Are you a prospective home buyer who can’t obtain a mortgage because of chaos in the banking industry? Or a prospective seller who can’t find a buyer? Then you’re a victim of the mortgage credit crisis, which has frozen the housing market into a state of permanent recession during the past two years.
In fact, during the past month, this crisis has actually worsened in increasingly bizarre ways. Stories about the crisis are now dominated by robo-signers who evict thousands of victims from their homes each month, and trench warfare tactics that pit banks against governmental authorities.
Tea party protestors have heatedly opposed the government bail-out of the financial services industry, arguing that America’s court system could have handled the case load if all of the nation’s major banks, insurance companies, and other financial institutions had simultaneously filed for bankruptcy in late 2008. Unfortunately, we are now learning about our system’s capacity to handle the simultaneous foreclosures of millions of American homes.
What are we learning? Suffice it to say that the results are not generating a sense of confidence in our system.
No One To Call
A few weeks ago, news of robo-signers began to rattle the mortgage industry. Who are robo-signers? They’re the employees who work for banks, enshrined with the responsibility of reviewing and approving the (mostly) computerized files associated with home foreclosure cases. Even though banks rely on computers to identify home owners who have defaulted on their mortgage payments, they must still rely on human beings to look for processing errors, lest they mistakenly seize the homes of innocent and financially responsible people.
But why are these employees called robo-signers? They’re not humanoid computers like Arnold Schwarzenegger’s Terminator or Paul Verhoeven’s RoboCop. Rather, they are real people who have been able to move at incredible robotic speed, reviewing and approving thousands of foreclosure cases each month.
Oddly enough, many of these bank employees are low-paid clerks who possess no industry knowledge or experience whatsoever. So how can they — or any one — possibly review and approve thousands of cases each month? Apparently, they have been blindly approving cases without reading them, and thus home owners who have been falsely classified as being delinquent cannot speak to knowledgeable bank reviewers about such processing errors. That’s because the reviewers themselves are not at all familiar with the cases that they have personally approved, and they’re far too busy robo-signing thousands of files to dedicate time to taking phone calls.
A Downward Spiral
Once news of the robo-signers spread across the markets, the housing industry fell into a downward spiral of cascading recriminations. Confronted with the need to defend themselves against charges of inappropriate home seizures, Bank of America (BoA) and other mortgage holders temporarily halted all foreclosure actions nationwide. That decision threw all home sales of foreclosed properties into states of extreme uncertainty.
BoA and others then resumed foreclosure actions a week ago, declaring that they had reviewed their policies and procedures and found them to be valid. But critics protested that BoA was simply denying its problems to defend itself against a multi-state investigation by state attorneys general to protect residents against illegal home seizures. Parties that bought mortgages from BoA before the global financial crisis then demanded that BoA simply buy back all of their bad loans, a demand that the bank angrily vowed to fight in court.
Just within the past few days, the chaos spread even more dramatically. In Britain, three prestigious hotels accused Irish bankers of wrongfully signaling that they were unprofitable and late on loan payments by transferring their debt into a high risk pool; they scrambled to reassure investors that they were actually profitable and current on their debt. And here in America, the Federal Housing Finance Agency estimated that Fannie Mae and Freddie Mac, guarantors of over half of the outstanding home mortgages in the United States, will ultimately require over $150 billion in government bail-out funds to remain solvent.
The Rule of Law and Due Process
Under assault, of course, is the fundamental premise that businesses and citizens can rely on the principles of the rule of law and due process to govern property disputes. After all, if home owners cannot rely on banks to review their own records before seizing their properties, they’ll never feel comfortable applying for mortgages and buying homes in the future. And if hotels cannot rely on lenders to classify their payment histories in an accurate manner, they’ll never borrow money to invest in growth opportunities again.
The American court system is now staggering under a wave of lawsuits that will require years of litigation. Would this same court system have been able to handle the simultaneous bankruptcies of all of these troubled financial institutions back in 2008? Perhaps so … but even Tea Party protestors have good reason to be skeptical about its capabilities.