The Foreclosure Scandal Has Become Pandemic

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doctor holding globeAs more mortgage companies “fess-up” regarding their apparent fraudulent processing of foreclosure documents, the foreclosure scandal has become pandemic.  And while the early response from many, including myself, was that this issue would soon be swept under the rug, with no benefit for struggling homeowners, and allowing banks to proceed with foreclosures, the problem has exploded in significance.


Attorneys and state courts around the country have begun to question the manner in which banks have processed thousands of foreclosures each month, and numerous errors have been discovered.  Court documents have revealed the casual manner in which foreclosures were often allowed to proceed even while homeowners were allegedly being considered for loan modification and in a few cases when the owner was not in default on their mortgage.  Ensuing investigations and testimony have revealed a foreclosure process that lacked proper verification and review by bank officials.  The issue is not about “flawed paperwork,” “oversights,” or “errors,” but whether the nation’s largest banks considered themselves above the law.



The foreclosure scandal raises several questions:


What caused this problem to surface?  Since most foreclosures aren’t contested, the lack of proper documentation has rarely been an issue.  Now, however, with banks needing to process thousands of foreclosures each month, it appears that many ignored the legal requirements and became little more than “foreclosure mills.”  Their failure to properly review documents compounded the errors, and the resulting number of homeowners contesting their foreclosures exploded.  As attorneys and judges reviewed the practices of these “foreclosure mills,” the entire system has come into question.  Ultimately, it appears that banks were treating the foreclosure process as carelessly as they did the original application for a mortgage.   


Why would banks knowingly commit fraud?  In order to expedite the initial packaging and sale of the various mortgage instruments that helped create the housing crisis, the mortgage industry more than a decade ago created Mortgage Electronic Registration Systems (MERS), to speed up the transfer of mortgages between financial institutions.  Considered by many to be the industry’s first step in ignoring the requirements for the proper transfer of mortgage documents, including the payment of local filing fees; when first established, the actions of MERS were rarely questioned, and the lack of accountability may have emboldened banks to more serious and more blatant violations.


What are the ultimate ramifications for both the housing market and the overall economy?  Regardless of reports to the contrary, many banks, their books still overflowing with “toxic assets,” teeter on the brink of insolvency.  If foreclosures are delayed for a significant amount of time, the U.S. could face the very real possibility of another banking crisis, and the potential for another bailout.  Additionally, lawsuits will continue for years, making stabilization of the housing market nearly impossible.  


What about the issue of title problems?  Some title companies have already announced their refusal to insure title on foreclosed homes.  And buyers, concerned about title issues, may simply avoid purchasing foreclosed properties until they are confident that such problems have been resolved.  Additionally, those who have recently purchased foreclosed homes may find title to the property clouded by this crisis. 


Who will pay for this mess?  While other issues surrounding this controversy are more complex, the answer to this question seems clear.  The U.S. taxpayer will almost certainly bear a significant portion of the ultimate costs.  With almost all mortgage loans backed by the U.S. government, taxpayers will, once more, be on the hook for government negligence and the banks’ avarice.  Whether or not we agree is immaterial; it is far too late to change the rules in this game.


Will extended delays in foreclosure further damage a fragile housing market?  There are more than 2 million homes currently in or facing foreclosure; a moratorium will mean the owner can’t be evicted and the bank can’t sell the home.  Then, once a solution is reached—and we can only speculate when that might be—the housing market could face a potential flood of additional inventory.   Not only will the market suffer, but there will be millions spent in sorting through the confusion, while defaulting owners are allowed to remain in their homes rent-free.  The potential costs are staggering.


What are the political ramifications of this problem?  Nothing of this magnitude comes without political consequences, and the potential in this case could impact both the economy and housing for decades.  Politicians will attempt to capitalize on the issue as a means to promote their party’s agenda, and that could impact the ultimate overhaul of Fannie Mae and Freddie Mac and the future of government involvement in home financing. 


How can this problem be resolved?  I suspect we’ll have a complete moratorium of foreclosures, whether voluntary or imposed, that will seek to find ways to move ahead with foreclosure, and congress may be pressured to legislate a solution to the problem.  With several states having initiated lawsuits against lenders or demanding that foreclosures be temporarily suspended, a national moratorium seems inevitable.  At some point, however, foreclosure must take place, and the U.S. taxpayer will pay for the majority of the losses.  Rather than creating TARP II, bailing out the banks for a second time, or doing nothing and allowing taxpayers to pick up the bill through Fannie and Freddie, we could finally create a system of meaningful modifications.  Doing so would lessen the burden on taxpayers and begin to stabilize the housing market and overall economy.  Regardless of the solution chosen, there will be no “free lunch” for anyone; the ultimate choice is just whether we’ll have burgers or bread and water.


What I’m proposing is not a means for homeowners who fail to make mortgage payments to get a “pass,” allowing them to remain in their home without paying, but neither is it a way for banks to ignore the law and the consequences of their reckless lending practices.  Banks and their attorneys created the mortgage instruments in question, and they forced borrowers to comply.  Those same banks should be compelled to work with homeowners who demonstrate a desire to remain in their homes; and if a solution isn’t possible, they must follow both the spirit and letter of the law when proceeding with foreclosure.  Allowing them to do otherwise is to ignore and harm the very legal system intended to offer protections to all of us.


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Re-Blogged 15 times:

Re-Blogged By Re-Blogged At
  1. Carla Muss-Jacobs, RETIRED 10/08/2010 06:03 PM
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Susan Laxson CRS
Parks Real Estate - Franklin, TN
Local Knowledge & Global Network

John, exceptional post and from all the comments it is clear that this is just the "tip of the iceberg"... how can we help?  ~ Susan

Oct 09, 2010 06:12 PM #85
Gary Miljour
loanDepot - Southern Pines, NC
Mortgage Originator NMLS Licensed in AZ and NC

John what a great post.  As a mortgage lender who works for a small company that does not service mortgages, I see this stuff happen all the time.  I have distressed homeowners that tell me horror stories about how their banks foreclosed after starting a loan modification.  My heart goes out to these folks who thought they were working in good faith with their bank just to have the bank slam the door on them.


I am just amazed that these big banks are not see the public relations damage that they are doing to their bank.  I know some folks who will never do business with some of these banks ever again based on the way they were treated.


and I agree, this is just the beginning.  More information will come out, the CA AG asked all banks in his state to stop their foreclosures.

Oct 09, 2010 06:18 PM #86
Gail Robinson
William Raveis Real Estate - Southport, CT
CRS, GRI, e-PRO Fairfield County, CT

Will extended delays in foreclosure further damage a fragile housing market? 

Some think that it will give the housing market a boost.  It's hard for normal inventory to compete with foreclosures on price.  Foreclosures drag markets down.  Short-sales not so much because of the 4-6 month delay in getting a response from the lender.  The smart thing would be for the lenders to refocus onto short sales and speed up that process.  In the meantime, perhaps normal home sales will get a chance to compete.

Oct 09, 2010 07:32 PM #87
Pamela Seley
West Coast Realty Division - Murrieta, CA
Residential Real Estate Agent serving SW RivCo CA

John, you summed it up so well.  I've noticed that mainstream news is down playing the seriousness of the crimes these banks committed.  They make it sound as if it is just some bad apples who robo-signed these papers, well, then, CEO's should be held accountable.  There's no excuse for this. 

California is non-judicial and that is what's working against the homeowner.  Until CA homeowners start challenging their foreclosures (which they can), the truth of what these banks have done is going to be pushed down.

Oct 09, 2010 09:36 PM #88
Bill Fritts
Sibcy Cline Realtors - Blue Ash, OH


Pandemic is the perfect word to describe what is going on out there. The only other words that I would attach to it is man-made. I feel like every time we start to get a grasp on what is happening, something "bigger and badder" gets discovered. Will it ever end?

Oct 09, 2010 11:24 PM #89
Patrick White
Home Driven Realty, Inc - Baldwin, NY
Driven to bring New Yorkers home

Good Morning John

Thanks for the post. Have a great day.

Oct 09, 2010 11:28 PM #90
Dave Halpern
Keller Williams Realty Louisville East (502) 664-7827 - Louisville, KY
Louisville Short Sale Expert

Every short sale the lenders approve is one less property that goes through the foreclosure mills. Yet the banks are getting more unreasonable with their short sale obstacles.

Oct 10, 2010 12:53 AM #91
Mike Saunders
Lanier Partners - Athens, GA

John - you have written the words that make me shudder and congress may be pressured to legislate a solution to the problem. The last thing we need is for congress to take poorly thought out action and write poorly written legislation that needs to be passed so that we can find out what is in it.

Oct 10, 2010 02:35 AM #92
Richie Alan Naggar
people first...then business Ran Right Realty - Riverside, CA
agent & author are the ruler of all you survey.....What we are finding out is that no entity is bigger than the people they serve. I knew that all the time I was blogging away at the banks, one day it would OUT all their nonsense. The scary part in this is that all the attorneys are asking for punitive damages in addition to righting these wrongs......You know John, when you have 10-15 million people who are caught up in something, that something has to be revisited and understood. Something is wrong with the system is what it says to me. Killing off millions of people (via defective foreclosures) only makes me think of Hitlers FINAL SOLUTION....John, time will tell who knew what and when. As for your Guru skills and talents, you were always all over the reality of this subject....well done my Real Estate friend...

Oct 10, 2010 05:39 AM #93
Mike Carlier
Lakeville, MN
More opinions than you want to hear about.

It certainly seems that it's another great day for lawyers.  The entire housing industry will ultimately suffer from the latest foreclosure mess.

Oct 10, 2010 05:58 AM #94
Richie Alan Naggar
people first...then business Ran Right Realty - Riverside, CA
agent & author


Oct 10, 2010 06:12 AM #95
Tom Brannigan
Long & Foster Real Estate, Inc - Wheaton, MD

John, thanks for the great post. This should help many understand where we are.  Personally, I think this will continue to get worse until homeowners get some real help.  I've known too many people who tried restructure only to be lead along for way too long by the banks and then declined.  I think the banks need to be accomidating with restructures.  Some say more regulation, some say less.  Maybe if the banks had been more regulated, we wouldn't be here.  I know foreclosure needs to happen in some cases but I also believe that many people really do want to stay in their homes.  I would love to link to this post from my blogs outside of ActiveRain.

Oct 10, 2010 06:13 AM #96
Ernie Steele
Berkshire Hathaway HomeServices Homesale Realty - Lebanon, PA
Call me, let's get started!!! 717-273-3774

Great post John...And great comments from everyone...This started long ago and the fix was in long ago to protect the banks...As a reply to a previous comment, President Obama had no choice but to extend and enhance the TARP program started under President Bush or bank failures would have been rampant...Enjoy the day.

Oct 10, 2010 07:28 AM #97
Mary Maxie

Thanks for your thoughtful & complete post. I'd like to use it for clients who are asking what's going on. Do you mind?

My personal feeling is that if banks had to service the loans they give out, with no gov't backstop of any kind, they'd be a lot more careful with the loans they grant-- they'd want more skin in the game, better credti scores, etc. As long as they can give everything away to someone else, & get paid for it,  the problem won't be solved.

Oct 10, 2010 08:41 AM #98
John Mulkey - Waleska, GA
Housing Guru

Rayssa - Yes, there are lots of unanswered questions.  I think we may get some clarity in the next few days.

Tim - While there apprears to have been some criminal activity, those deserving punishment will probably not receive it.

Susan - We just need to stay on top of the situation as it develops and to make our lawmakers aware of our concerns.

Gary - It will be interesting to see how it unfolds.

Gail - The effects all depend upon the timing and how the process unfolds.  There could be a short-term boost to sales if foreclosures sre removed from the market, but long-term, the results could be a continual drag on the market.

Pamela - GA in non-judicial also, but the effects are going to hit us all.

Bill - It does seem as if we keep adding to our problems.

Partrick - Thanks.

Dave - Depending upon how this plays out, it may help short-sales.


Oct 10, 2010 03:59 PM #99
John Mulkey - Waleska, GA
Housing Guru

Mike - But that's what they do; it seems to be their purpose in life.

Richie - Flattery may get you nowhere, but it creates a warm sensation inside : ) Thanks for your comments. It is going to be interesting watching this unfold.  Unfortunately, the problem involves the destruction of peoples' lives.

Mike - The potential for lawsuits is staggering.

Richie - Thanks!

Tom - Feel free to link, and thanks for your comments. I do hope this provides some incentive for banks to work with those who desire to keep their homes and who have the financial ability to do so.

Ernie - Thanks. If TARP had been used to remove the "toxic assets" from the banks as originally described, we might not have this problem today.

Mary - I'm happy to share.  But since the banks don't have to deal with the loans as you describe, they should take their medicine and cooperate with creating solutions.

Oct 10, 2010 04:09 PM #100
Kathleen Daniels
KD Realty - 408.972.1822 - San Jose, CA
San Jose Homes for Sale-Probate & Trust Specialist

John, Bank, Lenders, Services care about one thing and one thing only … their bottom line. They do not care about people or the laws that are there to protect the people.

Oct 11, 2010 03:14 AM #101

I need some help from a professional realtor or broker.

What about short sales?  Will they be frozen too?  Then there will be no homes to buy if you wanted to!!


I would appreciate some feedback.  Thanks!!

Oct 11, 2010 06:18 AM #102
Esko Kiuru
Bethesda, MD


The title issue could be with us for a long time. From now on it's double necessary to be totally careful when purchasing real estate, especially with a home that went through a recent foreclosure.

Oct 18, 2010 10:51 AM #103
John Mulkey - Waleska, GA
Housing Guru

Kathleen - That's the way it appears.

Thea - Short sales may, in fact, be helped somewhat, but the banks seem to be hedging their bets right now.  We'll see how it evolves.

Esko - And with the number of lawsuits in process or threatened, the litigation could take years.

Oct 18, 2010 01:51 PM #104
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