Forum Post: Mortgage Fraud by Banks Caused This Crisis and a Mortgage Moratorium Can Help Ease It

Virtually everyone knows the current economic crisis was sparked when so-called "mortgage-backed" securities (MBS) started having their ratings downgraded in 2008 when it came to light that the pools of mortgages "backing" these securities contained too many non-performing subprime mortgages. But few people know that subprime mortgages themselves were never a major part of what was wrong with most of these "securitizations." The real problem is that the securitization trusts never really received the thousands of mortgages that are supposed to be "pooled" and held in trust for the benefit of pension plans, nations, and other large institutional investors who bought securities sold by the trusts. In other words, no mortgages are backing the tens of trillions of dollars worth of MBS and the many other types of investments based on and derived from them.

The Nevada Attorney General has sued Bank of America over its deceptive practices involving Nevada's share of the $1.5 trillion of mortgages issued by Countrywide. Among other things, the Nevada AG's lawsuit says Bank of America has no right even to collect on any of those mortgages, let alone foreclose on homes when the borrowers go into default. This is because Bank of America is demanding and collecting monthly mortgage payments--and foreclosing on homeowners--on behalf of trusts that were supposed to receive the mortgages, but never did. The lawsuit also alleges that the failure to properly transfer mortgages from Countrywide to the trusts is not a mere technicality, because the false claim that the trusts held good title to these mortgages is the basis on which they avoided income tax on the vast amounts of money they collect from homeowners whose mortgages the trusts are supposed to hold.

In effect, this makes the mortgages uncollectable. The problem cannot be cured by simply transferring the mortgages to the trusts now, because trusts were required to receive the mortgages within 90 days after they were started up--and that was years ago. A transfer now is a red flag to the IRS that the trusts, and whoever has held legal title to the mortgages in the meantime, must pay taxes and penalties equal to 50% or more of the value of the loans in each trust--and by law, each trust must hold at least $100 million in assets. Transfers now would also be a tacit admission to pension plans and other institutional investors that, indeed, they were sold MBS that were never mortgage-backed.

This problem isn't limited to Bank of America-serviced, Countrywide-originated mortgages. It is true of most securitizations in the US during the first decade of this millenium, and perhaps of many of the earlier ones as well. The Federal Home Loan Bank of Boston filed a lawsuit this year against virtually every major mortgage lender and servicer in the country alleging this, as well as many other improprieties, on huge amounts of MBS it purchased.

To date, only one person has gone to jail because of the fraudulent sales of MBS that wrecked the world's economy--the president of a Florida bank who sold the same mortgages to more than one trust. A book on the collapse of Bear Stearns indicates it was doing pretty much the same thing--selling the mortgages more than once. In another instance, a pool of mortgages that was supposed to be held in trust was instead pledged to one of the Federal Home Loan Banks as security for a $300 million credit line. You're correct if you're thinking this sounds like the plot of the play (or movie) "The Producers," except that it involves trillions in mortgages sold to major investors, including your (or your parents') pension plan, or another country, or some other major financial institution whose solvency affects the rest of us, instead of a million dollars worth of shares in a Broadway play sold to a handful of little old ladies.

Law enforcement officials, staid institutions like Federal Home Loan Banks, and private lawyers are bringing this to the attention of courts in several cases around the country, and new cases are being filed regularly. So far, however, only some courts and some state attorneys general have really pushed the issue. It is time for the Occupy Movement to demand a mortgage moratorium so homeowners aren't forced to make monthly payments, and often even lose their homes, to servicers who have no legal relationship to them or their mortgages!

Consider what will happen when foreclosures stop: Trillions of dollars people are spending on unenforceable mortgages will be freed up. The free-fall of housing prices will stop. Real estate markets, which led the crisis and are its major continuing cause, will rebound. And banks will stop stealing homes and mortgage payments, instead being held accountable.