The Cake is a Lie – Part II

This is Part II in an ongoing series about the foreclosure crisis. For Part I of this series, please see The Cake Is a Lie.

by Jim Moriarty & Taylor Lindstrom

Let's say you want to buy a house.

You make somewhere around the average American salary of $60,000 a year (that's $49,000 after taxes), so you don't have enough money stashed away to buy a home outright. You get a loan from Bank of America, which gives you a lot of standard paperwork to sign and tells you that you now have a mortgage loan with them. You begin to make payments against that mortgage in the fond hope that one day, you will pay off the mortgage altogether and you will own your home outright.

But then you lose your job. You miss a mortgage payment. Then another. And another.

You receive a notice in your mailbox that you are delinquent on your mortgage payments and that your house will be foreclosed upon. It's written on paper that features the Bank of America logo and is signed by a Bank of America employee, which doesn't surprise you at all. After all, you took out a mortgage loan with Bank of America. Bank of America can certainly foreclose on your house - it's the lender.

Isn't it?

Neither a Borrower Nor a Lender

Not only is Bank of America not a lender - it's also not, insofar as mortgages are concerned, a bank.

A bank is an institution for the custody, loan, exchange, or issue of money. For Bank of America to have acted as a bank for the thousands of homeowners who are answering to its foreclosure notices, it would have had to loan those homeowners money. Naturally, as security against its loan, it would have gotten a promissory note and a mortgage loan agreement.

It did none of these things.

The name on the mortgages isn't Bank of America. It's MERS, the Mortgage Electronic Registration Systems, which was created during the housing boom specifically to address the needs of banks who wished to securitize the massive amounts of property they were acquiring. The official owner of the property - if a promissory note could be found, which in many cases appears to be an impossible task - is a pool of investors who are generally unaware they own a property at all.

Bank of America never owned the properties it spent the last decade so blithely selling as securities to investment firms - it's easy to tell; its name isn't on the paperwork. It never actually loaned would-be homeowners money for their homes - it's easy to tell; its name isn't on that paperwork, either. It holds neither promissory note nor mortgage nor deed of trust.

Yet, somehow, thousands of people are being foreclosed upon by an institution that they believe, irrevocably, is acting as their bank.

This is an enormous mistake.

The Loan Servicer in Bank's Clothing

How does Bank of America profit from a foreclosure? If it owned the property, a foreclosure would mean taking a loss on the original investment, and it's unlikely it would be pursued unless there was no chance the borrower would be able to make good on the loan under any circumstances. Otherwise, it would be in the best interest of the owner to renegotiate the loan and continue receiving smaller payments for a longer period of time.

As we've established, however, Bank of America is not the owner. According to the paperwork, Bank of America never had a stake in the mortgage at all. Its name appears nowhere. It is neither the lender nor the note-holder nor the mortgage holder. Bank of America has been foreclosing on its tenuous authority as loan servicer - in essence, the collections agency.

It's a clever con. Imagine a policeman approaches you, tells you that you are trespassing, and asks in a commanding tone to see your identification. Most people would oblige immediately and without question, and would certainly never dream of asking the policeman to prove that he is, in fact, a policeman. Imagine being handcuffed, arrested, and obliged to spend a night in jail, only to realize the next morning that the policeman whose commands you have obeyed unquestioningly is not actually a cop. 

This is the situation in which thousands of homeowners have found themselves. They have received a notice of foreclosure from an institution with the word "Bank" in its very name. They are told that they are delinquent on payments and must vacate their home. One day they return to their house to discover that the locks have been changed and their possessions placed on the sidewalk. They plaintively appeal their case and attempt to renegotiate their loans or offer alternatives like short sales.

They do this all the while unaware that the bank foreclosing on them is not actually a bank.

If it were a bank, it would have every financial reason to renegotiate the loans. As it stands, Bank of America only profits if it eschews its responsibilities as a bank - and looks to its responsibilities as, well, a company who wants to make money very badly indeed.

Making Money Every Way But Honestly

The federal government recently rolled out a loan modification program designed to incentivize banks to renegotiate with homeowners and come to new terms on their mortgages. Immediately after this program was instated, Bank of America suddenly became amenable to many homeowners' pleas to reconsider. It agreed to look over the paperwork - and in doing so, made itself eligible for a government payout for each of the relieved homeowners.

The government made the same mistake as the homeowners: the loan modification program was predicated on the notion that the government was dealing with a bank. What it wound up dealing with was the con artist.

After Bank of America received its governmental checks, it changed its tune again. The homeowners were told they did not qualify for a renegotiated mortgage, and foreclosures continued at the same crackerjack speed as before, often leaving homeowners in even greater debt. For its trouble, Bank of America had gotten a double profit: public approval for participating in the program and a monetary reward from the government. The agreement was that they would consider renegotiation. There was never anything in the fine print about meaning it.  

When foreclosures resume, it's time for another round of profits for B-of-A. As loan servicer, it used to make money by earning a small fraction of your mortgage payment for "servicing". If you are delinquent in your payments, however, the loan servicer now has an excuse to go for the big bucks: foreclosures entitle the loan servicer to a much, much larger payout. When you're paying your mortgage on time, the servicer only gets to collect a fraction of your payment.

If you default on your mortgage, the servicer gets to collect a fraction of the entire remaining cost of your house. Of course, the actual owners of the property - the investors - are getting screwed. But to Bank of America's way of thinking, that's not a problem.