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Add to FavoritesThe mortgage foreclosure crisis is a complex problem involving many factors and affected by other current economic factors. This is a downwardly spiraling problem that will have to play itself out.
Too many people greedily jumped aboard the real estate boom and invested unwisely and incautiously. Prompted by fear of rising home values, emotional desires of attaining the American dream, falsely thinking that the rising prices would give them equity in their homes and offset any changes in the interest rates, not being armed with enough knowledge, and not being able to foresee other changes in the economy like skyrocketing gas prices, runaway inflation, and job losses, buyers forged ahead with almost blind faith in the market and got what they could while the getting was good.
When politicians talk about infrastructure, they should also talk about people infrastructure. When communities become too expensive for working class people, that spells trouble. When the majority of the population is living on beer budget wages, but the housing has champagne price tags, people are forced to move to less expensive areas.
Take, for instance, South Florida. The first clue of big trouble came to light after our summer of non stop hurricanes. Insurance companies lost massive amounts of money that summer and raised their hurricane insurance premiums to unaffordable prices in the aftermath. In the state of Florida, banks require homeowners with mortgages to carry this insurance. But what does a homeowner do when they haven't anticipated this shocking and substantial dent in their budget?
Gas prices rose that summer, too. Then they declined a bit, but for just a short time. When gas prices started to climb again, they just kept on climbing.
Businesses have felt the crunch too and have been letting employees go or giving no raises or only the minimum.
Wages are not keeping up with inflation. Thus, homeowners feeling this stress put their homes on the market and the market gets flooded. Because the real estate market is partially driven by supply and demand, home values started to fall, compounding economic problems.
When news started surfacing about home foreclosures and huge increases in ARM mortgages, many shady lending practices came to light. Were the buyers warned that their interests rates could climb? Perhaps. But, in Florida at least, I hardly believe that anyone could have foreseen the economic impact of one hurricane season. Many buyers may have put those risks to the back of their minds because they feared skyrocketing inflation in housing costs even more. One has to remember that homes were going up in price by thousands of dollars every month. At the time, real estate seemed like the most profitable and safest investment.
This housing crisis affects the home owners involved, the lending institutions that now have to recoup their investments from defaulted loans, the investors of mortgage loan investments packages, Realtors, mortgage lenders, and more. The market is flooded and everyone is sitting around waiting to find out when this market will hit bottom. There is not much activity except from foreign investors who are taking advantage of the decreased value of the American dollar.
Interest rates have been reduced, but that does little to help. Gas prices are now driving the economy. The meat and potatoes people are turning to macaroni and cheese. They are scrambling to pay for higher fuel prices, higher food prices, and keep their jobs. The future looks gloomy, especially when daily there is news of this business or that closing stores, laying off employees, and losing money.
Forget the trickle down theory. We need a trickle up theory. To have a healthy community, there must be stability in home prices. Since property taxes are based on home sales prices, obviously Florida has taken a big hit in the revenue pocketbook. In order to make budgets and foresee costs of future needs, home town governments must know what they are working with now and in the coming years. At this point, it is anyone's guess.
When things were going very well, contracts were signed, projects were started, and then the crash came. But contracts must be fulfilled. So the powers that be must cut corners in other places. Even the universities are feeling the crunch. The Miami Herald said that the University of Florida is going to lay off hundreds of employees and decrease enrollment by thousands in the next four years. Other colleges will be doing the same. So what does this say to kids who want to go to college? What does this say about the waste of great minds to our society in general?
The government can help some people keep their homes, but that is not enough. The amount of loss on investments will be astronomical and difficult to calculate. In solving the mortgage foreclosure crisis, the government will also need to attack all other aspects of the economy:
hurricane insurance costs, gas prices, job losses, and rising food prices. People will need some stimulus to invest, but the stock market is shaky right now and no one knows where to put their money safely. Since the interest rates went down, there is not much money to be earned by saving and more to be lost in the inflation of goods and services.
As people cut corners trying to pay for their basic bills, other businesses will be hurt. People are stopping their land-line phone services, cutting back on cable, cutting their entertainment expenses, and staying out of the malls. That is the new trickle down theory.
There cannot be a healthy economy unless the masses have spending money. We cannot depend on big business to take care of us because their loyalties lie with investors and not employees. Their interest lies in their bottom line profit-loss statements looking good to investors.
They will out-source, lay off, close stores, deny raises, decrease benefits, and do anything else in their power to keep profits up and losses down.
Hopefully big business will finally get the message that they cannot do business unless people can afford to pay for their products. They are caught up in a huge dilemma. Businesses depend on investments to continue, but they also must serve the public and their employees. To thrive, they need both.
For there to be any substantial impact on the state of homeowners' economy and ability to honor their loan commitments, there needs to be a huge improvement in the overall economy.
We have to get a grip on inflation, for one. People must be encouraged to save, for another.
But we have been growing as an open market society by doing just the opposite. People have been encouraged to spend, spend, spend. Obviously, that way of doing things hasn't worked except for those on the top rungs of the economic ladder.
This country will have a long road ahead in trying to achieve some kind of market stability.
Until the powers that be understand the importance of having a healthy middle class, the downward spiral will continue.
Learn more about this author, Elizabeth Wordsmith.
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Yes
There is a solution to the mortgage foreclosure crisis, but it is not a quick fix. And the first order of business is to more completely understand what has happened and why. The real villain here may not be who you think.
The reason the solution to the mortgage foreclosure crisis is not obvious is that the problem is not obvious. Unless one is personally involved in a mortgage problem, all one will hear is the constant haranguing by the financial gurus and media talking airheads that people made poor loan choices and now cant pay their mortgages. This is not the whole story-nowhere close:
The real problem behind the mortgage fiasco appears to be actions to de-regulate the financial industries in the past thirty years. Once Congress decided to let the financial sector regulate itself, the proverbial fox-in-the-henhouse situation began to occur. As the Federal Government encouraged the loosening of credit to prop up an economy that showed signs of damage from a torrent of globalization and outsourcing, financial markets took that as tacit permission to play fast and loose with everybody's money. Perhaps it was that sign that caused the current problem. Certainly, a lack of business ethics contributed greatly. Once again, Middle-America pays for the mistakes, theft and simple poor judgment of the Big Boys. Mortgage fraud has been rampant and semi-respectable in the banking industry for several years. This is the dark underbelly of the foreclosure problem.
Statements that deadbeat borrows created their own problems is simplistic at best and the protestations of the greedy guilty at worst. Of course, there will always be deadbeat debtors. However, much of the foreclosure mess revolves around speculators-those that bought real estate to flip', using easy credit and balloon mortgages to parley a piece of their inheritance or 401(k) or even a loan into what they hoped would be a good investment. Many of these investors-I wont call them homeowners because they are a different breed entirely-used money gained from speculative stocks to purchase Mc Mansions, with a little down and an assumption that they would turn it over at a huge profit before the balloon payment came due. Victims of the Dotcom bust constitute the first wave of foreclosures-their overgrown homes sit, unfinished and deteriorating in many upscale developments. Even among these more savvy investors, mortgage fraud found victims.
That these borrowers have been abused by the system is obvious, although they were partly to blame for their later problems. However, there are other common procedures occurring that created the real problems, particularly in the sub-prime market: one is that brokers and loan originators have been given tacit approval to mis-lead and outright lie to consumers-a group of consumers least likely to be financially educated and able to afford good legal representation. Both groups have encouraged prospective buyers to buy more house than they could afford, fudged numbers behind the scenes and tossed unexpected legalistic paperwork at unsophisticated buyers at closing. This bum's rush has resulted in many buyers, often lower income and less educated in financial matters to end up signing things they did not understand and may well have been lied to regarding the particulars. Technically, it IS the buyers problem. Ethically, it is the lender, the broker, the loan originator who basically scammed these people into signing something they could never afford to pay. Just like the old confidence game' scams, these buyers believed they could trust their lender. Exactly the same thing happened in the home equity loan market. In both cases, the lender, the broker and the loan originator took their money and ran like the devils they are.
Even more egregious is the fact that certain large lending institutions seem to have turned a blind eye to employees who forged the borrowers' signatures on changes in the paperwork, changed numbers and generally turned it into a more profitable transaction for the lender and themselves. As judges, attorneys and other officials typically believe the bank wouldn't lie, borrowers caught in these schemes-lets call them crimes, because they are-had little recourse. The soon found themselves in foreclosure. One sad story recently in the news involves Edward Jordan, a retiree in Brooklyn who is in danger of foreclosure based on a home equity loan he took out that mis-represented his adjustable rate. His story can be found in the links below.
Most people with common sense cannot figure out how a lender would want to foreclose on a property as the profit factor is hard to see. A bit more digging uncovers where the profit factor comes in. It is the profit generated in servicing' fees. This complex slight-of-hand trick relies on a mortgage being over 30 days behind in payments and has evidently generated a great deal of effort to make sure many mortgages end up in servicing'. In a nutshell, a servicing corporation is formed and spun off from the mortgage company as a separate entity, although still a part of the lending institution. The servicing corporation charges fees-which are billed to the borrower, passed back to the main mortgage holder and thus generates profits over and above the expected interest paid every month. Added fees make homeowners fall farther and farther behind, particularly if they are in one of the tricky adjustable rate deals so prevalent with these loans. Soon, fees escalate as homeowners try to salvage their home from foreclosure. The fees compound so steeply and with such speed they can never catch up. The real trick is that neither the servicing corporation nor the mortgage company OWNS the mortgage; the mortgages have been bundled and sold to other entities, often overseas at inflated prices and end up on the REIT stocks lists. The buyers of these bundled mortgages are also charged fees for servicing' the account, often fraudulently. Again, relaxation of banking laws and oversight has resulted in every dollar being leveraged up to 30 times within the market, driving investment, profits and the fraud behind it all.
I realize the entire scenario is very complex-I barely understand it myself as I don't have a financial background and certainly cant explain it well as I don't have the specialized vocabulary to describe it. In that sense, I am much like the victimized sub-prime borrowers at the heart of this scheme. But, due to the fee structure, the founding of corporations within corporations and the derivatives market, it becomes profitable to lenders to make foreclosure happen and take the loss, as the principle has already been paid to them when they sold the mortgage at an inflated value. In the process, however, they have broken several laws and often defrauded the IRS right along with the home owner. It is for these reasons that the FBI has announced it is investigating seventeen banking institutions. A complete listing of those under investigation has never been published, but financial institutions mentioned in news articles include Morgan Stanley, Goldman Sachs, Bear Sterns, Wells Fargo, Countrywide and Citi Group. These are not small, fly-under-the-radar corporations; they are the leading financial institutions in the United States! The Securities Exchange Commission-another regulatory agency evidently lax in overseeing the investing corporations, is also investigating them, as is the IRS. Some of these slight-of-hand actions even defrauded the taxman. . .the one thing that will call down the wrath of the government.
Two cities, Baltimore and Cleveland, have actually filed suit against Wells Fargo for fraudulent foreclosures that have devastated those cities. The mayor of Cleveland has gone so far as to call the entire mess Organized Crime' and threatened to sue under the RICO Act. Judges in several states have been throwing foreclosure suits out of court because they finally realized the corporation bringing the foreclosure action is not the owner of the mortgage-it has been sold to overseas investors. By law, foreclosure action can only be brought by the owner of the mortgage. As a mortgage is sold, the borrower is supposed to be served notice the action has occurred. In most cases, these lenders have been working night and day trying to generate enough paper to provide a false record that this has been done as required by law. Borrowers are disputing that it ever occurred. In many cases, the required paperwork can not be produced for the court or is obviously fraudulent and the actual owner of the mortgage cannot be determined. Therefore, there is no one who can legally sue for foreclosure.
The fact that any of this has been discovered and put together so Joe Public could understand it somewhat is the work of one teen age kid in Texas. Cyrus Rafizadah began his own investigation of Wells Fargo after his mother, a commercial realtor was bankrupted by a predatory lending scheme. This extremely bright lad has investigated deeply and thoroughly the shady dealings going on in the real estate financing field and developed a unique and thorough website dedicated to uncovering the shenanigans in the field. He uncovered such items such as IRS fraud and the pass-thru entities that have been created to generate profits and has brought them to the attention of somewhat reluctant government regulators. Cyrus, an early entrant into the University Of Texas School Of Law will be graduating this spring with a Bachelors degree and hopes to specialize in consumer issues. His investigation of a single case has uncovered a financial fraud that brought the worlds' financial structures to its knees. Go, Cyrus!
As to how to fix the on-going foreclosure crisis, one way is to make public to all borrowers the laws surrounding foreclosure and who can file for it. Many courts are not aware of the frauds being perpetrated by these original lenders and service companies. Every Legal Aid office, every Pro Bono attorney needs to become familiar with this scheme. Congress could work to limit adjustable rate hikes. Money spent helping borrowers get rid of fraudulent charges and set up livable payment plans would go far. The worst thing Congress could do is what it is planning to do-provide funds for people to buy foreclosed homes: this simply makes it even more likely lenders will foreclose. Congress needs to act immediately to strengthen regulation of the financial sector and force criminal indictment of CEO's that profited from these schemes within their institutions. If you rob a bank, you go to prison for lots of years. Why not the same punishment for a bank that robs YOU? Transparency in lending and mortgage servicing must be forced on these institutions as it is apparent they will break laws and defraud the poorest of citizens if they can get away with it. Bail-outs of investment houses such as Bear Sterns and loans to investment bankers need to stop immediately.
Oversight is the job of Congress. Indeed, it is such an important job that members of the House Banking Committee need to be under increasing scrutiny for the poor decisions and rules they have made. We have strong fiscally-responsible people in Congress that could do a great job of stopping the quasi-legal drain on the taxpayers-why aren't they on the committee? The Federal Reserve, supposedly the entity that was supervising these renegade bankers, certainly should NOT be given more control over their actions , as a private, for-profit financial entity, it's supervision inherently leads to a conflict of interest. We have seen how they supervise'. Unfortunately, a bail-out of Bear Sterns is probably necessary at this time to avoid total collapse. But, financial entities need to be responsible for operating under fiscally-sound management: borrowers certainly have paid the price. We should expect no less of lenders.
For those who are interested in reading more about the inner workings of the foreclosure industry, I suggest you read Cyrus's excellent website at www. Predatorix.com.
Edward Jordan's story: http://abcnews.go.co m/Nightline/story?id =3892797&page=1
Morgan Stanley (MS, Fortune 500), Goldman Sachs Group (GS, Fortune 500) and Bear Stearns (BSC, Fortune 500) all
disclosed in regulatory filings Tuesday that they are cooperating with requests for information from various, but unspecified,
regulatory and government agencies.
http://www.predatori x.com/files/document s/CNNmoney%201-29-08 %20FBI%20Investigate s%20Subprime%20Fraud .pdf
Wells Fargo, BofA, others sued by city of Cleveland over foreclosures
http://www.predatori x.com/files/document s/SanFranTimes%201-1 1-08%20Cleveland%20S ues%20Wells%20Fargo. pdf
Baltimore sues Wells Fargo
http://www.predatori x.com/files/cases/we llsfargo/Baltimorevs WellsFargoComplaint. pdf
Learn more about this author, Linda Sunkle-Pierucki.
Click here to send Author comments or questions.
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