Big Problem for Banks: Due Process

From the New York Times by Joe Nocera.  Emphasis added is ours.

Like everyone else, I’d been reading with amazement the stories about one of those legal problems: the robo-signing scandal that has ensnared all the banks with mortgage servicing subsidiaries, Bank of America included. That’s the scandal in which a tiny handful of employees had signed — or allowed others to forge their signatures — on thousands of affidavits confirming that the banks had the legal right to foreclose on properties they serviced. In truth, they had often never seen the documents proving the bank had that legal right. In some cases, the documents didn’t even exist. As a result of the mounting publicity, many big banks had halted all foreclosures while they reviewed the legality of their affidavits.

Mr. Moynihan said that, at Bank of America, at least, the foreclosure halt in 23 states that require judicial proceedings was over. It had reviewed some 102,000 affidavits and — guess what? — no big problem! “The teams reviewing data have not found information which was inaccurate” or that would change the plain facts of foreclosure — namely that the homeowners it wanted to foreclose on were in serious arrears.

Thus the bank’s central position is that, since it is so doggone obvious that the homeowners can’t pay their mortgages, the fact that the affidavits might not have complied with the law shouldn’t cause anyone to break into a sweat. At one point Mr. Noski actually said, “I think it’s a big issue because people are losing homes. It’s not a big issue” for the servicers. Glad he cleared that up.

The prospect of a second legal assault is more recent. Shortly before the earnings call, Bank of America received a letter from a lawyer representing eight powerful institutional investors, including BlackRock, Pimco and — most amazing of all — the New York Federal Reserve. The letter was a not-so-veiled threat to sue the bank unless it agrees to buy back billions of dollars worth of loans that are in securitized mortgage bonds the investors own.

So there you have it. Having convinced millions of Americans to buy homes they couldn’t afford, Bank of America is now revving up its foreclosure efforts on these same homeowners. At the same time, having sold tens of thousands of these same terrible loans to investors, it is going to spend tens of millions of dollars on lawyers to keep from having to buy back their junky loans.

Apparently, being the biggest bank in the country means never having to say you’re sorry. …

Before the acquisition [of Countrywide], Bank of America was already one of the biggest servicers of mortgages. After the acquisition, it was gargantuan. From a standing start in 1968, Countrywide had become — by far — the No. 1 mortgage originator in the country, and the No. 1 servicer as well.

But during the subprime bubble, it had debased itself to maintain that No. 1 position, becoming a hotbed of fraud and predatory lending. Take, for instance, the facts that have been revealed in a lawsuit filed against Countrywide by the Mortgage Guaranty Insurance Corporation, which insured many of Countrywide’s loans. Mortgage Guaranty investigators tracked down some of the people who had gotten subprime mortgages from Countrywide. What they discovered was startling.

A loan for $360,000 went to a Chicago woman who supposedly earned $6,833 a month at an auto body shop. In truth she was a part-time housekeeper who was posing as the buyer to help her sister. The Countrywide loan officer not only knew these facts, she came up with the idea of having the borrower pretend to work at the auto body shop.

The lawsuit uncovered a raft of similar examples — case after case where the loan officers not only knew that fraud was being committed, but were actively engaged in committing it. “By about 2006,” says the lawsuit, “Countrywide’s internal risk assessors knew that in a substantial number of its stated-income loans — fully a third — borrowers overstated income by more than 50 percent.” And that is just one small subset of what went on at Countrywide. The truth is, any rock you turn over in the Countrywide subprime portfolio, something slimy is going to emerge.

That’s why most people, myself included, have no sympathy for Bank of America’s legal predicament — and no patience for its “we’re not the bad guys here” arguments. It is absolutely true that the homeowners that Bank of America wants to foreclose on are in default on loans they should never have gotten in the first place. (Gee, whose fault was that?) But it simply does not follow that the bank therefore has an absolute right to take back the home. Under the law, it has to prove it has that right — by filing documents that show that the owner of the mortgage has conveyed that right to it. That’s why this affidavit scandal isn’t some legal nicety. It’s about the single most important value of American jurisprudence: due process.

What the banks are doing here is saying “I think you owe us money. I’m not going to waste my time or money to check out the facts of these cases to see whether or not my information is correct. Nor am I going to make any real effort to modify the loan (which would help the investor of the mortgage backed security as well as the homeowner). Instead, I’m going to submit fraudulent documents to the court to provide evidence that I’m right. But that’s okay because we all know that the homeowner is a deadbeat anyway and probably owes somebody some money.”