Solutions to the Foreclosure Crisis without Legislation

Congress out of session with a crisis on our hands? What can we do without passing legislation to address rampant fraud in processing foreclosures?

Dean Baker makes a good point; respecting the veracity of documents and the legally requisite paperwork on all outstanding debts and securities is a matter of obeying the law not amending it. Circumvention of the law for expedience to generate short-term returns led to standard practices that are illegal. This provides no basis for an argument to change the law to make the problematic and haphazard practices legal. The question is enforcement. Unfortunately, it’s not that simple. Who needs to be demanding veracity? At what stage in the titling, securitization, investment or recovery phase of the life of the mortgage? From whom, servicers alone? And how do we get these entities to make these demands?

Conyers, Grayson, et al. had the right idea pursuing government agencies with a role in this fraud, e.g. GMAC, Fannie and Freddie. Releasing the offending robo signers and frauds pursuing foreclosure from these agencies’ payrolls is a great start. But this is the tip of the iceberg; fraud and problematic practices in the foreclosure process reflects rampant problems with the titling process and we should be pushing for an internal audit of all troubled loans we are holding in our government portfolio in one form or another. Brown, et al. have pushed for the White House to support a foreclosure moratorium and is the right thing to do but it has been unsuccessful.

Why: The government owns or is on the hook for quite a large share of the loans and securities attached to the US securitized mortgages outstanding. This is part of the problem and part of the solution. This is why Shaun Donovan and Tim Geithner are taking positions inconsistent with the goals of their own program, HAMP, on the implications of slowing the rate of foreclosures. See Baker on this here. The US government has too much stake as investors in this market to really want to shake it down in the short-term but in the long-term we have the most to lose by propping up an inflated set of assets and paying dearly to do so into perpetuity by way of a financial sector burdened by NPLs and a subsequent stagnant economy.

As far as a strategy goes, pressuring agencies that have a role as investors, issuers or guarantors of any and all distressed mortgage products, agencies which have the authority already to require legal documentation on these products, is, perhaps, the best multipronged non-legislative strategy out there for the longer-term. Some make better targets than others. The Fed invests in MBS (they’re unwinding their position in bailout investments but MBSs still comprised over $1078 billion of the Fed’s portfolio at the end of September), and by association, they also have a stake in AIG which is loaded with CDSs dependent on the market's view of banks balance sheets with these assets on them. The Fed and Treasury are not going to take a hit to market value of their holdings lightly, and they certainly won’t provoke that happening themselves. Treasury is funding HAMP alongside HUD, which has more of a political stake in solving the foreclosure crisis than a financial one, and of course, then there’s Fannie and Freddie. We could push for these agencies to pursue self-imposed internal audits of all the distressed properties they have in their various portfolios. This would run up against the Fed’s portfolio strategy and the holdings Treasury is trying to unwind from TARP—AIG needs to be behind us completely for that, also the Fed is still holding commercial paper from firms presumably holding structured assets. The Fed is also still holding commercial real estate backed securities. These all need to be unwound first before expecting the heads of these agencies and the White House to be on-board for serious writedowns caused by writeoffs on unrecoverable assets. (Treasury's sell-off of AIG shares is not expected to start until 2011.)

What we are left with, without a legislative impetus, by way of strategy is supporting and championing lawsuits by individuals (ideally a highly publicized class action) against a lender that is foreclosing on them without proper documentation to do so. The ACLU is going after the courts themselves but since the courts are doing their best and have no financial or political support from the federal government to do much more than muddle through, I think ACLU’s strategy could backfire on them. Their target has no money and nothing to gain materially from what they are processing, although the org can be commended for being pragmatic and working all the angles available to them.

Once AIG is sold off in its entirety and the Fed’s portfolio unwound we should pounce on Fannie and Freddie to audit their holdings. The problem is that Treasury and the Fed won’t sell off until the market value of their holdings increases, and that won’t happen until this foreclosure fraud settles down, which it won’t on its own fruition. Thus, the paradox of the bailout operations continues. The US government has too many conflicts of interest and cannot expect to really make money off our bailout without deceiving markets about the value of those holdings. Expect the market cheerleading to continue.

In the meantime, what can you do? Look out for word of a class action lawsuit you or someone going through foreclosure you know can join and demand your bank show you your mortgage using this site.

Views expressed on this page are those of the authors and not necessarily those of Campaign for America's Future or Institute for America's Future