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Foreclosures: Did Wall Street Banks Conspire to Rob Homeowners?

Are the financial firms alleged to have fraudulently repossessed people people's homes more like the gang that couldn't shoot straight or the mob? That question underlies the spreading foreclosure scandal, and how it is answered could affect any ensuing legal or legislative remedies to resolve the crisis.

Foreclosure Fiasco

Ohio Attorney General Richard Cordray is unequivocal in his assessment. In suing GMAC Mortgage and corporate parent Ally Financial in order to to block it from proceeding with any foreclosures in the state, he characterized the company as preying on vulnerable homeowners "through fraudulent and unfair and deceptive practices."

Cordray is seeking whopping penalties -- up to $25,000 for every foreclosure document GMAC "robo-signed" in Ohio. He's also investigating similar allegations against Bank of America (BAC), Citi, JPMorgan Chase (JPM) and Wells Fargo (WFC). That means fines could rise into the billions of dollars -- in Ohio alone -- depending on the level of fraud.

Some lawyers representing homeowners who have filed private lawsuits against banks go even further. A Kentucky complaint against Ally and Citigroup (C) claims the firms violated the Racketeer Influenced and Corrupt Organizations Act, a 1970 law typically used to target crime syndicates.

Such suits are filed in federal court, and carry potentially enormous damages. Making a RICO case would require proving that banks, law firms, document clearinghouses and other parties to foreclosure cases conspired in a "pattern of racketeering." An that's exactly what the attorney handling the suit alleges:

This is organized crime by people in suits, but it is still organized crime. They created a very thorough plan.
For their part, banks suspected of having rubber-stamped hundreds of thousands of foreclosure-related documents will have to come up with a better alibi than claiming, as Ally did, that such systematic flouting of the rules amounted to a mere "technical defect." That won't cut it as a matter of law or of public opinion. And indeed, mortgage servicers implicated in the affair have begun shifting their stance:
"We don't believe the procedural errors in these affidavits led to inappropriate foreclosures," Gina Proia, a spokeswoman for Ally, says.
We'll see about that. Given the company's sloppy approach to paperwork, it seems inconceivable that the company could have so rapidly confirmed that no borrower's home was, in fact, improperly seized.

If this predicament casts doubt on banks' methods in handling foreclosures, it also raises broader questions about the practice of turning mortgages into securities, which fueled the housing boom and is now complicating the bust. That's because in dicing loans into thousands of "tranches," securitization obscures their ownership. In many cases, the financial industry literally can't tell you who owns what.

Not coincidentally, that's the very problem banks are accused of ignoring in approving foreclosure affidavits they never reviewed. As Barry Ritholtz notes:

[T]he real estate/financing industry has brought the same machine-like technical prowess that they used to automate the process of underwriting mortgages to a similar automated foreclosure process. Is it any surprise that the results of this are similarly disastrous?
Nope. It also would be no surprise if the mushrooming legal challenges to foreclosures throw ownership of millions of homes around the country suddenly into doubt. No one profits from that.

Image from Flickr user Robbert van der Steeg

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