Imagine the scene. Unemployed for months, you must now hand over your house keys to the bank. Not one, but three different bank representatives knock on your door. Each of them has in hand a deed for your house. After verification, the three documents are… fake! And no one knows who owns your house.
We thought we’d seen it all from Wall Street bankers. But Foreclosuregate might just set a new record for financial fraud – and plunge us all into a brand new crisis.
From 2004 to 2007, the big U.S. banks granted millions of dollars in mortgages. Even a cleaning lady earning $10 an hour could get a $500,000 shanty on credit. The banks were raking it in by regrouping mortgages and reselling them as financial products to investors such as pension plans. Now, when you’re trading thousands of mortgages a day, it becomes costly and time-consuming to visit the notary for each one. The banks therefore created their own computer system (called MERS) to register the sales and purchases.
Today, millions of Americans are losing their jobs, and must hand over their house keys to banks. There’s just one problem: the MERS registrations contain few details and are worthless in the eyes of several judges who authorize foreclosures. To reclaim the houses, banks must present notarized deeds. Unable to find the original documents – destroyed or lost – several banks seem to have decided to fabricate false documents. And had them authorized by lawyers without scruples, one of whom admitted to authorizing 10,000 in a single month. The result is a total mess from coast to coast. Several banks find themselves trying to repossess the same house, and homeowners are being evicted when they shouldn’t be.
It gets worse. According to a growing number of analysts, if the banks created the MERS system, it wasn’t to save a few cents. It was to resell on the sly – to investors like your pension plan – huge numbers of fraudulent mortgages. Without sufficient documentation, the buyers of these products could not accurately verify their quality. We’re talking about a major, countrywide fraud.
If the facts – which are still piling up daily – confirm this theory, the big banks will face a mountain of lawsuits. They will also lose their rights to thousands of homes. American financial expert Janet Tavakoli talks about a possible $700-billion bill. In other words, bankruptcy for several big banks.
American taxpayers will never agree to bail out bankers yet again. Especially not in this context. Such incompetence, if coupled with criminal intent, deserves only one thing: That those banks be allowed to fail – in an orderly fashion – once and for all. Which is what should have happened two years ago.
David Descôteaux is an Associate Researcher at the Montreal Economic Institute.