Saturday, June 4, 2011


Imagine what would happen if you filed an insurance claim on your $20,000 car after you sold it. Most of us don't do this because it's against the law. Specifically, most of us don't do it because it's morally and ethically wrong. We have a conscience. Not so with our nation's biggest banks. They not only file claims like these, but they do it often. Here's how it works.

The nation’s five largest mortgage companies have been accused of defrauding taxpayers by using defective and faulty documents to file federal reimbursement claims on home mortgages that are backed by the federal government (VA or FHA mortgages, for example). The problem is that these claims are being filed on homes the banks foreclosed on AFTER they sold it for less than the outstanding loan balance.

If it were a car, what the banks are accused of doing with foreclosed homes is akin to filing an insurance claim on a car the bank repossessed AFTER they sold it for less than what the previous owner owed. Instead of taking a hit for making bad loan decisions they're forcing the federal government the American taxpayer to take it on the chin.

Five separate investigations conducted by the Department of Housing and Urban Development examined the activities of Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally. To pursue the case the feds are using the False Claims Act, a Civil War-era law crafted after numerous firms swindled the U.S. government by selling it (and Union soldiers) sub par and defective food, uniforms, and weapons. 

So, why is all of this important? Three reasons.

First, if the banks knew they were going to get their claims paid out by filing false claims to the federal government then the banks had a financial incentive not to hire people to help distressed homeowners modify their loans (not hiring more staff also saved the industry $40 billion).

Second (and worse), the banks also would have had a financial incentive to file and speed up foreclosures on distressed home owners whose homes were backed by the government. Taxpayer guarantees are easy pickings. Bank of America, it appears, has mastered this practice.

Finally, the key to making all of this market magic work was to find a way to kick people out of their homes en masse, and quickly. Hello, Robo Signing mills ...

There's a reason why the banks want to pay fines for doing all of the above, instead of being forced to negotiate with distressed homeowners. They've made a ton of money, and fines are viewed more as a nuisance tax. With the federal government making guaranteed payouts, and with nifty tools like "net present value" to undermine homeowner interests, foreclosure has become a lucrative business.

Why isn't any of this surprising?

- Mark

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