Foreclosure Fraud: 6 Things You Need To Know About The Crisis That Could Potentially Rip The U.S. Economy To Shreds

The foreclosure fraud crisis seems to escalate with each passing now.  It is being reported that all 50 U.S. states have launched a joint investigation into alleged fraud in the mortgage industry.  This is a huge story that is not going to go away any time soon.  The truth is that it would be hard to understate the amount of fraud that has gone on in the U.S. mortgage industry, and we are watching events unfold that could potentially rip the U.S. economy to shreds.  Many are now referring to this crisis as “Foreclosure-Gate“, and already it is shaping up to be the worst thing that has ever happened to the U.S. mortgage industry.  At this point, it seems inevitable that some financial institutions will go under as a result of this mess.  In fact, by the end of this thing we might see a whole bunch of lending institutions crash and burn.  This crisis is very hard to describe because it is just so darn complicated, but it is worth it to try to dig into this thing and understand what is going on because it has the potential to absolutely decimate the entire U.S. mortgage industry.

The truth is that there was fraud going on in every segment of the mortgage industry over the past decade.  Predatory lending institutions were aggressively signing consumers up for mortgages that they knew they could never repay.  Many consumers were also committing fraud because a lot of them also knew that they could never possibly repay the mortgages.  These bad mortgages were fraudulently bundled up and securitized, and these securitized financial instruments were fraudulently marketed as solid investments.  Those who certified that these junk securities were “AAA rated” also committed fraud.  Then these securities were traded at lightning speed all over the globe and a ton of mortgage paperwork became “lost” or “missing”. 

Then, when it came time to foreclose on these bad mortgages, a whole bunch more fraud started being committed.  The reality is that the “robo-signing” scandal is just the tip of the iceberg.  The following are six things that you should know about how deep this foreclosure fraud crisis really goes….   

#1 According to the Associated Press, financial institutions were hiring just about whoever they could find, including hair stylists and Wal-Mart employees, as “foreclosure experts” to help them rush through the massive backlog of foreclosures that were rapidly piling up.

Apparently many of these “foreclosure experts” barely even knew what a “mortgage” was according to the AP….

In depositions released Tuesday, many of those workers testified that they barely knew what a mortgage was. Some couldn’t define the word “affidavit.” Others didn’t know what a complaint was, or even what was meant by personal property. Most troubling, several said they knew they were lying when they signed the foreclosure affidavits and that they agreed with the defense lawyers’ accusations about document fraud.

#2 There is soon going to be a colossal legal scramble to figure out who actually owns millions of U.S. mortgages.

In his recent article entitled “Invasion Of The Robot Home Snatchers“, Robert Scheer described the complete and total mess that the U.S. mortgage industry has created….

How do you foreclose on a home when you can’t figure out who owns it because the original mortgage is part of a derivatives package that has been sliced and diced so many ways that its legal ownership is often unrecognizable? You cannot get much help from those who signed off on the process because they turn out to be robot signers acting on automatic pilot. Fully 65 million homes in question are tied to a computerized program, the national Mortgage Electronic Registration Systems (MERS), that is often identified in foreclosure proceedings as the owner of record.

Meanwhile, more organizations are stepping forward to help homeowners fight foreclosures.  National People’s Action, PICO National Network, Industrial Areas Foundation, Alliance of Californians for Community Empowerment and the Northwest Federation of Community Organizations have all partnered with the SEIU to launch the “Where’s The Note” campaign which is going to encourage homeowners to demand to see the note before submitting to a foreclosure.  Campaigns such as this are going to make foreclosures much more costly for banks.

#3 Legal battles over foreclosure documents could soon spawn thousands upon thousands of lawsuits across the United States.

Adam Levitin, a Georgetown University Law professor who specializes in mortgage finance and financial regulatory issues was recently quoted in an article on CNBC as saying the following about the situation we are currently in….

The mortgage is still owed, but there’s going to be a problem figuring out who actually holds the mortgage, and they would be the ones bringing the foreclosure. You have a trust that has been getting payments from borrowers for years that it has no right to receive. So you might see borrowers suing the trusts saying give me my money back, you’re stealing my money. You’re going to then have trusts that don’t have any assets that have been issuing securities that say they’re backed by a whole bunch of assets, and you’re going to have investors suing the trustees for failing to inspect the collateral files, which the trustees say they’re going to do, and you’re going to have trustees suing the securitization sponsors for violating their representations and warrantees about what they were transferring.

#4 The problems with foreclosure paperwork may be more widespread than anyone would have dared to imagine.

Attorney Richard Kessler recently conducted a study in which he found “serious errors” in approximately 75 percent of the court filings related to home repossessions that he examined.  Now he says that the foreclosure crisis could haunt the U.S. mortgage industry for the next ten years….

“Defective documentation has created millions of blighted titles that will plague the nation for the next decade.”

#5 If some banks discover that they are missing the paperwork for large numbers of mortgages (as is currently being alleged), those banks could be forced to significantly revalue those assets (as in “close to zero”) on their balance sheets. 

John Carney of CNBC recently described it this way….

The most damaging thing that could happen to banks would be the discovery that they simply cannot prove they hold a mortgage on a house. In that case, the loan would probably have to be written down to near zero. Even for current loans, the regulatory reserve requirements would double as the loan would no longer be a functional mortgage but an ordinary consumer loan. Depending on the size of the “no docs” portion of the loan portfolio, this might be a minor blip or require a bank to raise new capital to fill the hole in the balance sheet.

#6 Renowned investor Jim Sinclair is actually warning that the collapse of securitized mortgage debt could be the “final shot” that will wipe out many financial institutions across the United States. 

The recent warning that Sinclair posted on his blog is more than a little sobering…. 

I am asking for your attention again because of the depth of the fraud and now the size of the securitized mortgage debt OTC derivative pile of garbage that is in the trillions. This entire mountain of weapons of mass financial and social destruction is now in question. I have been telling you this for more than 2 years since the manufacturers and distributors of this crap were called by the NY Fed due to the loss of control over the paperwork.

I had dinner with my former partner, then lead director of and CEO of Bear Stearns. I could not contain myself so I asked him why he did so much business in OTC derivatives which were certain to bankrupt them. The answer I got was it was more than 50% of their profit. The right answer should have been it was more than 80% of their earnings.

Securitized mortgage debt is going to be the final shot that kills all kinds of financial entities in the Western world. The biggest holder of this putrid junk is pension funds.

Meanwhile, the stock market continues to go up, up, up as if everything is right in the world and as if a juicy new bull market is now upon us.

Well, let’s all join hands and sing happy songs around the campfire.

Perhaps if we all close our eyes and wish real hard all of this foreclosure fraud will just go away.

Then again, maybe not.

Will Quantitative Easing By The Federal Reserve Unleash Economic Hell?

Prior to the financial crisis of 2007 and 2008, the Federal Reserve could always count on being able to stimulate the U.S. economy with a quick cut to interest rates.  But now with interest rates just barely above zero, the Federal Reserve is searching for other ways to pump life into a U.S. economy that is staggering about like a drunken college student.  One of the ways that the Federal Reserve can do this is through something called “quantitative easing”.  In essence, what happens is that the Federal Reserve creates money out of thin air and starts buying things like U.S. Treasuries, mortgage-backed securities and corporate debt.  But many economic analysts are now warning that further rounds of quantitative easing by the Federal Reserve could end up setting off a series of events that could ultimately unleash economic hell.  In fact, there are quite a few high profile commentators who now believe that hyperinflation in the United States is absolutely inevitable.

For those not familiar with quantitative easing, Wikipedia has a pretty good definition….

The term quantitative easing (QE) describes a form of monetary policy used by central banks to increase the supply of money in an economy when the bank interest rate, discount rate and/or interbank interest rate are either at, or close to, zero.[citation needed] A central bank does this by first crediting its own account with money it has created ex nihilo (“out of nothing”).[1] It then purchases financial assets, including government bonds, mortgage-backed securities and corporate bonds, from banks and other financial institutions in a process referred to as open market operations.

But is it really a good idea for a privately-owned central bank to have the power to create money out of nothing and to do whatever it wants with it outside of U.S. government control?

Of course not, but we dealt with those issues in another article.

What we will concern ourselves with in this article are the negative effects that could be unleashed as the Federal Reserve further abuses this power.

Now keep in mind that disasters don’t usually happen overnight.  They usually build over time.  When the Federal Reserve begins new rounds of quantitative easing, it will take time for the effects to be felt.

And so far, the new quantitative easing measures that the Federal Reserve has implemented have been relatively mild….

*The Federal Reserve has announced that it will “continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature”.

*The Federal Reserve has also announced that it has decided to reinvest principal payments on mortgage holdings into U.S. Treasury securities.

*The Federal Reserve Bank of New York announced on Wednesday that it will purchase $18 billion in U.S. Treasury securities between now and mid-September.

But most analysts are expecting quantitative easing by the Fed to accelerate – especially if the U.S. economy continues to flounder.

So is there a reason we should be concerned about all of this?

Well, yes there is.

Marc Faber, the author of “The Gloom, Boom and Doom Report”, recently warned CNBC that all of this intervention by the Federal Reserve is going to create a “final crisis” that will destroy the U.S. financial system….

“Investors should have listened to me already six months ago when I wrote that the Fed will continue to monetize … they will print and print and print until the final crisis wipes out the whole system.”

In a recent article, Bob Chapman of the International Forecaster described some of the financial gymnastics that our “financial authorities” go through just to keep the current shell game going….

But first, we ignore things like monthly hundred billion plus mathematical discrepancies between the amount of the government’s deficits and the amount of treasury bonds being sold.  Then we give the proceeds from the bogus excess treasury sales to foreign countries, foreign central banks and sovereign wealth funds as well as Cayman Island hedge funds so they can do what with it?  Why, so they can buy US treasury paper and agency paper, among other things.  Yep, we set up the straw men, fund them with counterfeit money illegally created out of thin air beyond what is needed to fund the ever-increasing deficit being created by the drunken sailors running the US government, and we then magically create categories of new mega-buyers in our financial reports to show everyone how our treasury paper is just as “beloved” as in the old days.  Why, even the totally bankrupt UK has magically created $180 billion for the express purpose of buying up those treasuries to keep the whole rip-off party going.

What a mess they have created.

Things have gotten so bad that even CNN is publishing articles that openly acknowledge the crisis.  In a recent article on CNN entitled “Is This Finally The Economic Collapse?”, Keith R. McCullough warned that the Federal Reserve openly buying large amounts of U.S. government debt is a very dangerous threshold to cross….

Now that the US can’t cut interest rates any lower, the only option left on the table is what the Fed just announced it would start doing — buying Treasury debt. And that could lead the country to the brink of collapse: According to economists Carmen Reinhart & Ken Rogoff, whose views we share, crossing the 90% debt/GDP threshold is the equivalent of crossing the proverbial Rubicon of economic growth. It’s a point from which it’s almost impossible to return.

And that is the crux of the problem – the U.S. government has a debt that is absolutely spiralling out of control.  This is a problem that has been building for decades and there simply is no quick fix for it. 

But the truth is that it was seen as far back as 1835.  In his article for CNN, Keith R. McCullough included a very appropriate quote by Alexis De Tocqueville, the author of Democracy in America….

“The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.”

Today, approximately 57% of the U.S. government budget is spent on direct payments to American citizens or is money that is spent on behalf of individual American citizens. 

For decades, the “Congress critters” have been bribing the American people (and each other) with massive payouts and have been getting away with it.

But now we are starting to pay the price.

The truth is that the U.S. government has become an expert on wasting money.  Most of the folks populating Congress are so incompetent that they should not even be hired to mop the floors of a Dairy Queen, and yet they control how trillions of our tax dollars are spent. 

The end result is that we have a financial mess that is absolutely unprecedented.

The U.S. financial system is doomed.  The U.S. government and the Federal Reserve will probably end up trying to save it with a massive flood of paper money, and in the end that will likely result in the collapse of the U.S. dollar and hyperinflation.

But hopefully all of that is still a while away yet.  For now, the Obama administration and the Federal Reserve are trying to play a very delicate balancing act and are trying to keep this giant house of cards from collapsing.

As incompetent as they are, let’s hope that they can keep things together for at least a while longer, because when things really fall apart we are all going to be feeling the pain.

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