Author Archives: Abigail Caplovitz Field

Bank of America’s Protection Detail

Posted by on May 6, 2012 Comments Off
BofA

BofA wants more. (image: Thomas Hawk)

To protect Bank of America from inconvenience, Charlotte, North Carolina has directed its police officers to harass and arrest protesters. Unconstitutionally, in my opinion.

Charlotte Sides With Bank of America Over People

Charlotte has imposed special rules on a 2 block by 2 block square for 12 hours on Wednesday (May 9) to protect the Bank of America annual shareholder meeting from disruption by protesters. The rules apply to any “Extraordinary Event”, and were adopted nominally for the coming Democratic National Convention and city celebrations such as July 4. While the rules are poorly drafted and I believe facially unconstitutional regardless, imposing them for the BofA meeting seems overwhelmingly so. Extra restrictions for the July 4th celebration in the name of public safety is one thing; it’s an outdoor, public event hosted by the city for the benefit of its citizenry. The Democratic Convention is similarly easy to rationalize, given that the President and other national security targets will be there. But Bank of America’s shareholder meeting?

This annual corporate event is private, indoors, and part of ordinary corporate business. Worse, law enforcement’s targets aren’t potential Presidential assassins or hooligans with a stash of illegal fireworks; they’re peaceful political protesters. Heck, the protesters will include dissident shareholders and their proxies who have every right to be at the meeting. Besides, BofA will have home field advantage: the meeting’s at its corporate headquarters.

The recent experience of shareholder protests at Wells Fargo shows Bank of America executives, employees and shareholders are not in danger of anything except inconvenience. Nor did San Francisco police need special powers to handle the situation outside, while Wells handily managed the situation indoors–CEO John Stumpf’s pay package was approved in record time. Why is Charlotte helping BofA?

Unfettered Police Discretion to Target “Undesirables”

The establishment has always tried to silence dissent and enforce the social order by policing protesters as “disorderly” undesirables. During African-Americans’ civil rights struggles, Southern cops would arrest protesters using statutes that essentially let them pick their targets at will. The Supreme Court responded by saying unfettered police discretion is unconstitutional.

Unfortunately, in the ensuing decades, the Supreme Court’s doctrine around political speech has degraded into a blunt weapon for enforcing the social justice status-quo, empowering the establishment to marginalize dissenting voices and magnify corporate speech. For example, protesters get penned into irrelevant, out of the way “Free Speech Zones” and corporations get unlimited freedom to spend money to elect their favorite “representatives.” (One of the banks’ more effective purchases has been Congressman Spencer Bauchus (R-AL), who chairs the House Financial Services Committee and who has publicly said that Washington exists to serve the banks.) In a way, the city’s imposition of the new rules for BofA’s benefit is just a step further down the line toward deploying state power against citizens for corporate benefit.

How? Well, the rules render anyone near the Bank of America shareholder meeting criminally suspect for normal, harmless activities. As a result the new rules appear to give the police unlimited discretion to stop, frisk, arrest and search people–harass people–for nothing more than officers’ preconceived biases–profiling. Normally “profiling” means “racial profiling”, which is unconstitutionally stopping, frisking and/or searching someone because they’re black, since being black is inherently suspicious to many cops. Since race isn’t a proxy for protester status, what the new rules do is encourage “First Amendment Profiling”–targeting people for looking like protesters.

Rule Specifics

(As I detail what’s wrong with the rules, you can read along. The rules are codified in the City’s code at Chapter 15, Article XIV, Section 15-310 and seq. This link is easier to use, however.)

For example, a person can be arrested for walking his dog near in the prohibited zone. Although this Charlotte blog claims residents needn’t worry, here’s the rule:

“During the period of time and within the boundaries of an extraordinary event, it shall be unlawful for any person, other than governmental employees in the performance of their duties, to willfully or intentionally possess, carry, control or have immediate access to any of the following:

…(17) An animal unless specifically allowed under the terms of a [parade permit] or is a service animal used to assist a person with a disability.”

Maybe the blog is confident the police to “know” who they’re supposed to target, and that residents will be able to walk around unmolested. But that’s the kind of unlimited police discretion that’s unconstitutional.

Dog walking isn’t the only innocent activity rendered suspect. [cont'd.]

People also can’t possess or have accessible “(5) A backpack, duffle bag, satchel, cooler or other item…” if they have “the intent to conceal weapons or other prohibited items”. Well, unless one’s bag is transparent and nearly empty, a person using it has the intent to “conceal” whatever is inside. So how well that intent requirement limits police discretion to arrest you for having a baghinges on what’s prohibited. Too bad the prohibited items include permanent markers (list of banned items at (4).)

Permanent markers are so ordinary (see this Google shopping list) and so small that a cop might reasonably believe that anyone with a purse, briefcase or backpack is carrying a concealed permanent marker. That means anyone carrying any kind of bag or container is suspect. Where is the limit on police discretion?

Specifically, what guides the cop in deciding whether to ask a purse-carrying woman for permission to search her purse? If she says no, what stops him from arresting her? When the wrongdoing is possessing a Sharpie, hat facts could rise to enough suspicion that he doesn’t need to ask to search? Is it enough that she’s dressed like an office worker?

Also banned are Snapple bottles possessed with bad intent. Specifically, “(6) A glass or breakable container capable of being filled with a flammable or dangerous substance carried with the intent to inflict serious injury to a person or damage to property.” Will a cop think “sure, he’s just drinking the Snapple now, but he’s a protester, young, dressed in black with a pierced nose; looks angry. Maybe he’ll use the empty to make a Molotov cocktail. Better arrest him”?

Bike helmets are prohibited too, if “(10)…carried or worn with the intent to delay, obstruct or resist the lawful orders of a law enforcement officer”. What does carrying a bike helmet with “the intent to delay…the lawful orders of a law enforcement officer” mean? (“Delay” must be different from “obstruct” or “resist” since all three are prohibited.) Perhaps it targets a woman who inexplicably plans on shoving a bike helmet onto a cop’s face, catcher’s mask style, as soon as he speaks. How should a bicyclist carry a bike helmet so she can convey only lawful intent? By studiously avoiding looking at the cop? Couldn’t that be suspicious too?

To fully explore the rules’ absurdity, read them at the links above. The bottom line is this: for twelve hours, within a two block buffer zone around BofA headquarters, the City of Charlotte, North Carolina has told its police that any person carrying a purse, backpack, cooler, briefcase, bike helmet, Sharpie, and much else is suspect. If the suspects look like protesters, then Charlotte wants the cops to stop, question, perhaps frisk, perhaps search, and perhaps arrest them.

These Rules Can’t Be Constitutional

I’m not reading between the lines; the city’s explicit about targeting protesters. Speaking with station WCNC, the city reassured residents that while they might be stopped and questioned, only protesters would be targeted for punishment:

CMPD Deputy Chief Harold Medlock said the main benefit to the designation is that it allows police officers to “interact” more with people.

For example, if a person or group of people walks down the street with [prohibited items], an officer can’t normally do much about it, Medlock said.

But with the extraordinary events designation, “It gives us the ability to come up and say, ‘Hey, where are you going with this?’” Medlock said. “If they tell us they’re going to the protest, we’ll tell them ‘No, you’re not.’” (bold mine)

Note: I took out the word “crowbars” and put “[prohibited items]” in, because “crowbars” is misleading. The power exists, and can be used, for far more innocuous items. Deputy Chief Medlock uses “crowbars” to reassure people that the police are limited in sensible ways, when they’re not. For more on how the rules are aimed at protesters, see this Charlotte Observer article. Even the “residents can walk their dogs without fear” blog was clear on the point.

While I think the new rules are unconstitutionally vague on their face, how could they be constitutional as applied to defend BofA against protesters? Perhaps in the July 4th context Charlotte can claim the rules regulate conduct, not speech, but the fact that on Wednesday cops will targeting protesters as protesters makes it seem the rules are aimed at speech. Worse; they’re aimed at certain speakers.

If the rules are read as speech regulations, they seem even more clearly unconstitutional. The protesters are all anti-BofA, so isn’t enforcement content-based? Since disorderly conduct, trespass and other statutes could enable arrests for truly problematic protester conduct, how the new rules are “narrowly-tailored”? And what’s the compelling state interest being furthered? We haven’t yet reached the level of corporatism where preventing inconvenience to BofA can be called a compelling state interest.

We haven’t yet.

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Bankers Are Still Wrecking Housing Market Fundamentals

Posted by on April 30, 2012 Comments Off

(photo: Images of Money/flickr)

Regardless of the recent bullish stories on the housing market (examples here, here, here and here), housing market fundamentals are lousy. Demand in the last decade was wildly distorted by banker abandonment of underwriting and appraisals. Now bankers are worsening the crash they created. As a result, prices will just keep falling, and foreclosures cannot lead to clearing the market (regardless of what some say). Foreclosures can only make the problems worse.

Market Distortion From Excess Demand in Bubble Years

As a first step to seeing the problems, let’s get real about how profoundly market-distorting that lender-inflated bubble was. People who could not afford to buy homes, period, were nonetheless given loans, artificially expanding the number of people expressing demand. In addition, people who could have afforded a house, if not the house they purchased, expressed their natural demand in the ‘wrong’ segment of the market. Both distortions combined to spike prices far higher than natural demand would have driven them.

To see the price spike, consider the median and average home prices, nationally, in 1976, 1986, 1996, and 2006, using August values in each year, in constant 2006 dollars:

1976 Median: $156,603 Average: $171,838
1986 Median: $168,306 Average: $208,221
1996 Median: $176,031 Average: $205,198
2006 Median: $243,900 Average: $317,300

That is, across twenty years the median home price increased by about $20,000 and the average by about $35,000. In the next decade–the bubble decade–the median and average prices each grew about three times faster. That’s more froth than Starbucks puts on its biggest latte. And it’s a strong signal of just how far prices have to fall to get to where natural demand would have pushed them.

Excess Supply

But the price peak isn’t the full measure of how far prices need to fall, because supply didn’t remain constant. The price spike drove home builders to add supply beyond what they would have to meet natural demand. This chart from the National Association of Home Builders shows that from 1978-1997 sales of new homes oscillated between approximately 0.4 to 0.8 million homes a year. For twenty years, demand pressure was never great enough to sell more than that in a year. From 1997 through 2007, however, sales went from about 0.8 million to nearly 1.3 million a year and back down to about 0.8 million. That’s 11 years of sales volume that dwarfed the preceding 20.

We’re seeing that part of the market correct, because in 2010 and 2011 more like 0.3 million new houses sold, and that’s roughly the pace this year. But it’s not obvious that three years of below normal sales is enough to balance out that decade of excess. Moreover, all those extra new houses are only one part–a relatively small part–of our current supply excess. Foreclosures have brought far more homes to market, and worse, have far more yet to come, than that new home bulge.

More Foreclosures (Supply) to Come

RealtyTrac data shows foreclosures are increasing again, after slowing down last year. In New York it looks like 100,000 new ones may be coming, based on notices sent in the first quarter of 2012 alone. They’re also on the rise in Pasco County, Florida. But you needn’t look at these stats to understand we’re nowhere near out of the foreclosure crisis yet.

According to the Federal Reserve, about 12 million people owe more than their homes are worth, and CoreLogic reports that falling prices mean their ranks include even new buyers. Being underwater is a strong predictor of default and foreclosure because when life happens (job loss, divorce, illness), the homeowner can’t sell to get out from under the suddenly unaffordable mortgage. In addition, some people will strategically default, like the very wealthy who don’t care about their credit, and people who can otherwise make it work for them.

And then there’s the millions trying to get their loans modified. Banks are forcing far too many of those people into foreclosure even when modification is in everyone’s financial interest. One of many ways the banks turn potential modifications into foreclosures is by wildly overvaluing the home, which skews the critical “net present value” calculation. [cont'd.]

Banks Are Manipulating Inventory

Given the grim reality of too many houses at crazy high prices, how come we’re seeing a spate of good housing news stories? Well, those stories reported supply had shrunk so much, prices were rising. One of the most comprehensive was by Nick Tiramos for the Wall Street Journal, detailing that shrunken inventory was leading to some bidding wars in several markets. Local pieces, this Arizona Republic story, continued the theme. Both articles noted that the bidding wars didn’t mean prices had recovered much compared to the bubble years. Nonetheless, if the decreased inventory is for real, the optimism’s justified, right?

Too bad the inventory decrease seems artificial, the result of bank manipulation. Take Phoenix: RealtyTrac identifies 6,611 “bank-owned” properties there. An Arizona realty website lists only 275 for sale. Similarly, Yahoo real estate claims there’s over 8,000 foreclosure properties in Phoenix, but Realtor.com lists less than 4,000 homes of any type. AZHomeonline.net lists a bit over 4,000, plus 312 foreclosures and shortsales. So are the foreclosures in Phoenix on the order of 300 or 6,600? Makes a wee bit of difference when the non-”distressed” market is about 4,000, don’t you think?

(To Tiramos’s credit, his piece acknowledges the good news may not last because of the bank owned backlog; the more cheerleading articles don’t.)

Phoenix isn’t the only place where banks are holding properties off the market. In Portland, Oregon, banks aren’t selling 80% of the homes they own, The Oregonian reports. All the bank owned inventory statewide represents more than a year and half’s supply of houses all by itself, according to a RealtyTrac executive quoted in the piece. If the housing inventory is that distorted in Oregon, what’s it like in the hardest hit states?

By holding off inventory, the banks provide temporary support to prices, but for how long? The inventory will make its way to market–there’s just too many houses held in reserve for the banks to manage and maintain the properties in a market-price optimizing way. Moreover, this artificial control of inventory means foreclosures do not help a market to bottom; foreclosing cannot “clear” the market.

Where Will Future Demand Come From?

The last aspect of our housing market’s broken fundamentals is on the demand side. Specifically, who can buy a house now?

Not many young college graduates and their young families, normally the quintessential first time buyers. By 2008, over 200,000 young people had over $40,000 in student debt each, and given the explosive growth in debt, many more have that much now. In fact, the 1,781,000 students in the class of 2012 average over $25,000 each. Nope, young people won’t be buying homes for a decade or two. Millions of underwater homeowners can neither trade up nor down. Foreclosed former homeowners don’t have the credit or the cash to re-enter the housing market. In short, current and future demand for housing is likely to be substantially less than historically normal demand, even as prices keep falling and interest rates hover at historic lows. And that’s still true even if the job market comes back, not that there’s any sign of that.

The banks could substantially boost demand by writing all the underwater mortgages down to market value. People would be able to sell, and buy, and millions of foreclosures would be averted. But the chance the banks will take such drastic action is nil. Not essentially nil, like Powerball odds, but nil.

And nil is also the chance that housing is headed toward a broad based recovery, even if some local markets, unhampered by massive bank-owned inventory and large numbers of underwater homes, show sustained improvement.

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Assessing Schneiderman’s Task Force Gamble

Posted by on April 28, 2012 Comments Off

Eric Schneiderman (Photo: azipaybarah/flickr)

As people increasingly realize that the mortgage settlement was an enforcement fraud, attention’s turned to the “new” joint Federal/State task force that’s supposed to make the settlement into a “down payment,” by delivering much more. And so far people don’t like what they see, and are saying so. What’s striking about the resulting PR push back, however, is that it just highlights how banker-fraud-friendly our federal government is.

For example, Attorney General Eric Schneiderman penned a Daily News Op-Ed in which he pitches “More than 50 attorneys, investigators and analysts have already been deployed to support our investigations, with many more on the way” as somehow adequate to deliver on that “down payment” promise when the Savings and Loan crisis took over 1,000 and Enron alone took over 100. Not only hasn’t the federal government corroborated AG Schneiderman’s claim of “many more on the way”; “many more” than 50+ doesn’t sound like anywhere near the 1,000+ needed to approach the ballpark of accountablity.

Indeed, the only reporting on staffing beyond the 50+ promised to date comes from Reuters, which details efforts to hire a handful of additional prosecutors and experts as evidence the government’s serious. (Yippie! A whole 10 new prosecutors and 5 experts!) How’s that for serious federal commitment supporting the task force? And note this line from the Reuters piece:

“The task force formed earlier this year represents a more coordinated effort than prior investigations, the Justice Department official said in an interview on Thursday.”

Really? Only now, during a tough Presidential re-election campaign, five years after the profound bank frauds started coming to light, does the Justice department get serious enough to get its investigations coordinated? Justice convicted WorldCom CEO Bernard Ebbers faster.

Or consider The American Prospect’s long paean honoring NY AG Eric Schneiderman as “The Man The Banks Fear Most.” Note what it reveals about the Feds’ law enforcement zeal:

“The [Obama] administration…had proposed that the banks come up with $20 billion for aggrieved homeowners and former homeowners. Schneiderman wasn’t satisfied. What documents, he asked, had been subpoenaed? None, he was told. Who’d been called in to testify? Nobody, he was told.

The federal government wanted a hush money deal, saying to the bankers: pay us what we want and we won’t ask any questions. And when AG Schneiderman actual dared investigate the feds responded by pushing him to shut down his investigation and take the enforcement fraud mortgage settlement: [cont'd.]

“By June, the Justice Department had outlined a settlement that both Democrats and Republicans could support—all but Schneiderman and Biden. The reaction to their obstinacy was swift. High-ranking administration officials made calls to some of Schneiderman’s leading supporters, arguing that his investigative zeal shouldn’t delay a settlement.”

On what track record–on what set of objective facts–does AG Schneiderman think the federal part of the federal-state task force is interested in bank accountability?

The American Prospect paean goes on to discuss the mortgage settlement as if in an alternate reality in which the settlement gave homeowners meaningful principal reduction (not), stopped servicer misconduct (not), and stopped foreclosure fraud (not). As a result, I can’t vouch for the whole piece’s accuracy. Nonetheless others have already reported the settlement was based on very little investigation, and it’s not really news the feds have been soft on banker crime.

Even AG Schneiderman’s willing to implicitly acknowledge the no-enforcement fed’s track record. In the American Prospect piece he defends taking the gamble on making the task force real, not promising it is real:

Given the administration’s refusal to so much as look at bank criminality during its first three years, a number of progressives have expressed fear that the administration is taking Schneiderman for a ride, that it wants only to say the right thing through the election, at which point it will dump his investigation. Schneiderman doesn’t buy that critique….But he understands the gamble he’s taken if it turns out, as the critics charge, that he’s signed on to a Potemkin investigation.

…if the investigation doesn’t become real, he will have to choose between denouncing the president in an election year or becoming party to something he spent a year denouncing.”

So whither the task force? Did AG Schneiderman take a good gamble, or is he just being a tool?

Well, NPR did a puff piece on U.S. Attorney General Eric Holder titled “Holder: ‘More Work To Do’ Before Term Is Over” that suggests AG Schneiderman’s going to lose his bet. Consider what Holder says still needs doing:

“But I think there’s still, you know, there’s more work to do,” he hastened to add. “Although I’ve become contemplative … I’m not going to glide through the tape. I want to run through it.”

“Still on the agenda: protecting voting rights; holding BP accountable; and defending national security.”

Holding BP to account, but not the bankers… Good luck with that task force bargain of yours, AG Schneiderman.

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Setting the Record Straight: The Housing Bubble Lie

Posted by on April 23, 2012 Comments Off

(photo: downtownpearl/fllickr)

Let’s get something straight: we did not have a housing “bubble”, in the usual sense of the word. The mainstream narrative of crazed, greedy, irresponsible homeowner-wannabes driving prices unsustainably high, causing the still ongoing crash is wrong. Yes, we had a housing “bubble” in one sense; prices soared way beyond reality because excess demand fueled irrational bidding wars. The lie deals with why we had a housing bubble. The lie matters because like all problem-defining narratives, it shapes the policy solutions offered. So let’s take a look at the lie.

Consumer Driven Bubbles

The classic example of a demand-driven bubble is Holland’s tulip craze in the 1600s. A much more recent version was the DotCom fever a couple of decades ago. And at the risk of dating myself, the most vivid consumer-good craze of my youth was “Cabbage Patch Dolls” (not that I had one; I wasn’t into dolls.) How did these bubbles happen? Simple. Irrational economic actors, that is, normal people acting as consumers, got a kind of mob/herd madness/fever and outbid each other endlessly, until suddenly reality intruded and they stopped.

But here’s the thing: Houses are not like tulips, shares of stock, dolls, or any other mass-market consumer product. They just cost too much. The only people who can buy a house simply because they want to are cash buyers. No one will argue that cash buyers drove the housing bubble of 2005 onward (or whatever year you want to peg its start.) Cash buyers don’t fuel a foreclosure crisis either, though banks have been known to foreclose on cash buyers anyway.

We didn’t have a housing bubble in the ordinary sense because consumers don’t buy houses; banks buy houses. The housing market cannot undergo a demand-driven bubble without lender collusion and complicity.

No Bubble Without Bankers Blowing It

Home buyers who don’t have enough cash have to get a bank’s permission to buy. The dollars involved are big enough that banks historically did not hesitate to say “No, sorry, I know you want that house, but the house just isn’t worth that much, and besides, even if it were, you’re kidding yourself when you think you can repay the loan you want. No dice. Go find something more reasonable and we can talk again.”

In normal times, meaning, when bankers care if the loan will be repaid, bankers have two basic tools to protect their interests: appraisals and underwriting. Both get used conservatively, because if an appraisal is too high, the collateral isn’t worth the loan the banker’s making, sharply increasing his risks. If an appraisal’s too low, well, the deal might not get done, but from the banker’s perspective, better no deal than a loser. Ditto with underwriting. If the standards are very loose, the loans will default and foreclosures follow; if the standards are very tight, well, that shrinks the market and keeps prices down, but again, the bankers are happy: they’re getting paid back consistently. Bottom line: across most of the housing market’s history, bankers’ self-interest foreclosed any possibility of a housing bubble.

Obviously, the fact that the entire nation underwent a housing bubble shows the last decade or so means something changed. Given the market dynamics, only one thing can have changed: lenders’ incentives. People didn’t suddenly become nuts about housing; Americans have been so nuts about housing for so long the “American Dream” shifted from my immigrant grandparents’ dream of “equal opportunity to get ahead, hard work and talent is all it takes” to the “dream of home ownership.” [cont'd.]

Or to put it another way: what evidence is there that circa 2005 wannabe homebuyers became so sophisticated–nationwide, simultaneously–that they could con bankers who cared about ensuring loans made against sufficient collateral would be repaid into making huge numbers of loans that couldn’t be, against collateral that today’s market exposes was worth nowhere near the amounts claimed? Did some evil villain put something in the public water supply that somehow made wannabe homebuyers into talented con men and bankers gullible rubes?

Of course we got a housing bubble because lender behavior changed, not because consumer behavior did. And we can see it clearly by looking at what happened to underwriting and appraisals.

Fraudulent Underwriting

“Stated income loans,” which have become derisively known as “Liar’s loans”, actually have a longstanding and legitimate place serving a very specific, narrow slice of the housing market. Well, longstanding, yes, legitimate, sort of. For years these loans were made to high income self-employed people whose various tax-avoidance strategies didn’t reveal to the IRS all the income they could use to pay a mortgage loan back. So rather than document income with tax returns, these buyers would be allowed to “state” their income to the banks’ underwriters. I made the snide comment about these loans being sort of legitimate because I don’t consider dodging taxes legitimate, even when legal, but from an underwriting perspective they made sense. The stated income was more accurate than the tax returns. One way to see how lenders abandoned underwriting is to see the huge expansion of stated income loans, transforming them into liar’s loans.

To get a flavor of how the volume of liar’s loans exploded during the bubble, see this column by Joe Nocera of the New York Times. A couple of key excerpts:

“…stated-income loans became a means for both borrowers and lenders to commit fraud….Real estate speculators used stated-income loans to buy properties that would otherwise have been out of reach, hoping to flip them quickly, before their lack of income caught up with them. Far more frequently, however, mortgage originators used stated-income loans to put people into homes that were far beyond their means, knowing full well that the chance of the borrower ever paying back the loan was practically nil.”

and from a lawsuit against Countrywide Nocera quotes:

“By about 2006, Countrywide’s internal risk assessors knew that in a substantial number of its stated-income loans — fully a third — borrowers overstated income by more than 50 percent….Countrywide deliberately disregarded these and other signs of fraud in order to increase its market share.”

Lenders did two other things that made all the eventual varieties of liar’s loans (stated income; stated income stated assets; stated income, stated assets, stated job) so fraudulent: they automated underwriting, and they incentivized closing loans. Automated underwriting meant loan officers could game the system, as this one from Chase urged an investment home buyer to do, leading to the classic ‘garbage in, garbage out’ problem. Basing loan officers’ pay on funding loans meant that they would in fact game the system.

Liar’s loans aren’t the only way underwriting disappeared in the bubble years, but they illustrate the point. The other key change was what happened to appraisals. A couple months ago Reuters reported on a Countrywide whistleblower exposing appraisal fraud there. Consider this petition from 2005, which 11,000 appraisers signed with their names and addresses:

We, the undersigned, represent a large number of licensed and certified real estate appraisers in the United States, who seek [government regulators'] in solving a problem facing us on a daily basis. Lenders (meaning any and all of the following: banks, savings and loans, mortgage brokers, credit unions and loan officers in general; not to mention real estate agents) have individuals within their ranks, who, as a normal course of business, apply pressure on appraisers to hit or exceed a predetermined value.

This pressure comes in many forms and includes the following:

  • the withholding of business if we refuse to inflate values,
  • the withholding of business if we refuse to guarantee a predetermined value,
  • the withholding of business if we refuse to ignore deficiencies in the property,
  • refusing to pay for an appraisal that does not give them what they want,
  • black listing honest appraisers in order to use “rubber stamp” appraisers, etc.

We request that action be taken to hold the lenders responsible for this type of violation and provide for a penalty on any person or business who engages in the practice of pressuring appraisers to do dishonest appraisals that do not provide for independent judgment. We believe that this practice has adverse effects on our local and national economies and that the potential for great financial loss exists. We also believe that many individuals have been adversely affected by the purchase of homes which have been over-valued.

(As of March 2005, when the think tank Demos published a report on appraisal fraud, the above petition had 8,000 signatures; the petition was closed after the 11,000 was reached.) In 2006, the Wall Street Journal reported on appraisal fraud, including a survey of appraisers from 2003 found many faced pressures to inflate values. The author of the Demos report noted nearly a year ago that the narrative is shifting to make banks the victims rather than the organizers of appraisal fraud. (Of course, builders struggling to sell homes complain that today’s appraisals are too low.)

So there you have it: American underwent a massive wealth destroying housing bubble not because crazed consumers got out of hand, as they have in every other bubble in history. No. We got a housing bubble because the lenders’ historical incentives to regulate consumer demand, ensuring accurate property valuations and real ability to repay, evaporated.

Why did lenders’ incentives change? That’s a long story for another day, but it boils down to this: lenders no longer faced consequences if the loans weren’t repaid. They’d offloaded that risk to securities investors.

As long as people continue to believe that crazed consumers created a housing bubble, the kinds of policies needed to end the appraisal, underwriting and securities fraud that really did create the bubble have no chance of succeeding. So make sure your friends understand the housing bubble lie.

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The Bankers’ Subversion of the Rule of Law, Notary and Land Records Edition

Posted by on April 20, 2012 Comments Off

(photo: Alex756/wikimedia)

One way to see the double standard at the heart of the foreclosure fraud—one set of laws for the bailed out banks, one for the rest of us—is to focus on the role of notaries public, and then consider that role in light of what our Supreme Court said about notaries in 1984, in a case called Bernal v. Fainter, Secretary of State of Texas.

First, let’s recap the role of notaries in the foreclosure fraud crisis: Notaries are the people who verify that someone actually is who they say they are when that person signs a document. Because banks and their agents industrialized “Document Execution” as part of their foreclosure business model, notaries did not do their jobs. Notaries’ failure to verify identities has been so complete that many people will sign as one person, say, “Linda Green.” Notaries have also been told to sign documents using one name, and then notarize their own “surrogate” signature. “Well, what’s the big deal?” bank defenders say. Beyond the fact that there’s no “business convenience” exception to following the rule of law, consider Bernal.

Bernal involved Texas’s requirement that all notaries be citizens; lawful permanent resident aliens need not apply. Bernal challenged the Constitutionality for the citizenship requirement. To rule on the question, the Court had to consider what notaries did, and whether or not what notaries did was so political, so central to representative democracy, that limiting being a notary to citizens was rational. In finding that notaries were important but not political officers of the state, the Court made some observations of note.

For starters, law-and-order Texas considers the notary job so important it’s in the Texas constitution, a fact the State emphasized in asking the Court to let it reserve the job for citizens. The Fifth Circuit Court of Appeals explained, as quoted by the Court:

“With the power to acknowledge instruments such as wills and deeds and leases and mortgages; to take out-of-court depositions; to administer oaths; and the discretion to refuse to perform any of the foregoing acts, notaries public in Texas are involved in countless matters of importance to the day-to-day functioning of state government. The Texas political community depends upon the notary public to insure that those persons executing documents are accurately identified, to refuse to certify any identification that is false or uncertain, and to insist that oaths are properly and accurately administered. Land titles and property succession depend upon the care and integrity of the notary public, as well as the familiarity of the notary with the community, to verify the authenticity of the execution of the documents.” 710 F.2d, at 194.

Responding to this argument on its way to saying lawful aliens could be notaries, the Court said: [cont'd.]

We recognize the critical need for a notary’s duties to be carried out correctly and with integrity. But a notary’s duties, important as they are, hardly implicate responsibilities that go to the heart of representative government. Rather, these duties are essentially clerical and ministerial To be sure, considerable damage could result from the negligent or dishonest performance of a notary’s duties.

Lender Processing Services (LPS) bases its business model in part on the industrialization of documentation production and execution. Nevada Attorney General Catherine Cortez Masto sued LPS over its practices, including “fraudulent notarizations.” She also indicted two individuals involved in LPS’s document execution factory Missouri Attorney General indicted LPS subsidiary DocX for 136 counts of forgery and making a false declaration related to mortgage documents. The AG noted these forged documents were notarized by DocX as well.

The Attorneys General for Nevada and Missouri aren’t the only public officials taking action because of the “considerable damage” that results from such “fraudulent notarizations”. The state officers in charge of land records have been speaking out and even suing over the damage caused. The two most recently filed actions are by North Carolina and Louisiana. In North Carolina, Register of Deeds Jeff Thigpen (Guilford County) filed suit against LPS, the bailed out banks and their creation, MERS. Thigpen said he wants the banks to “clean up their mess”, noting:

“It is unbelievably frustrating to expend County resources in an attempt to create an efficient, accurate registry and have these banks wreak havoc on our efforts through fraudulent documents and a secret registry [the MERS system]. If we don’t fix this now, the future impact on land records and property values could be severe and incurable.”

Earlier this week 29 Louisiana Clerks of Court filed a civil RICO suit–yes, a civil organized crime suit–against the bailed-out banks. The Clerks, who manage the land records, allege the banks conspired to use MERS to defraud the state of land recording fees. The Clerks allege that MERS misrepresents Louisiana law, and that MERS fails to work as promised. As a result, the Clerks charge, the parishes were owed fees every time a note was transferred but were not paid them.

The Clerks flag an important point: critical players in each mortgage backed security are not MERS members. Thus even if MERS did work as MERS claims for MERS member companies, once a mortgage loan reached a securitization process entity that was not a MERS member, even on MERS’s own terms, a mortgage assignment needed to be recorded. Although the Louisiana clerks focus on only the Trustee for the securitized trust, the special purpose entities in the securitization process were not MERS members either. Thus at least two, and often three, recorded assignments were needed for securitized mortgage to maintain the perfection of the security interest.

Notarization fraud was not limited to LPS or the bailed-out banks-as-motgage-servicrs-as MERS. Law firms also engaged in the garbage practice. Maryland notaries who participated were forced to take the Fifth when asked about it.

Despite LPS’s insistence that “improper” notarizations are irrelevant and “surrogate signing” legal, the indictments tell a different tale.

Note: Law enforcers have neither indicted or sued a single big banker for this conduct. If the low level folk focused on now are used to flip people up the chain, fine. But if not it’s hard to see how the US can continue to see itself as operating according to the rule of law.

And no, the practices aren’t harmless even if LPS insists they are. Title is clouded in many places, and in Massachusetts may be flatly invalid. Communities denied millions of revenue in troubled economic times are suffering needlessly.

The US Supreme Court recognized how crucial honest notary practices are nearly 30 years ago, as did the State of Texas. At the time, a fundamental issue was at stake–the basic freedom to participate in the common occupations of the community–but now something just as fundamental is to–our property rights and land records system. Worse, more is wrong than notary practices, though honest notaries could’ve stopped “surrogate signing” in its tracks.

Why aren’t all our law enforcers indicting people on a system changing scale?

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