5 years ago it was obvious to anyone with the facts that the entire system or mortgage origination and mortgage foreclosures had been turned on it’s head, starting with one huge lie: that the value of the property exceeded the amount of the loan. It was in 2005 when 8,000 appraisers warned congress that their industry had been poached by the banks — unless they came back with an “appraisal” that was $20,000 higher than the contract amount, they would never see another dime of business. This one fact was the keystone for the largest economic crime in human history.
The answer is obvious. If a borrower had bribed an appraiser to submit a fair Market value that they both knew could never be sustained — and the obvious purpose was to defraud a lending institution not underwriting a loan under the mistaken belief that the collateral was adequate to repay the loan, the borrower and the appraiser would be punished, disciplined and prosecuted and rightfully so. The outcome of such a case would have been that the perpetrators would lose any license they had for appraisals, that the property would be foreclosed, and that the perpetrators would be ordered to pay restitution for the loss incurred by the lending bank.
The law is pretty simple and there is no protection for anyone to lie for the purpose of defrauding another person. There are no federal or state exemptions, no complexities that make prosecution difficult, just plain facts in which the money of the lending bank was converted into the money of the borrower, the appraiser and maybe their co-conspirators — the mortgage broker, the real estate broker and others. Indeed a perusal of the newspapers across the countries reveals just such prosecutions against borrowers, mortgage brokers and others who conspired to defraud the system (albeit the actual victim being unknown but nonetheless named in each indictment or information prosecuting people “low on the food chain.”
The facts in the mortgage meltdown are equally simple and we call for the same remedies, prosecution, discipline and punishment of the perpetrators. But in this case the perpetrators are the banks. They needed to inflate the appraisals in order to accomplish their twin objectives — closing another loan and making certain that even the “good” loans would fail. Now they confused the issue of title to the property and loan ownership beyond recognition if you look at THEIR paperwork instead of the traditional way record title is kept as notice to the world — through public records title registries.
By blaming the homeowners for the mortgage mess and by sleight of hand tricks played with investors, the Banks managed to steal the homes, steal the money of the investors and steal the bailout. They now seek to steal the non-existent mortgage bonds to fill their balance sheets with non-existent assets. The simple remedies that apply against the. Borrower and the appraiser who lied about the property value are said to present system risks, thus making old fashioned restitution for fraud inapplicable.
So here are the five major reasons the media, the pundits, the government agencies and of course the all-powerful Banks say that the most obvious remedy doesn’t apply.
1. The Banks didn’t commit the crime. It was the originators, the borrowers, the mortgage brokers, the appraisers — anyone but them. Not true. In fact not even close to true. The Banks put the pressure on by setting quotas in dollar volume without regard to quality. There are only two ways of enlarging the dollar volume of loans funded — (1) increase the number of loans and (2) increase the dollar amount of the loans. Since we know that the number of loans was decreasing by 2004-5, the only option left was to artificially inflate the value of the collateral which would enable the originator to fund a larger loan.
2. It’s not fair to reduce principal. But of course it is fair that banks get paid 100 cents on the dollar based upon an initial value and loan they tricked the borrower into taking. And it is fair that the banks get paid by the investors, paid by the insurers and paid by taxpayers all for the same loans even if they were not in default. The debt has been paid in full several times over. Allowing correction to a value of the collateral and the principal on the loan where the banks or investors get paid all over again, but at a realistic level is better than what the banks deserve — I.e., nothing.
3. Reducing principal will cause secondary problems that will disrupt the markets. First this refers to something bad happening if HELOCs or other secondary financing get paid off or modified. It is at best a muddled argument that is both wrong and at variance with the main argument that the borrowers are dead beats that don’t want to pay anything to anyone.
4. Correcting principal will cause disruption of the credit markets. Right. So by this logic, the fruit of fraud should always be sustained and allowed to prosper no matter who gets hurt. This logic certainly undercuts the notion of creating confidence in the credit markets.
5. Correcting principal to the value that should have been used when the deal was made will encourage people in the future to take out loans they nave o intention of repaying. This theory is advanced over the proposition that if Banks get away with this chicanery they might do it again. Here the borrowers did nothing wrong except believe the value that was used in the appraisal. Itmis the banks with a history if wrongdoing, not the borrowers.
Filed under: bubble, CDO, CORRUPTION, currency, Eviction, evidence, Fannie MAe, foreclosure, GTC | Honor, investment banking, Investor, MODIFICATION, Mortgage, securities fraud, Servicer, STATUTES Tagged: | Appraisal, fair market value, fraud, principal correction, principal reduction