A year and a half ago, I sat in the office of Jim Kowalski, a prosecutor turned defense attorney in Jacksonville, Florida, listening to him describe a crime that was, by then, known to anyone who'd dealt with the foreclosure process. Kowalski worked with a small cadre of local attorneys trying to slow the area's onslaught of foreclosures. In the aggregate, they were monstrously outmatched by banks with subcontractors of subcontractors dedicated to removing families from homes quickly. But on a case-by-case basis, they stole the advantage because they knew the mortgage industry's secret: it had buckled under the weight of its own corruption. All you had to do was force the banks' empty hand, and you could keep a client in her home.
The biggest tell came over listservs that connected legal aid outfits and small private practices overwhelmed by the sudden demand for foreclosure defenses. As lawyers like Kowalski compared notes on the three big banks whose servicing arms controlled nearly half the mortgage market, they noticed case after case of irregularities. Once they forced the servicers into court, the pattern became clear: everybody involved in the securities process had cut so many corners in pursuit of record profits, had operated with such disregard for the many steps that ensure a safe and sound mortgage market, that they couldn't even show who owned the debt.
In April 2008 Kowalski deposed a Citibank residential lending employee, Tamara Price, whose name had recurred on foreclosures. Price described a system for creating bogus mortgage assignments that was baldly deceptive, all the way down to the fake "vice president" title with which Price signed her name. The case was exceptional only in that Price was on record. Already, scattered judges had reached their wits' end with the legal corner-cutting and were throwing out foreclosures. Lawyers in the trenches clung hopefully to the trend; most national advocates quietly said it would never prompt the sort of federal leadership that the foreclosure crisis demands. More than two years and millions of foreclosures later, a deposition similar to Price's—from a GMAC employee who admits to "robo-signing" 10,000 sworn documents a month—has revealed the fraud to the whole country.
Federal law enforcement officials have launched an investigation that could lead to a Justice Department suit, though both the probe and the potential suit will certainly be lengthy. In the meantime, some investors in mortgage-backed securities are making noise about wanting their money back, a disaster the banks have clearly feared from the start of this crisis. The banks, for their part, insist that the robo-signing scandal is just a matter of bad paperwork.
And the defrauded homeowners? They go right on facing foreclosure—at least those who still have homes. The same political advisers who guided Barack Obama into claiming, as a candidate, that he'd freeze foreclosures now fret about "moral hazard" and the systemic threat that protecting borrowers would create. They insist that we accept the fantasy of a mortgage and banking industry in need of tweaks, rather than confront the grotesque beast that ate millions of American dreams before devouring itself.
Obama's arguments might be more convincing if the robo-signing fraud was exceptional. But it's just the latest dirty open secret to make headlines. In the past three years, we've learned that originators, desperate for more loans to feed banks, steered borrowers to the no-doc, low-doc and other subprime loans that were required to keep the securities game going. We learned that those originators targeted seniors and people of color—or, in the parlance common at Wells Fargo, "mud people"—because they were the easiest to exploit. We learned that the Office of Thrift Supervision (OTS) found widespread lending fraud and malpractice at one of the largest subprime lenders, Washington Mutual, year after year for five years—and did nothing. Worse, OTS blocked other regulators who wanted to act. And we learned that credit-rating agencies inflated ratings of plainly shoddy loans. All this and more was required to fuel the securities trade that made a very few people very rich.
A number of big banks have voluntarily suspended foreclosures while they no doubt scramble to falsify more documents. It's not the first voluntary foreclosure freeze. We last saw such charity when President Obama began crafting his foreclosure policy in early 2009. When it became clear that his policy would be toothless, the foreclosures resumed. Since then, the administration's audits have confirmed the program's widely predicted failure. A solution based on the industry's good will couldn't work then, and it won't work now. Bank of America announced recently that it will resume business as usual in the twenty-three states where foreclosures require a judge's approval. The bank insists that during its ten-day freeze it managed to review its foreclosure process in the relevant states and found nothing that demanded a pause. Just a few papers out of order is all.
Meanwhile, the president has thus far made it clear he will do nothing to force the banks' hand. He has said there will be no foreclosure freeze, and his foreclosure prevention program still contains no cudgel to force meaningful rewrites of plainly bad loans. The federal probe into banks' criminal behavior is welcome news, but millions of homeowners are fighting desperate battles right now and getting no real help from the White House or Congress, which has refused to pass the bankruptcy reform that would, finally, give borrowers the power to demand a fair deal. The president and his advisers tell us instead that holding banks accountable while helping families who are drowning in fraudulent debt is too dangerous for the housing market.
This position does not differ substantively from that of George W. Bush. Given what we've learned lately, it's even less defensible. Mortgage servicers have shown that they have neither the will nor the ability to fix millions of bad loans. But until those loans are dealt with, there will be no housing recovery, any more than the broader economy will revive without job creation. The situation clearly demands that the government step in and lead. There is sadly not much more than that to add to the foreclosure debate; the solutions have long been clear. As long as banks are left to write their own rules, they will go on flouting law and decency. And as long as President Obama allows them to do so, he's a willful participant in their ongoing scam.