Crimeless Victims


(WARNING: This another one of those posts where I defy liberal orthodoxy and cause people to think I have turned into a whip-kissing racist Republican. You have been warned.)


Finding Little Evidence Of Foreclosure Fraud, Feds Give Up

Over at the Huffington Post they’re still talking about “rampant foreclosure fraud.” But I was always skeptical of claims banks were stealing houses from innocent homeowners. One big problem with that theory: Banks lose money on virtually every house they take back in foreclosure. And now the federal government seems to agree.

With a pair of terse notices yesterday, the Office of the Comptroller of the Currency basically admitted that its elaborate process for turning up evidence of fraud in hundreds of thousands of loan files was a waste of money.


The outcome shouldn’t come as a surprise. After I wrote a piece critical of the parallel mortgage settlement with state attorneys general last year, comparing it to the deeply flawed tobacco settlement, I was barraged with comments from critics accusing me of downplaying foreclosure fraud. I responded with one simple question: Has there been a single case in the past five years of a homeowner who was current on his mortgage being foreclosed through fraud?

Silence. I did get a lot of legal gobbledygook from marginally competent lawyers who, as it turns out, were the real crooks in the foreclosure crisis. For excessive fees, they offered underwater borrowers the false hope they could somehow keep their homes without paying for them, either by challenging the foreclosure paperwork or convincing a judge that the national registry system known as MERS was not the legitimate party to foreclose. Those tactics mostly failed. The Federal Trade Commission has a website devoted to protecting borrowers from the real scammers in the foreclosure crisis, and prosecutors have found plenty of fraud. Last September North Carolina AG Roy Cooper, for example, sued three foreclosure assistance firms for charging upfront fees and delivering nothing in return.

The reality is robosigning couldn’t have been the cause of foreclosure fraud because robots can’t engage in the self-interested behavior that underlies fraud. Robosigning was just an acknowledgement that in a large, modern lending institution only the central computer registry of mortgages contains all the information about loans, and no lawyer at the periphery can possibly possess additional information beyond what is in that registry.


Fraud is a flexible term, of course, and many lawyers think it includes lending money to people who have no hope of paying it back. This so-called “predatory lending” doesn’t make any economic sense, unless you’re willing to buy the theory that the fees flowing from an ultimately unprofitable loan were enough to induce bankers to destroy their own institutions in search of a year-end bonus. That’s possible, but it downplays the responsibility of the borrowers who signed detailed loan documents, filled with caveats and cooling-off periods mandated by federal regulators.

As for robosigning computers stealing homes, still not much evidence for that. If you know of a case, do let me know.

I wrote a post or two about foreclosure fraud a while back. When the foreclosure crisis first started I was gullible enough to accept the claims of fraud at face value. But when I started to write about it something just didn’t add up.

According to the OWS crowd and some lefty bloggers, the foreclosure crisis was all a big scam wherein the Evil Big Banks conspired to steal peoples’ homes by getting the people to borrow money and then foreclosing on them. The only problem is that scheme does not make any sense.

The purpose of fraud is to make money. Fraud is a non-violent crime. The scam artist wants to convince the “marks” (that’s us) to part with our money and/or valuable property in exchange for something of little or no value. There are lots of variations, including everything from check forgery and credit card scams to pyramid schemes and full-fledged “stings”.

Now let’s look at a typical real estate transaction. You have a buyer, a seller and a lender. The seller is the grantor. They own the property and want to trade it for money. They will make money only if they receive more for the property than they originally paid. Up until recently it was commonplace for sellers of real estate to make huge profits (aka “capital gains”) from properties they held only a short time.

The buyer wants to acquire the property either to live in, as an investment, or both. They are willing to trade money in exchange for the property. Unfortunately, they don’t have enough money to make the seller happy.

This is where the lender comes in. The lender has money they want to invest in order to make more money. One way they do this is by loaning the money to other people with interest. The interest is their profit. They make money only if the loan AND the interest are paid. This may take 20 or 30 years to complete.

The lender agrees to give the buyer the money to pay the seller. The buyer agrees to repay the loan plus the interest. To protect the lender’s investment the buyer also agrees to give the lender a deed of trust securing the loan against the property. That way if the buyer fails to repay the loan the lender can sell the property to get their money back.

It is important to note that the lender does not really want the property. If they did they would have simply bought it themselves. They want the buyer to fulfill the loan agreement.

There are typically some other people involved such as realtors, inspectors, examiners and escrow agents. These people make their money off the transaction and once the sale is complete they are no longer involved. The seller walks away with the money and their part is finished as well. All that is left is the buyer and the lender. As long as the buyer keeps making the agreed upon payments everything is hunky-dory.

A default occurs when, for whatever reason, the buyer stops making the agreed upon payments. While this may not be the buyer’s fault it is definitely not the lender’s. It doesn’t matter why the buyer stopped making the agreed upon payments, it only matters that they stopped making them.

Before the lender can foreclose on a property there are lots of required hoops they have to jump through first, starting with an official notice to the buyer that they missed one or more of the agreed upon payments. I am not going to describe all those hoops because they vary from state to state and this post is getting too long already.

Normally when a property has been foreclosed upon it is sold at auction by a trustee. The proceeds of this sale are then used to satisfy the loan contract. The measure of damages for breach of contract is to put the lender in the same position they would have been in had the contract not been breached (including costs and fees).

If there is any money left over after the sale it is given to the buyer. If the sale does not cover the lender’s damages then they can pursue a deficiency judgment against the buyer. The lender cannot make an extra profit in a legitimate breach of contract action. Under the law the best case scenario is for lender to end up with the same amount of money either way. More than likely they will end up with less money after a foreclosure.

In order to make money though foreclosure fraud more than one party must be involved and the property in question must be worth substantially more than the value of the loan. The purpose of that kind of a fraud is to acquire the property for less than it is worth and then sell it at a profit and the scam takes place in relation to the trustee’s sale. But that won’t work if the property is worth less than what is owed. These days upside down mortgages are more common than the other kind.

Defenses to foreclosure like “show the note” and claims of robo-signing are legal technicalities rather than defenses on the merits. Mortgages are often bought, sold and traded between lenders. Sometimes Quite often they screw up the paperwork. But just because they screwed up the paperwork doesn’t mean you don’t owe the money.

Foreclosures and evictions are often traumatic because our homes are tied to our sense of identity. But it isn’t “yours” until you finish paying for it. If you don’t pay for it you gotta give it back. If somebody loans you money they aren’t being greedy when they expect you to pay it back.

About Myiq2xu - BA, JD, FJB

I was born and raised in a different country - America. I don't know what this place is.
This entry was posted in Housing Bubble, Wall Street Banks. Bookmark the permalink.

15 Responses to Crimeless Victims

  1. angienc (D) says:

    Defenses to foreclosure like “show the note” and claims of robo-signing are legal technicalities rather than defenses on the merits.

    Ayup. It’s a way to buy time for your client but they’ll eventually have to give up the house because they aren’t paying their mortgage. Attorneys who do this sort of work are taking people’s money to help them live “rent free” in the property for a little while longer (there is NO BODY doing this who is current on their mortgage) when really it would be better for the clients to spend that money as a deposit on a rental & for moving expenses.

    Although I do believe many of these loans (especially the “no money down” ones with little back up paperwork to investigate into ability to pay) should NOT have been made and DID take advantage of people in order for brokers to “earn” commissions, the OWS idea that somehow people should be able to live in the property without meeting their end of the deal (i.e., paying the note) is mind-boggling to me. And I say that as someone who works everyday helping people to try to keep their homes — the legal, non-scam artist way via Ch. 13 bankruptcy (where you pay the ENTIRE amount you are behind on your mortgage over 5 years through the bankruptcy in addition to resuming your regular OR renegotiated monthly mortgage payment) OR by walking away from the deal completely without liability via Ch. 7. As I often explain to clients who don’t have the ability to pay/go through a Ch. 13, when you put no money down on the house, you really aren’t losing anything by walking away — just think of the mortgage payments you *did* make as rent (which you would have had to pay even if you hadn’t tried to “buy” the house).

    Remember those bumpers stickers that were all over the place in the 70s “Gas, grass or ass — nobody rides for free”? These OWS morons need to get familiar with it, because it’s as true now as it was then & it isn’t “evil” — it’s just FAIR (to use their favorite word).

    • myiq2xu (D) says:

      the OWS idea that somehow people should be able to live in the property without meeting their end of the deal (i.e., paying the note) is mind-boggling to me.

      That’s right up there with borrowing $100K for a masters degree in Underwater BB Stacking and thinking you shouldn’t have to pay it back because you can’t find a job.

  2. Good post- I am going to tease out this one little piece

    The scam artist wants to convince the “marks” (that’s us) to part with our money and/or valuable property in exchange for something of little or no value.

    IMO that is part of the problem- lots of these underwater houses were worth WAY LESS than what the sellers foolishly (again my opinion) paid. Greed? Keeping up with the Jones’s? Stupidity? A combination of all of the above?
    So yes, people got scammed with their eyes wide open. Part of the reason we left MA was because we were never ever going to be able to save the down payment and afford a home there. Rents got up into the $1000 a month range and we finally said to hell with it. Took what we had and packed up and moved to where you can still, to this day, buy a home for under 100k.

    • votermom says:

      I agree – think the fraud part is in the housing bubble. It’s where the mortgages got bundled, sliced, diced and then sold on Wall Street as derivatives.
      So instead of the banks making money on loan repayment, they started making more money on selling the loan, so the normal safeguards were not in place.
      I don’t know enough to know who the culprits were in that.
      I think it has to do with not having a strict wall between the retail/lending bank and the investment bank though.

    • DandyTiger says:

      Left bay area for the same reason. The choices seemed to be crazy real estate costs or crazy commute distances. I opted for the green acres gambit – property values about 1/10 with the trade-off of having seasons and being rural. Me and my tractor are happy.

  3. you don’t sound “Republican”—–simple common sense is what you’ve written

  4. votermom says:

    Whip-kisser! 😀

  5. yttik says:

    The crime, the fraud, actually began with our Gov deciding that everybody was entitled to be a homeowners. That lead to banks and people in general believing we could have mortgages that exceed what we can afford. In the olden days, it was thought you should only spend 25% of your income on housing. That changed and became upwards of 50-75%. Heck, I know people who got mortgages that exceeded their income entirely. Today people tend to blame banks while completely ignoring the role our government played in setting up the whole disaster. Perhaps some in Gov had good intentions, but nobody really thought it through.

    • jeffhas says:

      What about the buyer? – I mean aren’t you supposed to know and be responsible for what you can afford?

      To me this all gets back to the ‘everyone is a victim’ – ‘there are no losers’ – ‘everyone’s a winner’ mentality – trophy’s for all!

      NOTHING of value (education, good paying job, home, good car, happy family) is easy – it ALL requires some effort and hard work…. but we don’t teach that anymore…. anywhere. Everyone’s supposed to be able to run their lives like a Kardashian – do nothing and have boatloads of money and a wonderful lifestyle – for doing nothing (although they do actually seem to be working to schedule their various paid events, dramas, and camera-hogging).

      Kardasian should be a verb… as in ‘I’m going to Kardashian that job’ (you know; do nothing but take the money and seek praise and attention)… or ‘We should Kardashian that restaurant’ (as in; show up dressed up and expect to not have to pay for that meal – because ummm you were ‘there’)… I could go on – I’m so sick of everyone EXPECTING something for nothing… in fact that’s it:

      To Kardashian; To expect something of value for no work or effort.

      • angienc (D) says:

        I’m not excusing the buyers totally BUT I do see mitigating circumstances with the buyers that I don’t see with the lenders & government because everybody has a dream of “owning” their own home, so the enticement/excitement along with brokers “selling” the idea that “all this can be yours for one low monthly payment” can cloud the vision of 1st time buyers.

        This is *especially* true with those damned ARM loans (and tons were made)– the broker tells the buyer “Your payment of $900 will fluctuate a little with the ARM.” Buyer: “What do you mean fluctuate? How much?” Broker: “Some months it could be $1000, so months it could go down to $700/$800.” This statement is *true* so the broker hasn’t lied to the buyer & has *explained* the ARM fluctuating, but when the payment *fluctuated* from $900 to $1800 it caught a lot of these naive buyers flat-footed and I *do* think they were purposefully mislead.

        Of course, this all doesn’t mean they get to stay in the house without paying the note, only that I blame the brokers/banks & government a heck of a lot more than I blame the buyers for the mess.

    • The crime, the fraud, actually began with our Gov deciding that everybody was entitled to be a homeowners.

      Not only “deciding” it but then forcing lenders to flip illogical cartwheels proving to the Feds they complied with the “decision”. It was being forced into the cartwheels that trashed the corporate culture and business ethics of most lending institutions, IMO. Once ethics went out the window it was only a short step to the “bundling” idea – which placed even more distance between buyer and lender. Whatever could go wrong with dat?

  6. foxyladi14 says:

    I like this statement. 🙂
    To Kardashian; To expect something of value for no work or effort.

    • yttik says:

      LOL! I like that term,too.

      Of course home buyers are responsible for buying homes they can’t afford or for not paying their mortgage at all, but they’ve paid the consequences for that. I think all the “experts” like government officials, lenders, real estate brokers. who convinced people that they could afford things they obviously could not, bear some responsibility, too. When you have all these professionals circling around giving you financial information you desperately want to believe, it’s hard to make good choices.

      But I can’t even completely blame lenders either, because they faced a lot of pressure from the Gov. I remember when you weren’t allowed to “discriminate” just because somebody was on welfare.

      Tell you the truth, I blame the Dem party, a party that I was active in back then. I didn’t realize it at the time, but in our eagerness to provide everybody with home ownership opportunities, we really didn’t think things through.

Comments are closed.