An independent audit recently conducted by Phil Ting, Assessor-Recorder for the county of San Francisco, indicates a “crisis of compliance” within proof of bank ownership of many foreclosed properties. Ting cites what he calls “pervasive and widespread issues,” finding at least one “clear legal violation” in 84% of foreclosure files, with multiple violations in 66% of files. The audit also found that 60% of documents were back-dated in some fashion, which is significant because every such document is filed under penalty of perjury. “Here in California,” Ting writes, “these lax standards are particularly damaging because lenders do not need to seek a court order to force a foreclosure. With little direct court oversight, we must rely on administrative procedures and state regulations to protect owners from fraud.”

The prevailing undercurrent within the mainstream media is that homeowners primarily are to blame for the mortgage crisis. This oversimplification glosses over an inconvenient truth within the mortgage market: lenders knew they were engaging in predatory lending and were encouraging offering predatory loans to individuals they knew could not pay. By cutting necessary legal corners in the rush to consummate the ensuing land grab, these banks have created a legal entanglement so huge that the courts are afraid to address it.

The only recourse that offers due process to the American people is for an immediate federally mandated moratorium on all home foreclosures and evictions until the courts can sort these enormous legal issues out and hold the crisis’ perpetrators accountable for their actions.

A Predatory Environment

To understand the birth of the predatory lending environment, we must first understand leverage. For every dollar someone deposits in a bank, the bank is permitted to loan a larger number of dollars. The amount a bank has spent in outstanding loans or investments, divided by their cash on hand, is known as the bank’s leverage. In April of 2004, thanks to a tremendous amount of lobbying by the banking industry, the Securities and Exchange Commission (SEC) began to relax leverage limits. Between 2003 and 2008, the leverage of giant investment banks roughly doubled. When Bear Sterns eventually collapsed in 2008, it was leveraged 33:1, meaning that if just 3% of money invested in Bear Sterns was called in, or if Bear Sterns’ investments depreciated by just 3%, the company would be insolvent.  

Banks entered into this risky world for one reason: they had rigged the game. First, banks began bundling peoples’ mortgages, along with other peoples’ student loans, car loans, and credit card debt, into packages called Collateral Debt Obligations, or CDOs. They then sold CDOs to anyone who would buy them, allowing the investor, rather than the bank, to make money off of ensuing payments on these loans. This may sound fine, but lost in the silence between the notes is an important fact: with this single action, the bank stripped themselves of any risk if the loans defaulted. Investors now held the bag, to profit or lose from accordingly.

Until very recently, mortgages did not work this way. Historically, a would-be homeowner would approach a bank to receive a loan to buy the home. The bank would sign a 15-year or 30-year mortgage loan with the homeowner, and would collect payment until the loan was repaid. This meant long-term commitment; the bank had a real stake in the homeowner not defaulting, which mandated real care in choosing who to give a loan to, and working with the homeowner to ensure they could keep paying.

Not anymore. In this new world, investors carry the risk. The banks, no longer concerned with finding optimal borrowers and offering rates that would encourage faithful repayment, and flush with cash from relaxed leverage limits, shifted their business model from quality to quantity. Their job became to find the highest quantity of worst borrowers possible. Largest quantity because the banks had just created trillions of dollars in potential loans out of thin air thanks to relaxed leverage limits. Worst because they could be offered the worst (highest) rates possible for that new money.

This moral bankruptcy by the banks eventually grew so bad that they were defrauding even their most prized clients. By 2007, shortly before the financial collapse, Goldman Sachs’ highest priority investment, which its salespeople were charged with selling as their top priority, was a CDO which made Goldman Sachs money according to how much their client lost. Now may be a good moment to remind you that everything Hitler did was legal.

As if this was not bad enough, the banks figured out a second way to extract money fro the debacle: credit default swaps. A credit default swap was insurance which paid off if a particular investment (in this case, CDO) failed. Historically, one must own a piece of property, such as a car or house, to insure it. This is not the case with a credit default swap. Picture this: Your neighbor is blind, and therefore a terrible driver. You take out extra insurance on your neighbor’s car, so when he or she inevitably crashes you make some money. This is all fine and good, but then you hatch an ingenious idea: why not sell your neighbor a Lamborghini that you have personally sabotaged, then secure this special insurance on it after you’ve sold it, but before they’ve driven it? You get to win on both ends- sell them a top-dollar car, then collect insurance money from the ensuing fireball!

There’s only one problem: you don’t own a Lamborghini. That’s okay; you don’t actuallyneed a Lamborghini, you just need a car that feels like a Lamborghini. So, you take duct tape and cardboard to your Saturn to get its dimensions right, then lacquer the whole thing until it feels enough like a Lamborghini to pass the test. You then sucker your blind neighbor into buying it, he crashes it, you pass ‘Go!’ and collect your $200.

That is what giant investment banks like Goldman Sachs and Morgan Stanley did. They teamed up with lenders and encouraged them to find the worst borrowers possible and offer them the worst loans possible with very little money down (the average sub-prime loan was 99.3% loan, .7% money down) and huge interest rates. This way homeowners would have the least-possible amount of their own money invested in their homes and would be willing to walk away when they got into trouble. Many lender banks were offering their sales teams greater commissions if they could trick a customer into taking a worse loan than they qualified for. As a result, minorities with little English language ability were the new preferred client. Talented accountants then sprung into action, using loopholes and tricks of accounting to combine these doomed-to-fail loans into packages (CDOs) that could pass the test of ratings agencies. These CDOs were then rated AAA by the ratings agencies, which is to call them as secure as investing in U.S. Treasury Bonds  (typically considered the safest investments in the world), and sold to sucker investors enticed by the CDO’s high ratings and the high yields offered by the bad loans contained therein. Goldman then took out credit default swaps on the bad CDOs, popped some popcorn and waited.

Everything went according to plan. When these homeowners began to default, they often walked away from their homes. The lead issuer of credit default swaps, AIG, went bankrupt suddenly in March 2008 as they could not possibly pay for all of the claims suddenly being made (AIG then went on to receive $180B  taxpayer-funded TARP money, which was then used for lavish CEO backpay and to pay out Goldman Sachs one-hundred cents on the dollar for credit default swaps they'd taken out against the toxic mortgage market). As more homeowners entered foreclosure, surrounding property values were driven down further by being near a foreclosure, leading to more foreclosures, and the spiral downward began. Companies suddenly discovered that they were not the only ones who had come up with the “bundle, sell, insure” scheme; everyone had. As such, many had been buying toxic CDOs with the money made from selling other toxic CDOs. Any company (Bear Sterns, Merrill Lynch, etc.) caught holding more Trojan horses than they had sold suddenly found themselves insolvent and collapsed immediately.

With this backdrop, the San Francisco Assessor-Recorder’s audit should surprise no one. Of course corners were cut when converting peoples’ homes into securities which could be bundled into CDOs. The SEC had suddenly given the banks twice as much money to work with by lowering their leverage limits, and the banks saw a sure-fire win on both ends by bundling, selling, and insuring bags of feces labeled ‘pure gold.’ In the quest for short-term profits, with the knowledge that the ensuing crisis would be so bad it would take a long time for anyone to notice the foreclosure irregularities, there was simply no money in doing the job right. 

The jig is up; the crisis is discovered, and homeowners are not to blame. What decency demands is a moratorium on all foreclosures until the fraud is worked out. What expediency demands is to sweep homeowners under the rug and pretend these irregularities do not exist in order to expedite the theft. Which course do you intend to allow history to take? 

(If you, or someone you know, is facing foreclosure, please get in touch with us. If you have legal expertise and a passion to achieve justice, please get in touch with us. If you do not have legal expertise, but have the passion to help or believe this cause is worth supporting monetarily, please get in touch with us. occupyfightsforeclosures@gmail.com, www.occupyfightsforeclosures.org, facebook.com/occupyfightsforeclosures, or @OFF_LA.)

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