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Banks To Lose Billions In Mortgage-gate

Banks To Lose Billions In Mortgage-gate

Reporter ,  22-Oct-10


The currently brewing crisis in American banking regarding the callousness and disregard to procedure with which banks have foreclosed on home loan defaulters is now threatening to cost those same banks billions of dollars. Thousands of cases have come to light where banks have pushed through foreclosure papers without the necessary paperwork, missing or even forged paperwork. Several states have called for investigations in the banking practices followed, and several major banks like Bank of America and JP Morgan chase have been forced to temporarily suspend foreclosure pending a sorting out of issues.

The banks have for the past few years been processing loans without regard to the credit-worthiness of the borrowers, leading to the sub-prime crisis of 2007. These loans were bundled and sold and resold as securities to investors and financial institutions, and on default became the cause of the present recession.

Once borrowers started defaulting on loans, banks started the process of foreclosing on them. Foreclosure is when a borrower fails to pay his or her EMI for three months, after which the bank has to get court approval for the repossession of the property in lieu of the money lent. However, since the original bank giving out the loan sold the asset (loans are assets to banks, and a liability for borrowers) to another, paperwork has been lost, misplaced and generally disappeared. Instead of cleaning up the mess which would take time and money, banks chose a ‘one-size –fits-all’ approach and started mass foreclosures without regards to the borrowers, many times evicting families which had no cause to be evicted.

The issue gained political mileage once several borrowers went to court against the banks, getting a reprieve on their repayments. However, this was enough for the state attorney generals of all 50 states to announce investigations into the practices being followed by the mortgage processing agencies responsible for the mess. Banks were forced to announce a moratorium on all repossessions until the process is cleaned up to the satisfaction of the government.

However, for banks whose money is locked into the real este assets, losses will pile up as they are unable to repossess and sell off the assets in order to recover at least a part if not all of their money. In the short term, this is likely to raise the prices of homes due to shortage, while promising a glut in a couple of month’s time when the process is reactivated.

On the other hand, if the legal authorities determine that improprieties occurred in the process of lending the money and subsequent repossession, banks could be the subject of not only regulatory but also civil litigation, as clients who bought these securities would want their money back. The total exposure of the industry is being quoted in the tens of billions, which if the verdict goes the prosecution way could mean a massive overhauling of the fiancial system once again, and major losses and job cuts, most definitely leading to the double dip recession on everyone’s minds.

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