The Bank of America has halted foreclosures nationwide, and three other banks—GMAC Mortgage (a unit of Ally Financial), JPMorgan Chase, and PNC Financial Services—have halted foreclosures in certain states. The reason is that the banks were using faulty paperwork to process foreclosures, leaving them open to legal challenge and creating at least the theoretical risk that the wrong borrowers were getting thrown out of their houses. President Obama pocket-vetoed a seemingly unrelated bill that would have loosened notarization procedures across state lines. But he's resisting pressure to declare a national moratorium on foreclosures for fear it will wreck the fragile recovery.
If you're having trouble understanding all this, join the club. For answers, Slateturns to George Bailey Jr., chairman of a building and loan founded by his father that has lent money to many families of lesser means in the little town of Bedford Falls so they might purchase their own homes and secure a little piece of the American dream. When the subprime market took off, Mr. Bailey's bank stayed prudently on the sidelines. (His rival, Mr. Potter, on the other hand, went long on subprime mortgage securities and eventually received a $10 billion bailout under the Troubled Assets Recovery Program.)
Please state your questions in a loud, clear voice, as Mr. Bailey is deaf in one ear.
Q: The housing bubble burst five years ago. It tipped the economy into recession at the end of 2007. Because so many of the mortgages were packaged into risky financial securities, the housing sector took out Wall Street in the fall of 2008. But that was two years ago! The recession has been officially over for more than a year. So why is the foreclosure crisis only happening now?
A: Two answers:
1. Because the housing crisis was really big, it created a really big foreclosure backlog for banks. That meant a lot of paper to process. Also, while banks are eager to get rid of foreclosed houses as quickly as they can, they know that if they dump too many houses into the market all at the same time, that will drive housing prices down even further. The foreclosure rate peaked in 2009 (see Page 80), but it remains high and well below delinquency rates (see Page 79). The banks still have a lot of houses to foreclose on.
That tells you why there are lots of foreclosures going on—or were, until several banks recently stopped them. But you probably want to know why we're only learning about the goofy paperwork now.
2) Because it was only in June of this year that hard evidence of questionable foreclosure practices began to dribble out. Exhibit A was a deposition taken by one Thomas Cox, a lawyer representing a homeowner in a Maine foreclosure case. In the deposition, Cox asked Jeffrey Stephan, who leads GMAC's "document execution team" for foreclosures, "When you sign a summary judgment affidavit, do you inspect any exhibits attached to it?" "No," Stephan answered. "I review, quickly, the figures" in the summary judgment, he said. "Other than that, that's about it." Cox: Did you read the summary judgment itself in its entirety? Stephan: "No." Cox: "So, other than the due date and the balances due, is it correct that you do not know whether any other part of the affidavit that you sign is true?" Stephan: "That could be correct." In a separate legal proceeding, Stephan testified that he signed off on 10,000 foreclosure documents every month.
Cox posted the deposition to a consumer advocacy listserv, and the phrase "robo-signer" started spreading like wildfire. Mortgage bankers following similarly rushed procedures realized their foreclosures were vulnerable to similar legal challenges.
Q:So what if the banks are a little sloppy, employing robo-signers to zoom through tedious paperwork? If the bank is preparing an affidavit in a foreclosure procedure, doesn't that mean somebody isn't paying his mortgage?
A: Yeah, probably, but banks have been known to make mistakes by foreclosing on the wrong people. Cutting corners on verification increases the risk of such mistakes. Also, as Andy Kroll (who has covered the issue extensively for Mother Jones) pointed out, these "foreclosure mills" frequently charge ahead without knowing or caring that their own bank has already agreed with the delinquent homeowner to work out a loan modification, which is usually a better outcome for all concerned. The Obama administration certainly thinks so, which is why it included a Home Affordable Modification Program (HAMP) in the 2009 stimulus bill. * HAMP provides payments to borrowers and lenders if they agree to modify the terms of a mortgage along certain lines. The program hasn't been particularly successful. As the Atlantic's Daniel Indiviglio recently pointed out, under HAMP banks are already canceling more loan modifications than they're creating. One possible reason is that the banks' foreclosure mills are charging ahead with robo-signed foreclosures too quickly for the banks to complete or consider such loan modifications.
Q: Don't homeowners get a lot of warning and lead time before they get thrown out of their houses for not paying the mortgage?
A: You're confusing owners with renters. In some jurisdictions, it can take forever to kick renters out. (Remember Michael Keaton in Pacific Heights?) With homeowners, it's a lot easier. The rules vary by state, but typically the banks have 60 to 90 days after they fail to receive your mortgage payment to start the process of selling your house and about 20 days after that actually to sell it. So three to four months after you stopped paying the mortgage, you can easily find yourself out on the street.
Q: What was this notarization bill Obama pocket-vetoed, and what has it got to do with the foreclosure crisis?
A: It required states to accept documents notarized from other states that have more lax notarization requirements. In effect, whichever state came up with the most loosey-goosy notarization rules could set itself up as Notarizationland for the entire country in much the same way that Delaware has set itself up as Incorporationland. Sponsored by Rep. Robert Aderholt, R-Ala., the bill was previously viewed as an uncontroversial measure to help bring the notarization process into the computer age. * "I first introduced this legislation in April of 2005," Aderholt huffed after Obama vetoed the bill, "and obviously there was no concern about weakening the foreclosure documentation process at that time." He is correct; the bill wasn't intended to encourage shoddy foreclosure paperwork. But Elizabeth Warren, de facto head of the new Consumer Financial Protection Bureau, perceived, correctly, that it would very likely have that effect and persuaded President Obama to block it.
The GMAC deposition suggested that notaries working in foreclosure mills don't perform anything like the oversight role they're supposed to. (GMAC's Stephan: "After I sign it, it is handed back to my staff. My staff hands it to a notary for notarization." Attorney Cox: "So you do not appear before the notary; is that correct?" Stephan: "I do not.") This would therefore not seem a good moment to ease up on their regulation.
Q: Senate Majority Leader Harry Reid, D-Nev., has called on all mortgage lenders in Nevada to halt all foreclosures until the legal questions surrounding robo-signing are resolved. Is this stupid political grandstanding by an incumbent facing a tough re-election?
A: That goes without saying. The more difficult question is whether a moratorium would be a good idea, anyway. The Obama administration has rejected this option for fear of doing further damage to the housing market, which remains a drag on the economy. Housing can't recover until the backlog in foreclosures is cleared and lenders can take the money they're currently spending managing real estate they own but don't want and redirect it toward new mortgages. And, besides, two of the four biggest mortgage lenders—Bank of America and JPMorgan Chase—already have imposed complete or partial moratoriums of their own.
On the other hand, the other two biggest mortgage lenders—Wells Fargo and Citibank—have not. Wells Fargo is conducting a review of pending foreclosures, and Citibank is keeping a low profile. Fannie Mae and Freddie Mac imposed a foreclosure moratorium during the winter of 2008-09, at the height of the financial crisis, and the sky didn't fall.
But, on yet another hand, in the winter of 2008-09 the economy was already so deep in the crapper that nobody was likely to notice if a foreclosure moratorium made things a little bit worse. This time out, making the economy a little bit worse could put the country back into a recession.
OK, gotta go. Mr. Martini is a little behind on his house payments and we're making some adjustments. Remember, no man is a failure who has friends! Corrections, Oct. 13, 2010: This article originally misidentified HAMP as the Home Affordable Unemployment Program. (Return to the corrected sentence.) It also misidentified Rep. Aderholt as a congressman from Georgia. He represents Alabama. (Return to the corrected sentence.)
Corrections, Oct. 13, 2010: This article originally misidentified HAMP as the Home Affordable Unemployment Program. (Return to the corrected sentence.) It also misidentified Rep. Aderholt as a congressman from Georgia. He represents Alabama. (Return to the corrected sentence.)