Yesterday I posted an excerpt of Joe Nocera’s column in the NY Times on the government’s failure to deal effectively with the foreclosure fiasco.  The fact the so many people took on mortgages that, in a reality-based world, all parties involved would have acknowledged they couldn’t afford is a fiasco in itself, but that’s actually not the fiasco the government was supposed to be investigating.  The fiasco they were supposed to be investigating was that banks foreclosed on people who were current on their mortgage payments.  More simply stated, banks stole people’s homes.  Matt Taibbi wrote about it several years ago in Rolling Stone.  An excerpt:

Virtually every case of foreclosure in this country involves some form of screwed-up paperwork. “I would say it’s pretty close to 100 percent,” says [attorney James] Kowalski. An attorney for Jacksonville Area Legal Aid tells me that out of the hundreds of cases she has handled, fewer than five involved no phony paperwork. “The fraud is the norm,” she says.

Kowalski’s current case before Judge Soud is a perfect example. The Jacksonville couple he represents are being sued for delinquent payments, but the case against them has already been dismissed once before. The first time around, the plaintiff, Bank of New York Mellon, wrote in Paragraph 8 that “plaintiff owns and holds the note” on the house belonging to the couple. But in Paragraph 3 of the same complaint, the bank reported that the note was “lost or destroyed,” while in Paragraph 4 it attests that “plaintiff cannot reasonably obtain possession of the promissory note because its whereabouts cannot be determined.”

The bank, in other words, tried to claim on paper, in court, that it both lost the note and had it, at the same time. Moreover, it claimed that it had included a copy of the note in the file, which it did — the only problem being that the note (a) was not properly endorsed, and (b) was payable not to Bank of New York but to someone else, a company called Novastar.

Now, months after its first pass at foreclosure was dismissed, the bank has refiled the case — and what do you know, it suddenly found the note. And this time, somehow, the note has the proper stamps. “There’s a stamp that did not appear on the note that was originally filed,” Kowalski tells the judge. (This business about the stamps is hilarious. “You can get them very cheap online,” says Chip Parker, an attorney who defends homeowners in Jacksonville.)

The bank’s new set of papers also traces ownership of the loan from the original lender, Novastar, to JP Morgan and then to Bank of New York. The bank, in other words, is trying to push through a completely new set of documents in its attempts to foreclose on Kowalski’s clients.

There’s only one problem: The dates of the transfers are completely fucked. According to the documents, JP Morgan transferred the mortgage to Bank of New York on December 9th, 2008. But according to the same documents, JP Morgan didn’t even receive the mortgage from Novastar until February 2nd, 2009 — two months after it had supposedly passed the note along to Bank of New York. Such rank incompetence at doctoring legal paperwork is typical of foreclosure actions, where the fraud is laid out in ink in ways that make it impossible for anyone but an overburdened, half-asleep judge to miss. “That’s my point about all of this,” Kowalski tells me later. “If you’re going to lie to me, at least lie well.”

Read the whole thing.  It’s an excellent piece of investigative journalism.  Basically, the paper trail which should exist for a mortgage had been obliterated in many cases.   Mortgages get bundled and passed around multiple times and the paperwork which makes them legal – or at least once upon a time made them legal – gets lost/destroyed/whatever.  (If your mortgage has been sold decent odds its paper trail has been too.)  Banks foreclosed on people without any legal basis for asserting they’re the mortgage holder.   Often times they engaged in illegal activity to facilitate the process.  And yet the courts responsible for providing legal review permitted to foreclose anyway.  Nice.  Did they foreclose on people who defaulted?  Most certainly.  Did they foreclosure on people who were paid up and had been doing everything by the book?  Yup, they did that too.  As Nocera points out, the government never bothered to investigate which homeowners’ claims were legitimate and which weren’t.  They just spread money around and swept the illegal activity under the rug.   A lot people got screwed – not just homeowners who were improperly foreclosed upon but people who bought mortgage-back securities based on junk loans and, ultimately, us taxpayers who are going to cover a lot of those losses.
It’s pathetic that there wasn’t an investigation to determine what fraction of the cases were legit vs fraudulent, how the banks perpetrated their fraud, etc, etc.

So why would the government not bother to investigate whether claims were legit or fraudulent?  After all, they’re going to hand out $3.3B in cash.  Well, let’s try to do a ballpark estimate of what it might take to investigate:

(1)  

where C = total cost, N = number of mortgages to clear, s = cost per investigator, and r = resolution rate.  We know N = 3.8M.  Let say the bottom line cost per investigator is $100/hr and they work 40 hrs/week.  That’s $4k/week.  Let’s say they resolve two cases per week.  Do the math and…  I come up with $7.6B as a ballpark estimate.  Only $2k/mortgage but when you’ve got 3.8M mortgages to investigate it adds up.  And they’ll be distributing $3.3B…  Well, that might explain why the government chose not to investigate.  Doesn’t excuse it but it could certainly explain it.

Another thing, if there are 3.8M mortgages to investigate and a good investigator resolves 2 per week, then that’s about 2M investigator-weeks worth of labor.  Let’s say they committed to resolving all cases in two years – that’s about 100 weeks, so you’d be talking on the order of 20,000 investigators working full time.  That certainly wouldn’t pose any logistics problems…

I’d say the takehome message here is “An ounce of prevention is worth a pound of cure.”  If you let things get this messed up then amount of effort required to fix the problem will be staggering.