Posted tagged ‘Fraud’

Lest We Forget: How The Banks Are REALLY Screwing Us In The Foreclosure Mess

October 23, 2010

Everyone, and I mean everyone you ought to be reading, has been working through the mechanics and the meaning of the foreclosure fraud being performed on the nation by our biggest banks.  For a quick overview, head on over to Rortybomb, just read your way down, and check out Naked Capitalism as well.  I promise you, once you start down the trail of links, you’ll have days of infuriating study ahead of you.

But for all the justified outrage at the simple disdain for the concept of property rights and the rule of law* there’s something else being missed here, something that astute observers have commented on, but that seems to be a bit obscured as we all, understandably, rubberneck in horror at the trainwreck that the major banks have made of the foreclosure process.

And that is that the entire foreclosure endeavor is in fact a huge imposed cost on American homeowners and our economy; it almost certainly runs against the long-term interests of the financial system as whole, whatever the incentives may be for individual companies (and it may well be a long term fail for many of the short-term beneficiaries as well).  Foreclosure as it is being practiced now is likely to be a net negative for homeowners now, to the point that subsidizing in some way those who got into trouble is economically rational, even if it might be galling to those who’ve paid up and gone about their business.

At least, that’s how I read this paper by John Campbell and Stefanio Giglio and my MIT colleague Parag Pathak, “Forced Sales and House Prices.”  It uses an ingenious trick to isolate the implications of forced foreclosure sales for prices of both the foreclosed home and nearby properties by tracking such sales in comparison with other forced sales, like those that follow the death of an owner.

Their results are of a sort fairly common in applied or empirical economics:  quantifications of the seemingly obvious.  Foreclosed properties sell at a deep discount to their local markets and in doing so, drive down the values and sales prices of nearby homes.  Money quote:

We find that foreclosures predict lower prices for houses located less than 0.25 mile, and particularly less than 0.1 mile away. Although foreclosures and prices are both endogenous variables, the fact that foreclosures lead prices at such short distances does reinforce the concern that foreclosures have negative external effects in the housing market. Our preferred estimate of the spillover effect suggests that each foreclosure that takes place 0.05 miles away lowers the price of a house by about 1%.

Not the sexiest prose in the history of styli and tablets, I’ll admit, but the point is clear enough: this study found that foreclosures sell at 27% discount to the unforced sale price, and that the loss to the seller (the foreclosing banks) is compounded by a loss to every homeowner in the neighborhood.

As foreclosures mount, that loss grows — and, the study found, such effects are often concentrated in lower-priced neighborhoods, which is to say that when scum like those dispossessing Kirk use fraud and deceit (advising him to skip a payment to start up the loan modification process, only to use the action taken on that advice to begin the process of seizing Kirk’s home) — and thus maximize their short term return by dragging out a foreclosure process, they are imposing a charge on every homeowner and every bank lending on homes in Kirk’s neighborhood.

Expand your view to the country as a whole and you see that over the last decade, the banks lent recklessly, leveraged insanely, and then resorted to a range of unsavory-to-illegal manouvers to limit exposure to the consequences of decisions that, taken altogether, effectively bankrupted the US and much of the world’s financial system.

They have received enormous sums to prevent an overt bankruptcy, and in response have pursued tactics that do untold harm to thousands, perhaps millions of American citizens as they foreclose on the properties they recklessly exposed themselves to over the last several years.  As they pursue those foreclosures, those banks have both deceitfully tripped some homeowners into default (see Kirk, above) while performing multiple frauds and failures to proceed in a legal fashion in a sequence of actions that looks suspiciously like a fee-maximizing game of delay.

In  so doing our financial lords and masters harm us all by slashing yet further the value not only of homes in default, but those of hundreds of thousands, maybe millions of homeowners who had nothing to do with either the bad loans in the first place or the foreclosure fiasco now taking place. This is effectively not so much as a tax as a taking — one that reduces the wealth of millions of Americans who don’t have scratch to spare thank you very much

Duncan Black (can’t find the link in haste…will try to dig it up) among many others have been screaming for years that the appropriate policy from both a social and an economic point of view has been mortgage cramdown — I’d add you’d need a (non-kangaroo) court-supervised dispositions of the properties too far underwater to permit any reasonable mortage adjustment to save the day.  But whatever the details, there is a growing body of work that suggests it would be cheaper for our country, if not for an individual bank or holder of an ill-begotten MBS, to keep people in and maintaining their homes while not imposing what amounts to a huge fine on every nearby homeowner who has kept their property out of default.

And that is not just this DFH talking.  This is the clear implication (expressed in a rather different language than the authors of the original work would use, no doubt) of the soberest of sources, two Harvard and one MIT economist, as respectable a set of oracles as you could possibly hope to find.**

One last thought:  There are those (as noted below — see the Wall St. Journal) who argue that the foreclosure documentation mess is merely a matter of trickery and delay on the part of those who shouldn’t have bought houses in the first place, and that,in the words of the Journal,  “the bigger damage here is to the housing market, which desperately needs to find a bottom by clearing excess inventory and working through foreclosures as rapidly as possible…”

If, however, you live in the reality based community, and not in the ideological bubble chamber that is the Journal’s — and the modern GOP’s — true home, then you would read things like the paper cited above, and maybe think twice before suggesting that the best outcome for America (and maybe the banks too, in fact) is to accelerate a process that destroys value for homeowners who are not in arrears, in the process of depressing the country’s real estate market for years, at least.  Just a thought, you know.

*One of the weirdest things about the whole housing mess to me has been the wholesale abandonment by the alleged “conservatives” among us of any commitment to — or even basic understanding of — the idea of property rights, contract law, and the roles and duties of parties to contracts governing real property.  We have McArdle outraged that folks who got their sums wrong walk away from mortgages — as if the banks did not have a full, contractually specified recourse, to take possession of property they were supposed to have exercised proper caution in evaluating.  We have the Wall St. Journal dismissing as mere sloppy paperwork sustained, widespread and long-lasting fraud by the major banks in their attempt to pursue contractual remedies to which they are not entitled.  It seems to me that there is nothing more likely to produce a long-term threat to the American real estate market than confirming the belief that one of the biggest risks in home purchasing is that your lending will f**k you over.  Yet the Wall St. Journal thinks it appropriate to dismiss criminal conspiracies by banks as mere high spirits.  Astonishing — but worth remembering the next time that paper opines on the sanctity and infallibility of “free” markets.

**I hope it is obvious, and if it is not, let me make it so here: every interpretative statement and every conclusion not drawn from a direct quote from Campbell, Giglio and Pathak is mine and mine alone.  If I’ve made analytical errors, they are mine, not theirs; if you dispute my characterizations or conclusions, your beef is with me, not them.  To give you just another taste of their reasoning however, here’s one more passage from the concluding section of the paper cited above:

Our results cannot be definitive on the causality from foreclosures to house prices, but the combination of timing effects (stronger from lagged foreclosures than from future foreclosures) and geographical effects (stronger at extremely short distances) suggests that there is reason to be concerned about spillovers from foreclosures to neighboring houses…

The authors are cautious writers.  They make it clear, however, and they quantify their reasoning, that foreclosure does damage to the sales price of both the defaulted property and the neighborhood.  As I say, a quantified glimpse of the obvious — but it is often necessary to prove what you know, both so you can say so with authority, and because every now and then the obvious is false.  Just not this time.

Images:  Winslow Homer, “The Camp Fire,” 1877-78

Dorothea Lange, “Migrant family from Arkansas playing hill-billy songs. Farm Security Administration emergency migratory camp. Calipatria, California” 1939

Too Busy To Post, Too Enraged Not To Note The Latest Bit of Fraud/Nonsense–Mortgage Backed Securities/Foreclosure disaster edition

October 13, 2010

On multiple deadlines today, but I couldn’t resist this juxtaposition.

First, this, from two weeks ago (h/t LegalForesicAuditors.com):

NEW YORK — JPMorgan Chase has temporarily stopped foreclosing on more than 50,000 homes so it can review documents that might contain errors.

JPMorgan’s move Wednesday makes it the second major company to take such action this month, underscoring a growing legal problem. The issue could stall an already overloaded foreclosure process.

…..

JPMorgan acknowledged Wednesday that its employees signed some affidavits about loan documents without personally verifying the files. These affidavits verifies the accuracy of the loan information, including who owns the mortgage.

….

In some states, lenders can foreclose quickly on delinquent mortgage borrowers. But 20 states use a lengthy court process for foreclosures. They require documents to verify information on the mortgage, including who owns it. Florida, New York, New Jersey and Illinois are the biggest states with this process. 

Christopher Immel, a Florida lawyer who represents homeowners, said people who already have lost homes could sue their lender, alleging errors in documents.

In August, a judge in Duval County, Fla., ruled that JPMorgan could not foreclose on two homeowners. The reasoning was that Fannie Mae carried the mortgage on its books and JPMorgan Chase only collected payments on the loan. JPMorgan Chase had identified itself as the owner of the loan.

….

More lawsuits could come soon.

In May, JPMorgan employee Beth Ann Cottrell said in a deposition that she and her staff of eight signed about 18,000 legal documents a month without reviewing every file. In a similar testimony, GMAC employee Jeffrey Stephan said he signed 10,000 documents a month without personally verifying the mortgage information.

And then there’s this, hot of the intertubes via NYTimes.com:

JPMorgan Chase kicked off what was expected to be a mixed quarterly earnings season for big banks on Wednesday with a 23 percent increase in third-quarter income.

After powering ahead for the last year on the strength of its trading operations, JPMorgan topped investor expectations with the help of improvement in its credit card business and a gain from money it had previously set aside to cover possible losses from bad loans.

Net income rose to $4.42 billion, from $3.58 billion a year earlier. Earnings were a $1.01 a share, handily topping analyst forecasts for 88 cents. Earnings were 82 cents a share in the period a year ago.

The Times piece does note the fact that the bank faces significant costs and potential liability as it confronts the failure of its foreclosure process, and it quotes JPMorgan’s new CFO trying to discount the implications of this issue, saying “The whole mortgage issue costs us so much money now, to me it [the foreclosure SNAFU] is incremental.”

Just two quick thoughts:

1:  Given the different avenues through which JPMorgan is exposed to potential liability (as holder of delinquent loans, and through its role in the making of the market in mortgage backed securities affected by flawed documentaton — see this excellent series for more), the confidence expressed by the CFO in question, Mr. Douglas Braunstein, reminds me of this moment of assurance:

2:  What justification can anyone provide for the ongoing employment and wealth of the management of the major US banks/investment houses?

And to add just one more query in the spirit of honest curiousity:  what rationale is left for avoiding a modernized version of Glass-Seagall?  Commercial lending is a public utility, and needs to be both regulated and guaranteed as such.  Everything else can be at one’s own risk — but the two activities have to be kept separate, not just by alleged Chinese Walls, but institutionally, at the level of holding of capital and the existence of public insurance/guarantees.

Tell me, anyone, why this is wrong.

All of which is to say that before the Obama adminstration or Congress starts immunizing the big Wall St. firms from the consequences of what appears to be a decade of profiteering on real estate fraud, we gotta take the current structure down to the foundations.

Carthago Delenda Est.

Image:  Vincent van Gogh, “The Cottage,” 1885.

David Brooks, again

September 5, 2008

There is one truly mortal sin in all of science:  to create data that do not exist, to make stuff up.  It’s called fraud, and, when uncovered, it marks the end of at least one career — and often, as collateral damage, of those connected, often only very loosely with the original deceit.

In journalism simple fraud also gets you a ticket out the door; Jason Blair is now planning to work in human resources, I hear.

But more subtle frauds do not merely survive; when committed by the right person, in defense of a crucial narrative, they actually persist, and worse, gain prominence and traction to influence the most important political decision the victims of such frauds can make.

Exhibit A:  David Brooks’ latest.

Andrew Sullivan calls today’s column “poignant.”  I guess that’s right, if you, like Andrew have had a long history of friendship with Mr. Brooks.  I am unburdened by such ties of affection, so I’m free to be a little more harsh.

In this column, Brooks is trying to argue that, in fact, a toaster is rabbit — or that the McCain Palin pair are who they say they are.

Now, where I sit, that’s the job of the candidates, to present a claim for themselves that others — first responders being the press — can then test against hard ground of reality.

This role Brooks has abandoned, with a retreat so thorough it’s hard to remember when he actually did give a damn.

E.g, he writes of Palin

Millions declared themselves qualified to judge her a bad mother.

Yeah?  Who?  Remember it was the McCain campaign that released the news of Bristol Palin’s pregnancy, and Barack Obama who told his supporters and all of America that kids were off limits.

The notion that somehow the evil liberals leapt to judge Palin is not supported by any fact that Brooks has (or I reckon, can) cite; it is simply part of the fundamentalist projection machine, as documented by someone whose reporting has consistently outshined Brooks’ the comedian — yup, the funny guy — Jon Stewart.

The tactic here:  If the facts on the ground don’t suit, Brooks appears to have concluded, make up a just vaporous enough claim to avoid close scrutiny.

And then there’s this.

And what was most impressive was her speech’s freshness. Her words flowed directly from her life experience,

What — well maybe, except that Governor Palin’s teleprompter skills were put to work on a speech retooled from one originally written for the expected male nominee.  Again, you can’t quite nail Brooks with the same pure charges of fraud for the word “freshness” — except to note that it is a false claim on the face of it, an opinion that could not be held by a rational observer in possession of facts commonly known.

But worst of all is the claim Brooks made near the top of his column:

Her career in Alaska has been nibbled on the edges, but the key fact is this: When the testing time came, she quit her government job, put her career on the line and took on the corrupt establishment of her own party.

Not a single clause of that is true.  She took on an unpopular governor in alliance with a now indicted Senator at the beating heart of her party’s corrupt establishment.  And as for her career:  her troubles are increasingly well documented — from regressive sales tax increases and reckless accumulation of debt in her tenure as Mayor to the abuse of power investigation she now faces.  To Brooks that may be nibbling around the edges — but for someone whose claim to power rests on experience and ethics, those are issues that strike to the core of who she is.

I could go on — it’s my habit, after all, and Brooks has a seemingly inexhaustible font of hackery — but the real key fact is this:  Brooks’ column today repeats, in near lockstep, the McCain/Palin campaign’s narrative of the last few days.

As he sees it, or rather repurposes someone else’s carefully tested themes, it is not the new man from the party out of power, but an old reformer joined by a young reformer who offer the true possibility of change in a Washington that has, in Brooks’ words aroused McCain’s  “burning indignation at the way Washington has operated over the last 12 years.”

Nowhere does Brooks address the question raised by the opposition:  what change can be expected from a man whose voting record suggests near perfect lockstep with his GOP colleagues over the last eight years?  Maybe he has an argument to counter that Democratic Party attack, but rather than deploy it, he’d rather repeat the McCain campaign’s official fantasy of a freewheelin, freethinking man — and that’s not reporting, nor even punditry.  Brooks’s column could have been “written” by a stenographer.

Is this fraud?  No, in the end, I guess not.  Making facts up, creating characters, putting words never spoken or thoughts never conceived into print is what counts as journalistic fraud, just as actually faking data, reporting on experiments never done, or done with different outcomes, is what truly constitutes scientific fraud. You dont’ get fired for misinterpreting real data. (usually)

But it’s a species of deceit nonetheless.  It repeats other people’s claims uncritically.  It verges on unequivocal dishonesty with the nasty jabs at unnamed critics; it is merely credulous, the work of a hired hand pushing a message that his working brain, were it ever to fire again, couldn’t swallow whole.

Image:  Kobi, “Two Rabbits,” 19th century.  Museum of Fine Arts, San Francisco.  Source:  Wikimedia Commons.