The American subprime mortgage crisis contributed heavily to our economic crash. It most likely began with the repeal of the Glass-Steagall Act--which was signed by President Bill Clinton in 1999--combined with the excuse of a government directive to provide more minorities with government-backed mortgages. Banks that accepted regular customer deposits [commercial banks] were no longer legally separated from investment banks--banks that issue securities. This allowed investment banks to speculate with the money from deposits customers had made to the commercial banks. And, rather than seek out and lend to those minorities who were creditworthy, the banks smelled big profits elsewhere.
Banks began to falsify buyers’ income statements and bribe appraisers to dramatically overvalue homes for prospective buyers. This provided a lot of instant equity on paper, and allowed the banks to knowingly make many, many bad and fraudulent loans they otherwise would not have been able to make. The lending banks immediately took these bad loans and sold them to other banks. This eliminated the original banks’ “skin in the game”. Because the original banks immediately dumped their fraudulently-made bad loans off onto other banks, they stood very little risk of losing money on the deal. Because these bad loans were no longer all that risky for the original banks to make, they were encouraged to continue committing fraud to make terrible loans, even increasing the number of bad loans they made and sold. Fraudulent mortgages were made with the specific intent of selling them immediately afterward.
The banks who purchased these mortgages “bundled” them with other bad mortgages and placed the packages into tax-exempt real estate trusts called Real Estate Mortgage Investment Conduits [REMICs] creating a “pool” of bad mortgages. In order to maintain tax-exempt status, REMICs have specific requirements, which were intentionally violated by the banks, committing yet another type of widespread fraud. The REMICs were then divided into shares, creating investment products called mortgage-backed securities, or MBS.
Ratings agencies purport to be the watchdogs of the financial industry, rating the risk of financial products, assigning each a specific rating, and thereby protecting investors from unknowingly investing in bad products. Unfortunately, in this scheme the ratings agencies were complicit. They not only failed to sound the alert on these super-risky, fraudulent products, but via a AAA rating actually advised investors that the financial risk of these products was nearly zero.
The actions of the ratings agencies could, of course, be explained or excused away by admissions of incompetence, or simple failure to actually do the job investors trusted them to do. Evidence, however, says otherwise. As far back as 2006, Clayton Holdings found widespread failure of banks to meet underwriting standards. In other words, when Clayton Holdings analyzed these mortgages, they discovered that the mortgages being made shouldn’t have been made, and became alarmed. They passed this information to at least three major, reputable ratings agencies--Fitch’s, Moody’s and Standard and Poor’s--but the agencies rejected the evidence and allowed the AAA ratings to stand.
Investors relied on these ratings, and suddenly, everyone wanted MBS due to the low rated risk and high rate of return. These terrible, incredibly risky investments were purchased by large pension funds, the investment divisions of major corporations, financial investment firms, individual investors, major investment funds--virtually everyone--who were all under the impression that these investments carried almost zero risk, thanks to the willful incompetence of the ratings agencies. The demand for MBS grew, and banks conspired to meet the demand, often selling mortgages that didn’t even exist yet, necessitating the urgent need to find a prospective buyer to lend to. As a result, banks committed even more fraud to make even more bad loans to create even more MBS.Meanwhile, behind the scenes, banks were rapidly buying and selling--assigning--bad mortgages to and from each other. This created a significant expense, in the form of mortgage recording fees. In general, when the mortgage assignment changes, the new information must be recorded with the county, and a fee must be paid. This helps to ensure a clear chain of title for each home. Visualizing a method of eliminating expense and the necessity of completing documentation, the mortgage industry created the Mortgage Electronic Registration Systems Inc., or MERS. MERS purported to act as the “owner” of any mortgages held by its members. Any mortgages bought and sold from MERS members to MERS members were not recorded with the county. This allowed the banks to buy and sell even more frequently while avoid paying the required mortgage recording fees, but completely screwed up the chain of title, making it extremely difficult or impossible to discern who had owned a specific mortgage at any given time.
Initially, at least, this was bad for everyone, except the banks. Any homeowner with a mortgage assigned to a MERS member is very likely to have title issues; it has been estimated that ownership cannot be legally proven for most mortgages assigned to MERS members. Frighteningly, nearly 60% of all outstanding mortgages are assigned to a MERS member. This means that if your mortgage has been assigned to a MERS member, you may have big problems if you decide to sell your home.
To sell your home, a title company must provide title insurance, which guarantees the buyer that there are no problems with the title for the home. Before a title company will issue title insurance, they investigate the home’s chain of title. If there are any title problems, the title company will refuse to provide title insurance, and your sale will fall through.
MERS is also bad news for counties. Individual counties have each estimated their dollar loss in the hundreds of millions from non-payment of legally required mortgage recording fees due to the use of MERS. Collectively, the number of dollars lost would be even more staggering. Several civil lawsuits have been filed by counties, basically requesting the end of MERS and restitution for the lost fees; other counties are likely to follow suit.
The negative effect on counties means that MERS is also bad for taxpayers, as they again are the ones from which the money must come to make up the budget shortfalls created as a result of the blatant illegal actions of the banks.
Banks enjoyed the financial gains of yet another fraudulent scheme, at least until the foreclosures started. In order to legally foreclose on a home, the bank needs to document that the mortgage is legally assigned to them, and evidence that shows how that came to be, if they are not the original lender. The problem is that MERS members simply cannot do that, because no documentation was generated whenever the mortgage changed hands, and the new mortgage assignments were never recorded with the county.
Enter the robo-signing and fabricated documentation schemes. When the banks lacked the real documentation needed to foreclose, they simply bought some; Docx was a division of LPS, a mortgage software company, that provided banks with fabricated documentation, which would later be signed via robo-signer. MERS has no employees, but allows its members to pay people to fraudulently sign thousands of foreclosure documents while claiming that these people hold various positions-- including the title of “vice president”--at MERS, which they do not, in order to sign documents with that title. This is important because the documents these people are signing are affidavits attesting that a thorough review of MERS business records indicates the assignment of mortgage to a particular bank. But these robo-signers were NOT vice presidents, were not allowed anywhere near MERS’ business records, and could not have completed the thorough review they were attesting to even if they HAD been allowed. In many cases, the person signing these documents did not even exist. At least six different signatures have been documented for the non-existent “Linda Green”, who also claimed a variety of titles at a variety of companies “she” was never employed by, and “she’s” not the only one.
Banks wouldn’t be able to get away with this if the courts functioned properly. When fraudulent documents are discovered--which rarely happens, unless the homeowner brought an attorney--the court generally dismisses the case, without prejudice. This means that the banks can and do have new, fraudulent documents created, and re-file, time after time, until they get it right, despite the fact that the court was made aware of existence of the fraudulent documents. Banks usually win as a result of the homeowner just not showing up; the courts generally automatically enter a win for the plaintiff. But when the BANKS forget to show up, the case is usually continued.
This would all be troubling even if it involved just a single bank. But the thing to remember here is that, far from being ONE bank, virtually every large bank was involved in this scheme. Virtually every large bank committed many types of widespread fraud that caused the economic crisis. And virtually every U.S. state, county, taxpayer, citizen, suffered, at a minimum, financial injury as a result. And this was no accident. The banks were aware, at EVERY step, that their actions were illegal, and that they were committing crimes, among them conspiracy, tax fraud, securities fraud, bribery, forgery, perjury, suborning perjury, grand larceny…the list goes on and on.
In essence, when the banks attempt to illegally foreclose, they are demanding that they be held to a different set of rules. They are asking courts to hold homeowners to the law, but not the banks. The courts seem to think that’s fine, and so do many American citizens. The banks ask for a different set of rules when they plead to be bailed out, at taxpayer expense. If the citizens make bad investments, it’s their own fault, but when the banks conspire to engineer a widespread scheme of fraud, corruption and theft, it’s somehow the taxpayers’ fault. And many American citizens are buying that line, too.
When does it end? When will these Americans realize that they, too, have been harmed by the crimes of Wall Street? When will they realize that it’s not okay for wealthy criminals to be held to a different and more lenient set of standards than poorer, hard-working Americans? When will they stop swallowing the outrageous and easily disproven lies of Wall Street, wake up, and join the Occupiers, in spirit if not in effort? What will it take to bring them into reality?
I don’t know, either. But I’m going to keep trying.
We’ve ALL been screwed by the crimes of Wall Street. Now is the time to ensure that doesn’t happen again. Add your support, add your voice, add your effort. And if you can‘t or won‘t do that, at least stop blaming the victim.