Capital Markets

Foreclosuregate: Who Will Save Us From Our Salvation?

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This house is going up: Women, minorities hardest hit.

A great unpublished Los Angeles Times Blowback article once took the paper to task along the following lines:

"I'm sick of your paper whining about everything! Waahh, unemployment is high, we have to do something for job seekers! Waahh, unemployment is low, we have to help employers find skilled laborers! Waahh, real estate is too expensive, the poor buyers! Waahh, real estate is too cheap, the poor owners!"

And so on. I'm going from memory but I am sure about the waahhs, the topics, and the series of disjunctions, all of which were deemed too amateurish for posting by my esteemed fellow Tribune paycheck collectors. But I still think it was a wonderful critique of the do-something-do-ANYTHING-no-don't-do-that school of journalism.

Case in point: In 2008, 2009 and through this summer, only locust-eating fanatics like me were saying the foreclosure crisis was not a crisis at all. Many states, applauded by their local media outlets, instituted foreclosure moratoriums. Distinguished members of congress spent hundreds of billions of dollars to mitigate the foreclosure epidemic. A large and growing chunk of ARRA Stimulus debt was issued toward an effort to keep people in their homes.

Then last month, the foreclosure epidemic went into remission. The spasms were arrested not by any new regulations or toxic assets purchases or taxpayer money for loan modifications. Instead the temporary cure for the foreclosure epidemic took a form known only to the few and happy band of sisters who had been following the "show me the note" craze since 2009. 'Twas paperwork killed the foreclosure beast.

This house is going down: Minorities, women hardest hit.

In late September Ally Financial (the witness-protection-program alias of GMAC) suspended evictions because of the shadiness of thousands of documents signed by an employee in the company's GMAC mortgage unit. GMAC has now expanded its foreclosure moratorium to all 50 states, not just the 23 where court approval is required for a foreclosure. (Questionable affidavits are an issue in many of these cases.) Chase Home Mortgage began a review of its own foreclosure portfolio, and froze operations in the 23 court-approval states, following a similar auto-signature scandal by one of its employees. PNC Financial followed suit. Wells Fargo is doing a similar review, and last week Bank of America suspended foreclosures in all 50 states. Mortgage Electronic Registration Systems  (the Bebe Rebozo of "show me the note" conspiracy theories) continues to get defensive about its role as a clearinghouse for electronic changes of mortgages and MBS.

I'm sorry, I know this material is enough to give you heartburn of the ass. How, for example, did GMAC, a company designed to provide financing for Government Motors car purchases, end up being the country's fourth-largest mortgage lender? Why wasn't Bank of America allowed to fail two years ago, and have its mortgage portfolio taken over by discount buyers with much higher incentives to find the correct paperwork and renegotiate bad mortgages? These stories are too grim for a family publication. The important thing is that Foreclosuregate, though it may not roll off the tongue, is in full swing in these here United States.

Should be good news, right? If anything will help bad borrowers get back on their feet, it's an indefinite reprieve during which they won't have to pay any money for their housing.

But think of the poor buyers! Or the poor sellers – we're not sure which. From David Streitfeld and Andrew Martin:

With home sales this past summer at the lowest level in more than a decade, real estate is ill-prepared to suffer another blow.

But as a scandal unfolds over mortgage lenders' shoddy preparation of foreclosure documents, the fallout is beginning to hammer the housing market, especially in states like Florida where distressed properties are abundant.

"This crisis takes a situation that's already bad and kind of cements it into place," said Joshua Shapiro, chief United States economist for MFR, an economic consulting firm.

Three major mortgage lenders — Bank of America, GMAC Mortgage and JPMorgan Chase - have said they are suspending foreclosures…

They are also waving off Fannie Mae from selling any of the foreclosed homes whose loans they sold to Fannie.

If only we could all wave off Fannie Mae.

It's worth noting that this time the doomsayers are right, broken-clock-style: The foreclosure paperwork problem is bad news. But that's because anything that delays the process of getting bad borrowers out of their homes and cheaper houses back on the market lengthens the time until real estate hits bottom. Unfortunately, every newspaper, every politician, and every saltwater economist has been telling us for about three years that we need to slow the foreclosure avalanche. Now that that's actually happening, of course, it's a new emergency. When will the government do something about it?