Bleak fall of the $100 billion mortgage bubble
We’re entering the “Bleak House” period of the mortgage bubble. The action has shifted to the courts. Worse, it will drag on for years and cost hundreds of billions of dollars.
As with Dickens’ mid-19th century tale of the English legal system, lawyers become enriched and families and communities get shattered one court file at a time.
So, what will the courts discover in our mortgage mayhem? That thousands of documents were ill prepared and possibly fudged because Wall Street couldn’t wait to get their hands on them for securitization. It was all about the bond market, stupid. Mortgages literally became back-of-the-envelope ways to get rich.
How much will this cost investors, banks and middlemen? I’ve seen estimates of $100 billion, although it certainly will be more if it swiftly envelopes mortgage and title insurers like Ambac, Assured Guaranty, MBIA and others; banks like Bank of America, Citigroup, Wells Fargo, et al; and mortgage servicers and ratings agencies like S&P, Moody’s.
To see what’s going on, I visited the nation’s largest unified court system in Chicago’s Cook County. To say that the chancery court, where foreclosures are heard and decided, here is swamped, as it is in other cities, is like saying the Pacific Ocean has a few drops of water.
As two lawyers argued over a lawnmower and surge protector, an exasperated judge reminded them that he alone had 7,000 cases in his docket. Cook County may see its backlog of foreclosures grow to more than 50,000 this year. I can’t imagine what Miami, Phoenix or Las Vegas courts look like.
Frequently, those who are losing their homes in foreclosure come in without representation and get burned.
A woman who had lost her job as a psychologist’s administrator went before a Chicago judge without a lawyer to tell him she was attempting a short sale for less than the mortgaged value of the property. She was granted a continuance. The judge wished her “good luck.”
But what about those who don’t show up in court? Are the banks waiting for them and the unrepresented millions to slip through foreclosures that may not withstand full legal scrutiny?
There is some counseling from homeowners and paltry legal aid in Cook County — the judge hands the homeowners a piece of paper and a referral, but the lawyers don’t actually defend clients, who typically can’t afford counsel. The banks know this, of course, since countless homeowners don’t even show up and get ruled against in default judgments. Some homeowners were foreclosed upon even when they were on top of their payments.
Yet for homeowners who discover that a bank can’t prove ownership of a property through the proper documents and assignments, a judge may be able to throw out the foreclosure. Investors who didn’t get what they were promised also have a good case.
Now that the light is shining on these foreclosures, there’s a lot of legal scurrying going on. All of the nation’s largest banks have been vetting their foreclosure files and finding problems. Wells Fargo was the latest to say that it’s rechecking 55,000 foreclosures. It’s up to the state attorneys general to see if there’s any fraud involved.
By the end of 2010, nearly 3.5 million foreclosure notices will be sent out, reports SIGTARP, the inspector general for the Troubled Assets Relief Program in its latest quarterly report. That’s five times the 2006 rate and 26% more than last year. Bank repossessions continue to climb and are running about 100,000 a month, mostly due to rampant unemployment. Almost 3 million slipped into foreclosure in 2009.
Meanwhile, the government’s homeowner modification program (HAMP), is coming up short. Some 700,000 out of 1.4 million trial modifications have failed in keeping people in their homes; 173,000 remain in limbo.
Washington’s biggest folly is neglecting to make modification programs mandatory or neglecting to subject them to realistic affordability benchmarks. Congress should at least provide some “rent to own” options for homeowners or ways to resolve their mortgage debts in bankruptcy courts.
Ralph Nader recently observed that “underneath all of this fine print abtrusiveness and the backhanded evasion of state rules is the contractual tyranny that infects the entire financial services economy and beyond.”
Now that we are reading the fine print of securitization and faulty mortgage bundles, it’s become clear that our real estate crisis is perhaps beyond Dickens. Instead, think Poe’s “Fall of the House of Usher.”
John F. Wasik is also author of “The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream.”
Photo caption: Real estate signs are seen in the front yards of houses in this file photo taken in Maricopa, Arizona. REUTERS/Joshua Lott