A scam at the heart of the US
By Julian Delasantellis
Travelers visiting New York city from Americas's rural heartland in the 1980s
might have been able to regale the folks back home with tales of encounters
with knife-wielding drug addicts and/or disease-scourged prostitutes, but it's
not like their predecessors who made the same trek back in the 1950s didn't
have a tale to tell around the cracker barrel as well. They might have come
back to the square dance and talked about playing and losing at the game of
Set up on rapidly movable folding card tables, in order to remain mobile
against the disproving eyes of the constabulatory, three-card monte games were
operated by New York sharpies who, when spying a rural rube from Racine,
Wisconsin, or maybe Red Wash, Utah, would invite the visitor to play a simple
card game. Three cards from a deck would be dealt face up-one a face card
such as a King or Queen. Then the cards would be turned face down, the "dealer"
would arrange and re-arrange them on the table, and, the contestant would be
invited to chance a wager as to which card was the face card.
This was a lot harder than it seemed, especially with the dealer usually
employing sleight of hand to hide the face card in his sleeve. No matter how
hard he tried, no matter with how much concentration he watched the dealer's
hands, the contest could never be won by its very nature; the player was
destined to lose the card and his wager - rather like the chances of those
facing foreclosure in the current mortgage and financial crisis of ever gaining
relief from their hardship.
Joseph Campbell might have described the common cross-cultural themes in human
mythology by talking about the "Hero with a Thousand Faces", but in America
last week, the hero that arose had but a single face. It was not US Airways
pilot Chesley "Sully" Sullenberger, whose perfect Hudson River landing of an
Airbus A-320 on January 15 saved 155 lives. It wasn't the Greenwich Connecticut
police officers who stopped the rampage of Travis the chimpanzee with volley
fire from their service issue Glocks, and, for the animal rights crowd, it was
not even Travis's heroic rebellion against the brutal millenniums long
repression of homo sapiens.
It was CNBC Chicago commodities reporter and trader Rick Santelli, who, in a
suspiciously unrehearsed (did you know his network contract is up for renewal
this summer?) voiced one of the most powerful insurgent sympathies in America
these past 30 years or so. It was a pure revolt of the affluence of the have's
against the desperation of the have not's, in this case, against President
Barack Obama and those who might benefit from his "Homeowner Affordability and
"The government is promoting bad behavior," Santelli screamed from a futures
trading pit. "Do we really want to subsidize the losers' mortgages, or would we
like to buy cars, buy houses in foreclosure, and give them to people that might
have a chance to actually prosper down the road and reward people that could
carry the water instead of drink the water? This is America! How about we all
stop paying our mortgage! It's a moral hazard. How many of you people want to
pay for your neighbor's mortgage [on a house] that has an extra bathroom and
[for which the neighbor] can't pay their bills? ... President Obama are you
listening? Cuba used to have mansions and a relatively decent economy. They
moved from the individual to the collective - now they're driving '54 Chevys ..
We're thinking of having a Chicago tea party in July - all you capitalists that
want to show up at Lake Michigan, I'm going to start organizing it."
On the CNBC website, the adulation of Santelli ran thick. This post, by "Alan"
illustrates a key component of the conservative strategy of stoking anger and
umbrage against the poor - it's a lot easier to whip up resentment against
those one sees every day, as opposed to the left's continuing uphill struggles
to organize a resistance against the faceless, far-away world economic elite.
do I sign up to join the Chicago Tea Party? It's time that Americans demand
that Congress listen to us! I pay my bills, I work two jobs, and this year paid
more in taxes because my wife and I both work. We pay our bills, student loans,
etc, yet every semester I teach, I run across students that throw away their
Pell Grants and other financial aid by not coming to class or by acting like
college is nothing more than high school. With great opportunities comes great
responsibility - I think we need to demand an end to wasteful spending.
Very little of this, such as "Alan's" diverting the focus from mortgages to
loans taken out by the students he despises and being made to teach (note to
Alan - you can go a lot longer before you start hating the students by teaching
part-time) in exchange for a paycheck, bears any real or even imaginary
resemblance to anything in the Obama plan; it's just another example of the
elite's continued engendering of free-form rage in the upper middle-class
against the lower middle-class.
Many in the upper middle-classes cling desperately to the belief that it is
only the existence of the poor that keeps them - the upper middle-class - from
entering the ranks of the super elite, and, as the elite is now attaching its
powerful suction hoses to the upper middle-class to vacuum and drain them dry
as they so recently have been doing with those classes underneath, the fervor
with which the upper middle-classes hold on to this belief grows in direct
proportion to how poor they are now becoming; as their wallets are lightened,
they weigh themselves down with the ballast of rage. I, for one, liked the
introduction of toilet envy in the Santelli rant; the Old Testament's Ninth
Commandment admonishes one not to "covet your neighbor's house"; as for the
bidet in the master bath, well, that's still apparently up for grabs.
The core focus of the Obama mortgage plan seems to be to try to throw a spanner
down into the foreclosure-forced sale process in which more supply drives down
real estate prices, even fewer homeowners are able to refinance, leading to
more foreclosures eroding the values of bank mortgage-backed securities - in
short, the wealth-destruction machine now plaguing the capitalist world.
For many homeowners, being able to refinance existing mortgages into newer
mortgages with today's insanely lower interest rates could go a long way
towards pulling them out of their troubles, but, with the market values of
their homes declining, there is insufficient "equity" (house value minus
remaining mortgage) to meet the standard refinancing guidelines. Typically, if
your "loan to value" ratio is above 0.8 (your mortgage value is 80% or more of
your appraised house value) you'd be denied the opportunity to refinance.
The Obama plan provides for homeowners whose mortgages are owned by the now
fully owned government-sponsored enterprises (GSEs) of Fannie Mae and Freddie
Mac being allowed to refinance at loan to value ratios from 0.8 to 1.05. The
GSE's own somewhere around 50% of US mortgages. A homeowner must contact his
loan servicer - the party to which he writes the mortgage check, in order to
see if his is in the lucky half.
Of course, the logic here is that a mortgage made current and being paid off is
not one defaulted on and rotting away in some bank's portfolio of
If the above is insufficient to keep a borrower in a home, a further
initiative, to be financed with US$75 billion of Troubled Asset Relief Program
(TARP) funds, aims to reduce monthly mortgage payments to a level that the
homeowner can manage. The mortgage owners would be responsible for bringing the
homeowner's monthly payments to around 38% of monthly income: government
payments would then kick in to help to further bring the level further down to
It is important to note that, while the monthly payments are being reduced
under this component of the plan, there will be no obligation that the overall
mortgage amount, the principal, will be reduced. Some interpretations of the
plan say that the banks and other mortgage holders will be able to tack on the
interest payments they're temporarily foregoing onto the back of the mortgage
Also, for those followers of Santellism, the ideology born of the image of
imprudent mortgage borrowers spending all night gleefully running around and
through their mansions flushing their many toilets while poor Mr Taxpayer has
to get in line with his kids behind the door of just his one, the plan
precludes help to those who borrowed way too profligately. There will no
assistance for multiple-property-owning real estate "flippers", those with
loan-to-value ratios above 1.05 (like those whose McMansions have suffered a
huge decline in value) and those whose "jumbo" mortgages, $420,000 or more, did
not qualify for purchase by the GSEs.
For those dressed up in their Clinique Bonus Days war paint, opening boxes of
mortgage-backed securities with their Swiss Army knives to toss into Lake
Michigan at the Santelli tea party, one wonders if they fully realize just what
they are doing, just how much damage they are doing to both the economy and
As US real estate prices continue to fall, one of the core dogmas of modern
American life, the section of the "American dream" that offers social mobility
(upward social mobility - there's plenty of downward social mobility going on
now) through the physical mobility of being able to move to a better
neighborhood, or, to be able to move across the state or country to take
advantage of a better career opportunity, comes very much into question.
As real estate prices decline, more and more property owners owe more on their
mortgages than their houses could be sold for. Unless they are willing, or even
able, to bring a big, fat, five-figure-or-more check to the closing table when
they sell the house, that's where they are and that's where they're gonna stay.
(For a discussion of the phenomenon of underwater homeowners, see
Pain relievers should feel the pain, Asia Times Online, February 28,
In other words, one hopes that you really like your current house and
neighborhood. Unless real estate prices turn around through some mechanism
similar to the Obama mortgage plan, that 30-year mortgage you signed in 2005
means exactly that - you won't be getting out of that house until 2035 - not
one minute sooner.
But in the effort to save American homeownership, the devil has once more taken
refuge in his most secure redoubt - the details - specifically, the crooked
mug's game America's moneyed elite have established at the nexus of law and
Any American who spent time with grandparents over the holidays probably
received a good solid earful of how mortgage practices have changed over the
past 30 years or so. Most Americans know that, instead of having the bank whose
august lobby they nervously walked into hold the mortgage note to maturity,
mortgages now get wrapped and unwrapped, palletized and unbundled, so
extensively that the mortgage borrower probably no longer has any idea who
actually owns his mortgage. Who is it that is actually getting the money that
the "servicer" - the firm dedicated to managing the obligation and to which the
mortgage checks are written - is sending somewhere up the line?
In the old days, there would be no distinction between mortgage owner and
servicer; they would be exactly the same entity. The bank would take the
mortgage check, cash it, then deposit it in its vaults. Now, it's infinitively
In the early part of the 20th century, the Hearst newspaper chain ran a comic
strip about the misadventures of two grossly overmannered Frenchmen, Gaston and
Alphonse. The two were always getting themselves into the medium's standard
comic conniptions, but they could never do much of anything about it since they
were just so insufferably polite.
"After you, my dear Gaston," Alphonse would offer. "I wouldn't dream of it, you
first, dear Alphonse," Gaston would reply.
The servicers and mortgage owners have got this little Alphonse and Gaston
routine going now. "Why don't you save the mortgage borrowers?" say the
servicers, usually big Wall Street "money center" banks, to the mortgage
bondholders. "You go first" say the mortgage note holders.
Frequently, bank public relations shills rush warm and fuzzy press releases (I
bet there's even little hearts where the dots should go above the i's, and
pictures of little teddy bears on the side) out to the clueless financial media
about how the bank is delaying or suspending foreclosure proceedings among
mortgage clients who have fallen on hard times and need a bit of breathing room
to get right back on their feet, the poor fellows. Wells Fargo, Bank of
America, Citigroup and JP Morgan Chase made such an announcement on February
But look closer at the beneficence. The forbearances and suspensions apply only
to those mortgages that the four institutions both own and service. Got a
mortgage serviced by Bank of America (that's who you write the check to) but
not owned by BofA? You're out of luck; in that case, the servicing arm of the
bank is going to continue to interpret its fiduciary duty as a servicer to the
mortgage note holder and continue foreclosure proceedings.
In the opposite case, where the bank "owns" a note serviced by someone else,
the question becomes, just what does the bank own? In the mortgage
securitization craze, mortgage debt got so mixed, combined and re-combined that
the original mortgage on one house may be at least part-owned by 100 separate
bondholders. It's nice if the servicing entity gets word that one of these 100
wants to act like a human being instead of a bondholder, but unless the
servicer hears from the other 99, the servicer's lawyers are going to tell the
company to continue with the foreclosures, so as to preclude the possibility of
one of the mortgage holders getting so ticked off at not receiving their pound
of pain through foreclosing on the mortgage borrower that they sue.
This division of labor, and, more importantly, bifurcating of responsibility,
is not an issue for mortgages under the wing of the GSEs. There, the ownership
of the mortgages by the GSEs and the attendant right to manage or modify them
in any manner to their liking is unquestioned. However, in contravention to the
cry from the political right that the entire financial crisis is a result of
the GSEs doing too much, in reality, it's more the case that they did too
In losing control of the mortgage insurance market to the private sector's
credit default swaps, the current mortgage holder/servicer dichotomy entered
creation, and it is now consuming hundreds of thousands of American homeowners
each month. (For an account of the laissez faire's cheerleaders attempt to
replace the GSE's with credit default swaps, see
Jaws close in on Bernanke, Asia Times Online, July 16, 2008.)
Interestingly, the securitization industry trade group, the American
Securitization Forum, is urging the industry to take upon itself the role of
savior of the borrowers that the servicers are hesitant to assume. The ASF
claims that the servicers can, without the formal approval of the loan owners,
take it upon themselves to modify delinquent loans. That includes working with
borrowers to make mortgages more affordable rather than proceeding to
foreclosure. In an ASF commentary on the Obama mortgage rescue plan, it was
noted that "Our goal is to enable servicers and borrowers to create loan
modifications with sustainable mortgage payments for the borrower while also
serving the best interests of investors."
"Serving the best interests of investors" - as defined by the servicers. In
this interpretation, even if the lenders want to proceed to foreclosure and
recovery of an asset through a forced sale of the property, the servicer can
just ignore the wishes of the mortgage note holder.
The Obama plan does recognize the divided responsibility between servicer and
borrower. To stiffen up their spines a bit, it is offering a $1,000 bonus to
servicers for every loan they modify, and it is also stating a desire to
clarify comprehensively into statute the new, expanded powers of the servicers.
Still, one wonders just how much good this will do. As long as the servicers
are made to worry that any forbearance shown to borrowers risks a lawsuit from
mortgage holders, they'll continue to be showing up at the courthouse door with
bundles of foreclosure petitions. It's nice to have the rules proposed by the
president supporting your position, but there's nothing in the plan that has
the US Department of Justice sending a barrister out to argue your case. At
least for that large proportion of mortgage borrowers not under the protection
of the GSEs, it is questionable just how much good, just how many mortgage
borrowers, are going to be assisted in this.
But if the government can't fight your battle, might you have a bit more luck
doing it yourself? Strange as it may seem, a growing number of mortgage
borrowers are finding that it is possible to play David to big finance's
Goliath. In its haste to rule the world, big finance seems to have forgotten
about the slingshot it left lying on the ground.
The servicers are saying that their foreclosure actions are just looking after
the interests of the mortgage holders. "Prove it" says a whole new breed of
informed and aggressive lawyers for mortgage borrowers.
Prove that you're acting in the interest of the mortgage holders - produce a
piece of paper from the mortgage holder authorizing the servicer to act in this
fashion. Prove that you actually know who the mortgage holder is; with
mortgages cut and chopped, with insolvent and other banks being chewed up and
spit out every day, can you actually find the real holder of the mortgage; that
information may be in some discarded office computer or scrapheap junked file
cabinet long lost in the endless consolidation of the banking and financial
In essence, mortgages are, at their core, just IOUs between borrower and
lender. The borrower bar is arguing that the servicers should not be granted an
a priori assumption of standing in these disputes between borrower and lender,
and many bankruptcy judges are listening.
In his "livinglies" blog, Florida attorney Neil Garfield posts a petition he
submitted to the US Bankruptcy Court in California.
"We are all familiar with the securitization process. The steps, if not the
process, is simple. A borrower goes to a mortgage lender. The lender finances
the purchase of real estate. The borrower signs a note and mortgage or deed of
trust. The original lender sells the note and assigns the mortgage to an entity
that securitizes the note by combining the note with hundreds or thousands of
similar obligation to create a package of mortgage backed securities, which are
then sold to investors.
"Unfortunately, unless you represent borrowers, the vast flow of notes into the
maw of the securitization industry meant that a lot of mistakes were made. When
the borrower defaults, the party seeking to enforce the obligation and
foreclose on the underlying collateral sometimes cannot find the note ... a
person seeking to enforce a missing instrument must be a person entitled to
enforce the instrument, and that person must prove the instrument's terms and
that person's right to enforce the instrument ... Enforcement of a note always
requires that the person seeking to collect show that it is the holder."
If you're in a situation where you're facing foreclosure and the GSE's can't
help you, this strategy, or finding a lawyer competent in this strategy, may be
your last best hope. At the very least you'll pick up a few months or year of
added time; maybe even enough for those on the other side of the table to
realize they're going to have to negotiate with you for real. Maybe, at the
very least, you can take some measure of comfort or solace realizing just how
many banker silk suits and drawers you're ruining.
Have the judges act like New York City flatfoots and shut down the three-card
mortgage monte game created by securitization. If a Santellite throws a
tantrum, just tell him to go take a time out in a corner of his house - for the
next 30 years.
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at[email protected]