High Noon: Banks vs. The Law (Mortgage Foreclosures) – Part 2

So, just what is the “mortgage foreclosure crisis”?  One part, as suggested in part 1 of my “High Noon” series of posts on this issue is that the banks have lied in court in order to save money, cut corners, and rapidly foreclose on houses that they may or may not be able to prove they should be able to legally foreclose.  Part 1 suggested a political/legal crisis as we decide whether banks have to comply with laws and court procedures or not.

Now before I get into more explanation of the problems and potential risks to the economy from these foreclosure documentation problems, I want  to Jon Stewart give a quick overview of the problem. Unfortunately I can’t embed the video here (WordPress.com doesn’t have code for a Daily Show embed) so go here: http://www.thedailyshow.com/watch/thu-october-7-2010/foreclosure-crisis.

High Noon: Banks vs. The Law (Mortgage Foreclosures) – Part 1

In recent weeks a legal storm has begun to blow regarding mortgage foreclosures.  It seems that in the last decade, as banks and Wall Street rushed to push mortgages and borrowed money at any homeowner or wannabe homeowner who was breathing while simultaneously raising the money by pushing too-complex-to-understand Mortgage Backed Securities Trusts and bonds (MBS) on investors, the banks found it a bit inconvenient unprofitable to follow the detailed laws about recording mortgages and transferring notes.  Now, as homeowners have fallen behind in payments and the banks (through their mortgage servicer operations) have taken to foreclosing on properties in high volume.  Of course, there’s those nasty details about the notes not being recorded properly and the paper trail not being complete.  No problem for today’s super banks, though. They just lie.  That’s right, they’ve been caught, as in court testimony and TV interviews of their own mid-level managers.  Seems they sign and file affidavits claiming the “paper work is lost but don’t worry Mr. Judge, I know personally the facts of this case intimately and this is what they are”.  Except they sign these affidavits of “intimate knowledge” in high volume.  As in 10,000 per month or 1 every 1-2 minutes.  As Yves at Naked Capitalism recounts

Reader ella in comments provided a reminder:

An affidavit is a legal document which can substitute for live witness testimony in court. All testimony in court is governed by the rules of evidence or by statute. All testimony requires that the witness swears to tell the truth, is competent and has personal knowledge of the facts they are testifying about. An affidavit is no different, in most if not all jurisdictions; the affiant swears to tell the truth by being placed under oath by the notary, the affiant states in the affidavit that they were sworn, are competent and that they have personal knowledge of the facts in the affidavit. The notary attests to the oath of the affiant and that the affiant is who he claims to be.

If a witness lies in court or in an affidavit then they could be charged with perjury. Perjury is lying to the court.

The affidavit issue is being portrayed in the MSM at a paperwork problem. Lying to the court is not a paperwork problem. Attorneys are prohibited from making a material misrepresentation to the court of fact or law. Further, attorneys in most jurisdictions have an affirmative duty to report known perjury by their clients to the court.

The problem with the affidavits is perjury on behalf of the affiants and possibly the notaries depending on the notaries’ knowledge that the affiants had not reviewed the files, the promissory notes, the mortgages, or the records of default.

Further, you can reasonably argue that the entities pursuing foreclosure (banks or servicers) have perpetrated a fraud on the court by submitting perjured affidavits. If the attorneys representing the entities have knowledge of the fraud or are preparing questionable documents then they may also be involved and subject to penalties.

At the heart of any trial or hearing is the determination of the truth of the matter. It is the very purpose of the rules of evidence and what law and fact is presented to the court. If the affiants lied, as it appears, then the truth of whether they owned the note and held the mortgage and the borrower was in default is at issue. Courts, Attorneys General, and bar associations need to serious consider actions that will assure compliance with the rule of law.

This country cannot stand as a democracy if there is one set of law for the banks, corps, elites and another set of law for the rest of us. Perjury and fraud on the court is very serious matter. It is not a mere paperwork problem.

This doesn’t summarize all of the problems related to the growing foreclosure fraud crisis, but in my opinion, it’s one of the most significant.  These big banks have perpetrated, with intent and foreknowledge, fraud on our courts.  They have lied under oath.  They have perjured.  These are not “paperwork problems”.  These are crimes.  Not civil infractions. Not “misstatements”.  These are crimes.  Crimes that would see any individual put in jail.  The banks need to be held accountable. If not, then we do not have a viable legal system of “equal justice for all”.  If we don’t have that, we can’t have market capitalism.

More to come in future posts on this topic, because it is looming like a growing shadow over the economy.

Monetary Policy: The Wrong Tool for the Job

Generally, there are two broad policy approaches to having the government (or it’s appointed representative, the central bank)  manage the macro economy.  One, fiscal policy involves deliberate management of the government budget (spending and tax policy) with a view to stimulating or slowing the economy.  The other is monetary policy where the central bank (or government if it has retained control over currency) moves interest rates up or down, and buys or sells bonds in order to stimulate or slow the economy.  Fiscal policy acts directly on the economy: government spending adds directly to demand for goods and causes those goods to be produced and thus raise employment (assuming there are unemployed people to hire).  Taxes directly take money away from households and prevent them from buying goods (assuming they were going to spend anyway – which they may not if very high income or wealth).

Monetary policy however, is very indirect. It’s almost a Rube Goldberg machine in design.   The central bank has to buy/sell bonds on the public market and to/from banks in an effort to increase/decrease interest rates by affecting the supply/demand for such bonds.  Then, if the central bank is trying to stimulate, it has to hope that the lower interest rates cause busineses and consumers to decide that lower financing costs (lower interest rates) now make some purchases more attractive than before. Then the businesses and consumers have to borrow and then go buy things (typically consumer durables, houses, or business investment).  There’s a lot of steps there where the policy could be defeated by folks not cooperating.  For example, today lots of businesses are deciding that since they have excess capacity already and not enough people are buying the goods they make now, there’s no sense in borrowing to expand.  Likewise, consumers who are scared they may not have a job next year are taking a pass on buying a house or car even though the interest rate is low.

Joe Stiglitz explains the problems we face today with monetary policy in a post at Project Syndicate.  Keynes pointed out a long time ago (before the dark ages of macro), that in times of high unemployment, unused capacity, and low interest rates (what is sometimes called a liquidity trap), monetary policy isn’t going to be very effective.

With interest rates near zero, the US Federal Reserve and other central banks are struggling to remain relevant. The last arrow in their quiver is called quantitative easing (QE), and it is likely to be almost as ineffective in reviving the US economy as anything else the Fed has tried in recent years. Worse, QE is likely to cost taxpayers a bundle, while impairing the Fed’s effectiveness for years to come.

John Maynard Keynes argued that monetary policy was ineffective during the Great Depression. Central banks are better at restraining markets’ irrational exuberance in a bubble – restricting the availability of credit or raising interest rates to rein in the economy – than at promoting investment in a recession. That is why good monetary policy aims to prevent bubbles from arising.

But the Fed, captured for more than two decades by market fundamentalists and Wall Street interests, not only failed to impose restraints, but acted as cheerleaders. And, having played a central role in creating the current mess, it is now trying to regain face.

In 2001, lowering interest rates seemed to work, but not the way it was supposed to. Rather than spurring investment in plant and equipment, low interest rates inflated a real-estate bubble. This enabled a consumption binge, which meant that debt was created without a corresponding asset, and encouraged excessive investment in real estate, resulting in excess capacity that will take years to eliminate.

The best that can be said for monetary policy over the last few years is that it prevented the direst outcomes that could have followed Lehman Brothers’ collapse. But no one would claim that lowering short-term interest rates spurred investment. Indeed, business lending – particularly to small businesses – in both the US and Europe remains markedly below pre-crisis levels. The Fed and the European Central Bank have done nothing about this.

They still seem enamored of the standard monetary-policy models, in which all central banks have to do to get the economy going is reduce interest rates. The standard models failed to predict the crisis, but bad ideas die a slow death. So, while bringing down short-term T-bill rates to near zero has failed, the hope is that bringing down longer-term interest rates will spur the economy. The chances of success are near zero.

Large firms are awash with cash, and lowering interest rates slightly won’t make much difference to them. And lowering the rates that government pays has not translated into correspondingly lower interest rates for the many small firms struggling for financing.

More relevant is the availability of loans. With so many banks in the US fragile, lending is likely to remain constrained. Moreover, most small-business loans are collateral-based, but the value of the most common form of collateral, real estate, has plummeted……

…Copyright. Project Syndicate, 2010.
http://www.project-syndicate.org
For a podcast of this commentary in English, please use this link:
http://media.blubrry.com/ps/media.libsyn.com/media/ps/stiglitz130.mp3