that the things I have gotten wrong here, you will let me hear about.  ;o)

A bill to legalize electronic ‘robo-signings’ that legitimized electronic notarizations of fuzzy or fraudulent documents attempting to prove clear title to mortgages prior to foreclosure proceedings was recently passed unanimously in both houses of Congress.  When consumer groups and Elizabeth Warren discovered the implications of the law, they lobbied the President hard, and he refused to sign the bill. 

A company known as MERS had been created by the big banks dealing in mortgage-backed securities (MBS’s) to keep an electronic database of the chopped-up mortgages that were bundled for sale, and in most cases found to be based on asset bubble prices that bore no relationship to reality.

When the housing bubble burst, these bundles were found to be close to worthless, but their losses were absorbed by the Federal Reserve to the tune of trillions of our tax dollars, which was advertised to us as a mere $700 billion delivered in two waves, the first wave occurring while Bush was still President, the second, once Obama was in office.  As we know, the Fed’s massive buying of toxic bundled mortgages allowed the Big Banks to appear more solvent; Wall Street was happy, so the stock market got happier, corporations posted huge profits…you know the other side: pensions lost value, millions lost jobs, people got behind on mortgage payments, lost their health insurance, etc. . . .

TARP oversight chairman Elizabeth Warren conducted investigations early on into the world of derivatives, and found that part of the beauty of them for the banks was that they were designed to be confusing and opaque; regulation would have been difficult, i.e., easy for regulators to gloss over.  Loads of subprime loans could be mixed with a few healthier notes, and the bundle could still get a AAA rating from the agencies. 

As foreclosures on homeowners increased, consumer groups studying the problem found that often times the entity initiating the foreclosure on a particular home essentially was often unable to produce the actual mortgage note.  Digging deeper, they found all sorts of irregularities, including that often the same mortgage may have been sold multiple times, so that multiple entities might be claiming foreclosure rights.  Homeowners sometimes found that they were making payments to the wrong banks all along, or if they had gone through the HAMP program to seek relief with a lowered payment schedule or principal reduction, even while making their new payment schedules, foreclosures were proceeding nonetheless.

At the same time, county clerks began complaining that properties weren’t being registered in their local offices (so-called ‘wet-ink recording’), bypassing recording fees that added up to some big bucks for their local budgets.  Some counties asked for investigations from their State Attorneys General.  The original complaints were mainly about MERS and the bypassing of fees, but when the AGs dug into the problem, they found much wider abuses had been at work.

Ted Kaufmann finally held hearings.  He is now the head of TARP, and he conducted hearings under the auspices of the Congressional Oversight Panel.  Here is the video report he issued at the conclusion of his investigation.  It’s worrisome at the lowest level of potential scams; at its upper reaches, it’s horrific, and could amount to trillions of dollars worth of either questionable or fraudulent mortgages.  Kaufmann urges Treasury and the bank regulators to run new stress tests on the banks to discover the amount of their exposure.  Given that all the Big Banks passed Geithner’s stress tests post-bailout, one might wonder about the strength of those tests.

Some economists have discussed the possibility that banks might be forced to buy back many of the mortgages, or ‘put-backs’; others claim that bills have been written and will be introduced soon in Congress that will essentially retroactively validate the MERS-generated affidavit-based mortgages, many of which seem to have had no original note transferred as the mortgages were conveyed down the line.  It is, as they say, a bloody mess.  The CNBC report I linked to above has this from ‘self-styled consumer advocate’ Neil Garfield.

Complicating things further, the millions of mortgages and deeds being possibly fraudulent or clouded will cause instability in the real estate markets, as well as undermine the entire fabric of Property Rights as the basis of Capitalism in the Republic.

Many have said that contract law in America is now dead, and that attorneys will be busy for decades sorting it all out.

For average Americans, home ownership has generally become a large piece of their security for old age; without it, millions might be forced to face post-retirement in fear, insecurity and poverty.  Many others may fear to purchase a house if the chain of ownership is clouded; I can’t think how ordinary title insurance might be affected.

Yves Smith at nakedcapitalism.com thinks ‘MERS Should Be Taken Out and Shot’, but doesn’t quite buy Garfield’s information on Congressional remedy.

Keep your eyes peeled for convenient fixes of the problem FOR THE BANKS.  There would be another case made that the banks simply can’t afford to take the massive hits that would be fair if there were any consideration of the term moral hazard, which, as we know, is now simply a quaint term from the days of yore.

That Kaptur’s bill to fund a thousand more investigators for the crisis failed is telling; I can’t find the vote as it hasn’t been posted yet at House.gov.  Her bill to prevent Fannie and Freddie from buying more MERS-involved mortgages will likely die the same death.

(cross-posted at dagblog.com)