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by MatthewCCox

Mortgage Fraud is More Common Than You May Think

October 29, 2011 in Finance

The Massachusetts Supreme Judicial Court issued a momentous decision on October 18, 2011. This decision could be disastrous for the banking industry. It could produce a perfect storm that causes a derivative crisis, one that will make 2008 look like a walk in the park.

Their decision in FRANCIS J. BEVILACQUA, THIRD vs. PABLO RODRIGUEZ essentially made foreclosure sales in Massachusetts over the last five years wholly void.

Void ForeclosureYou may be thinking, “Yeah, so what?”

I suggest you think again.

This decision was necessary because banks, commercial lenders, and commercial investors often buy and sell mortgages on the open market. In addition, they buy and sell the servicing of these mortgages. All of this buying and selling requires underlying paperwork. Sometimes – maybe most of the time – this complex paperwork isn’t handled correctly.

Therefore, when a lender or mortgage servicer forecloses, it often doesn’t have the necessary paperwork to do so.

The Massachusetts SJC’s decision rules that it is illegal to sell a foreclosed house if the paperwork is not in order. And, since that impacts approximately two-thirds of the homes sold in Massachusetts during that time, this creates quite a mess for Massachusetts.

Let’s look at the implications. According to the ruling, when a house is foreclosed illegally:

  • The person who lost the home via foreclosure is still the owner.
  • The person who bought the home is not the owner.
  • The remedy is for the buyer to sue the bank.

Since the Massachusetts SJC is highly respected, other states will likely follow their logic. This creates quite a problem nationally. The estimated number of foreclosure transactions across the United States since 2008 is more than six million. Many of these homes were bought by investors and resold which means two parties suffered damages. The number of cases could easily exceed ten million.

Again, you may be thinking, “Yeah, so what? This doesn’t affect me. I haven’t been foreclosed on and I haven’t purchased a foreclosure.”

Again, I suggest you think again.

If you have a mortgage, do you know who owns it? Do you know who has the correct paperwork to administer your mortgage? If not, how can you be sure you will be able to sell your house if you need to do so? How can you be sure you will get a clear title when you pay the mortgage in full?

Do you realize that paying your mortgage if you don’t know the answers to these questions may be a fraudulent act?

Some legal experts are recommending their clients contact their mortgage company and request the paperwork on the history of the loan. Along with this request, they suggest telling the mortgage company that all future payments will be made to an individual’s savings account until the company provides clean paperwork.

This refusal to pay mortgages along with millions of lawsuits for botched foreclosures (The State of Delaware filed suit this week.) could very well be the perfect storm for the next banking crisis, especially if underlying derivatives are tied to the mortgages.

What do you see as other possible consequences of the court’s decision?

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by MatthewCCox

The Banks are Gambling with House Money

October 29, 2011 in Finance

The current gambling games being played by the banking industry are mind boggling. One game is so outlandish that, when it became popular in 2003, Warren Buffet called it a “financial weapon of mass destruction.” Certain banks, labeled as too big to fail, lost badly at this casino game in 2008, resulting in a need for bailouts via taxpayer funding.

This game is called derivatives.

Now, before your eyes glass over and your mind goes cloudy, I suggest you shake yourself awake and read this article. I’ll do my best to keep it simple because this topic is important, especially if you want to understand the cause of the next financial crisis, one that promises to impact us more intensely than the last one.

Derivatives are bets. These bets are hedges against investments going sour. An astute investor invests in something with the hope of the price increasing. Then, he purchases a derivative or bets that the price will go down. That way, he wins no matter what the price does. The bet has significant odds in the investor’s favor so it is highly leveraged. In other words, the derivative costs less than its value.

This practice has become a booming business. In fact, since they are highly leveraged with favorable odds for the investor, many gamblers – er…investors purchase derivatives as their only investment. Some estimates put the combined value of these bets at six hundred trillion dollars. That’s ten times the entire world’s Gross Domestic Product.

Do you see the problem?

If all of those derivatives came due at the same time, there wouldn’t be enough money in the world to pay them. Granted, this is unlikely to happen. It would take a perfect storm of events.

Of course, unlikely doesn’t mean impossible because this IS exactly what happened in 2008 when the mortgage crisis hit. That segment of the market suddenly lost value and all the related derivatives came due. The banks and insurance companies didn’t have enough money to pay their bets so they asked the government for help. (The documentary Inside Job tells this story. I don’t agree with its message of a need for increased government regulation. However, it does an entertaining job of explaining exactly what happened.)

Banks, insurance companies, and investors did not learn from the 2008 situation. They are repeating the same behaviors today. The situation is setting up for another crisis with the  difference being that, this time, the banks are manipulating the system to guarantee that the government will provide funding. Last time, they had to beg. This time, the bailout will be legal.

FDIC GambleAs a rule, derivatives are not insured by the FDIC because they are not deposits in a bank account. They are uninsured investments that can suffer loss. Bank of America recently found a way around this and transferred derivatives, valued at seventy-five trillion (YES – that’s with a T) from its investment bank arm into its depository arm. This was done upon insistence by the Federal Reserve and without approval of the FDIC.

If those derivatives fail, government will be responsible for an amount that is greater the world’s Gross Domestic Product.

Will they fail? They will if they, like in 2008, are tied to the mortgage market. I’ll explain why in my next article.

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