Banks' foreclosure deceptions go deep

First the financial services sector nearly drove the economy off a cliff by selling "liar loans" to unqualified homebuyers, bundling them into securities and selling the toxic investments to unsuspecting buyers. Then, when the bottom dropped out of the housing market in 2008 and those homeowners defaulted, the nation's biggest banks resorted to fabricating legal documents to foreclose. The breadth of the robo-signing infractions, and the willingness of managers to direct the fraud, is outlined in a recent report by the inspector general of the U.S. Department of Housing and Urban Development. The country's largest banks can no longer claim that the elaborate deception was primarily the fault of low-level employees or contract workers.

The five banks that were subject to this extensive review of their foreclosure practices — Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally — represent the nation's largest loan servicers. They are also part of a $25 billion settlement with the federal government and 49 states, including Florida. According to the report, the banks' internal processes for generating foreclosures were rife with illegal and unethical conduct. The banks generated legal documents by the thousands, and employees signed them without checking for accuracy. Even affidavits that certified that the person signing had personal knowledge of the facts were routinely signed by employees without such knowledge. Documents were notarized without notaries actually witnessing signatures.

In the frenzy of loan securitization, with single mortgages potentially resold dozens of times, the robo-signing raises the question of whether loan servicers actually possess the paperwork to prove they may legally foreclose.

What is clear is bank managers didn't care about the integrity of the legal system, which relies on the veracity of affidavits to function effectively. At Ally Financial, a team leader in the foreclosure department said he signed up to 10,000 affidavits per month without reviewing them. Wells Fargo and JPMorgan Chase gave low-level employees important-sounding titles, such as "vice president of Chase Home" and "vice president of loan documentation" to appear qualified to sign documents.

Even at Citigroup, which claimed that its internal processes were sound after the robo-signing scandal became public, vice presidents admitted to government regulators that employees would sign stacks of documents every day without first reviewing them for accuracy. When the paperwork mess led most large banks to suspend foreclosures in states with judicial oversight such as Florida, Citigroup kept going even as it continued using law firms engaged in fraudulent practices.

As part of the multistate settlement, these banks will have to engage in aggressive loan forgiveness and modifications in exchange for settling the civil charges. But the agreement leaves room for future investigations and criminal prosecutions that should be pursued. For the banks, writing a big enough check shouldn't be enough for perpetrating a massive deception on the courts and homeowners.