Tom Sgouros: More Accountability Needed in Foreclosure Crisis

Monday, November 14, 2011

Tom Sgouros, GoLocalProv MINDSETTER™

 

One of the tragedies of government is that when it works, it disappears. A high-functioning program generates no headlines, generates no ire from the people, and garners no attention from candidates for office. Rhode Island has, you may be surprised to know, one of the most effective and least expensive health departments in the country. When the timing of the swine flu outbreaks caused such disruptions in the vaccine supply a couple of years ago, Rhode Island was a model for dealing with the problem and achieved vaccination rates far higher than other states with less fuss. But you didn't hear about that, because why is that news?

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One of the real marvels of government in America is exactly such an invisible story. Recent stories about property taxes in Greece make it clear. It turns out that the land record system in Greece simply isn't very good or complete. Obviously, people have owned land there for thousands of years, but until recently it seems that title to the land was mainly established in courts, in proceedings initiated by people who wanted to claim it using evidence from wills and bills of sale and so on. Taxing property in a system like that doesn't work very well, since the system wasn't built to prove ownership by someone who doesn't want to admit it.

Contrast that with America where you can step into any municipal or county registry of deeds in the country and trace a property's ownership from the present day all the way back to, well, when someone stole it from the natives. Along with that, you can see all the debts against that property -- the mortgages, along with the tax and other liens. Considering how big our country is, this is a tremendous achievement, a vital bulwark of protection for property rights, and maintained by a veritable army of registry clerks, employed by towns and counties across the country.

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Law? What law?

Sadly, this bulwark has been vandalized by our nation's banks, who created an electronic registry, called the Mortgage Electronic Registration System (or MERS, though not to be confused with the pension MERS -- this isn't a pension article) to get around local filing requirements. No law was passed allowing banks to ignore those legal requirements, they just did it. But the worse part of the story is that after choosing to ignore all the local land registries, the banks didn't maintain their own records. In 2007 a title examiner friend of mine told me about vast rooms he'd seen, filled with unfiled records, miles of shelved file boxes hiding out in a basement in Boston, with one or two clerks tending them, but little or no obvious effort to enter the data.

As usual, none of this might have mattered if things hadn't gone horribly wrong. That is, if all the mortgages recorded in MERS instead of in proper registries had been paid off, then who would know the difference? But in addition to eliminating the concept of lending standards, the same banks that set up MERS also set up a system of slicing and dicing mortgages for resale that encouraged foreclosure over renegotiating a debt. The same banks lobbied hard for the bankruptcy "reform" bill of 2005 that prevented many homeowners from working out their debts. So not only did they create a system that subverts the record-keeping rules we have, but they made it far more likely we'd need those records.

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In other words, at the root of the robo-signing scandals and all the other forms of mortgage fraud involved in the foreclosure crisis was a cavalier dismissal of local laws about registering mortgages and transfers of ownership with your town. As a result, the ownership of hundreds of thousands of properties has been thrown into question, and tens of thousands of people, possibly more, have been unjustifiably put out of their homes. The damage to our nation's economy, not to mention all those families, is incalculable.

Should we just sweep it under the rug?

So why are the SEC and Justice Departments pushing states to get behind a blanket foreclosure fraud settlement that assigns blame to no one and essentially lets banks off the hook with a $20 billion payment? Now $20 billion is not exactly chump change, but the industry earned $29 billion last year. Much of that was paper profit, part of a complicated accounting debacle having to do with the banks' own debt (and about which I'm sure we'll hear more soon) but it seems to have been real enough to provide another round of tremendous bonuses. JP Morgan dealt out a $10 billion bonus pot last December, for example. Where is the incentive for an individual banker not to make precisely the same bad decisions in the future?

In exchange for this $20 billion, all the states are supposed to agree not to prosecute any fraud related to foreclosure or land records. Kamala Harris, the California Attorney General, has already indicated that she won't go along with the settlement. Eric Schneiderman, New York's AG has at least implied an interest in going forward with independent investigations into these kinds of fraud as well, something that isn't compatible with approving the settlement. (Peter Kilmartin, our AG, "continues to be apprised of the" negotiations over the settlement, says Amy Kempe, his spokesperson, but has taken no stand on them.)

It's all well and good to talk about abstract notions of justice and honesty, but let's be clear about what's at issue here. Banks accused of fraud means banks accused of unlawfully taking money from their own customers. Those customers include you, me, and the state pension fund (but this isn't an article about pensions). If you want to have banks you can trust with your money, and if we want a banking system we can trust with our economy, we need more accountability than the current draft of the foreclosure settlement envisions. Calling the AG's office is easy (274-4400 x2 234) -- why not add your voice?

Tom Sgouros is the editor of the Rhode Island Policy Reporter, at whatcheer.net and the author of "Ten Things You Don't Know About Rhode Island." Contact him at [email protected].
 

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