Mercury Rising 鳯女

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Good News: The Foreclosure Fraudsters Are About To Get Slammed. Hard.

Posted by Phoenix Woman on October 3, 2010

Cindy Kouril, who has been all over this story, has the goods:

4closure fraud has a set of pleadings from Kentucky. It’s a class action suit based on the events of the last few weeks. A group of homeowners in Maine has also begun a class action suit. I believe that one is also in federal district court, though I have not yet seen those papers.

If there are enough class actions brought in enough district courts, based on the same subject matter and proof, the cases will likely be consolidated into what’s called a “multi –district litigation.”

This is snowballing so much faster than I dared hope.

The banks behind this are going to pay, and pay hard.

4 Responses to “Good News: The Foreclosure Fraudsters Are About To Get Slammed. Hard.”

  1. Charles II said

    You may recall that I preached many sermons on why the federal government intervening to force lenders, borrowers, and taxpayers to split the costs of reducing mortgages to affordable levels was critically important. Instead, the lenders got very sniffy about “moral hazard” on the part of the borrowers, many of whom they had cheated, and insisted that the borrowers pay up or get out.

    The kind of uncertainty introduced by a lawsuit of this kind could bring on a real Depression. Sp, color me less than enthusiastic… not out of any sympathy for the lenders, but for the poor, battered American people.

    • The problem is that the foreclosure waves themselves are causing a real Depression. And these same banks that lectured us on “moral hazard” even as they got billions in TARP are going to have to be pushed hard to be made to do the right thing — a thing that will save themselves as well as the rest of us.

      The smarter banks will be working to make out-of-court settlements now. But most of them aren’t that smart.

      And the ball is rolling:

      Suddenly, foreclosure fraud has become the potential stick that homeowners have long needed to force lenders to the negotiating table. It could theoretically operate in the same fashion as cramdown: instead of lenders wanting to modify the loan before a bankruptcy judge gets to do so, the lender would want to modify and not risk a years-long foreclosure process where they find out they have no standing to foreclose. . . .

      It just takes a few judges to throw down the hammer on some lenders, and call into question their entire practices, for them to put a “Loan Modifications Now!” sign out in front of the door so they don’t have to deal with foreclosures. If borrowers know their rights, they can really put the screws to these banks.

      UPDATE: Just for those who think the borrower is still at fault for failing to pay his mortgage, and shouldn’t get out of it on a technicality – the banks are full of big boys and girls. They knew the acceleration of mortgage defaults, and going all the way back to the top of the bubble they knew how many mortgages were circulating through the system. They could have hired the appropriate number of people to track ownership of the title, and perform the due diligence if the mortgage failed. They didn’t want to spend the money to do it correctly. And I could care less if this comes back to bite the lender in the ass now. It’s called bad business practices. And they deserve everything they’re getting.

      • Charles II said

        Here I have to disagree with you. Foreclosures are certainly diminishing GDP in the sense that any payments that were occurring cease. There is a transfer of GDP as any cash that the families being foreclosed had as a result of not paying for shelter now must be turned toward paying for shelter. Some have argued that this has allowed them to spend more than they otherwise would have, which is possible. There are other effects– a positive effect to GDP on attorney’s fees, for example. And effects of unknown magnitude on making other borrowers more cautious in their spending and the disruption of work at the employers of the foreclosed.

        But suppose we say that GDP contracts $10,000 for every foreclosure. A million foreclosures only add up to $10B. This is roughly 0.07% of our economy. Therefore, it cannot be considered to be a primary cause of depression.

        The primary effect of foreclosure depressing the economy occurs on the bank’s balance sheet. Let’s say that the average price of a home is $200,000. Then whenever the home ceases to be a performing asset, the bank’s balance sheet drops by that much (I’m oversimplifying here, but bear with me). Assume that the bank has a conservative 3:1 ratio. It must reduce credit by $600,000. Now a million foreclosures looks like a credit contraction of $600B (roughly 5% of GDP)– even though nothing fundamental has changed between the moment that the homeowner stopped paying and the moment that the house was foreclosed (which is when the bank absolutely must write down an asset).

        This effect of credit contraction, because it’s a consequence of accounting rather than “the real economy”, can easily be counteracted. For example, the Fed can swap Treasuries for mortgages and, basically, allow any writedown to occur on the Fed’s books, delaying for as long as is necessary the bank writing down assets. Since there is zero transparency at the Fed, this is what I suspect they are doing. I don’t know for certain. But this is what is called “extend and pretend.” (I think it’s actually a wise move. It costs nothing, and it prevents a sharp contraction of credit that would damage the real economy). Let’s say that between the effect of credit contraction and the effects of extend and pretend, the real damage to the economy is 1%. Could be a little larger, might be smaller. Might have some multiplier effect due to damaging small business expansion, might not. This is not large enough of an effect to explain what we are seeing.

        No, what is causing the Depression is unemployment. If every employee represents a salary plus overhead of $100,000, then 5 million extra unemployed people represents a direct contraction of GDP by $500B. At best, unemployment insurance will reduce this impact by ca. $150B. So, this effect cannot be smaller than $350B (2.5% of GDP) and is more likely nearer to 5% of GDP. Add this to the effect of credit contraction and you have an effect large enough to account for what we are seeing. And this is not including multiplier effects, including the reduction in spending by people who are still employed.

        Now, this is a Fermi calculation. The pros will have more precise data. But I am confident in the basic conclusion. Unemployment is the primary driver of weak economic growth

      • Charles II said

        Adding: What I meant to say is that the way that foreclosure could contribute to a depression is through uncertainty. While PW sees it as just deserts to the banks for not hiring people to scrub titles, I see it in terms of the damage that will be inflicted on the rest of us. Too much concern about moral hazard works both ways.

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