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Foreclosure Fraud: It’s a Kind of Ponzi Scheme

Back in 2005, I considered doing a refinance on my house. Other houses in my neighborhood were selling at prices that were almost double the size of my existing mortgage and my (then) husband thought we should tap into some of that equity because my income was going to be cut for a time while I took time away from my law practice to run for public office.

So the mortgage broker came to visit and he practically went insane over how much equity I had in the house. I was considering taking out $50,000 or $100,000 to put into a rainy day fund in case my income dropped enough that I would have trouble, oh say, paying the mortgage.

He gave me the long song and dance about what a fool I am not to take out every penny I can, but I stood firm. He said he knows how busy I must be with the campaign, so let’s do a no-doc, or low-doc loan. I object to the higher interest rate and the huge jump it would make to my monthly payment; besides I already have my documents together in anticipation of having to release them in connection with the campaign. . . .

He told me that he doesn’t have any conventional mortgages available. I said I can’t make a monthly payment that size even if my income is not disrupted. He replies that he has closed at least two loans, in my neighborhood, with similar sized payments for families with smaller incomes than we have.

I was shocked, and wondered if I was spending too much money on luxuries, like groceries. He told me that I should take out the money from the equity and use it to pay my mortgage payments, and when that money runs out, refinance again because houses just keep going up and up.

He even said he had a tickler calendar to remind him to go visit prior customers when their ARM was about to go up, so they could refinance again but back to a teaser rate, and he anticipated building his whole career around this snake-swallowing-tail cycle of pulling equity out to make payments one couldn’t otherwise afford.

Fortunately for me, I kicked the bum out of my dining room. I kept the old mortgage for as long as I owned that house.

This predatory lending mortgage origination system was founded on a Ponzi scheme premise, which assumed more and more new “equity” could be pumpted into a system by inflating housing prices. And house prices were inflated by making loans too easy to get.

I had enough verifiable income and equity in my house to easily qualify for a fixed-rate 30-year mortgage to replace my existing fixed-rate 30-year mortgage (one of MY incentives for considering refinancing, was to take advantage of lower interest rates set by the Fed) and no one wanted to even look at my documents for one of those. Everybody and their brother wanted to sell me a liar’s loan at much higher interest rates and with all sorts of ARMs and balloon payments.

As I explained in this post, it’s almost impossible to conceive of a way out of this mess if we try to honor the contracts in the RMBSs.  I suspect that the only solution to this mess will lie in the law of equity. That’s the option Iceland is evaluating right now.

Unlike the U.S., Iceland temporarily nationalized its banks when it bailed them out. Iceland actually got something in return for its bailout money. Iceland has appointed committees to sort out the banks, so they can be put back into private hands — sort of like temporary receiverships.

The government of Iceland has just instructed the committees to write down about $2 billion worth of mortgage debt; this represents about 8% of the banks’ total assets and would make the mortgages both more affordable and more reflective of the home’s current market value. This is in addition to an existing temporary foreclosure moratorium that is due to expire soon.

The U.S. needs to take over the process and appoint a receiver to figure out who are the equitable owners of these mortgages, since they don’t seem to have legal owners, and restructure/writedown the mortgages to some sane level reflecting current market values and to create a de facto quit claim on the property in favor of the newly created modified mortgages to quiet title. Then the mortgages can be held by the party whom equity favors.

Then the Government needs to outlaw this type of practice. No more RMBS of this kind, ever again.

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Cynthia Kouril

Cynthia Kouril

Cynthia Kouril is a former Special Assistant United States Attorney in the Southern District of New York under several different U.S. Attorneys, former counsel to the Inspector General for the N.Y.C. Department of Environmental Protection where she investigated threats to the New York City water supply and other environmental crimes, as well as public corruption and fraud against the government, former Examining Attorney at the N.Y.C. Department of Investigation and former Capital Construction Counsel at New York City Parks and Recreation.
She is now in private practice with a colleague whom she met while at the USA Attorney's Office. Ms. Kouril is a member of the Steering Committee, National Committeewoman and Regional Coordinator for the New York Democratic Lawyers Council, a member of the Program Committee of the Federal Bar Council and a member of the Election Law Committee at the Association of the Bar of the City of New York. She is active in several other Bar Associations.
Most important of all, she is a soccer mom.