Smart financial writers are sure giving the impression that the fraudulent dealings of the big banks that enabled them to make mega-profits from the housing bubble are unraveling right now. The real economy, the activity involving money that most of us work in, is about to take some new hits. This might be as drastic a blow as the financial collapse in September 2008 if they are right.
- During the middle of the 2000s, bankers and their various intermediaries were so hot to rush more housing loans into existence so they could cut them up and resell them, that they neglected make sure that the legal steps that create ownership of real property were carried out. Now that the loans have gone bad, it's nearly impossible in many cases to figure out who has the legal right to foreclose because titles are not clear. That's why Attorneys General in all 50 states are looking into the mess and why Bank of America has suspended foreclosures. How can they demand the house back from a delinquent borrower if they can't show they own it? And if this sort of evasion of legal processes was going on all over the country, how can anyone know that "their property" is really "their property"? Our economy depends on that confidence. According to financial journalist Barry Ritzholz,
- After the banks rushed these messed up mortgages through, they cut them up, turned them into bonds and sold them to investors. They never let on to investors that they were selling mortgages they knew were unlikely to pay off and on which they could not even vouch for the legal ownership of the underlying property. For the banks, this led to a bonanza of fees. They could make money selling what they knew was partially worthless and also something they couldn't honestly swear they owned. And they hid all this from the investors. The investors belong to the class of persons that have good lawyers. They'll be coming after the banks and the banks could owe them billions because of the fraud. As Andrew Leonard observes at Salon
The Service Employees International Union (SEIU) and a bevy of community organizations have launched one useful defensive initiative. At the website Where's the Note? they've created an online tool that anyone who owes on a mortgage can use to demand of the bank that you pay the loan to that it show it has the "note" to the property. That's the paper you signed when you closed on your house. One of the horrors of the current situation is that, too often, banks that lent in the last decade can't produce the note.
There are a lot of people writing about all this, some of them even in a prose that approximates everyday English. Some who have helped me to understand a little, in addition to the two cited above, include Gretchen Morgenson -- a financial journalist at the New York Times, Felix Salmon who finance blogs for Reuters, Emptywheel at FireDogLake and Mike Konzai at Rortybomb.