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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.

 
How the foreclosure crisis has swept across America

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.

Chronic logjam

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.

Overplayed?

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.

23 comments so far. Why not have your say?

niblick

Oct 28, 2010 at 13:45

Don't understand the comment re negative equity holders "throwing back the keys".Surely the uncovered debt remains with the borrower even if the security offered (the house) does not cover it as originally envisaged.Am I not right also that the uncovered debt then gets even bigger as and when the banks knock out the house at a low auction price?

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Romilly Cocking

Oct 28, 2010 at 13:55

@niblick You're right about the UK, but not the US, where many mortgages are 'non-recourse'. For a mortgage like that, if the borrower returns the property to the lender the borrower is off the hook.

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K Woods

Oct 28, 2010 at 13:56

Response to Niblick

Laws are different in many US States where you cannot be pursued for outstanding debt provided the debt arose from the original mortgage ie not from eg a home improvement loan.That is where i think the problem lies-why keep on a negative equity debt when you can cut yourself free with little consequence? You may have more trouble getting credit in the future but that may be preferable to having thousands of pounds of debt which is not covered by the equity in the property.

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JohnnyOilShareHolder

Oct 28, 2010 at 13:57

Sure, but they then just declare bankrupcy and start again I assume, or have no liquid assets that the bank can pursue in a worthwhile manner!

Sometimes I think the world is going in a direction where careful savers just end up paying the price for all the carefree irresponsible people who are just borrowing and spending, then getting state benefits to bail them out.

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Anonymous 1 needed this 'off the record'

Oct 28, 2010 at 13:58

In most States the debt goes to the Lender/bank and for some few years now Homeowners have been sending the kays back by "jingle mail" as it is commonly called over there.

The only sting in the tail for the homeowners apart from a blight on their credit history for roughly 7 years is that the IRS (TAX) will charge them tax on the amount owing after the house has been sold. The IRS see this as a personal gain for the homeowner.

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Jonathan

Oct 28, 2010 at 14:15

And British bankers purchased this dept...

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julian mockridge

Oct 28, 2010 at 14:18

is this a taste of things to come for the UK?

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BOB BRIDGES

Oct 28, 2010 at 14:45

Yes Julian., I think so. And what are the lenders going to do with the property they don't want? They'll have to sell it off at knock-down prices. Surely that'll bring prices down to where they need to be to make home ownership viable again.

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camogli

Oct 28, 2010 at 15:41

Yeh, just like in the 1980's in boom times, people handed back the house keys and they thought that was it, but they are liable for any shortfall in what the bank sell the repossessed house and what they are due the bank. Yeh there is going to be a market correction which is long overdue and largley caused by the banks offering credit to anyone in years gone by....

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huudi

Oct 28, 2010 at 15:42

At least they have a public list of foreclosures. In UK anything of value is sidelined by banks or estate agents ie: reserved for freinds and who wants to befreind a bunch of con-men? there is call for a change in the law here

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William Phillips

Oct 28, 2010 at 16:55

What you won't read in coverage of incidental thrills and spills as deleveraging gets underway-- e.g. this 'foreclosure crisis'-- is a main cause of the housing bubble: political correctness, which forced lenders to tee up unsuitable customers.

For years the courts and government were pressing lenders not to 'redline' whole districts because their denizens were too flakey to repay debts or hold down steady jobs. It was every Amurrikan's birthright to own a mansion like Southfork, or at least the Little House on the Prairie. If you supplied the bucks the underclass wouldn't welsh; they'd rise to the challenge and become good little bourgeois like us white middle class suburbanites.

Disagree with this a priori contention, no matter how much experience of deadbeats you could pray in aid, and your institution was deemed 'institutionally racist'. Poor blacks and Latinos *must* become homeowners, then they won't riot or screw around, see?

Didn't work out. Nature beat nurture yet again. The race hustlers could sue every lender in sight and compel him to scatter funds broadcast, underwritten by taxpayer guarantees. But the lobbyists couldn't make their people give back the money-for-mansions.

And so vast tracts of inner cities are ghetto or barrio wastelands, with not one decent house left standing or one reliably creditworthy family to move in. Lots of illegal immigrants, welfare check recipients and other types of fly-by-night who got huge, soft loans are squatting or flitting. It'll get far worse before it gets better. Already latter-day Hoovervilles have sprung up under flyovers.

For now Uncle Sam goes on picking up the tab, and the liberal media continue to shut down discussion of the innate fitness of some kinds of physically adult human to lead useful existences in a high-IQ, post-industrial society. Moral hazards stalk the Land of the Free... and the Far East laughs behind its hand at the spectacle of a country so soft in the head. so far removed from the pioneer spirit that built it. (OK, some got 40 acres and a mule, but after that they were on their own.)

The reigning delusion of the US politcal elite is that abilities and moral qualities are randomly distributed, and can be topped up for all by generous infusions of preaching, handouts and prohibition: choose your blend according to whether you are a Democratic or Republican brand of semi-socialist, . All parties subscribe to this sentimentality for fear of being called 'mean-spirited'. It is part of the denial of innate and irreducible differences among men that will kill the USA. Liberal egalitarianism is the social expression of a collective death wish

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Christopher Carter

Oct 28, 2010 at 17:24

Goodness 1/4 of all properties in negative equity that is a lot of properties! Now just suppose that you are a nice honest citizen then you will keep playing your mortgage and honour your loan won't you? Say you think your house is worth $100K and you paid $120K (with $10K down payment) well you might be a bit uneasy, but you wouldn't want to risk your good credit record would you? Now suppose you see your neighbour's house coming onto the market for $70K, repossessed because he didn't keep up his repayments and you later find that he is not, after all homeless, but has bought a better house up the road for just $90K. You might then start to re-assess your morality, thinking of your family and those rouge bankers that only have themselves to blame. So you decide to jump ship thinking you have missed the boat. Happily you now discover that you can actually get one similar to your neighbour's new house for $85K. Your credit rating is a concern, but not a problem because the banks are absolutely desperate to sell to anyone with a guaranteed income and a deposit, they deal in money not real-estate for goodness sake. You tell your other neighbour about this, a really nice guy dead reliable and a bit of a stickler for morality. You convince him to drop his morality down a notch and join you. Wow you envy him, because he can now get that same house of $75K there are now so many coming onto the market from repossessions. What a happy situation all winners in your street and no losers!

Meanwhile America inc. heads for the toilet bringing the rest of us with it no doubt.

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Boyan

Oct 28, 2010 at 18:42

I think, once again, it's largely a case of regulatory failure - i don't know how nice and honest (sic C Carter) a citizen you ought to be in order to neglect self-interest and the financial well-being of your loved ones; of course you'd post the keys away to your bank if you could.... as for you W. Phillips, you should refrain from airing such hateful and racist views here: the poor, uneducated, exploited and racially abused in the US of A a predominantly members of the ethnic minorities and black americans, who, for no other reason but persistent policy failures of their elected representatives, languish on the botton rung of a very nasty social order indeed.

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struan robertson

Oct 28, 2010 at 18:59

When you get down beneath America's veneer, it stinks. Americans are not all bankers. When are we going to see some teeth bared at the clowns ruling the place.

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Going loco

Oct 28, 2010 at 22:51

A cursory reading of the comments here might lead you to think it's the usual crop of dommsayers & moralists spouting the usual rubbish about a catastrophe that will never happen.

But you'd be wrong because it isn't rubbish, and the collapse is happening now, before our very eyes.

@Romilly Cocking - correct, but it's worth remembering that the non-recourse rules are different in each State. In the months ahead we may hear that some States are suffering lower rates of "voluntary" defaults or "jingle mail" than others, but this will probably correlate with the non-recourse rules (or lack thereof).

@JohnnyOilShareHolder

Yes, the world IS "going in a direction where careful savers just end up paying the price for all the carefree irresponsible people who are just borrowing and spending, then getting state benefits to bail them out." And this will not end well. I hit the buffers of moral responsibility when Charlie Bean urged me to splurge my hard-earned savings (several hundred thousands of pounds saved for my retirement) on pointless consumption. Those who behave well and are frugal and save and invest are penalised. Those who do not are rewarded. How do you think that is going to play out in the long run Mr. Bean? What message is that going to send to the population at large? What behaviour is going to be encouraged by what has been going on in the corrupt financial sector?

@BOB BRIDGES

"And what are the lenders going to do with the property they don't want?" They are going to hang on to it, subsidised by the corrupt government and the corrupt BoE, who will encourage them to fraudulently disguise it in their books at values above what anyone will actually pay.

@William Phillips:

"Moral hazards stalk the Land of the Free... and the Far East laughs behind its hand". Oh yes, indeed this is the case. I wonder if there has ever before been a situation where an enemy has hoodwinked its foe so completely?

@Boyan

No Boyan, you are wrong. It is NOT a case of regulatory failure. It is a failure of morality, and that is much more dangerous. We are watching a great power brought to its knees by a failure of morality. They think they are moral because they take stands on issues such as sexuality and abortion and religion; but when the great temptation of "free" money was presented to them they showed that they have no morality worth the name; and that is their downfall, which we are witnessing now. Sadly, we are no better.

@struan robertsonOct 28, 2010 at 18:59

"When are we going to see some teeth bared at the clowns ruling the place" - now that really IS the question if you think, as I do, that outcome is now a real possibility. I suggest you read Mr. Orlov, who has described in detail how the borderline psychopathic police (when their wages stop being paid) and the organised thugs will take over the joint.

BTW Mr. Orlov's most prescient description of the USA is that it has been an economic superpower that has striven for world dominance but in effect has eviscerated its host country, eventually leaving behind an empty shell: an impoverished population, an economy in ruins, a legacy of social problems, and a tremendous burden of debt. Even he did not foresee the degree to which the criminal minds would take over the finance industry as this article describes.

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William Phillips

Oct 29, 2010 at 15:56

Boyan: "as for you W. Phillips, you should refrain from airing such hateful and racist views here: the poor, uneducated, exploited and racially abused in the US of A a predominantly members of the ethnic minorities and black americans, who, for no other reason but persistent policy failures of their elected representatives, languish on the botton rung of a very nasty social order indeed."

Don't worry, in America I wouldn't have to 'refrain', I'd be censored out of the debate for daring to point out what 95% of the whites, Jews, orientals and high-caste Indians keeping the US economy going know in their hearts to be the truth... including liberals who are too tongue-tied to admit it to each other, but who make damn sure once they've got families (if they ever do) that they and their kids don't live, work, play or school near the objects of their affection and protestation.

Actions speak loudest. America is rapidly resegregatiing de facto: it's going up from the townnship to the county level, and soon the state. That is why most House incumbents in Congress put more effort into getting renominated for their parties than fighting elections. The votes for parties split on racial lines, so redistricting-plus-incumbency almost guarantees re-election.

The fiddling of mortgage policies was a social experiment in breaking down the natural tendency of birds of a feather (and colour) to flock together. It has failed, calamitously, as school busing did. Politics and race map on to each other. This will be more true when (by midcentury) whites are no longer a majority in the country. Who'll be the tax base then?

I might have known the token liberal in this thread would have made up his mind beforehand that everything bad that happens to brown and black folks is Big Bad Whitey's fault. But even if that were true, it's no argument for continuing to chuck money at poor, dumb people who can never repay it.

And since it isn't even a small part of the truth that brown and black Americans have no control over their own destiny-- the curiously patronising, quasi-imperialist explanation of their failures always advanced by the enlightened liberal progressive-- we are back to Square One on the foreclosures. What next? Tax the thrifty, the ingenious, the persistent, the energetic even harder to subsidise the weaker brethren?

Tell that to the Tea Party, bubba. A lot of liberal pieties are no longer affordable-- including unending quotas, handouts, set-asides and affirmative action for those who have demonstrated over three generations since the Civil Rights Act passed that they could not make use of such favouritism to bust loose from welfare's chains. The vaunted 'black middle class', for instance, is largely an artefact of such favouritism: public spending cuts will decimate it. Only the TARP bailout prevented a far worse crisis in minority home ownership, but it's only been postponed.

Asia rampant will force the USA to decide. Will it continue to become a gigantic welfare state for the dysfunctional or turn into a lean, mean competitor in global markets that give no credit for domestic woolly good intentions? No choice, really. Sticking with the status quo means insolvency for all.

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GD-C

Oct 29, 2010 at 18:45

There is a very simple cure to the ills of the U.S. property market and its associated building industry.

All the U.S. government has to do is give non U.S. citizens(individuals/families) who have no criminal record and can prove they have a net pensioned income of $24,000 p.a. a guaranteed right of residency in all states, IF they purchase outright in cash a property costing (including all taxes) a minimum of $250,000. The agreement would contain the provision for applying for citizenship within 5 years. If a felony should be committed by the individual or a head of household prior to citizenship, then right of residency would be forefeited. A million houses could be taken off the market in a matter of months.

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Anonymous 1 needed this 'off the record'

Oct 30, 2010 at 00:48

GD-C

2 Years ago I had exactly the same thoughts as you regarding the purchasing of a property for cash and proof of financial stability leading to the granting of US Citizenship.

I did a 6 month Road Trip in the US and drove through 18 States but could see the damage done by the financial crisis. I do not hold any political views or vote but the Yanks love to try to get outsider's views. They did however seem to think that President Obama is making things a lot harder for ordinary folk than he talked about on his election campaign (what's new there?) and Obama seems to be despised by his own voters now.

I have seen the tent cities, the way some once industrious towns are now wrecked, talked to people in many towns and they all seem to think that their future is going to be bleak for many years yet.

Just my own opinion and I love America for it's scenery, entertainment and wide open spaces, but I would not dream of buying a house there now, not even for staying 6 months a year. After spending the best part of 20 years saving and investing to fund an early retirement there I don't know where to look now, tried SE Asia and it's hard living in the humid heat and pollution near the cities. Maybe Oz or NZ next then....

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anticlimactic

Oct 30, 2010 at 04:20

I think the article misses out on the real problem.

As I understand it : Processing documentation was equally sloppy when the mortgages were first sold, meaning that in many cases the banks and mortgage companies do not have clear legal ownership of the properties. Also some mortgage companies avoided paper documentation of ownership in order to avoid some taxes, relying on an electronic system, MERS, to keep track of ownership. MERS has no legal standing in proving ownership. In addition a proportion of mortgages were sold on non-existent properties by estate agents who took the money and ran!

To sum up : the banks and mortgage companies do not legally own a significant number of properties. This has a lot of implications :

[1] You can not foreclose on a property you do not own

[2] People who can afford to pay their mortgae realise they do not have to as no one owns their home, and so they stop paying! They may even get a free home out of it!

[3] The mortgage derivatives sold to the suckers in Europe and elsewhere were in effect sold fraudulently as the banks did not legally own the source properties. Hence the current owners of derivatives have legal recourse to try and force the banks to buy them back. So far £200 billion is touted, but could obviously go much, much higher.

Some bloggers suggest it could be as bad or worse than the original sub-prime problem.

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Jonathan

Oct 30, 2010 at 08:07

anticlimactic, I somehow doubt that any of the British banks will get anything back from the dodgy credit default swaps they bought from America. The American legal system often makes it impossible for anyone from another country to sue anyone or any company in America.

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Baw Heid

Oct 31, 2010 at 18:04

A million houses could be taken off the market in a matter of months...

But what about the people who lived in those houses, where do they go?

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Orlando Furioso

Nov 01, 2010 at 15:41

Hey, Anonymous 1, looking for somewhere to retire? Try Nicaragua. Its cheap and with petrol half the price of the UK. The people are lovely to be with (and the women are breathtakingly beautiful). The countryside has so much variety there is always something to admire and enjoy. The night skies are so dark and full of stars it'll take your breath away. There are beautiful, open beaches hardly touched by tourism. I have some great English friends in Managua who can point you in the way of good, affordable housing for yourself. Learn some spanish and you'll get on tremendously as the people love someone who takes an interest. There's the second biggest freshwater lake in the whole of central and south America; and as many volcanoes as Iceland half of which are actively simmering most of the time. Coffee plantations in the northern hills to visit and enjoy, the two oldest spanish cities in the Americas... the list just goes on. Fly Continental airlines via Houston to Managua and take a coach to San Juan del Sur on the southern Pacific coast. Breathtaking! You can fly and stay for a month for £1500, including spending money. And I'm not a travel agent, I just love the place...

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Jonathan

Nov 01, 2010 at 17:00

Orlando Furioso, It's a nice idea retiring in this sort of place but retiring to a place where there is low life expectancy usually means if you get sick (which a lot of people at retirement age do) you have can't rely on getting decent medical treatment.

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