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Guest Post: On The Ethics Of Mortgage Loan Default
Submitted by Greg Lemelson At Amvona
On the ethics of mortgage loan default
Is
it ethical for the American homeowner whose mortgage has been
securitized to default, even If they are not financially distressed?
First, consider it is unlikely that
marketable, fee simple, insurable title can be obtained as a result of
fulfilling the obligations of the related promissory note. On the
contrary the titles to some 60 million homes in America are badly
clouded. Secondly, encouraging investment in an asset class that has
been artificially inflated, then deliberately destroying the price of
the asset, as part of a separate profit making scheme is unethical, and
any agreement based on this type of fraud is grounds to consider the
original debt instrument used in the agreement null and void.
Fortunately these grounds are unnecessary, as increasingly US courts are
ruling that these mortgages are already invalid for numerous other
reasons.
On November 12th, 2010 we published our article “Tattoos, Pyramid Schemes and Social Justice”
in which we advocated that homeowners consider suspending their
mortgage payments. In the article we enumerated reasons why we felt
this action is both ethical and prudent. On January 11th, 2011 we
published our articles “Ibanez– Denying the Antecedent, Suppressing the Evidence and one big fat Red Herring”
which outlined the legal realities of securitized mortgages, and the
impact of the landmark Ibanez decision on homeowners, particularly in
Massachusetts. We affirmed our conviction that Massachusetts homeowners
with securitized mortgages might want to consider suspending their
mortgage payment, and place instead their funds into an escrow account.
Both articles were widely published and
read, and in both cases we received also some negative feedback,
although strangely, only from foreclosure defence attorneys. Their
sentiment was universal “we would never advise a client to stop paying their mortgage”
- we marvelled. When challenged on this point, or presented with the
evidence, none could provide any reasoning for this advice that they
would so confidently given their clients, nor could they identify a
fallacy in the arguments we had made, or a fact we had misrepresented.
Perhaps they recognized the intrinsic
problem in responding simply “because that is what people do, and we
should take it for granted that because people do it, it is correct.”
Such inductive reasoning at the corporate level can not be defended as
anything more than “group think".
In such a case, we suspect fear, shame
and guilt are more powerful drivers than reason. Further, such thinking
serves only to exaggerate the anxiety that stems from the perceived
consequences of default. This is not a coincidence, or something which
is “hard-wired” into the human person. These are emotional controls
that have been cultivated over many decades that encourage borrowers and
in particular homeowners (those in possession of real property), to
follow unnatural social norms, even at the expense of critical thinking
and reason. Thus the context in which such financial obligations exist
go almost entirely unexamined.
Financial and ethical considerations in
which default is not only feasable but perhaps even a moral imperative
are ignored. In sharp contrast are the standards lenders within the
same culture abide in their quest to maximize profits. Needless to say,
this asymmetrical ethic, leads to the possibility of abuse, and
widespread economic injustice. In our society, it is now the case that
debtors, and in particular home owners are akin to indentured
servants. The severity of the condition is directly and inversely
proportionate to the misdeeds of the financial system which gave rise to
it.
Ultimately we were forced to conclude,
that those who possess too much fear and too little confidence are
acting in fact on the basis of emotion, even though the prospective
outcome is not what they would otherwise choose. A spirited response in
reason is what is necessary to ensure that such emotions do not distort
rational thought and overcome it.
We hope the above articles, along with
the following serves as a practical, financial, and above all ethical
framework for understanding the risks involved in continuing to make
mortgage payments on securitized loans and their derivatives in light of
what is known today about the serious defects in chain of title, and
the abuses that took place by many in the securitization process.
We do not make such suggestions lightly.
A catastrophe of “epic proportions”
Despite our concern over the seriousness
of the advice given, we never wavered in our conviction that we were
“right”, even if unpopular.
On May 25th, 2011 a report was released
based on a Massachusetts investigation that identified fraudulent
documents clouding the titles to Massachusetts properties. The report
cited the example of homeowners who were already in some stage of
default for financial reasons, and discussed the issue of fraudulent
conveyances as a result of perjury. It would be an error to present
this information only as a means to stave off foreclosure for those who
no longer have choices. Perjury is the fruit of a system built on many
layers of fraud that diseased the entire securitization process.
However, the important aspect of the report was not the examples of
those who are financially distressed, but rather, (and correctly) the
implications to those who are neither in foreclosure, nor financially
distressed.
Although it took only 8 words to say
what took us just about 6,000 in our last article to say, and although
it came about 7 months after our initial article, the unmistakable words
“…the ownership of your house is in question” finally had emerged in main stream media.
The problem is hardly unique to Massachusetts.
We also hope that the foreclosure
defence attorney’s (or more importantly their clients) who so strongly
criticized our thinking on the matter, will listen to the words of John
O'Brien, Register, Southern Essex District Registry of Deeds – his
proclamation does not leave much room for interpretation; “This is a catastrophe of epic proportions."
The report is limited in scope as it
cites only one example of a name used (namely “Linda Green”) to commit
perjury and cloud thousands of titles to Massachusetts homes. However,
there exists far more names other than “Linda Green” which have been
used to commit perjury - the math is not difficult.
Nonetheless, the report barely touches
the tip of the proverbial Iceberg, for the issue of perjury pales in
comparison to the fundamental and irreparable harm done in the
securitization process, which universally affects securitized mortgages
nationwide - a fact that will be increasingly revealed.
For example a review of what has been said on the Ibanez matter makes any investigation into mere perjury wholly unnecessary.
In the November 2010 article we wrote:
“Americans have a
duty to ask critical questions about the operations of their financial
institutions, and if evidence has been presented that a deal was made,
but not everyone was playing by the rules, than those deals need to be
looked at again. It is not good enough any longer to say, if it
doesn’taffect“me” than, I’m not getting involved. We have a duty to one
another as Americans, and more importantly as human beings, to care
about truth and justice. What’s more, apathy, so long as we are not
affected, is a short lived consolation. Ultimately, this crisis will
affect everyone …”
Mr. O’Brien goes on to say of
Massachusetts homeowners who have not necessarily defaulted on their
mortgages, but whose mortgage documents have been perjured:
Massachusetts homeowners who have not necessarily defaulted on their
mortgages, but whose mortgage documents have been perjured:
"They may not be able to sell their home, and they may not be able to refinance their home. And that is a major, major problem."
Here is another excerpt taken from the November article:
"It has been
made to appear as if those who have fallen on hard times are a matter of
"incidental" inequalities in an otherwise procedurally just system.
However, it is precisely the opposite which is true. Our financial
institutions have created deliberate inequalities, through the use of
procedurally unjust systems."
Marie McDonnell, a Forensic Mortgage
Analyst provided the following comments in the same May report
(referring to the titles to Massachusetts properties):
"I'm speechless. The scope of the problem is unimaginable; the depth of the fraud is shocking."
You mean there is something in it for the bank?
People are not stupid and ought not to
be treated as such. They make mistakes from time to time, but that is
not the same thing as being stupid.
The value of your home may be going
down, but this condition will not last forever – obvious though it may
be, it’s still wroth stating; nothing last forever, including rates of
increase or decrease in asset prices. In the meantime, a few folks from
your bank or the government (not clear if they are necessarily separate
entities any longer) may try to convince you that there are some things
you can do with your home to improve your lot, and help you transfer
this “unwanted” asset to themselves (even if it does provide shelter -
Investment qualities aside for a moment).
Here’s the recent Menu:
1. “The sucker trade”
aka refinancing. It goes something like this: “Can I exchange your
big unsecured “credit card-like” debt which was improperly secured for a
properly secured mortgage on your home?” And what do you get for this
trade? A fraction of a point off the interest rate on your note. Never
mind one was unsecured and the other secured.
There is secured
debt and there is unsecured debt. The two are not the same in value to
the barrower, nor are they the same in value to the lender. We would
challenge anyone to find a business in the world that would choose
secured debt over unsecured debt (regardless of their financial
condition), for a fraction of a point. Why should consumers be any
different? There is one adage in business that is eternally true: “there
is no free lunch”.
This is why so much
mortgage loan activity in the last 1.5 years has been refinancing.
Banks are not interested in taking on new risk, they are interested in
mitigating old ones. These new notes and mortgages don’t find their
way to MERS, and they do not follow the “old” securitization process.
These original wet-ink notes find their way to actual bank vaults this
time.
No need to worry
about the 30+ pts. you’ve lost on what is probably your biggest
investment - because of the asset bubble you did not see, understand,
or create - after all, why worry about what may take more than 20 years
to recover in value when you can save a fraction of a point on the cost
of your debt – listen to the radio adds, and the brokers – there has
“never been a better time” (sounds creepily like 2005).
2. “The Kumbaya”or
the “we’ll get through this together” offer – aka the ‘short sale’
option. Think of it as making smoresand singing Kumbaya with your
servicer. Only when you go home from camp, you lose everything, and
they gain everything thanks to PMI, GSE guarantees, credit default swaps
and deficiency judgments. If this continues unabated, use the mortgage
escrow account we suggested setting up to start buying stock in Wells
Fargo or US Bank – the money will be better spent – at least you’ll be
on the other side of the asset transfers.
3. “The Gandhi” –
aka “just give me your house because I asked nicely, and you’re an
honorable person and we know you want to do the ‘the right thing’ ”
option or ‘Deed in Lou of foreclosure’. By far the best choice for the
peacemakers of our modern society. If you think you can take this high
road, get ready to also walk around barefoot, spin cotton on a simple
gin for hours at a time, live in a tent, and give up marital relations
with your spouse – because that‘s what it means to be like Gandhi –
pacifist through and through (never mind true pacifist are one in 10
million, or maybe less). A great many who are actually afraid, claim
instead to be pacifists - this might be a good time to do a Myers Briggs personality test.
4. “The Pinocchio”
or “free lunch” option (don’t worry, there is really no cost) - our
personal favorite which is now being espoused by an anxious Wall Street
government. Payments to homeowners who surrender their real estate,
rather than raise legitimate legal challenges to the ownership of the
home you and your family live in. You will only have to trade in “real”
property, for a few pieces of paper (that will get you by for a few
months), backed by nothing, that make cell phones look
depreciation-resistant. For some reason the image of Pinocchio turning
into a donkey keeps coming to mind.
Imagine all that work with no
self-interest, bankers are a generous bunch, perhaps when they come,
they will even ‘greet you witha kiss’. A great many mortgage brokers
who represented predatory lenders were also willingto offer their advice
duringthe golden years of the housing uber-bubble. These are the same
people, with a different slant. At that time, the refrain was “prices
will only keep rising, so you can do something like pay any price”
because by this logic, if prices keep rising, no price is too high.
Now the financial industry which has helped us move from a country which makes things, to a country which makes things up, are
chanting their inglorious antiphon – prices will only keep sinking, so
let us take that house off your hands, after all, we’re in it together
and both parties are taking a loss. Right? This way you can get rid of
the discomfort of having to deal with this. By this logic, no value is
enough to fight for your home, because prices will keep sinking and
thus, the value will ultimately go to zero.
Both statements are logical fallacies and indeed two sides of the same coin – although they have distinct attendant emotions.
In every transaction there is a buyer
and a seller – no matter what monetary instruments are used in the
consummation of the transaction (debt, equity, currency, etc.) Your
home is no different. It may help to not think of it as shelter for a
moment or as “the American dream” (needless to say the dream needs to be
elevated). Try for a moment instead to think of it first as just 2 x
4’s and drywall. If this is hard to do, consider thinking of your
American dream as being fortunate enough to live in a still largely free
country of plenty, to have had a mostly good life, reflect on your
positive memories – and let your house just be an object (last time we
checked there were no shortages for future reacquisition) – that is what
it is after all, it’s just an object.
Once you arrive at this moment of honest
detachment, then you might want to consider how those who are
interested in your home, see the world. Humans are animals in a way,
and they are also far more. Through our choices we move closer to the
animal kingdom of primal instincts or closer to another kingdom that is
very different than that of mere animals. Let’s just say that your
bank, your servicer, the trusts, the depositors, the trust
administrators, the investors, the engineers of derivative products, the
CDO salesmen, the ratings agencies, the intermediaries entities, and
certainly their lawyers, have made choices (not that it can’t be undone)
to be a little closer to the animal kingdom – keeps this in mind when
speaking to them – it’s important. To this group your house has
nothing to do withdreams– it has to do with one thing only; little
sheets of green paper. Now think of money for a moment as a redemption
slip on society, and if you have many of these “redemption slips”, you
in affect have much you can ask of society if you so choose.
Ad Misericordiam
These folks want to redeem a number of
these “slips” on you as a member of society. Perhaps your claim to your
home is weak, if it appears that the debt is greater than the equity
(understandings of both debt and equity need to be examined carefully),
or because you have struggled to make your mortgage payments, or because
you are legitimately concerned about getting clear title to your home,
or perhaps you just don’t want to participate in a pyramid scheme that
causes others to suffer. That is ok, we understand, everyone will want
you looking at yourself full time, and if it applies, your misfortunes
in life. If you have a personal misfortune such as divorce, loss of a
job, or heaven forbid a sick family member, expect it to be used against
you. You might as well go lookinthe mirror and read yourself your
Miranda rights before you get on the phone with your servicer and
divulge every detail of your personal and financial life just because
they asked nicely and said they would “help”.
Try to remember, you’re not calling
Mother Teresa. That isn’t to say you shouldn’tempathize withthose who
would like to take your home. Wall Street bankers and their progeny are
human too. They suffer just like you. They have personal short
comings like you. Although their personal shortcomings less often
involve layoffs and confusing financial burdens – their suffering is of a
different variety altogether – nonetheless they suffer.
It is better to keep your suffering to
yourself, they are not genuinely interested in hearing about it, and it
is best to vet who you share with in the first place, including the
details of your personal finances. There is nothing wrong with that
information being entirely private, although if you were raised in
America, you were not raised to understand this. By preserving
yourself, you will also preserve your dignity – even if all else is
lost, nobody can take this last item away from you, and it is worth more
than all of the homes in America.
It is a harsh saying, and we wish we
could find something more subtle, but we could think of no other saying
that more accurately describes what we are speaking of here, that is to
say “Do not give dogs what is sacred; do not throw your pearls to pigs.” If at some point this seems like a good idea after all, it may be worth reading the line which follows from the one cited – the consequences are fairly clear.
Self-pity rarely achieves much.
Instead, if the urge to sadness at your portion in life can’t be
overcome, then do it in private. Perhaps think of those who have less
than you in life – perhaps orphans in Haiti or those in some other
seriously underprivileged society, than you will feel rich. We have
poor in America, but we don’t have too many who are starving just
yet. Prepare yourself to fight a good fight. Even if you lose, you
will have the swagger that you fought for what is right and just, which
is easier to describe at parties than the procedure for rolling over and
playing dead.
It is a curious thing to witness the
endless talk of ”helping homeowners”, and of perpetual applications to
“modifications” and “forbearance”. If a person draws you into a crime
unwittingly and unknowingly, a context in which you expend great time,
energy and resources, believing the circumstances to be quite other than
they in fact are, is it anything other than insulting when the same
person offers to “help” you with your “situation”? Does an “appeal to
pity” seem like the most appropriate of responses?
Arbitrarily asserted, arbitrarily denied
These folks want you looking at yourself, because they don’t want you looking at them. This behavior is so deeply ingrained in our culture that
even seasoned consumer and home owner advocates fall prey to the
proclivity of discussing primarily the circumstances of the debtor
rather than that of the creditor. However, the question isn’t how good
is your claim to the security interest in the real property you call
home. The real question is how good is the security interest of those
who seek to take it from you? And how did something so simple and
mundane as a mortgage become so irreparably harmed? Could it really
have been mere incompetence?
Possession is an important part of the
law. If there is a serious and legitimate dispute over ownership,
which has now been well established for about 60 million properties and
some 7 trillion in securitizedmortgages, why would you give up your
legitimate claims? Perhaps you would do this only if you did not
realize just how legitimate your claims are (default or not), and how
illegitimate theirs are, because after all it is not the topic of the
many phone conversations with your servicer.
In fact, given the gravity of the
question over clear title, the only seemingly prudent thing to do is to
suspend mortgage payments, weather you can afford them or not, and to
instead place those funds into a private escrow account, as we had
previously advised. That is why they want you to be highly circumspect
of your condition in life, because you will be too distracted to notice
the thief in front of you. Remember if greed doesn’t work, fear will,
and vice versa. Think of them as the commensurate emotions associated
with bubbles and collapses – they vacillate, one to the other, but the
transfer of assets abides at a steady clip to those who feel no
emotions.
These folks will try to help you
undervalue yourself. Don’t. You were not designed or built to be a
slave to another man through debt. It is, for lack of a better word, a
sin. If you don’t have a Ph.D in finance from Harvard, you probably
couldn’t design this Ponzischemeif you’re life depended on it. Are you
accountable? You are. But they are more accountable. It is important
to think for yourself when someone tells you something ridiculous like “prices will always go up”.
Intellectual inertia with a streak of greed is wrong, but it is also
minor on a relative basis, and very prevalent. However, using superior
knowledge and power to prey on the ignorant in a calculated way is more
serious. You have a stronger claim to the security interest in the
property than they do, on many grounds, not the least of which is
ethical. That isn’t to say you will win, but you have to try.
If they are to assert their claims
arbitrarily, than you can arbitrarily deny them - should the burden of
proof not be symmetrical?
It has been said that “time reveals
truth and justice”. Do not worry about what others say about you today,
or next week. Worry about what people will say about you in ten years
or more. For it is only when we look back and remember, that we bring
our experiences of life into complete focus, and others see us for the
intentions which work inside us, and not merely the outward appearances
which can be misleading. If somebody calls you a “deadbeat” or a “squatter”
thank them, for is it not widely known that people judge others
according to the way they feel about themselves inside? Or as the great
prophet Bob Marley once said “Judge not, for you judge yourself”. Besides is there any more obvious way to poison the well, than to use such loaded language?
Your servicer wants updated details of
your financial condition in order to decipher if it is cost affective to
sue you for a deficiency judgment after your home is taken (if it is to
be sold in the near term, they will want the fastest sale, not the
highest sale), it is not primarily, as you may be told, to determine
qualification for a modification. For example, they would like to know
where your bank account is so that they can attach it, and they would
like to know where you work, and see a recent pay stub, so they can
eventually garnish your pay. Think through it – you live in the most
litigious society in the world.
After all, you are going to pay the
difference, either through a judgment, or such things as your
involuntary ownership of the GSE’s (another form of indirect wealth
transfer). It is a peculiar thing indeed when we believe it is ok to
hand over the details of our financial and personal matters to perfect
strangers on the phone, because they have “represented” that they are
the counterparty in interest to a loan that was taken out as part of our
(unknowing) participation in a global pyramid scheme.
We now know much about predatory
lending. We know about liar loans that were wholly executed by highly
compensated brokers. We know that the more CDO’s and synthetic CDO’s
that were sold with AAA ratings (despite being jam-packed with sub-prime
paper), the more billions investment banks made. We know that banks
understand that their security interest to the real property used in the
MBS trusts is not there, and that they are willing to use forgeries,
and perjury as their means. Basically, the lesson of the last few years
is that the engineers of this hyper-pyramid scheme will do anything to
get what they want.
Have things changed? Is that what the
evidence points to? Or is that what we want to believe about human
nature? That these folks are not “that bad”? Because we want to
believe something, does it make it reality? An objective review of the
evidence does not indicate the players involved in your mortgage have
your best interest in mind. It would be best to accept that upfront, so
that a reasonable plan, that actually has a chance at success, can be
made.
This is not about “sticking it to the
bank”. This is about legitimate questions. Protecting yourself and
your family’s financial future, and comingto a reasonable business
solution to this very bad situation, that does not involve your
subjugation and further humiliation. There may have been intellectual
inertia, even greed, in your actions, but where is it written that you
must live withthat mistake forever? and who qualified the bank to do the
judging? At some point there has to be an agreement, and a settlement,
but you ought to meet the bank at the negotiatingtable at least as an
equal, if not a superior, for your misdeeds are minor in light of
theirs. Do you call their CEO, Board members, or shareholders and ask
for the details of their personal and financial lives before you’ll
“discuss” anything?
All that should be said by a homeowner
is that the asset prices were wrong when you bought your home. You had
no control over the setting of those prices – but the folks who did have
responsibility for the setting of asset prices, knew something you
didn’t and stood to profit from that special knowledge. That’s why they
owned credit default swaps and not real estate when the bubble popped.
When the bank is willing to discuss a
settlement of your unsecured debt (as in they cannot legally foreclose
on your securitizedmortgage), then you can talk about a number that
makes sense for bothpartiesto avoid protracted and expensive litigation
that might lead to a judgment, which at any rate will be collected over
many years if at all. Is this not the same as a principle reduction
today, particularly when future payment on a hypothetical judgment will
be made in dollars which are sure to be worthless. At least in the
event of a write down, your bank has the opportunity to re-invest the
residual loan value in something that might actually appreciate, as
opposed to fixed payment in devalued future dollars. But then again,
perhaps they already know this, which is why their first preference is
foreclosure. For one, the value of your home does not have to be
impaired on their balance sheet, and secondly, although nobody is
telling you this, your home will appreciate again, and has far superior
prospects of beating the doubled edge sword of taxes and inflation, than
the bank wants you to know.
There is a right way and a wrong way to plunder
Plunder? We confess it is a strong
word, and probably seems like a) it only corresponds to a small fraction
of the loans made that are now clearly understood as “predatory” in
nature or b) is hyperbole. Neither is correct, it is rather the only
way to describe the mortgage securitization industry in the last
decade. There is one characteristic of greed which is constant – the
addict always over stays their welcome (just ask casino operators or
stock brokers about the psychology of some of their clients).
Here are a few points to consider:
1. Why would such
products exist which have variable features as a function of time. For
example, low front end interest rates with a later reset, or terms which
allow for the annexation of more collateral at a later date (deficiency
judgment). Not unlike an actuary for an insurance company, a banker
makes a decision on risk based on a statistical profile of the barrow,
since past-time can only be known at that moment, why would future
characteristic of the loan be determined in present time, when the
future cannot be known? Unless there is in fact some designs being made
on the future.
Remember, these
folks make their living from investments, and investors think far into
the future. Most barrowers make their living from a paycheck, and their
future projects about as far as the Friday after next.
The case of variable rate loans:
- If at a future date, the interest rate is static, the bank gains nothing by adding this feature.
- If
at a future date, the interest rate is lower, the bank stands to lose,
when the customer refinances inside or outside the bank.
- If at a
future date, the interest rate is higher, than the customer may not be
able to afford the loan, in which case, the bank stands to make a
windfall through foreclosure.
Since our economists
have long held that both inflation and housing price appreciation are
steady, why would these loans ever exist? As a sort of actuary, the
bank would determine the price for the risk based on historical
patterns, set the terms, and a deal would either be done or not, and
every one would move on. But that is not what happened with these
“innovative” products. There was a “lead-in” and a carefully planned
design made on future time.
2. However, it will
quickly be pointed out that many barrowersagreed to misrepresent both
their financial history and circumstances in order to obtain these
loans. This is true. Here are some important points to remember:
a. There are both
qualitative and quantitative differences in the behavior of barrowers
who made misrepresentations and lenders who planned predatory loans. In
quantitative terms it is the business of lenders to make loans, that is
to say market debt. If there were no buyers for such loans, life would
continue on, and we may well have a healthier society. However, the
same cannot be said of the lender, for if they do not issue debt, they
have no business so to speak of, and life does not “go on” for debt is
the instrument by which their income is earned, and unlike the
barrower, represents an “asset” to the bank under normal conditions.
Therefore both motives and incentives for the making of new loans are
far greater on the part of the lender.
b. In qualitative
terms, the business of the lender is a) risk assessment and b) asset
appraisal. In a consumer society it is critical that entire generations
of consumers (including consumers of financial products) never learn
how to do either competently. We have largely succeeded at this task in
America. The result is that the intricacies of risk assessment are
overwhelmingly within the circle of competence of lenders, and
completely outside that of the barrowers. Again the balance of power is
asymmetrical.
To suggest than that the conduct of the
two groups is ethically symmetrical is incorrect, and masks the truth
that the real risk of systemic predation is inherently on the side of
banks.
The common refrain is that it was the
lack of restraint on the part of barrowers which caused the crisis, but
this is nothing more than to establish a false cause. That is to say it
draws a highly questionable conclusion about the cause and effect
relationship. The child of a false cause is naturally, a false
dilemma. The bank bailouts were precisely that; a false dilemma sold to
the American people, and a prototype of the much larger wealth transfer
operation that was about to take place in the form of foreclosure.
In the construction of the bailout
package, the US treasury reduced the options Americans had to consider
to just two, which were sharply opposed and unfair to the American
people to whom It was presented (i.e. bail out the banks, or else we
will be facing “…the Collapse of the Global Financial System”).
It is like being victimized twice. By accusing the American people
(falsely) of being the cause, then forcing a false dilemma, those
responsible have not played fair, and have caused a great many to
overlook alternative explanations which are far more accurate.
Nonetheless, the fact remains that banks
lent vast sums to Americans at interest rates that did not reflect
prudent risk management. There are only two possible explanations:
a) Our financial
institutions somehow suddenly lost (or perhaps never possessed) the
acumen that is part of their circle of competence; that is to say risk
assessment and asset pricing, and were revealed to in fact be imbeciles.
b) The loans made were predatory by design and served a purpose in their ultimate failure.
Despite many Ivy league degrees, bankers
are involved in a business model which is no more sophisticated than
borrowing pieces of paper (usually from their friends) for zero
interest and loaning out the same at a rate of interest above zero.
Given the simplicity of their business model, we are tempted to select
option “A” (our various and sundry encounters with bankers has served
only to affirm this preference). However, “B” is in the only option
which excludes absurdity from the calculation.
This taken into consideration with the
certainty of asset price manipulation, and other abuses in the
origination, and reselling of these loans ought to be carefully
considered.
In truth, greed paints you into a
corner. The only way out this time has been excessive liquidity, to
blanket over the fallout, like snow over an ugly landscape. Yet, with
excessive money supply, comes excessive inflation, and with excessive
inflation comes a preference for hard assets over fixed income; in
short, your bank would rather have your home, than your mortgage
payments, modified or not. Imagine, at the rate we are going now, what
the value of your future mortgage payment denominated in dollars will be
at the expiry of your loan term say 25 years from now. No interest
rate is high enough now to outpace the real rate of inflation – and if a few rounds of golf with the folks at FASB allow you to keep your land grab on the books at unimpaired prices in the near term; well even better.
If we ascribe to a traditional definition of ethics, than we must
concern ourselves with that which we do voluntarily, and not what we do
because we are forced. In this sense, the question ought not to be “is it ethical to stop paying your mortgage”?
The real question in light of everything that has been revealed, and
the very real human suffering that has been caused is; “is it ethical to pay your mortgage.”
»
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Tables Turn: Deputies and movers show up at bank to seize property for homeowner
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COLLIER COUNTY, Fla. - A bank foreclosure story you've got to see to believe. A Collier County couple turns the tables on Bank of America, the bank that tried to foreclose on their home. Now, the family is foreclosing on the bank! Even bringing trucks and deputies ready to seize property.
The foreclosure nightmare started when Warren and Maureen Nyerges paid cash for a home owned by Bank of American in the Golden Gate Estates. They never had a mortgage whatsoever. But, the bank fouled it up and wound up issuing a foreclosure through their attorney.
The couple took their case to court and after a year and a half nightmare the foreclosure was dropped. A Collier County judge said Bank of America has to pay the couple's $2,534 legal fees for the error. After more than five months the bank still hadn't paid up. So, the homeowners' attorney did just what the bank would do to get their money, legally seize their assets.
"I instructed the deputy to go in and take desks, computers, copiers, filing cabinets, including cash in the drawers," Attorney Todd Allen told WINK News.
Outside the Bank of America on Davis Boulevard, several deputies stood by with movers ready to start hauling out the bank's office supplies and furniture.
Inside, the homeowners' attorney was locked out of the bank manager's office by deputies while the bank manger tried to figure out what to do.
Allen says the manager was visibly shaken, "Having two Sheriff's deputies sitting across your desk, and a lawyer standing behind them, demanding whatever assets are in the bank can be intimidating. But, so is having your home foreclosed on when it wasn't right."
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Fun video at link. It's a crying shame that BAC is allowed to use the word "America" in it's name.
At this point people should do what is best for them in terms of dafaulting on a mortgage or not. The banksters have screwed real estate up, and made tons of money from it. It looks like bad times are coming that people should prepare for. Paying payments on hundreds of thousands of dollars that your home is no longer worth, may make it much more difficult to prepare. People 1st; banks 2nd.
At the beginning of this Depression, I would have thought more about the ethics of walking away from the debt. At this point I see the world is rigged toward the banks and corporations, and rigged against people, so the individual is highly likely to get screwed if he is the only ethical one around.
I defaulted on debt at the beginning of this Depression, and I am very glad I did. I could not afford to pay the debts in question though, so it is not exactly the same ethical decision.
The ethical decision I did have was whether to go bankrupt and lose all my assets because they would be sold at low cost to cover my debts, or to simply ignore the situation and try to protect my assets until the statutes of limitation ran out. I did the latter and am glad that I did. It was my blood, sweat and tears that grew the business I had and paid off the house that I lived in. I only couldn't pay my debts because of the crash and the high inflation that was happening in 2008. The banks got bailed out to still be solvent. I had to do that for myself. It was rationalization I'm sure, but I would do it all over again. Why should the banks survive while I fail?
Great read, thanks for sharing.
Many people in Australia are going to be facing the same tough choices over the next couple of years.
Thanks for keeping this BLUNDERING Fiasco alive (ALIVE) Tyler. sarc/off
I think you have to consider that the Banks in essence defaulted. They were bailed out by the American People. Everyone knows this. The reason the Banks defaulted is because they wrote too many bad loans.
The people expect the Government largess to the Banks to be passed on to themselves as was to the Banks. So, if the Banks got Government funds to make up for the Bad Loans then the people that have those bad loans expect the money to be passed on to them. When you think about it, if the Government gave the Banks the difference from the Loan and what they lost on the loan by foreclosure, then why not pass that on to the person with the loan so they could stay in their Home?
Something also to consider is that in past history someone could file Bankruptcy and the Courts would cram down or in essence have the ability to change the loan terms for the Borrower or Debtor. Lower interest rates, the term of the loan or principal. The Banks effectively lobbied to change the Bankruptcy laws so that this is no longer a possibility. As they did with Credit Card loans. Now you cannot declare Bankruptcy and just wipe out all of your credit card loans. You have to show that you do not have sufficient income to pay them over time.
I know that Hank Paulson talked about Moral Hazard yet the Banks showed the worst Moral Hazard there is. This set the example. If Banks became insolvent the Government bailed them out. Americans got the message. They think that they should be bailed out also. They have watched the Banks say it is just Business too many times as they Foreclosed without even attempting to work with the individual. So, the individual when confronted by the Bank to pay their mortgage said, Hey, It's just business. You have no moral obligation to work with me, I have no moral obligation to pay.
Never for Money, Home is for love......
I have a mortgage loan with Bank United. I have the payments automatically drafted from my checking account. I have had the payments drafted for over 10 years. About 2 months ago they drafted 2 payments from my account. I check my account on line every few days and noticed it within about a day. Usually, carry more in the account than I need. But, I will tell you, I was not a happy camper. Why, the double draft? Were they hoping that I would not have enough money for 2 Mortgage Payments? Did the Bank need cash flow, so the double drafted my payment?
I had to fax them a copy of my Bank Statement to show them that the Payment was double drafted. I resent that as I feel that at this time it is a violaiton of my Privacy. But, to be reimbursed, I had to do it. In about 2 days they deposited the Money back into my account. But, what if I did not have that extra money. I would have bounced checks up the wazoo. Was this a test? Would they have tried to Foreclose if one of the payments were not honored?
Just questions about the Banks motives.
Big banks have data processing centers and process data for small banks as well as for themselves. Wherever your bank's data is processed, this is likely what happened: processor captures all credits for the bank's customers to one set of tapes (or hard disks). They capture all debits for the bank's customers to a separate set of tapes (or hard disks). At some scheduled time, they run all the credits into the customer accounts. Then they run all the debits into the customer accounts. Given that humans are prone to making mistakes, either the credit or the debit run can be run twice, or more. That results in what is called a double-posting. I once managed a department responsible for rectifying these double postings and recalculating the proper interest owed on the account if it was interest-bearing. Something like this is probably what happened to you. Incredibly sophisticated processes still have to be run by humans who make mistakes.
Yeah. OK, fine. Now tell us what the outcome would have been if the auto draft had not been made. The borrower would then have been in default on the mortgage. A land grab would have ensued and this fella would still be battling the assorted fees and charges associated with a "mistake" in your "human error" scenario. When it goes the other way the outcome ain't so rosy.
Agreed. Except for the auto draft to have not been made, an entire tape (or hard disk) would have to have not been run. Due to the nature of the process, it is more likely that something will be run more than once (forgot to check off that tape had already been run) than not run at all.
Don't know about Bank United, but Wells Fargo did this to me once, and it *did* result in three overdraft charges. Contrary to most reports I hear, they were actually very apologetic, and replaced not only the payment withdrawn in error, but also the three overdraft fees within 48 hours.
A big part of any deal is how you approach the people on the other side of the table. Odds are, you are not talking to a "bankster," but rather a genuine person who is just doing a wage-slave job. A little consideration for that seems to go a long way- the big dogs are skinning us in an impersonal way, but there are all kinds of petty bureaucrats who can make things either much easier, or impossibly difficult for you, depending on how you treat them. Those are the people you're actually talking to.
Just another way to think about it, really. While the CFO of the bank could care less if you live or die, that does not necessarily affect the behavior of any given loan officer. They just applied for a job, and are basically marking time until the end of their shift. If you walk in and jack them up, they're going to shut down, "lose" your paperwork, run you in circles and generally make your life miserable. You can ask for a supervisor, but are as likely as not going to get one of their buddies to blow smoke up your ass instead.
The trick is to first make them feel valued, and then make them a co-conspirator. Never underestimate the ability of an employee to hold a grudge... everyone gets screwed in a 9-5 job, and many craft little revenge strategies all day long- your case could be one of them, if managed properly.
And, you don't have to waste time, money and effort fighting million-dollar legal teams in court. It's much easier to charm a bank teller or loan officer who is only making $10-15 an hour.
If a significant number of people strategically default, and you do not – then at some point you will feel like an economic schmuck. Especially if the defaulters are reaping some sort of comparative advantage, like piling up tons of cash whilst living rent free.
Sucks, but this is the America we live in today. I say pay your bills if you can, but get debt free as fast as possible. Debtor’s being slave to the lender and all that…
it is moarally WRONG to pay your mortgage....by continuing to do so, you are only helping the banks and this will lead to bloodshed in the future......hopefully by ALL NOT paying our mortgage , we can start again WITHOUT bloodshed
Let me get this clear: if I buy a distressed property from a bank where the original mortgage was tainted then my purchase may be void as well and I may lose my money too?
You should be OK if you have title insurance and if that title company remains solvent.
The problem is, every title company will go "busted" defending all the suits... This is WAY bigger than everyone seems to think...
Even if it's not distressed, your buying a property that may have had a mortgage sometime since 2005 that could have been securitized, and therefore part of a legal action for about 20 different reasons.
Also, the banks are trying to forclose on those they can get a deficiency judgement against even if no payments have been missed. If a buyer has a mortgage and other sufficient assets they are ripe for a forclosure. I can see Third party companies are going to be popping up and are will call homeowners and try to identify those owners by asking in-depth financial questions about their home and other assets... The people with some real money besides their home are more of a candidate for forclosure than those living friday to friday... So I dare someone to put their mortgage payments into an escrow account. I'd be scared to death, that effort alone would be enough to start forclosure proceedings for breach of contract. And they don't want to work it out, they want the house back... It's complicated...
Also, the banks are trying to forclose on those they can get a deficiency judgement against even if no payments have been missed.
Bank must first declare a person in default before they can begin foreclosure proceedings. Can't declare default if no payments missed. And a deficiency judgement can be granted only after a forclosure sale. Your statement is wildly incorrect.
http://en.wikipedia.org/wiki/Deficiency_judgement
... and will call homeowners and try to identify those owners by asking in-depth financial questions about their home and other assets... The people with some real money besides their home are more of a candidate for forclosure than those living friday to friday...
People who have money are not going to be giving the time of day to someone asking about their assets over the phone, or in person. Perhaps your words came out wrong and you are trying to say something different from what is actually typed in your post. The only candidates for foreclosure, ever, are folks who have missed the required number of payments on their mortgage. No one can be foreclosed on when their payments are current.
they just call the loan... when the owner can not get another loan, they forclose... not good business but why do they care? they are all in trouble anyway... it's complicated, and if it were easy to understand it would be easy to explain... sorry, I know what I'm trying to say.
No one can be foreclosed on when their payments are current.
If the bank is distressed they must do what they need to do to raise money... They rely on everyone thinking your statement is true. It's not...
Ok - I meant that the foreclosure process would not go to completion. The bank might start the process, in error. But there are too many safeguards along the way that would succeed in preventing the bank from reposessing a house where the mortgage payments are current. And mortages are not callable, unless it is an unusual mortgage as I stated previously. Bonds are callable. That is the nature of a bond. The nature of a mortgage is that they run for a defined period of time so long as payments stay current.
It's not that the purchase would be void, but for sure you could lose your money. Heh.
After the banks forclose on those that can realistically payoff a deficiency judgement, they would then possibly turn to calling the balance of their loans (securitized or not). Not that it would be popular or good for confidence in lending, but no bank would like to be the last bank to call it's loans as "ALL" the banks are somewhat equally distressed. And then it's Bedford Falls all over again. This is very serious... They are kind of tiptoe'ing around it now, as not to wake anyone up too quickly... TARP was about buying time... IMHO...
And even calling loans just made recently, is possible, and maybe probable if you think about it. They are all just "feeding the shark, in the hopes that it will eat them last"... So when the frenzy begins... WOW!
Counter measures:
1.) repeal minimum wage (grandfather existing, and ensure co's don't fire and replace within 18 months. a guy who hasn't worked in 99 weeks has a bad looking resume, worse than someone who's been making $2.00/hr. you get the concept I hope.)
2.) enforce and strengthen anti-trust laws (no drug companies buying more drug companies and laying off duplicates, that's bad for competition)
3.) raise gas/diesel prices to about $11 /gallon (then it will be cheaper to make products locally. Jobs return.)
Lending and Jobs will then return. Trust me. Just takes some guts...
Yeah, pretty sure that's just nutty shit. #3 is novel, at least, but would shatter demand in the vast majority of the US. Even stupid folks wouldn't go to work if they were paying more in commute prices than they earned.
I'm not opposed to massive deflation, but I don't think it can happen.
I get that a lot. The nutty shit part... and I don't think it will ever get any traction, but in 6 months it will be someone else's idea and your going to wonder where you heard it before... I get that a lot too...
If massive deflation of the dollar does occur, seems a pretty safe bet that all the "reserve" dollars pour back into the US and strip the country of all assets.
Just can't see that. A brief deflationary burst, maybe, but it can't last given the number of dollars in the world.
Standard mortgages are not callable. Balloon payments, yes. Foreclosure for non-payment, yes. But not callable. I'm sure private parties could create a mortgage that was callable, but it would be an odd situation where a buyer would ever agree to such terms for a mortgage.
And deficiency judgements again?? I refer you again to the Wikipedia link in my response to you above.
there are no rules... if banks started calling loans it's because they are failing, it would lead to real confidence problems for sure, but they can do it... guaranteed... If your convinced not, then that a good place to be, with about 98% of the rest of the population. It may never happen, and then your right.
Did you ever think they had the right to sell your agreement to someone else and they in turn could then securitize your agreement into a tranche of other agreements, which could all be in jeopardy because of some failures? Meaning no title at the end. And even if they didn't sell yours into jeopardy, they themselves were at risk of failure because of all the litigation due to alledged illegal activity. It becomes a snowball no matter how you look at it...
And all banks, in the same jam, at the same time... yikes...
... there are no rules ...
Yes there are. They are spelled out in the loan contract on any loan. One can sue to enforce performance under a contract.
Did you ever think they had the right to sell your agreement ...
Yes I did. Every properly-written loan contract includes a clause that the lender has the right to sell or assign his interest in the loan. That is common business practice.
And all banks, in the same jam, at the same time...
Yes. That is not in dispute.
Rich man, poor man. Houses are not assets. They are places to live (and breed).
Here's a warning to Australians, based on my own sad experience.
If you own property in Australia, and have an old style Land Title Deed (the big rag-paper A3 sized document, dating from the early 1800s, with the ornate scrollwork, stating ownership "in fee simple", and with on the back a nice history of all the land's ownership changes and mortgages for a couple of hundred years, be careful.
If you ever take out a mortgage with the land as collateral, DO NOT hand over that physical title deed to the bank. Because you won't be getting it back. It will get 'lost', or 'disposed of' or some other bullshit story. Turns out these old form deeds are 'obsolete', and will vanish somewhere in the system. In its place on repayment of the loan you'll get (from the Lands Department) a boring A4 ink-jet printed sheet of paper saying the government acknowledges that you are the owner (at their discretion) of the land.
Legal advice I sought says is this is perfectly normal. You never owned the original title deed document, it wasn't actually a deed of absolute ownership, the Lands Dept's records are the only true record of ownership, their new filing system of land titles obsoletes the old Deeds, they can destroy the old documents if they like, etc.
My question is, if the old Title Deed (that looked really cool, had great sentimental value, and clearly stated absolute ownership) was so fueking irrelevant, why give it to the fueking Commonwealth Bank (on taking out a mortgage) at all?
Silly me, for thinking I was entering into a contract with the bank, in which they were agreeing to return the actual physical title deed after I paid off the $300K loan (in six years, without a payment missed.) Apparently not. Fuekers.
On suggesting to my lawyer that the CBA probably actually bundled up my mortgage into a CDO, and so my title deed may be sitting in a third party warehouse somewhere in a big bundle of other deeds, and I'd like to sue the CBA for breach of contract, fraud, conversion, acting ultra vires, and whatever else could be made to stick, I'm informed that I don't have a case since parties to a contract are legally able to sell their side of a contract on to others - without the consent or even informing the counter party to the contract. Also, that old Title Deed was worthless, etc, see above.
The law in Australia is a sick joke.
Anyway, if I were to do this again, before taking out a mortgage I'd go to the Lands Dept, say I'd lost the original Title Deed, pay the small fee to get them to print out a new-format crappy certificate of title, and give *that* worthless piece of shit to the bank. Let them do whatever they dammed want with it.
I can't help suspecting that this whole stinking situation is designed to physically eliminate as many of those old, very clear and solid Land Title Deeds as possible. One more example of creeping dis-empowerment of the people by the government. Who needs eminent domain legislation, when the people can't actually prove they own their property?
Anyone in American thinking that the same may apply there? That the breakdown in chain of title to private property might have been a *deliberate* objective?
I muddled through this article and came to this statement: "listen to the radio adds, and the brokers..."
and I was like brokers? what brokers still exist? so I continued thinking it was still a mildly interesting read until I came to "deed in lou." Do you mean "deed in lieu" you fucking asshole? Try actually knowing what you are talking about. So I couldn't continue. This article was written by a fucking clown who likes to hear his own spew and sits in front of his pc with his pants down around his ankles. It just goes to show that you don't have to know anything in American society to make it; you just have to have endless confidence and be a shameless self promoter.
It's complicated... you have to hear/read this stuff 10 times before it makes sense...
The banks want the property, not the loan. The courts could rule the loans to be "NET" unsecured. To get the property the banks will do many things. A couple of which are: Deed in Lieu of forclosure, Deficiency judgement (because everthing is a pseudo "short sale") as most are upside down, etc. But the loans in good standing they want the most, because if the buyer pays off the mortgage in 25 years at 5 1/2% the banks lose big time. Also, they can not deliver a title at the end (maybe - maybe not). Because somewhere along the line a bank that allowed the agreement to be securitized or was allowing other agreements to be securitized, will have touched (or sold) the loan. Think of the credit default swaps that have been passed around like a joint, often by those who could not pay the insurance off. It's not really a security, it's an agreement, and the courts can do almost anything with them. Because it's not who held it last that has to pay. It's a series of agreements.
Enter the same guys who were selling mortgages on million dollar houses to strawberry pickers making $14 per hour. The show "American Justice" or "Gangs in America" believes many of them come from the ranks of the many "gangs" having now gone legitimate. So now they are needed to get properties back. Not because people are not paying on their agreements, but because they expect rates to go back into the teens or higher in the near future, and 5 1/2% unsecured loans (unsecured by virtue of court action) will not be good business, when banks are selling secured loans at 14% for example.
Again, it's complicated, and I'm obviously not an expert... but you have to think like a cheater with all this... You have to really understand the CDS problem, the loan securitization problem, the fed reserve problem, and the defecit problem to start to tie it all together.
The guy was all over the map, but that's the nature of this one... It's a twelve legged spider at a minimum.
There is no such thing as an unsecured mortgage. A personal loan, by definition, can be unsecured. A first mortgage, by definition, cannot be unsecured. For it to be classified as a mortgage, it must be secured by real property. You are maybe confusing the unsecured concept with the non-recourse concept. They are two totally different animals.
The mortgage was originally secured, but unsecured to the servicer, in that the loans were securitized and subsequently may be found to be illegal, fraudulent or other based on that act alone...
"This is why so much mortgage loan activity in the last 1.5 years has been refinancing. Banks are not interested in taking on new risk, they are interested in mitigating old ones. These new notes and mortgages don’t find their way to MERS, and they do not follow the “old” securitization process. These original wet-ink notes find their way to actual bank vaults this time. "
So the bank is a servicer or middleman in the securitized scenario with a lot of risk exposure from litigation on both sides. To mitigate that risk and assure the loan is secured in the old sense of a mortgage loan, the bank advises the owner to re-finance. "Wet-ink notes in the vault". Now the only risk is that the bank may not be able to provide a title at the end of the trail in 25 years. Feed the shark, in the hope he will then eat you last.
So he offered you 1/2 point less than your original loan, and what he gets is either a chance to manage his own risk somewhat by getting fresh paper, or he gets enough info in the application process for the re-finance to know whether the buyer could pay a "deficiency judgement" or whatever you want to call it, in the event he then calls the loan. Note: I know you think that's not possible, but if it could happen, imagine the affect. Once this rolls there will be no new loans available in theory, as they will all be in the same fix.
Some may get this, others not... If your being raped, don't tell the rapist your going to tell someone they did it... Because now your dead... The rapist is doing what they think they have to do... The banks will be doing just what they think they have to do as well... A stretch I know, but the best I have on short notice...
Deficiency judgements are not allowed in non-recourse States. States which allow deficiency judgements are those states where mortgages are recourse and the bankruptcy proceeding is presided over by a judge. The judge is the one who allows a deficiency judgement to be lodged against the person forclosed on. The deficiency judgement is allowed only if the house has sold at foreclosure auction for less than what is owed. The judge grants or denies the mortgager's request to reclaim the difference from the person foreclosed on.
If a loan can be called, by definition it is not a mortgage loan. It is a different type of loan.