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How the foreclosure crisis has swept across America
The US is in the midst of a residential property foreclosure emergency the likes of which it has never seen before.
Easy money… it’s the gift that keeps on giving.
There were some American economists who’d dared to believe the end was in sight, that the sub-prime mortgage fiasco had somehow worked its way through the system, and that even if the complex re-packaging of bad debt didn’t, in the long term, turn a minus into a plus, at least it would be possible to wipe the slate clean (ish) and start again.
Indeed, it is passing through… but like a kidney stone. America is in the midst of a residential property foreclosure emergency the likes of which it has never seen before.
One in every 139 American homes received a foreclosure notice during the third quarter of 2010. Around 2.5 million properties are currently in the process of being repossessed, the same amount again in serious arrears, and 11 million (that’s a quarter of all mortgaged properties) are in negative equity (incentivising the owner to pass the keys back to the lender).
The result is a chronic logjam, as borrowers fail faster than lenders can process. Critics accuse the banks (and the lawyers who work with them) of performing to type. The same people who got the economy into this mess in the first place, they argue, by lending vast amounts of money to sub-prime borrowers on a nod and a wink, have now turned the repo-business into a new goldrush enterprise, in which care and diligence are the victims of volume and bonuses.
Dodgy tactics and robo-signers
One Florida law firm office manager was caught signing at a rate of 1,000 files a day. When her hand hurt, a paralegal was allowed to take over and forge her signature. Mortgage firms hired temporary staff – hairdressers, burger flippers, factory workers – to sign documents stating records had been checked and properties were ready for foreclosure. Some, later, admitted to not knowing what a mortgage was, and to changing dates on documents when necessary. Offices were turned into make-shift repo-factories, files spread across floors, some lost, while the 'robo-signers' attached their names to affidavits they didn’t understand.
You’d think, under these circumstances, mistakes would be made. And you’d be right. There’s the Florida man who – seven months after he’d bought his home outright – discovered title to the property had been transferred to the Bank of America. There’s the man who, despite being completely up-to-date with his mortgage repayments, was approached on his front lawn and served with a foreclosure notice. After the issuing office wouldn’t return his calls, he was forced to hire his own lawyers to resolve the error. It took several months, and cost a small fortune.
No ban, no trust, no rights
The Bank of America was forced to freeze repossessions earlier in the month while it conducted its own internal investigation. Other banks have imposed their own temporary moratoria. This week, Federal Reserve chairman, Ben Bernanke, announced a government investigation into foreclosure fraud; but – despite calls for action – the US Government is ruling out imposing a blanket, temporary ban.
So, how serious is this? It depends who you ask. Critics of the system, still angry at the banks’ role in creating the recent economic problems, paint the foreclosure mess as the final wave in what began as the sub-prime mortgage storm. After it’s finally rolled up on shore, it will take at least one big bank with it as it retreats. It’s a sign, too, they say, that the industry still can’t be trusted, that it’s still happy to play fast-and-loose with process, the law and individuals’ rights.
According to the industry itself, the whole issue has been overplayed. Yes, the Bank of America has finally admitted to an error rate in foreclosure processing that’s higher than it should be (as high as 3.5%), but almost all of those errors are technical, meaning names have been mis-spelt, first names and last names swapped, signatures missing. Nobody – they’re keen to point out – has been evicted following an error. Most of the borrowers who have been served an imperfect foreclosure notice were in arrears.
What’s certain is that the whole subject presents a nightmare for Barack Obama. The President who, in early 2009, announced a $75 billion plan to 'end this crisis and preserve for millions of families their stake in the American Dream', also knows that the American economy, and the property market in particular, can’t move on until this backlog has worked its way through the system. But it’s a brave president who, on the eve of a mid-term election, will make that his message.
The Citywire guide to investment trusts
In association with Aberdeen Asset Management
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