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"We did a thorough review of the process, and we found the facts underlying the decision to foreclose have been accurate. We paused while we were doing that, and now we're moving forward."
-- Barbara J. Desoer, president of Bank of America Home Loans
Bank of America announced Monday that it was going to lift its foreclosure moratorium in the 23 states that require court approval to force delinquent homeowners out of their houses, though the moratorium will continue in the remaining 27 states as they are reviewed on a case-by-case basis. The nation's largest bank was the first to freeze foreclosures in all 50 states.
The news comes as investors seem to be taking the fauxclosure fiasco more seriously, as Bank of America and Wells Fargo (NYSE: WFC ) both hit new 52-week lows last week. Bank of America's lifting of the moratorium will most likely put pressure on JPMorgan Chase (NYSE: JPM ) and PNC Bank (NYSE: PNC ) to lift similar foreclosure freezes.
Let's look at some things we learned in the past week about the debacle.
The foreclosure "experts"
At JP Morgan, employees liked to refer to the foreclosure "experts" as the "Burger King kids," and that actually is not far from the truth. The Associated Press reported that the banks hired "robo-signers" who could barely explain what a mortgage was. Some of these workers came straight from the aisles of Wal-Mart or from hair salons where they worked as stylists before becoming foreclosure and mortgage "experts."
According to the AP report:
Many of those workers testified that they barely knew what a mortgage was. Some couldn't define the word 'affidavit.' Others didn't know what a complaint was, or even what was meant by personal property. Most troubling, several said they knew they were lying when they signed the foreclosure affidavits and that they agreed with the defense lawyers' accusations about document fraud.
In a deposition taken last year, one such "expert" from Litton Loan Servicing, a division of Goldman Sachs (NYSE: GS ) , said, "I don't know the ins and outs of the loan. I'm not a loan officer." Geesh.
Who owns what?
As the troubles expand and more intense investigations get under way, there is going to be a nationwide scuffle to figure out who really owns each individual mortgage. This problem dates back to the securitization of these loans. Banks were originally given a grace period to turn down loans to unqualified consumers, but as we are all too aware, this would rarely happen.
These mortgages that were purchased from the banks were then packaged with other mortgages, and then sold to investors. As a result, the securitized mortgage bundles may have to be unwound and sorted through one by one to see who owns what. This will lengthen this fiasco substantially, while also potentially creating massive liabilities for the banks that owned the mortgages.
The fight will continue
The battle has already moved from document chasing to home reclamation. Last week, one evicted family reportedly returned with a locksmith and broke into their home as police watched idly. The family had fallen behind by $880,000 on their payments, but believes the house was improperly purchased or sold, as the mortgage was passed around from bank to bank.
If this is true, according to the family's lawyer, they have a right to be in the house. The lawyer said: "They may claim we're violating the law. We're claiming they violated the law. Typically the authorities will say this is a civil dispute, but the question is, who owns the home? Because whoever doesn't is trespassing."
While Bank of America's decision to lift its nationwide foreclosure freeze is certainly noteworthy, I don't believe it means the problems are over for the mortgage lenders and investment banks that were players in mortgage securitization, like Goldman Sachs and Morgan Stanley (NYSE: MS ) .
Uncertainty about the situation is even greater because of next month's elections. Candidates certainly don't want to look like they are holding hands with the banks, but at the same time they realize that a struggling economy is one of our country's most pressing issues. Continued investigations and foreclosure freezes will most likely impede the housing recovery, and thus the economy. The market hates uncertainty, and there is still too much of that to go around in the financial sector.