Our financial overlords have come up with an ingenious new way to loot the American economy: Forging foreclosure documents. Here's Exhibit A:
When Jason Grodensky bought his modest Fort Lauderdale home in December, he paid cash. But seven months later, he was surprised to learn that Bank of America had foreclosed on the house, even though Grodensky did not have a mortgage.
Grodensky knew nothing about the foreclosure until July, when he learned that the title to his home had been transferred to a government-backed lender. "I feel like I'm hanging in the wind and I'm scared to death," said Grodensky. "How did some attorney put through a foreclosure illegally?"
Bank of America has acknowledged the error and will correct it at its own expense, said spokeswoman Jumana Bauwens.
Mr. Gordensky is actually fairly lucky, since he had a pretty easy case to make that the bank couldn't foreclose on a mortgage that never existed. Others aren't quite so fortunate:
Luis Fernandez's foreclosure documents never looked quite right. Critical papers regarding his Orlando home were missing dates, and some signatures appeared to him to be forged. The mortgage had been sold so often - including once in the middle of the foreclosure process - that at times it was hard to tell which company was trying to seize the house. He challenged the foreclosure in court but failed.
Now, as Fernandez seeks to appeal his eviction and get his home back, he has learned that the law firm representing the banks is under investigation for fabricating foreclosure documents.
For those wondering why the banks are resorting to forging documents to foreclose on peoples' homes, let's review what happened over the last decade:
- Mortgages typically aren't held by the original lenders. Instead, they're sold off to Wall Street so they can be thrown into mortgage-backed securities. From there, they're thrown into special purpose entities like collateralized debt obligations (CDOs). And then maybe they're diced up again and thrown into a CDO squared, which is a CDO backed by pieces of other CDOs. Or if they're really lucky, a CDO cubed, which is a CDO backed by pieces of other CDOs that are backed by pieces of other CDOs.
- OK, I'll try to explain it in English: imagine the mortgage is a berry that gets eaten by a worm that gets eaten by a bird that gets eaten by a cat, and then gets crapped out. If you were the person assigned to find the remnants of berry within the mound of cat poop, could you even attempt it?
- So the lenders have absolutely no idea if the original mortgage is anywhere on their books -- or, for that matter, if it's been sent through a rift in the space-time continuum and is now held by the Rang'ar Interplanetary Fifth Dimensional Bank of the Gamma Quardrant. They have no idea what loans they are and are not exposed to. Oh noes! What are they to do?
- The answer, it seems, has been to make stuff up. Forge foreclosure documents, send them out and hope that the people getting screwed aren't smart enough to raise hell about it.
Dean Baker explains this better than I can, and without resorting to crude metaphors involving cat poop:
If the servicer followed the law on carrying through foreclosures then it would have to go through a costly and time-consuming process of getting its paperwork in order and ensuring that it actually did have possession of the title before going to a judge and getting a judgment that would allow them to take possession of the property. Instead, banks got in the habit of skirting the proper procedures and filling in forms inaccurately and improperly in order to take possession of properties.
GMAC, the former financing arm of General Motors and now called Ally Financial, has become the poster-child for these sorts of practices. Jeffrey Stephan, a leader of one of its foreclosure units, acknowledged that he had signed thousands of affidavits claiming that he had reviewed documents he had never seen.
Here's a fun thought: What happens if your mortgage was part of a synthetic CDO? That is, some bank synthesized a security based partly on your mortgage utilizing credit default swaps? Does this mean that if the bank foreclosed on you you'd not only lose you home but would be required to also hand over a duplicate home that's never been built? The mind boggles. I'll have more to say on this in the future when I debut my own creative financial innovation: The four-dimensional collateralized synthetic obligation cubed! Stay tuned.
RELATED: Barry Ritholz is having a contest to craft a new advertising slogan for Goldman Sachs. My favorite so far: "God’s Work. It’s not just for hurricanes and famines and locusts anymore."