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Brett Arends' ROI
Oct. 5, 2010, 12:00 a.m. EDT · Recommend (1) · Post:
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By Brett Arends
BOSTON (MarketWatch) "” Some of the country's biggest mortgage lenders apparently have been bending the law to speed up foreclosures.
Investigations are under way at Bank of America Corp. /quotes/comstock/13*!bac/quotes/nls/bac (BAC 13.57, +0.42, +3.20%) , J.P. Morgan Chase & Co. /quotes/comstock/13*!jpm/quotes/nls/jpm (JPM 39.66, +0.71, +1.82%) and Ally/GMAC for pushing foreclosures with flawed paperwork. All three have frozen many of their foreclosures pending a review. One suspects that others are doing the same.
What does this mean? Here are seven lessons from the latest scandal:
1. The banks are still stupid "” OK, not all of them, but a surprising number. Foreclosures actually hurt them. A foreclosure empties a home and helps blight a neighborhood. It drives down property prices and makes it harder to sell the home and the one next door. Yet here are several of the biggest banks actually bending the rules to speed these foreclosures up and make matters worse. It beggars belief.
Hundreds of people showed up for a foreclosure help event in Tampa, Fla., that was sponsored by J.P. Morgan Chase. Video courtesy of Fox News.
Remember that throughout the crisis the banks largely have resisted bending the rules to prevent foreclosures "” something that might have helped everyone. They have been dragged kicking and screaming into renegotiating any doomed loans, even when there was absolutely no hope of it ever being repaid on the original terms. They have resisted short sales, and fought bitterly with real-estate agents who actually got them an offer. I've seen this firsthand. The banks caused the crisis; they barely have missed an opportunity to make it worse.
2. The banks still think they're above the rest of us. Two years ago they brought the economy to its knees, and took our money to save themselves. (Bank of America, J.P. Morgan Chase and GMAC/Ally, the three banks most implicated in the current scandal, required tens of billions from taxpayers.) Yet here they are, utterly unabashed, skirting the rules again.
The key thing here isn't that the banks were at times filing faulty foreclosure paperwork that they hadn't read properly. It's that they couldn't possibly have read the paperwork, and nobody at the bank seemed to care. One bank employee said she signed around 8,000 foreclosures a month. If we figure a month consists of 22 workdays of eight hours each, that's 45 foreclosures an hour. In other words, one minute and twenty seconds per foreclosure, eight hours a day, five days a week. And that's assuming she took no lunch breaks and wore diapers so she never had to leave her desk. Yet none of her bosses cared.
3. We are back in squatters' law. In the worst-hit states, like Florida, Arizona and Nevada, you wonder now why any distressed homeowner is still paying his or her mortgage. In most cases, they have no equity left and no hope of any.
I occasionally hear stories of people who simply have stopped paying. They know the banks are way too swamped to come after them. As the current scandal shows, it's even worse than we thought. It may take a long time before the banks get around to foreclosing. In many cases, the loans are so tangled up in the securitization fiasco that nobody even knows who owns the paper. A hedge fund in Connecticut that has long since shut its doors? A German pension fund? The government of Iceland? In some cases, it may take years to sort this out. Meanwhile, the homeowner can simply live in the home rent-free, banking the extra money.
4. You need to protect your family against these people. If you want to avoid foreclosure, you need to talk to a lawyer at the first sign of trouble. You can't trust the banks to protect your interests. And you need to understand the basic principles of financial self-defense. That's true whether you are fighting foreclosure, or giving up.
At this point, more homeowners are going to start realizing that a mortgage is simply a contract. It's a loan secured against a property, not a blood oath.
In some states, if a bank forecloses on you and sells the home for less than the size of the mortgage, they can, at least in theory, try to come after you for the difference. But in this environment that's increasingly rare. You should understand that even if they do pursue you, there are a lot of assets they can't touch. Simplifying somewhat, they can't touch money in your 401(k) or IRA. They can't touch your children's college money if it's been in a 529 plan for two years. Depending on your state, other assets "” such as money in a life-insurance policy or a variable annuity mutual-fund account "” may also be protected. Even in a worst-case case scenario, you may be able to keep most or all of your savings. Of course, if the banks know you're protected they're less likely to come after you, and more likely to come to the table to discuss a deal.
5. The "moral obligation" on mortgage borrowers is looking more and more threadbare. Naturally it depends on who your lender is. Lots of community banks, and even some of the bigger ones, may have played fair. But do you really owe a moral debt to repay your mortgage, at all costs, to an institution that is happy to work the fine print against you when it suits them "” and then is happy to bend the rules against you when that suits them?
Seven months ago, I asked homeowners: "Do you think your lenders would be shy about squeezing you for an extra nickel if they thought they could get away with it?" A lot of angry people wrote in to complain that this was a terrible calumny against the fine, all-American banks that made this country great, and so on. Read earlier column, "?When It's OK to Walk Away From Your Home.'
Turns out I was being too kind. These guys make Will Shakespeare's Shylock look friendly. At this point, more homeowners are going to start realizing that a mortgage is simply a contract. It's a loan secured against a property, not a blood oath. If homeowners stop paying, the banks are free to take the property in fulfillment of the loan. Those are the terms and conditions. The banks knew this from the start; after all, they wrote the terms and conditions.
6. This crisis so isn't over. Yes, I know that Wall Street has rallied a long way from the lows. The Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (DJIA 10,937, +185.69, +1.73%) is climbing toward 11,000, and a lot of voices are ruling out a "double dip" on the economy. But the latest revelations are just another horrible snapshot of what is still happening out there, on the ground, in the real economy. This is one reason I'm still really wary of banking stocks. Every time we lift the rock on these companies, we see all sorts of unpleasant surprises crawling around. Turns out even they don't know what's going on in their own businesses. There have to be easier ways to earn a return.
7. Oh, and so much for heroic private-sector competence. By curious happenstance, the latest scandal came to light just as I was staggering over the finish line of Ayn Rand's gigantic, antigovernment dystopia "Atlas Shrugged." The book is politically significant this year: Sales have boomed and it's supposed to be one of the inspirations for members of the "tea-party" movement. The book portrays all government activity as incompetent and evil, while private-sector businessmen are invariably heroic Titans manfully bestriding the world, overcoming hurdles and solving problems. Then you turn on the news and see heroic American businessmen like Dick Fuld, who pocketed tens of millions helping to run Lehman Brothers Holdings Inc. /quotes/comstock/11i!lehmq (LEHMQ 0.05, 0.00, 0.00%) and the economy into a brick wall, testifying to Congress. Then you read about bankers who try to get around the law in a petty and malicious campaign that would actually make the housing crisis worse.
In "Atlas Shrugged," the top business people eventually all sneak away to a secret valley in the Rockies. Maybe we could pay a lot of our bankers to follow their lead.
Brett Arends is the author of "Storm Proof Your Money," on how to survive the slump.
Brett Arends is an award-winning financial columnist with many years experience writing about markets, economics and personal finance in Europe and the U.S. He has received an individual award from the Society of American Business Editors and Writers for his financial writing, and was part of the Boston Herald team that won two others. He was educated at Cambridge and Oxford Universities, and has worked as an analyst at McKinsey & Co. He is a Chartered Financial Consultant (ChFC) and Accredited Asset Management Specialist (AAMS). His latest book, "Storm Proof Your Money," has just been published by John Wiley & Co.
A trio of economists project that high unemployment could last a long time, maybe even forever. Boy, what a dismal group!
5 min ago2:15 p.m. Oct. 5, 2010 | Comments: 8
- McMWest | 11:40 p.m. Oct. 4, 2010
"The real meaning of the foreclosure scandal http://on.mktw.net/cS0Cb5" 11:41 p.m. EDT, Oct. 4, 2010 from MKTWArends
"7 myths and realities about taxes http://on.mktw.net/abM0zD" 11:27 p.m. EDT, Sept. 27, 2010 from MKTWArends
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