Foreclosure Mess Spreads

I’ve been posting a lot about the ongoing foreclosure mess* over the last couple of days.  The story has slowly evolved from a “move along, nothing to see here” situation with the initial revelation that GMAC/Ally was suspending foreclosures to something that appears to be developing into a potentially huge problem that may have far-reaching implications.  In brief, mortgage servicers GMAC/Ally, JP Morgan, and Bank of America are alleged to have used defective or potentially fraudulent practices in their foreclosure process.

Recipe for disaster: two parts hubris, one part greed, sprinkle in some laziness, and add a dash of incompetence.

*I’m going to go ahead and use a Posterisk here:  The other day I was searching around for a snappy name that easily describes this mess.  In my research I heard someone refer to it as “foreclosuregate” (although I cannot remember who).  At what point can we stop putting “-gate” on the end of every scandal?  Watergate happened 36 years ago.  Aren’t we more creative than this?

The best place to get a lot of the backstory is (in my opinion) from Yves Smith at nakedcapitalism.  They’ve been all over this thing from the get-go and I recommend looking through their site for more details.  Barry Ritholtz has also written some fine pieces about this matter on his blog, The Big Picture.  Tom Lawler at CalculatedRisk had an excellent take on the situation today.

Today’s New York Times features a story by David Streitfeld and Gretchen Morgenson that says that Nancy Pelosi and 30 other Democrats in Congress are calling for the Justice Department and the Federal Reserve to get involved.  Their request said that “the excuses we have heard from financial institutions are simply not credible”.  These lawmakers join several attorney generals and governors calling for moratoriums on foreclosures until further investigation.

Nobody really seems to know where this situation is going from here (rest assured there will be tons of litigation – already several class actions suits have been filed, alleging RICO charges among many others).  Old Republic National Title, one of the largest title companies, has stopped offering title insurance on any GMAC/Ally and Chase foreclosures.  Without title insurance, it is nearly impossible to get financing for a house, and these houses are rendered unsellable.  The problem is that the titles for many mortgages that were securitized and foreclosed upon are extremely clouded.  Notes were lost and many loans were sold multiple times, making it hard to determine who actually owns a house and who has standing to foreclose upon a house.  Many foreclosures and sales of foreclosed properties could be bogged down in litigation for years to come.

As the story progresses, I will continue to post updates and opinions here.