Thursday, July 7, 2016

Book Review: “Chain of Title: How Three Ordinary Americans Uncovered Wall Street’s Great Foreclosure Fraud” by David Dayen

David Dayen’s book, Chain of Title, looks at the financial crisis of 2008 and its aftermath from a different perspective than most of the existing literature, which has focused on the financial difficulties of major financial participants and how the government did or did not come to their rescue. Dayen focuses instead on the plight of the people whose homes were foreclosed on and the fraud committed to accomplish these foreclosures. The financial difficulties of many of the homeowners were due to their losing their jobs as a result of the economic downturn in the aftermath of the financial crisis.

As for the financial institutions, the book describes in great detail how they and their lawyers commit fraud in having documents manufactured after the fact in order to cover up that the mortgages and the associated notes were not properly transferred after the original secured loan was made. The financial institutions had taken shortcuts in order to securitize home mortgage loans quickly and to evade local real property recording fees. When many of the home mortgages were in default, the financial institutions bringing the foreclosure cases to court in those states, such as Florida, which require this, they manufactured documents, sometimes sloppily to a comical extent. Judges, in many instances looked the other way, and some in Florida had a financial incentive to process as many cases as possible, because they were paid by the case.

In many, though not all cases, the homeowners had in fact missed payments on their mortgage loans, sometimes with the encouragement of representatives of the lenders. Some might say that, therefore, they do not deserve much sympathy because the original deal was that the mortgage loan was secured by the home. Defenders of financial institutions might dismiss this book as leftist propaganda in the “Occupy Wall Street” genre. The author, in fact, writes for left of center publications and websites. But, this is too easy a dismissal. As Zach Carter in an article about this book for the Huffington Post remarks:

“Because Chain of Title shows both the Bush and Obama administration policies siding with elites against consumers, it’s tempting to see the book as a narrative of the American political left. But the lessons Dayen draws from his tale could come straight from a conservative think-tank. Property rights are important, he argues, and the rule of law matters. But neither mean very much when the government refuses to enforce them for everyone.”

In fact, not only were homeowners being foreclosed on by institutions that did not have proper documentation that the mortgages and the notes had been properly transferred to them, institutional investors in mortgage-backed securities were put at risk by the practices of the financial institutions. In many cases, it appears that the mortgages and notes were not properly transferred to the trusts associated with the securities, which means that there were potentially adverse consequences to investors if something went wrong. If a trust did not hold the mortgages and the notes, the arrangements to issue the securities ran afoul of the tax regulations that permit such a structure. Investors, therefore, might not have the type of security they thought they had. In the event, the book documents that the both the IRS and the Justice Department knew about this but decided to do nothing about it, not even to use this and other possibly illegal practices of financial institutions to bring pressure on them to offer some relief to homeowners.

Most readers will be outraged by the practices described in this book. The author begins by telling the story of a Florida nurse who runs into problems with a financial institution and her developing obsession with foreclosure practices. Two other main characters are subsequently introduced who share the same obsession, a car salesman and a lawyer. The early part of the book reads like a novel, especially when telling the story of the nurse.

Scores of other characters are introduced, and it is hard to keep them all straight, as they disappear and then reappear much later. The book would have been helped by a listing of all these people with a brief description of who they are. Also, it is somewhat disappointing that many of these people have interesting stories, but they are not fully developed, leaving the reader to ask what happened to them.

Another problem with the book is that it makes no attempt to analyze why the government acted as it did. For example, it seems that the author made no attempt to interview Treasury Secretary Tim Geithner or Attorney General Eric Holder about their reasons for not getting tough on these bad and, most likely, illegal practices. Perhaps, they would have refused to be interviewed, but that would have told us something. Someone else in the government might have been willing to talk if they were not.

Still, while I have these criticisms, this is an important book, and probably will not get the attention it deserves. As far as I can tell, the only major (“mainstream”) publication to review the book is the New York Times Book Review. The review is by Frank Partnoy, a professor at the University of San Diego School of Law. Those familiar with Professor Partnoy’s writings will not be surprised to learn that he likes the book
The book should be read because it has an important story to tell about one of the causes of the financial crisis and about how the federal and state governments operate when powerful constituencies are affected. Arguably, if financial institutions had correctly transferred mortgages and notes and paid the recording fees, this would have slowed down the mortgage securitization process, which reached such a frenzy that “synthetic” securities based on mortgages were created, the banks not being able to make enough, mostly bad, loans quickly enough. This could have lessened the severity of the financial crisis, which after all stemmed from a real estate bubble fueled by excessive lending.  

It is also disturbing to realize that the problems with foreclosure practices and improper transfers have apparently not been cleaned up. What is holding back another excessive frenzy in private label mortgage related securities is not the financial institutions but limited investor demand. Meanwhile, the government remains undecided about what to do about Fannie Mae and Freddie and Freddie Mac. The book does not go into this, but one might wonder how properly documented the trusts underlying their securities are. (I don’t know.)

The Obama Administration can be justifiably criticized in not facing these problems head on. As far as the prospects for the next Administration in dealing with this, Hillary Clinton is viewed as too close to Wall Street, and therefore it is unclear whether a Clinton Administration would have any appetite to deal with this. A Clinton Administration would have people who understand the issue. As far as Donald Trump is concerned, while he is running a populist campaign, he was involved in the mortgage industry in Florida (see article by Dayen and another article by Lynn Szymoniak, one of the main characters in Dayen’s book). Also, the finance chair of Trump’s campaign is Steve Mnuchin, who once headed OneWest Bank, which Dayen contends was “one of the worst foreclosure operators” (see the end of this Salon article). This is, of course, not dispositive of what a Trump Administration would do, but the signs are not positive.

One can hope that federal and state governments do not continue to view this issue as a can to be kicked down the road until the next crisis happens. Absent a crisis, though, the next Administration will likely view many other issues as more pressing, though some of the regulators may do something.

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