The scandal involves employees signing names not their own, under titles they did not really have, attesting to the veracity of documents they had not really reviewed. Investigation reveals that it did not just happen occasionally but was an industry-wide practice, dating back to the late 1990s; and that it may have clouded the titles of millions of homes.
If the settlement is agreed to, it will let Wall
Street bankers off the hook for crimes that would land the rest of us in
jail - fraud, forgery, securities violations and tax evasion.
In his speech on January 24th, President Obama did not mention the settlement but announced instead that he would be creating a mortgage crisis unit to investigate wrongdoing related to real estate lending.
The question that needs to be investigated is
why it was being done. The alleged justification - that the bankers were so
busy that they cut corners - hardly seems credible given the extent of the
But assignment was delayed until it was necessary to foreclose on the homes, when it had to be done through the forgery and fraud of robo-signing.
Here is a working hypothesis, suggested by Martin Andelman:
“Repos” are overnight sales and repurchases of collateral.
Yale economist Gary Gorton explains that repos are the “deposit insurance” for the shadow banking system, which is now larger than the conventional banking system and is necessary for the conventional system to operate. The problem is that repos require “sales,” which means the mortgage notes have to remain free to be bought and sold.
The mortgages are left unendorsed so they can be used in this repo market.
But FDIC insurance covers only up to $250,000. FDIC insurance was resisted in the 1930s by bankers and government officials and was pushed through as a populist movement: the people demanded it. What they got was enough insurance to cover the deposits of individuals and no more.
Today, the large institutional investors want
similar coverage. They want an investment that is secure, that provides them
with a little interest, and that is liquid like a traditional deposit
account, allowing quick withdrawal.
The collateral is bought by a “special purpose vehicle” (SPV), which acts as the shadow bank.
The investors put their money in the SPV and keep the securities, which substitute for FDIC insurance in a traditional bank. (If the SPV fails to pay up, the investors can foreclose on the securities.) To satisfy the demand for liquidity, the repos are one-day or short-term deals, continually rolled over until the money is withdrawn.
This money is used by the banks for other lending, investing or speculating.
MERS allowed houses to be shuffled around among multiple, rapidly changing owners while circumventing local recording laws. Title would be recorded in the name of MERS as a place holder for the investors, and MERS would foreclose on behalf of the investors. Payments would be received by the mortgage servicer, which was typically the bank that signed the mortgage with the homeowner.
The homeowner usually thinks the servicer is the
lender, but in fact it is an amorphous group of investors.
Mortgages can’t be transferred in and out once the closing date has occurred.
The REMIC Pooling and Servicing Agreement typically states that any transfer significantly after the closing date is invalid. Yet the newly robo-signed documents, which are required to begin foreclosure proceedings, are almost always executed long after the trust’s closing date.
The whole business is
quite complicated, but the bottom line is
that title has been clouded not only by MERS but because the trusts
purporting to foreclose do not own the properties by the terms of their own
He sent to,
...over 30,000 documents recorded in the Salem Registry that he says are fraudulent.
It is the way our system is set up: the banks are not really creating credit and advancing it to us, counting on our future productivity to pay it off, the way they once did under the deceptive but functional façade of fractional reserve lending.
Instead, they are vacuuming up our money and lending it back to us at higher rates.
She wrote in the Huffington Post in October 2010:
Not only has the system destroyed county title records, but it is highly vulnerable to bank runs and systemic collapse.
In the shadow banking system, as in the old fractional reserve banking system, the collateral is being double-counted:
This allows for expansion of the money supply, but bank runs can occur when the borrowers and the depositors demand their money at the same time.
And unlike the conventional banking system, the
shadow banking system is largely unregulated. It doesn’t have the backup of
FDIC insurance to prevent bank runs.
Gary Gorton explains that it was a run on the shadow banking system that caused the credit collapse that followed. Investors rushed to pull their money out overnight. LIBOR - the London interbank lending rate for short-term loans - shot up to around 5%.
Since the cost of borrowing the money to cover loans was too high for banks to turn a profit, lending abruptly came to a halt.
As noted by The Business Insider:
Interestingly, countries with strong public sector banking systems largely escaped the 2008 credit crisis.
These include the BRIC countries - Brazil, Russia, India and China - which contain 40% of the global population and are today’s fastest growing economies. They escaped because their public sector banks do not need to rely on repos and securitizations to back their loans. The banks are owned and operated by the ultimate guarantor - the government itself.
The public sector banking model deserves further
Please contact your state attorney general and urge him or her not to go through with the robo-signing settlement, which will be granting immunity for crimes that are not yet fully known. Phone numbers are here.
The surface of this great shadowy second banking system has barely been scratched.
It needs a very thorough investigation.