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Why Rampant Foreclosure Fraud Was Inevitable

The WSJ editorial page has some advice for people who might object to a bank illegally foreclosing on their home: Don't worry about it.

We're not aware of a single case so far of a substantive error. Out of tens of thousands of potentially affected borrowers, we're still waiting for the first victim claiming that he was current on his mortgage when the bank seized the home.
Then "we" aren't very aware, are we? Homeowners, consumer advocates and attorneys have complained about these and related abuses long before the housing market collapsed. Take the case of Hugo and Melissa San Martin of Port Lucie, Fla. As reported by Mother Jones, the couple in July sued a law firm that represents major banks and mortgage servicers for moving to repossess their home despite the San Martins never having missed, or even been late on, a payment.

Another Florida couple, Holly and Rory Hewitt, got similarly mauled in October 2007 when their lender, subprime mill Countrywide (now owned by Bank of America (BAC)) wrongly told them they were in default on their loan:

The Hewitts, who had the money, immediately called and asked how much they owed so that they might get things straightened out. Soon after, a reinstatement letter arrived on the letterhead of Countrywide's legal counsel -- the Law Offices of David J. Stern.

The $18,500 bill was larded with charges -- property inspection, title, and late fees that seemed exorbitant even in an industry renowned for arbitrary fees, plus monthly loan payments that weren't yet due. In addition, Stern charged the Hewitts for serving legal papers not just on Rory and Holly, but on a nonexistent spouse for each. In all, the couple was being gouged for thousands of dollars.

These aren't isolated cases. Class-action complaints representing tens of thousands of homeowners nationwide allege a range of abuses, including lenders failing to prove ownership of seized properties, ginning up foreclosure-related fees and falsifying documents.

Peccadilloes, as far as the Journal's op-edniks are concerned. The paper indicts the usual suspects -- House Speaker Nancy Pelosi, Senate Majority Leader Harry Reid, deadbeat borrowers -- in dismissing the multiple "robo-signing" investigations as petty "politics." (Showing the suppleness of a yoga master, it also simultaneously smooches and spanks Alabama Republican Richard Shelby, a longtime friend of the banking industry, for piling on to the foreclosure mess.)

The Big Picture's Barry Ritholtz has a priceless take on the WSJ's assessment:

I used to think that the partisan, money-losing screeds that are WSJ OpEds were written by intelligent idealogues. Their errors were thought to be a function of a variety of cognitive mishaps and biases. These are typically associated with sports fans, but afflicts partisans as well.

I am no longer convinced of this.

I now believe they some combination of heavy metals or other pollutants has somehow rendered the judgment centers of their brain inoperative. They function in ways indistinguishable from other human beings, except when it comes to anything involving judgment. This includes complex mathematics, a new or unusual fact pattern, or simply something that conflicts with prior experience. It is beyond them.

If they are not developmentally disabled... then the alternative conclusion is that they are liars.

Tell it. In pooh-poohing the foreclosure scandal, the WSJ also studiously ignores that such practices are part of a much wider pattern of deceit within the mortgage industry. Michael Hudson, a staff writer with the Center for Public Integrity, a nonprofit journalism organization, is blunt in describing the schemes mortgage originators used during the housing bubble to ensnare borrowers.

"Lies were being told and fraud was being committed," said Hudson, who has covered the mortgage business since the early 1990s, in an interview. "If you talk to people in the industry at the ground level, they'll tell you they did everything they could to make sure borrowers didn't know what they were getting into."

Hudson, himself a former WSJ reporter and author of a forthcoming book on the subprime meltdown ("The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America -- and Spawned a Global Crisis"), said this fraud included forging borrowers' signatures on loan documents, inflating real estate appraisals and creating phony tax forms to overstate the income of loan applicants.

As we're seeing with lenders that rubber-stamped foreclosure documents, such tactics were commonplace in the years leading up to the financial crisis, Hudson emphasizes. Likewise, what the Journal blithely dismisses as "sloppy work" by bank employees is nothing of the sort.

Rather, such chicanery is a principle of design -- a standard feature that routinizes fraud along the lending chain, from the moment many mortgages are issued, to their pooling within securities also wired to blow, to the sorry spectacle we're witnessing today as millions of people lose their homes. In short, worry.

Image from Flickr user Woodleywonderworks

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