naked capitalism

Gretchen Morgenson of the New York Times reports on an ugly bit of mortgage market history: that Fannie Mae was told in 2006 to address the derelict behavior of its servicers and foreclosure mills yet chose to do pretty much nothing about it.

Morgenson tells the story of one Nye Lavalle, a Florida businessman who stumbled into the mortgage mess by accident. He sought to pay off a mortgage on a house he owned, and discovered that the payoff amount was inflated by $18,000 due to bogus late charges and force placed insurance. He refused to pay and the bank would not reverse the charges. The bank added more fees to the loan as Lavalle entered into a protracted court battle, which he ultimately lost.

Morgenson does not say exactly when Lavalle lost his fight or started his mission of investigating bad foreclosure and servicing practices, but by 1996 (!) he had already found evidence of the sort of chicanery that has been revealed as common, if not endemic as of 2004: apparent forged signatures, across a range of servicers: Banc One, Bear Stearns, Countrywide Financial, Freddie Mac, JPMorgan, Washington Mutual. Most ignored him, a few brushed off his charges. In 2003, he had created a compendium of abuses at Freddie and tried getting the attention of management. It did, sort of. They hired an outside law firm to investigate, which issued a detailed report which despite taking a rather dismissive tone towards Lavalle in its early pages, corroborated many of this charges, and recommended that the GSE take some corrective measures and it was firm on some basic issues:

“It is axiomatic that the practice of submitting false pleadings and affidavits is unlawful,” said the report…“With his complaint, Mr. Lavalle has identified an issue that Fannie Mae needs to address promptly.”

The Times indicates it does not know whether the report went to the board or its regulator, OFHEO, but the comment from the officialdom was not encouraging:

James B. Lockhart III, who headed that regulator in 2006, said he did not recall reading the report. “I probably did not see it as back then foreclosures were not a very big deal,” he said.

Notice the attitude, which seems to be at the root of why we got here. Abuses were seen as OK as long as they affected only a few, powerless people. There was no apparent concern that this was an unambiguous legal abuse, and that it might be a symptom of other, even more serious problems. Why would you create false documents unless there was a problem with the real ones?

Notice how the spokesman shifts the issue. The stance taken is that the borrower is presumed to be in trouble due to an inability to pay, when Lavalle, a wealthy man, discovered significant, false charges, including late fees when he had always been current. Even he was not able to prevail when he tried challenging the servicer.

The report, while confirming Lavalle’s reading of the law and finding even more extensive abuses by foreclosure mills than he cited (he fingered only the now-shuttered Stern law firm in Florida; they found similar problems in Connecticut, Georgia, New York, Illinois, Louisiana, Kentucky and Ohio) disagreed with him on the consequences. He thought foreclosures could be unwound, they pooh poohed the idea (narrowly, that is correct: the legal system is set up to treat sales out of bankruptcy and foreclosures as final, but wronged borrowers in certain states could conceivably recover under “wrongful foreclosure” statues, which provide for damages as a multiple of the value of the house). The Times flagged this comment:

“Courts are unlikely to unwind foreclosures unless borrowers can demonstrate that the foreclosure would not have gone forward with the correct pleadings, which is a difficult burden for most borrowers to meet,” the report said. “Nevertheless, the issues Mr. Lavalle raises should be addressed promptly in order to mitigate the risk of exposure to lawsuits and some degree of liability.”

Translation: you really aren’t at risk here, but it would be kinda nice if you cleaned this up.

Even in the wake of the robosigning scandal, it appears Fannie’s attitude has not changed, although it tries to claim it took matters seriously:

A spokesman for Fannie Mae said in a statement last week that the company quickly addressed several issues that were raised in the 2006 report and that it took action on other issues associated with foreclosures in 2010. “We want to prevent foreclosure whenever possible, but when foreclosures cannot be avoided they must move forward in a timely, appropriate fashion,” he said.

The “they must move forward in a timely, appropriate manner” (notice the lack of agency?) is a might makes right statement: Fannie will foreclose when it, in its imperial wisdom, thinks a foreclosure is warranted.

My perception is that attitude is widely shared in the servicing industry. As I wrote longer form last fall, after speaking at a conference, members of the industry rejected, with obvious hostility, the notion that there was something wrong with how they conducted their business. And as long as the industry is so steadfast in its denial, from the low to apparently the senior levels, I fear nothing will change absent major changes in personnel.

Update: It turns out that Carrick Mollencamp and Nick Timaros of the Wall Street Journal had a story on the Fannie internal investigation in March of 2011. It appears the Journal also was able to get a copy (the tone of the article suggests a full reading) but did not put it on line as Morgenson did. And it highlighted this tidbit:

Fannie officials also told investigators that the company had opted against performing regular reviews of its foreclosure attorneys because the company’s lawyers felt the firm would be better insulated from responsibility for misconduct. The report said the approach was under review at the time.

This sort of conduct has become endemic in the mortgage industrial complex, and is all too common in Corporate America generally. Rather than trying to do things right, and fix problems when they occur, the priority now is to make sure someone else is the bagholder. No wonder this country is falling apart.