“The first thing that needs to happen, I think, is to get these people out of their homes,” a man wearing a bespoke blue-striped shirt, a Hermés tie patterned with elephants and Ferragamo loafers said recently. “Correct! I’ll explain,” the veteran member of a bank restructuring and advisory team said.
Amid evidence of sham documents and widespread paperwork gaffes, if not systemic fraud that increasingly looks like it may be terrifically deep, Bank of America recently halted all foreclosure proceedings around the country. That followed similar announcements from the home-loan giants JPMorgan Chase and GMAC.
But Wall Street does not sympathize. “You had people putting zero down to get massive houses they couldn’t afford to be in,” he said Monday morning, “but now they want to stay. And the government wants to let them stay, because they’re voters.” A few hours later, the Goldman Sachs arm Litton Loan Servicing said it had suspended certain foreclosure proceedings, too. “Talk about a financial scandal,” a Wall Street Journal editorial this weekend joked. “A consumer borrows money to buy a house, doesn’t make the mortgage payments and then loses the house in foreclosure–only to learn that the wrong guy at the bank signed the foreclosure paperwork. Can you imagine?”
“The problem is they don’t deserve to be in that place. They probably deserve to be there less than they used to,” the source continued, referring to incomes lower now than they’d been when the loans were made in the first place. “You do need to foreclose, and you need to go back to people living in houses that are consistent with their income levels.”
In order to understand Wall Street’s shrug during this foreclosure crisis, which as many as 40 attorneys general are expected to announce an investigation into this week, the key is to appreciate just how deeply connected the gesture is to Wall Street’s view of who’s to blame for the financial crisis.
The feeling, the idea at the bottom of all the others, is that even if Wall Street aggravated the crisis by bundling and betting on mortgage-backed securities that turned out not to live up to high ratings, it was not a matter of, as Citi chairman Richard D. Parsons told The Observer this summer, “bad people trying to do bad things.” The loans wouldn’t have been there in the first place if American home buyers, driven by what The Weekly Standard calls immediate gratification without personal responsibility, hadn’t overstepped their bounds.
So when Ken Bentsen, the executive vice president for public policy and advocacy at Wall Street’s largest trade group, the Securities Industry and Financial Markets Association, talks about this foreclosure fraud crisis, he points out that the homeowners arguing about administrative problems are the ones who’ve gotten themselves tied up in the foreclosure route in the first place, regrettably. “No one has raised the question that anyone who’s going through this process shouldn’t have been in the foreclosure process,” said Mr. Bentsen, who, as a congressman from Texas, helped write the Sarbanes-Oxley and Gramm-Leach-Bliley acts.
“Look, I think it’s just human nature. People want to have a bogeyman,” Ralph Cioffi, the former Bear Stearns hedge fund manager, who was found not guilty of fraud, said in a recent Observer profile about anger at banks and bankers. “People don’t want to take responsibility for their own actions.”
“Again,” said Mr. Bensten, “we’re dealing with mortgages that are in default, which is, again, what we’re dealing with here.”
“WE’RE NOT AWARE of a single case so far of a substantive error,” The Journal’s editorial said. “Out of tens of thousands of potentially affected borrowers, we’re still waiting for the first victim claiming that he was current on his mortgage when the bank seized the home.” The fund manager Barry Ritholtz, who writes the blog The Big Picture, and Naked Capitalism’s Yves Smith, whose chronicle of the foreclosure jumble has been encyclopedic, furious and convincing, would disagree. They’ve linked to stories in papers like the Sarasota Herald-Tribune and The South Florida Sun Sentinel about banks mistakenly taking over homes that hadn’t been foreclosed on. Not only was Fort Lauderdale’s Jason Grodensky not late on the payments on the house that Bank of American foreclosed on, but he didn’t even have a mortgage.
“Thanks for the query,” The Journal’s editorial page editor said, responding to an interview request, “but I think I’ll let the editorial speak for itself.”
“If there was a preponderance of evidence, massive, or a large amount of misfiled, not misfiled, but incorrectly foreclosed actions on people that were not in default,” Mr. Bensten, who said he hadn’t seen those stories, explained, “that’s something that should be looked at.”
A former member of the Goldman Sachs management committee was not so sure. “Don’t you think, out of 10 million data points, there will be 500 unbelievably screwy examples? It’s a little bit so what,” he said on Tuesday. “I don’t get it. It doesn’t feel like this is fraud. Maybe there is sloppiness, but at the end of the day, people took out mortgages they can’t pay back. Now I worry that if anything, the government is making something that is just a clerical error into something that would be nefarious or whatever.”
Officials like the House Committee on Financial Services’ Alan Grayson have called for a nationwide foreclosure moratorium to investigate two levels of potential fraud. The first is what banks would call paperwork problems: In sworn depositions, a GMAC middle manager named Jeffrey Stephen testified that some months, he had to sign more than 10,000 foreclosure documents without looking at them, and without proper notarization.
But then there’s the potential layer of fraud below those “robo-signed” documents, which goes back to the mortgages themselves. As Mr. Grayson wrote in a letter to the administration, not only is it unclear who owns cities of foreclosed houses, because of negligent record keeping, but many of the loans that now make up trillions of dollars of securities are in “a legal gray area.”
“It seems a lot about it is, like, notaries,” the Goldman source said. “I didn’t know anyone even focused on what a notary did! It almost struck me as some kind of anachronism that must have had some value in the past–which I don’t understand.”
On Monday, Mr. Bentsen’s SIFMA released a statement that warned that a moratorium would catastrophically hurt housing sales, and the economy. But wouldn’t investors be nervous about investing in mortgages from here on out if the gray areas weren’t looked into? The flip side of that, Mr. Bentsen said, is that you don’t want to make those investors uncertain about their ability “to get at their capital if at any time the government can impose a moratorium.”
Reuters’ Felix Salmon pointed out that it was the association’s own member banks that had voluntarily imposed the foreclosure halts. Mr. Bensten said that there was “no discrepancy,” because a voluntary moratorium is much different than one imposed by the federal government.
As it happens, David Axelrod had told Meet the Press a day earlier that the White House does not support a big moratorium. “Because,” he declared, “there are in fact valid foreclosures that probably should go forward.”
ON TUESDAY, CITIGROUP announced it would stop providing foreclosure work to the huge Florida law firm run by David J. Stern, which the state attorney general has been investigating. In addition to a deposition from an ex-employee who described rampant fraud, Mr. Stern himself has been accused of sexual harassment, and is the target of a class-action case accusing him of racketeering. He is said to have a jet-propelled yacht called Misunderstood.
This year, Mr. Stern’s foreclosure-processing business was essentially acquired by a New York investor named Kerry Propper. “I believe in efficient markets,” Mr. Propper, who has spent his free time working on and funding an upcoming documentary on genocide, told The Observer this year. “An efficient market needs certain things, and the main thing, I’ve learned over many years, is a rule of law.” Mr. Propper believes in systems. “If someone is borrowing money and they don’t pay, and the bank decides it’s all right,” he said, “then the system will break, O.K?”
The fate of those borrowers is something Wall Street is going to be thinking about for a long time. “They were trying to ride a bubble. They were not just innocent victims,” said Robert Shiller, the Yale economist who co-created the Case-Shiller housing price index, and who predicted the collapse in his book Irrational Exuberance. “But on the other hand … they were lured into betting on a speculative bubble. And there were people who benefited from continuing that feeling–wealthy people making money.”
“The question to me is not do you foreclose or do you not foreclose. The question is when and with what philosophy you foreclose,” the man on the bank restructuring team said. “If you want to reduce the amount of leveraged homeowners you have, you need to ultimately kick them out of their homes.” A colleague walked up: His recommendation was to burn houses. It would lower the supply.