The Titanic that is the U.S. housing market has just sprung its biggest leak, and even some of the largest banks responsible for this mess, like Bank of America and JPMorgan Chase, are now imposing a temporary moratorium on foreclosures. They have done so very reluctantly and only after courts throughout the nation, and the attorneys general of 40 states, questioned the legality of a securitized system of homeownership that has impoverished tens of millions.
How do you foreclose on a home when you can’t figure out who owns it because the original mortgage is part of a derivatives package that has been sliced and diced so many ways that its legal ownership is often unrecognizable? You cannot get much help from those who signed off on the process because they turn out to be robot signers acting on automatic pilot. Fully 65 million homes in question are tied to a computerized program, the national Mortgage Electronic Registration Systems (MERS), that is often identified in foreclosure proceedings as the owner of record.
MERS was the result of a partnership formed back during the Clinton years between Fannie Mae, an ostensibly government-sponsored agency that morphed into a very much for-profit mega-Wall Street hustler, and Countrywide, the largest and most rapacious of the private mortgage marketers. The scam of computerized credit approval and mortgage certification they came up with was subsequently embraced by Freddie Mac, the other huge housing agency, and the leading Wall Street banks joined in the feeding frenzy. MERS owners now include Wells Fargo, AIG, GMAC, Citigroup, HSBC, the two housing agencies and Bank of America. But the courts are increasingly challenging MERS claims to the right of foreclosure since this whole racket, which bypasses the power of counties to register property ownership, was never authorized in the law.
Yet the White House on Tuesday once again manifested an indifference to the suffering of victimized homeowners when press secretary Robert Gibbs warned of the “unintended consequences to a broader moratorium.” Which presumably would be worse in his view than the intended consequence of evicting people from their homes, which has already affected some 20 million Americans and threatens many more. What arrogance for an administration featuring Timothy Geithner and Lawrence Summers, who created this mess back in the Clinton era, to evidence such slight compassion for the victims of their folly.
The disastrous disarray in the housing industry is a direct result of decisions taken during the deregulation frenzy of the Clinton presidency when the securitization of mortgage and other debts was removed from any regulatory supervision. Instead of mortgages being between customers and banks and then being properly recorded by local government agencies, they became poker chips in the Wall Street casino. Tens of millions of home mortgages were recklessly issued with scant reference to their true values and bundled into securities to be sold on the unregulated derivatives market. But in order for there to be sufficient fluidity in the rapid-fire swapping of stock bundles of individual homes, those mortgages had to be unhinged from the valid legal restraints that had governed their issuance throughout most of human history.
To engage in the recklessness of turning people’s homes—their castles and nest eggs—into playthings of Wall Street market hustlers, or securitization of the assets, as it was termed, homeownership record-keeping had to be mangled beyond recognition. Throughout the preceding centuries of this nation’s history, the origination of housing loans was between the homebuyer and a lender, both of whom expected to be connected through decades of payments. Until the nuttiness that began in the 1990s when homes became ciphers in a marketable security, the verification of homeownership was a straightforward transaction dutifully recorded by local county governments. If the house was sold, the physical records were changed and available for all to see.
But that didn’t suit the newfangled collateralized debt obligations based on collections of mortgages to be cut in tranches as to their expected risk and sold as securities in an unregulated futures market. To facilitate the scam, the records of homeownership came to be largely maintained without the traditional local paper trail in a new computerized national database. The ensuing difficulty in tracing such ownership is now at the heart of the courts’ objections and the compelling argument for a government-enforced national moratorium on home foreclosures to provide sufficient time to sort this mess out.