Q&A: How Mortgage Lenders Broke the Law and Got Away With It
August 16, 2016
The financial crisis and its aftermath haunt the 2016 elections. The shattering dislocation caused by the Great Recession set the stage for political insurgencies that have shaken both political parties. Free trade without a safety net is one of several issues galvanizing the downwardly mobile white voters rallying behind Donald Trump. On the left, Bernie Sanders weaponized the issue of Wall Street’s duplicity, Hillary Clinton’s ties to it, and the stunning fact that no one went to jail for systemic fraud that plunged the world economy into chaos.
The story of how we got into this mess is well known. But many of the accounts have centered on New York skyscrapers and on the corridors of power in D.C. Early this summer, financial journalist (and Prospect contributor) David Dayen released his dramatic account of the disaster from the perspective of three people who lived through foreclosures. Chain of Title focuses on Lisa Epstein, a nurse; Michael Redman, a car salesman; and Lynn Szymoniak, an insurance fraud lawyer. All three live in Florida, one of the states at the heart of the bubble. All of them wound up in difficulties, but instead of submitting to the indignities of foreclosure they fought back.
Dayen’s account interweaves the personal stories of these citizens with a bird’s eye analysis of the machinations that allowed the bubble to form and the cottage industry that sprang up to paper it over. Over the course of the book, his heroes uncover a stunning fact: The entities foreclosing on them do not have the legal right to do so. In the process of packaging mortgages into complex financial products, banks lost track of who actually owns the titles to the houses. Not only that, but the lenders have tried to cover their tracks by doctoring the paperwork—often clumsily—to make it appear as though the foreclosures are legitimate.
Dayen’s protagonists uncover a fraud so pervasive that it seems to implicate the majority of mortgages dispensed during the bubble years. He portrays the weak penalties imposed on the criminals in question, which were limited to fines and stiffer regulations, as a signature failure of the Obama administration that explains the further degradation of public trust in our institutions.
The American Prospect caught up with Dayen in his hometown of Philadelphia to talk about the financial crisis, Chain of Title, and the whole ugly episode’s deleterious effects on American democracy. This is an edited transcript of that conversation.
Jake Blumgart: There have been a raft of books about the financial crisis. What sets yours apart from the rest of the literature on the housing bubble and its aftermath?
David Dayen: I felt like what was missing from the literature was a ground-level focus on those who were most powerfully affected by the financial crisis. The experience of homeowners was largely invisible in the policy debate and even culturally. There’s a movie that came out last year, 99 Homes—Lynn Szymoniak was a consultant on it—and to prepare, the director wanted to look at instances on film where somebody was evicted and foreclosed upon. He looked in film archives for depictions of foreclosure in movies and he had to go all the way back to The Grapes of Wrath. That really speaks to the fact that we don’t look at this community, and the community doesn’t look at itself very much. People in foreclosure don’t talk to each other about foreclosure. They try to navigate it themselves individually. There’s a lot of shame and humiliation attached to it.
That’s what the main subjects of my book were reacting to. They got their foreclosure notice and they saw these irregularities with the foreclosure. But instead of just using that to fight their own cases they wanted to collectively help more than just themselves. To build that support space for a broad range of people to fight these cases and get a more equitable solution. It’s really a novel thing to see victims like this, who are dealing with their own personal crises, try to band together and go after the most hurtful financial institutions in this country.
OK, talk to me like I’m stupid and see if I have this right. Basically, during the housing bubble, the mortgages issued during that hot period were securitized into immensely complex financial products. After they’d been sliced and diced it became nearly impossible to prove which financial institution owned which mortgages. Is that right?
That’s generally right. These Wall Street institutions were so sophisticated that they could figure out how to package thousands of mortgages into an instrument that was a bond they could sell all over the world. And they could give part of the interest on a loan to one mortgage-backed security, and part of the principal on the loan to another mortgage-backed security. They could slice and dice these things through financial alchemy. But in that process, they neglected the most elemental part of this entire process, which is maintaining the chain of ownership on the loan by physically documenting transfers from one entity to another.
This goes backs to the 1630s in America, to the first property records law. One hundred fifty years before we had a constitution, we had this idea that you have to document property transfers publicly and that you have to show it, so everyone in the community has access to that information. They have to have confidence that when they are buying or selling a property, no one else has a claim on it. Despite their complexity and sophistication, the simplest part of this process is the part that financial institutions just completely neglected during the housing bubble.
How did the industry deal with this problem of its own making?
I guess it wouldn’t have been a problem at all if everyone had ended up paying their loans. But that didn’t happen, and millions of people went into default. That presented this problem that you need the documents to prove ownership. If you stole my car, I need a piece of paper to prove I owned the car in the first place. What they did was, they falsified that paper. They hired third party companies to mass produce fabricated documents to allegedly prove up this chain of title, this chain of ownership on these loans—particularly in states where you actually need judicial ruling to foreclose, like Florida.
False evidence was distributed to court houses and country records offices on a mass scale, and my three individuals figured this out. They weren’t in law enforcement, they weren’t in government, they had no expertise prior to this in real estate. They were foreclosure victims, and they committed this revolutionary act when they got their foreclosure papers: They actually read them. They found irregularities and became obsessed with unravelling this whole massive scheme. Then they made a pact to expose it to the nation. That’s why we know about this today.
So, basically, the financiers created a business model that was structurally incapable of doing this right?
It would have been extremely costly and time consuming because of the way that securitization was carried out during the housing bubble. It would have cut into their profits in a significant way. But if those laws were adhered to you would not have had as big of a housing bubble. These laws were there because buying a mortgage should be a deliberative process both at the level of the homeowner individually and at the level of the lender when they are trying to sell that mortgage in the secondary market.
When those laws are broken, that’s when you get this chaotic situation we had during the foreclosure crisis. People were foreclosed on who had no mortgage, who paid cash for their homes, you had people getting two foreclosure notices for different companies with each claiming to own the loan. You just had this absolute breakdown of the system of integrity in this market, which is the largest market in the world.
What percent of the mortgages had this fraudulent paperwork?
Near the back of the book, I mention a case against Barclays Bank that was one of the rare cases where one of the litigants actually got to do some discovery. They looked into one of these mortgage-backed securitizations and looked into all the mortgages in them and found that 100 percent had not properly transferred the documents. It was routine, a matter of course. Nobody transferred the paper correctly. So you’re talking about every securitized mortgage in the United States having this fatal defect.
How is it that so few people seem to be aware that so much of the foreclosure crisis was based on the mortgage industry’s illegitimate claims?
I think people on a subconscious level have a sense that it was all based on fraud. They might not know the details, but look at the Bernie Sanders movement. He says the business model of Wall Street is fraud and a lot of people were attracted to that idea.
It’s somewhat a failure of the media. There are brief moments where this got into the headlines late in 2010, when all the big mortgages services stopped foreclosing on people because they no longer had confidence that they could do it legally. You saw headlines then and around the big settlements in 2012. But in those spaces in between, where you have this absolute horror story, the traditional media just turned a blind eye. I shouldn’t have been able to write this book, because it should have been common knowledge. Someone should have gotten to it before 2016.
Do you think it’s due to the complexity of the issue? Probably a lot of journalists were concerned that their readers wouldn’t click on a link about securitized mortgages.
There is a passage in the book where a reporter from the Tampa Bay Times says this story is too complicated for a daily news audience. But Lisa Epstein asked, “Was Watergate too complicated?”
Ultimately what I show in the book is just fabrication and forgery. I think we all understand that. When you see the name Linda Greene, who was employed by one of these third-party companies, and she was named as a bank vice president for over 20 different companies to speed up the assembly line because so many documents had to be prepared. Other people signed her name. There’s a piece of the book where you see the name Linda Greene in 17 different styles of handwriting. This is not that hard to understand. People get forgery, people get fabrication.
What I try to do with the book I try to simplify that story a little bit by peeling it back like the layers of an onion. It’s a whodunit. I follow these subjects as they come to understand it piece by piece. If you do it in this deliberate fashion, you could have made it real to people. A home is the most important and the biggest purchase most families ever make. When you are talking about these real stories about people trying to save their homes, that’s a gripping piece of journalism.
What could the Obama administration have done about this systemic fraud and abuse?
First of all, you prosecute wrongdoing. When you do that you create a deterrent so wrongdoing doesn’t recur. As the result of that failure to prosecute, every day in America people still get thrown out of their homes because of false documents. A bunch of settlements were made and you would presume that the settled activity actually stopped, but it hasn’t. There was no mandate to clean up this system. Now you see this pitched battle on the ground level where there are still foreclosure defenses and judges are really confused about it. There isn’t any global solution coming, so they have to go on a case-by-case basis.
As far as what can be done today, I have long since passed the stage where I think somebody on a white horse is going to come to the rescue. But one of the reasons I wrote the book is that I don’t want this to go down the memory hole. I want us to reckon with the fact that this massive fraud took place and we didn’t do anything about it. We have to figure why there is this skewed system of justice in this country, where who you are matters more than what you did.
Why did the administration prove so reluctant to do anything about this scandal that warped millions of American lives?
That’s the million-dollar question. Why did no one go to jail for the various sins perpetrated during the financial crisis? Why did no one go to jail for the crimes? I’m not clairvoyant and I can’t answer this question completely. What I know is that just from the actions that were taken, it appears there was this concern over the banks having balance sheet problems. There was less concern over homeowners, even though there are credible studies that show that the failure to deal with the foreclosure crisis had a material effect on the recovery. The economy grew slower because you had millions of people worried about whether they were going to be kicked out of their homes and not spending money in preparation for that possibility.
This was one of the biggest mistakes of this administration. I don’t think we can write the legacy of the Obama administration without including that when they had the chance to really strike a blow for Main Street they did not take the opportunity. That was disastrous for the rule of law in this country, and it seeds a lot of the anxiety we see playing out in our politics in this election cycle.
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