Editors Choice: From the Trenches, a Lawyers Opinion

The Banksters…Guilty as Charged

If you read my blog, you know why the banks are my first party to blame. They single-handedly created the perfect storm for the worst economic collapse since the Great Depression. First, by deliberately not adhering to their own underwriting guidelines, and secondly, for the lack of transparency in their dealings, particularly with residential mortgages. Back in 2015, I wrote about a decision from Judge Denise Cote, from the Federal District Court of Manhattan, who ruled that two banks had misled Fannie Mae and Freddie Mac in selling them mortgage bonds that contained errors and misrepresentations. Judge Cote brilliantly singled out the key question on the issue: “did the banks lie?” and her even more brilliant “drop-the-mic” answer: “they sure as heck did.”

As you already know, banks never took responsibility for their wrongdoing, nor changed their corporate values to prevent further wounds to the economy. For them, I coined an adaptation of the phrase Once a thief, always a thief: Once Wall Street, always Wall Street. A few years ago, a friend of mine Sheldon Cohen, former commissioner of the IRS, told me that if the banks were allowed to get away with the bad behavior THIS time, what would happen NEXT time. Oh, how right he was! The wrongdoing keeps happening and scandal after scandal the American public gets shocked for a few seconds, some minors laws are rapidly passed to stop the bleeding on the news, and we all move on…. I had said in the past: “shame on you.. you Despicable Banks”, but maybe, shame on us too, for when are we, as a Nation, going to start demanding banks to follow the rule of law?

Guilty: Mortgage brokers for pushing faulty loans’ approval

In 2009 the New York times started its column Your Money, with the following statement: “It’s a bad time to be an honest mortgage broker”. The NYT was absolutely correct, 2009 was a disastrous time to be a mortgage broker, honest or dishonest, as the whole guild was publicly trashed by everybody and scolded by legislators. Many real estate companies, including mortgage insurers, declined servicing clients represented by mortgage brokers out of fear of faulty dealings. The public outrage was not fair to the many decent brokers that were doing their jobs, but sadly, the outcry was not unfounded.

A few years before the collapse, groups of brokers started pushing faulty loans to some groups of people, as well as pushing groups of borrowers with unworthy credit history to some lenders. In plain English, brokers were lying left and right. There were several lawsuits filed in Maryland claiming systematical singling out of black borrowers for high-interest subprime mortgages. Similarly, the NAACP filed a class action lawsuit in California in 2007, trying to get judicial action to stop brokers’ targeting of black families to market subprime loans. In those cases, a long chain of brokers’ misbehavior was unveiled.

The records showed discriminatory and predatory lending practices, targeting of minority groups for certain loans, and misrepresentation of borrowers’ credit worthiness to lenders.

The misconduct was so gruesome as to include characterization to the faulty loans offered to minorities as “ghetto loans” or loans for “mud people” in internal communications between brokerage firms’ employees. Those loans put hundreds of families on the verge of foreclosure since the first day of their homeownership, prompting economic devastation for the whole system.

Apart from discrimination and predatory lending, brokers hid important factual loan information to borrowers. For instance, brokers, whose services are retained to get the best deal for borrowers, hid prepayment penalties and negative amortization on the original loan agreements.

Later, when borrowers where having difficulties during the crisis, those penalties prevented them from getting alternatives to foreclosure such as mortgage modifications. Hence, if the banks where pulling the trigger to kill families’ financial stability, brokers certainly made sure those families were not able to move to avoid the bullet.

Government actors that were supposed to act as regulators and slept over the banks’ dealings with mortgages.

In my last two posts, I talked about some of the ways the government failed the American people, to whom it owes zealous protection, during the 2008 collapse and the Great Recession that followed.

I explained the IRS’ informal amnesty given to banks that evaded taxes by unlawfully claiming REMIC status, and I talked about how the government’s bailout was a reward to Wall Street’s outrageous lack of ethics.

It is clear that all branches of the government failed. But I want to take a deeper dive in the role of the judiciary because the judiciary, historically, is the most trusted branch of the government and during the economic crisis it betrayed that trust… badly!

There was a Rolling Stone article titled: “Courts Helping Banks Screw Over Homeowners”, yes, it was that bad.

In particular, the judiciary is to blame for abdicating its role in protecting the public from the abuses of the financial industry during the Great Recession, thereby breaking the “aspirational view” the public had vested in the third branch of our government and the system of checks and balances.

I have mentioned before that courts have held foreclosure courts to lower standards, nevertheless the wrongdoing of the judiciary during the economic collapse is deeper than that single issue. Judges collectively, and repeatedly, decided cases favoring powerful parties failing to their duty to objectively apply the rule of law to dispense justice. A decade after the collapse the distrust on the judiciary is still very deep.

For example, courts decided to change the long-standing definition of negotiability when applied to mortgage promissory notes.

To explain this issue would take me pages (if you are interested you can check an article I co-authored on it), but in summary, the courts decided to allow the banking industry to treat Fannie Mae and Freddie Mac standard promissory notes as negotiable instruments under Article 3 of the Uniform Commercial Code (UCC).

Those instruments clearly do not meet the UCC’s requirements, hence, by siding with the financial industry on that argument, courts enabled lenders to take advantage of less experienced borrowers without fear of retribution.

Instead of acting as a shelter to the public’s assets in the economic emergency, courts exposed those assets to the fierce reach of the banking industry, causing more loss and poverty. Judicial decisions of that kind allowed the crisis to hit deeper and longer.

People’s trust in the judiciary was eroded which is really, really bad for our country, we need to have trust in our judiciary to function!

Distrust in the judiciary is not only bad for our moral, people often forget that there are real economic implications of not trusting the courts: Investors are less likely to invest if they do not feel that the laws are uniformly applied; deals freeze if parties feel uncertainty about rulings in a dispute; contracts are not as strong and reliable if parties feel that courts do not have uniform standards, etc.

It is not only a matter of aspirational values; impartial judges are a public necessity.

American constitutional defense of property rights and open and transparent recordation systems are true engines of inbound capital flow, which allowed our Nation to go from a developing country to the economic empire it is, in about 150 years.

Hernando de Soto, articulates in his book, The Mystery of Capital, Why Capitalism Triumphs in the West and Fails Everywhere Else, that America’s source of success is the legal structure of its property system.

American constitutional protections of property, including its recordation system, and the protection of due process, bring to life the value (capital) dormant in the assets and talents we own.

Legal title transforms ownership into wealth, without good and reliable title recording, and protection of it, there can be no freedom of contract, no gains on equity nor attachment of property to obtain capital to invest.

Without legal title the market is restricted and capital flows slow. In that sense, our legal system is an institutional framework to produce wealth, but of course it is highly dependent on the stability of the judiciary.

Executive interest in supporting homeownership

The American dream of homeownership is arguably the most uniformly-shared dream. With the exception of Millennials, all generations of Americans have aimed to buying a house.

Politicians have not been deaf to those aspirations, on the contrary, historically homeownership-support agendas have been big-ticket items in political campaigns.

In fact, for many decades before the Great Recession, it was considered a given that homeownership rate was a desired national economic goal.

The two administrations before the 2008 collapse took this goal even further by launching massive national plans to increase homeownership. Clinton released the “National Homeownership Strategy” in 1995, a plan with the goal of “boosting homeownership in America to an all-time high”, and George W. Bush, signed the “American Dream Down payment Initiative” in 2003 to assist first-time homebuyers stating that homeownership would reduce racial inequality.

Those executive programs were not only well intended but based on sound sociological and economic studies that indicate that homeownership is a solid foundation for wealth acquisition that historically has created more stable communities.

However, those plans gave the wrong message. They created the idea that homeownership was for everybody, and it is not. It sounds cruel, but the reality is that not owning a home is better than getting into home-related debt that you cannot afford to pay.

People that cannot afford to buy a house need to improve the health of their finances, have a reliable source of income and get education on how much they can, and should borrow and under what terms.

Giving people a small down payment or relaxing requirements to qualify for mortgages is not the solution, it increases votes, but it also convinces the general public that everybody must purchase a home at any expense.

That mindset paved the way to the housing market frenzy of the early 2000s, which ended in the Great Recession.

Greedy People that wanted to take unfair advantage of the market.
Buyers were so eager to participate in the “home-buying-frenzy” of the early 2000s that they would trust about anybody that promised homeownership.

The wealth accumulated by real estate investors within a few years was just mesmerizing for the general public and qualifying for loans was so easy, it all looked too good to be true, and it was!

What took place in the home-buying frenzy in the years before the collapse of the real estate market can only be described as craziness -everybody just willing to fudge everything just to make a closing happen!

Of course, craziness lures all kind of crazies: brokers dying to make deals, banks dying to get loans to pack and resell, inspectors willing to apply a little make-up here and like make up there to hide properties’ serious defects, appraisers willing to inflate property values, notaries willing to engage in fraud.

In essence, every step involved in the process of buying a home was suddenly polluted by unethical and unprepared people willing to do anything and bend all kind of rules to “benevolently” “help” borrowers qualifying for loans and making closings happen.

In sum, all of us.

The purpose of this last post is not to simply point fingers (well… that too, a little bit) but to paint a clear picture of how much WE as a community have the power to allow or prevent an economic collapse.

WE must take responsibility for our economy and become, first more educated, and secondly, more opinioned clients of financial providers as opposed to submissive consumers of financial products.

There is a big difference!

Our firm, Oppenheim Law transformed after the collapse. As you know I became a foreclosure defense attorney almost by default after representing developers for almost two decades.

The change taught me more about the practice of law and the human condition than what I ever learned in law school or my previous twenty years of law practice.

I was the underdog when I started fighting against big banks, but many other good lawyers joined, and we changed things for many struggling families. Although it was a good fight and it was worth fighting,

I hope that revisiting what we all did wrong can prevent repeating the same mistakes in the future.

From the Trenches,

Roy Oppenheim